Japanese companies are increasing overseas acquisitions, using their cash-hoards to snap up assets beaten down by the global credit crisis and economic slowdown.
The value of foreign purchases by Japanese companies this year has already topped 2007's total by 91 per cent, according to data compiled by Bloomberg. That's the biggest gain among the world's 10 largest markets and contrasts with fewer deals in the US and UK, where credit is drying up after the subprime rout.
Takeovers by companies including TDK Corp. and Daiichi Sankyo Co are putting Japan on course for its biggest buying spree since the 1980s bubble, when Japanese buyers overpaid for assets like New York City's Rockefeller Center and California's Pebble Beach Golf Links.
“Pebble Beach and those kinds of trophy assets, it's clear those were crazy deals, but now they're buying things that are earnings enhancing and using cash that's been generating no income to do it,” said London-based Scott McGlashan, who manages Japanese stocks as part of J O Hambro Capital Management Ltd.'s $4.7 billion in assets. “It's a very opportune time for Japanese companies looking to make acquisitions overseas.”
Japanese companies have cash equal to 11 per cent of their assets, the second-highest amount after China among the world's 10 biggest equity markets, according to Bloomberg data.
Buying-Spree: Foreign purchases climbed to $48.6 billion so far this year from $25.4 billion for all of 2007, Bloomberg data show. The value of deals in the US is down 67 per cent from 2007 and UK. acquisitions are off 66 per cent as debt financing costs climb.
McGlashan said he is on the lookout for deals that mirror Daiichi Sankyo, Japan's No. 3 drugmaker, which has gained 11 per cent since it agreed June 11 to buy India's biggest drugmaker Ranbaxy Laboratories Ltd. for $4.6 billion. Nikko Citigroup Ltd. analyst Hidemaru Yamaguchi boosted his share price estimate for Daiichi Sankyo by 7 per cent after the purchase.
TDK, Japan’s largest maker of magnetic heads for hard-disk drives, announced plans last month to acquire Germany's Epcos AG, which makes components for Nokia Oyj, for $1.87 billion. TDK paid 6.1 times Epcos's earnings before interest, taxes, depreciation and amortization, or Ebitda, less than the 8.7 times average for Epcos's 15 closest European peers.
“In general, M&A doesn't benefit the acquirer because it tends to occur during boom times when management is overconfident and they pay too much,” said Seiichiro Iwasawa, chief strategist at Tokyo-based Nomura Securities Co. Ltd. “Japan is unique because they remember their massive bubble-era failures and have such low confidence that they are being extremely careful to do deals that make sense.”
Takeda, Kirin: Pharmaceutical companies may use their above-average levels of cash to make purchases and food producers may pursue takeovers to grow outside Japan's shrinking domestic market, Iwasawa said.
Takeda Pharmaceutical Co., Japan's largest drugmaker, had $15.5 billion in cash and securities as of March 31, equal to more than half its total assets. The company agreed to buy US-based cancer drug specialist Millennium Pharmaceuticals Inc for $8.8 billion on April 10. Takeda shares gained 3 per cent since then, beating the Topix's 2.4 per cent decline.
Kirin Holdings Inc. spent more than $3 billion the past two years on acquisitions in Asia. The nation's biggest beverage maker has said it's ready to spend almost $3 billion more by 2010. The company yesterday agreed to buy Australia's Dairy Farmers for A$675 million ($580 million), adding to its lead as the country's largest seller of fresh milk.
The buying spree helped Goldman Sachs Group Inc. report record profit in Japan for the year ended March 31. The New York-based firm holds the top spot among merger advisers for deals where Japanese companies are acquiring overseas assets, according to Bloomberg data. UBS AG ranked second and Nomura Holdings Inc was first among domestic companies.
‘Buy for Profit’: Paul Sheehan, chief executive officer of Thaddeus Capital Management, a Hong Kong-based hedge fund, said companies are using foreign acquisitions to boost their size, rather than shareholders' wallets.
“The deals are nowhere near as accretive as returning cash to shareholders or buying domestic competitors and profiting through consolidation and cost saving,” he said. “I don't buy for growth, I buy for profit.”
Mitsubishi Estate Co bought Rockefeller Center for $1.4 billion in 1989 and lost it seven years later after defaulting on the mortgage. Pebble Beach, the site of the 2010 US Open, was snapped up by Japanese golf magnate Minoru Isutani in 1990 for $841 million.
