India Inc's acquisition spree- are the analysts wrong?

Tata Steel, Hindalco, Suzlon- the analysts have uniformly given the thumbs down to big overseas acquisitions, done or proposed. Are they right or wrong?

First, analysts can be wrong quite often. When it comes to earnings forecasts, for instance, analysts have had a poor record. There are empirical studies that show that forecasts that used past earnings or sales growth or even GDP growth tended to be more accurate than the labourious forecasts of analysts.

There is, of course, no dearth of anecdotal evidence of analysts' fallibility. When Tata Motors (at the time, Telco) ventured into cars, they predicted that the car venture would sink the profitable truck operation- among other things, the Tatas did not have it in them to service the retail customer. They were proved wrong- and how!

The analysts were also telling Infosys management for long that their business model was not sustainable. Beyond a point, the company could sustain earnings growth only by moving into products. Well, Infosys has gone on to become a $2 bn company by scaling up IT services.

And don't forget that, until a few weeks ago, S&P had rated India as below investment grade. It took four years of growth of 8% for S&P to recognise India as investment grade. Through all the years that we were growing at more than 6%, S&P continued to insist we had a serious fiscal problem. We will now be meeting the FRBM target for the centre well ahead of 2008-09, the scheduled date for the centre to reach a fiscal deficit/GDP target of 3%.

My second point: the analysts could be right in the sense that the companies that Tata Steel and Hindalco will underperform over the relatively short time horizons that funds look at while making allocations- say, three to four years. For this period, yes, these companies will not deliver returns to shareholders.

But the point about these acquisitions is precisely that management has taken the long view. And it has had the courage to take the long view because the industrial houses concerned have substantial stakes in the companies concerned, unlike professional managers. I argue in my recent column that this is one of the strengths of family-managed businesses vis-a-vis businesses run by managers.

Read my column in ET.