It was sold less than two years later at two-thirds the purchase price as Isutani's company went bankrupt. Toshiba, Japan Tobacco: Recent buyouts have been more successful. Toshiba Corp's 2006 purchase of US nuclear reactor designer Westinghouse Electric Co is paying off as the unit's profit rose almost five- fold in the first quarter, paring an overall loss caused by weakness in Toshiba's semiconductor business.
Japan Tobacco Inc, which bought UK-based Gallaher Group Plc in 2007 in Japan's largest foreign takeover, expects gross profit in overseas markets to climb 10 percent this year, while domestic earnings are forecast to fall 15 per cent as the number of smokers declines.
Thursday, August 28, 2008
'We'll have to take hard decisions if global oil prices stay high'
Planning Commission deputy chairman Montek Singh Ahluwalia speaks on GDP growth forecasts, infrastructure investment, energy policy and financial sector reforms in an interview with KG Narendranath & Subhash Narayan. Excerpts:
What is your take on the current scenario with respect to the Indian economy, which is marked by high inflation, a credit squeeze and reasonable fears of low industrial output? The Economic Advisory Council to the prime minister has forecast that GDP growth this year would be 7.7%, a significant dip from last year’s 9%.
There is a wide range of predictions. EAC has projected that growth this year would be 7.7%, but the Centre for Monitoring Indian Economy has predicted 9%. My view has been that a range of 8-8.5% is reasonable and maybe, the low end of that range is likely. However, we should be quite satisfied if we grow at around 8%, given the current global economic conditions.
How much does the current rate of inflation worry you? How would the graph of weekly WPI-based inflation move in the short term?
A year on year inflation rate exceeding 12% is a cause for worry but inflation is a worry all over the world. There is also a question of what index to use. The CPI shows a much lower inflation rate of 7% and that is the way inflation is measured in most countries. I expect the WPI inflation to come down over the next three to four months.
The global slowdown has already adversely impacted India’s exports, as is experienced by industries like textiles, engineering goods and chemicals. Even the IT sector is now feeling the pinch, thanks to the spending slowdown in export markets like the US, indicating that the services sector wouldn’t be left unhurt either.
A slowdown in GDP growth will obviously be reflected in individual sub-sectors so this is not adding anything to what is known. I will only add that the projected slowdown (of the Indian economy) does not reflect a basic deceleration in the country’s growth momentum. India can doubtless grow at an average rate of 9% over five years (in the Eleventh Five-Year Plan), provided sensible policies are in place. The proviso is important. So, I don’t subscribe to the view that 9% growth is going to happen no matter whatever is done or not done on the policy front. I’m confident that it (9% growth in Eleventh Plan) is achievable, but we need to do many things — in agriculture, infrastructure, energy policy and also in a number of other areas — to really accomplish it. The Planning Commission has outlined the whole policy agenda for the Eleventh Plan. Even if three-fourth of what has been prescribed by the commission is actually acted upon, then we will certainly yield an average growth of 9% in the current Plan period.
EAC has said agriculture growth this year would be just 2% as against 4.5% last year. Your comments.
Our target concerning farm sector growth for the Eleventh Plan as a whole is 4%. We have already had a year in which the growth exceeded that figure. In the current year, the growth could be a little less than 4% though we need not conclude just yet that it will be only 2%. A lot will depend on the quality of monsoon — thankfully, monsoon has already picked up in certain areas, but we still have little more time to go (before deciding on the quality of monsoon).
What are the policy measures required for the farm sector to gather further growth momentum?
There are a number of things we have to do. There is tremendous scope for increasing productivity of land with existing technology, if the right kind of farming practices are adopted. There is need to have more (public) expenditure and also better implementation in areas such as irrigation, watershed management in rain-fed areas, production and distribution of seeds, and providing technical knowledge to farmers , particularly on soil nutrition, which is necessary for bringing about scientific application of fertilisers. We also need to develop infrastructure that will support agricultural diversification.
When it comes to the objective of increasing farm output, what are the segments that should get high priority?
The projected farm sector growth of 4% is not expected to come from food grain sector, which needs to grow at only 2% per year. It’s the non-food grain sector, which will grow at 6-8% and result in 4% overall growth. This sector —comprising horticulture, dairy, livestock, poultry, fisheries etc — produces perishable goods, and to have an expansion of this segment of agriculture, it is very important to develop marketing linkages, logistic and transportation capacities. These are areas largely in the domain of the state governments. In this regard, many states have already reformed the Agriculture Produce Marketing Committee (APMC) Act, but some of them haven’t yet notified all of the relevant rules for the reform to be implemented. While better management of public expenditure is crucial for farm sector growth, it is also necessary to involve the private sector in its development. We need to have mechanisms for contract farming that can help link farms to markets and also a system for transmission of technical knowledge. Improvement in rural road connectivity is also important. All these areas are being addressed through a variety of government programmes.
Have you in mind any specific measure that could make a big difference to the agriculture sector?
We need to use the resources being made available for the National Rural Employment Guarantee Scheme — around Rs 18,000 crore a year — for improving land productivity and thereby increase farm output. The NREGS is already performing a really useful function of generating employment. Converging the NREGS resources with schemes to increase land productivity would be a sensible way to increase farm incomes and employment. All this, of course, will have to be supported through sufficient expansion of agriculture credit. The UPA government has done an excellent job when it comes to expansion of agriculture credit and this is reflected in the major increase in credit flows to the sector in the last three years. In addition there has been a one-time loan waiver for a large number of farmers.
When it comes to increasing farm productivity, balanced use of fertilisers is very important. It’s only recently that a new investment policy for the fertiliser sector has been announced, even though the sector has been witnessing an investment famine for the last few years, making the economy much more vulnerable to the high prices of imported urea.
The new investment policy (in the fertiliser sector) gives incentives to the right kind of fertiliser production. But for the full results of this new policy, we’ll have to wait for another 3-4 years. As an immediate priority, we need to focus on utilising as much of the (existing) capacities as we can, and also taking timely steps for needbased imports of fertilisers.
Off-budget liabilities like oil and fertiliser subsidies, it is estimated, would be 5% of GDP this fiscal. Ideally, these should also be reckoned as fiscal deficit.
I think the 5% estimate is from the EAC report. Whether to bring these off-budget liabilities on the book, or to keep them off the book is essentially a question of accounting. The important point to note is that most of this (off-budget) deficit is really due to the very large increase in international prices of petroleum and fertilisers. We’ve passed on some of this price increase to the consumers, absorbed a fraction by reducing taxes and also forced the producers to take a hit. But a very large part of this price increase has not been passed on and this enlarges the subsidy bill. Clearly, it is not a sustainable solution to maintain this level of hidden deficit (off-budget deficit) year after year. The objective of policy should be to bring down the total deficit, sum of off-budget and on-budget deficits, to a comfortable level. Right now, it (the total deficit) is definitely not comfortable.
What happens if global prices remain high?
If that happens we will really have to take some hard decisions. The ability of the economy to grow at a healthy rate will depend on our ability to take these hard decisions. I’m not pessimistic about India’s ability to grow even with high global oil prices, provided we take the right policy decisions. If we are moving on to a world in which the medium-term prospects are that of expensive energy, we must make sure subsidies are meant only for the needy. There’s a need for lifeline availability of energy at affordable prices, and we should assure that. But beyond that, energy should be fully priced. If the Rajiv Gandhi Gramin Vidyut Yojana is properly implemented, it can potentially bring down the use of kerosene for lighting and therefore, largely obviate the need for subsidy.
Despite the ambitious targets set for power gen eration in the Eleventh Plan, the situation on this front doesn’t seem to be encouraging, despite Ultra Mega Plants .
The dip in generation growth that you are referring to is a transient one, which I don’t regard as pointer to the medium-term prospect in this regard. In the last Five Year Plan, we could add just 21,000 MW to the generation capacity. I’m reasonably sure that in the 11th Plan we will add three times of that to the generation pool, even if we fall slightly short of the target of 78,000MW. As for ultra mega power plants, they will mostly come up during the 13th Plan, but we have other projects that will help meet the target.
As regards the viability of the power sector, coal sector reforms are very important. So, too, are measures for addressing the investment torpor in the distribution sector.
Yes indeed, a rational approach to energy must cover all relevant sectors. Having said that, it is not the case that there are no reforms in the coal sector. By allowing captive mining of coal for power production, we have allowed new private investment into the industry. This is a substantial reform measure that we are closely watching to see if the process of allocation of captive coal mines is being accelerated.
I also agree that the single most important challenge facing the power sector is the one concerning distribution. The AT&C losses continue to be 35%. No system can survive with losses of that magnitude. The 10th Plan target was to reduce these losses to 15% but we could not achieve that. Now, the 11th Plan target, again, is to cut these losses to 15%. Some states like Andhra Pradesh (18%) and Tamil Nadu (20%) have brought down AT&C losses substantially. We’re encouraging other states to learn from the experiences of these states.
Attracting investment in the power sector won’t be a problem if we cut the AT&C losses and also accelerate the move towards open access. Open access is to become mandatory from January 1, 2009. However, it is important that wheeling charges are made reasonable. Unfortunately, most of the electricity regulators continue to have a public-sector protection mentality and this hampers open access initiatives, which, if properly carried out, could have brought distribution companies under competitive pressure.
The ambitious project to attract $500-billion investment in infrastructure doesn’t seem to fully fructify. The target is to increase infrastructure investment from 5% of GDP now to 9% by the end of this Plan. This corresponds to investment of $500 billion, over the five year period. This means attracting an additional $150 billion over what would happen with normal growth.
That is indeed ambitious, and most of it will have to come from public sector corporations making an extra effort, and from public private partnerships (PPPs). Fortunately, we now have a policy in place that has generated a lot of interest, but there are also problems. To generate the massive flow of investment, transparency and better project preparation are vital. We have to do more in this area.
Many state governments are doing a very good job in this regard; some are seeking our help to structure the projects. Andhra Pradesh has demonstrated an outstandingly successful pure PPP model for a metro system by bidding out the Rs 12,000-crore Hyderabad metro to a private party without requiring the centre or state governments to pay anything—in fact, the state will get some revenue from the proposed metro. The revenue model of the project involves land associated with the metro being aggressively developed to subsidise the metro.
Do you think the pending Bills of financial sector reforms will pass muster in the tenure of the UPA govt?
Let me not speculate on what will be passed by the Parliament. In fact, we have a very clear agenda on financial sector reforms – the bills pending in parliament are a small part of that agenda. We need to take a much broader approach to financial sector reforms. The Planning Commission is about to receive the report of the high-level committee headed by Dr Raghuram Rajan, which is expected to outline a ten-year road map for reforms. This should be the basis for intense discussions on the next steps in reforms. We will put this in the public domain to elicit views and stimulate discussions. It should be noted that India’s savings rate is much lower than China’s and so, for us to grow at 9-10%, we need much greater financial sector efficiency than China. This makes financial sector reforms especially important in our context.
What is your take on the current scenario with respect to the Indian economy, which is marked by high inflation, a credit squeeze and reasonable fears of low industrial output? The Economic Advisory Council to the prime minister has forecast that GDP growth this year would be 7.7%, a significant dip from last year’s 9%.
There is a wide range of predictions. EAC has projected that growth this year would be 7.7%, but the Centre for Monitoring Indian Economy has predicted 9%. My view has been that a range of 8-8.5% is reasonable and maybe, the low end of that range is likely. However, we should be quite satisfied if we grow at around 8%, given the current global economic conditions.
How much does the current rate of inflation worry you? How would the graph of weekly WPI-based inflation move in the short term?
A year on year inflation rate exceeding 12% is a cause for worry but inflation is a worry all over the world. There is also a question of what index to use. The CPI shows a much lower inflation rate of 7% and that is the way inflation is measured in most countries. I expect the WPI inflation to come down over the next three to four months.
The global slowdown has already adversely impacted India’s exports, as is experienced by industries like textiles, engineering goods and chemicals. Even the IT sector is now feeling the pinch, thanks to the spending slowdown in export markets like the US, indicating that the services sector wouldn’t be left unhurt either.
A slowdown in GDP growth will obviously be reflected in individual sub-sectors so this is not adding anything to what is known. I will only add that the projected slowdown (of the Indian economy) does not reflect a basic deceleration in the country’s growth momentum. India can doubtless grow at an average rate of 9% over five years (in the Eleventh Five-Year Plan), provided sensible policies are in place. The proviso is important. So, I don’t subscribe to the view that 9% growth is going to happen no matter whatever is done or not done on the policy front. I’m confident that it (9% growth in Eleventh Plan) is achievable, but we need to do many things — in agriculture, infrastructure, energy policy and also in a number of other areas — to really accomplish it. The Planning Commission has outlined the whole policy agenda for the Eleventh Plan. Even if three-fourth of what has been prescribed by the commission is actually acted upon, then we will certainly yield an average growth of 9% in the current Plan period.
EAC has said agriculture growth this year would be just 2% as against 4.5% last year. Your comments.
Our target concerning farm sector growth for the Eleventh Plan as a whole is 4%. We have already had a year in which the growth exceeded that figure. In the current year, the growth could be a little less than 4% though we need not conclude just yet that it will be only 2%. A lot will depend on the quality of monsoon — thankfully, monsoon has already picked up in certain areas, but we still have little more time to go (before deciding on the quality of monsoon).
What are the policy measures required for the farm sector to gather further growth momentum?
There are a number of things we have to do. There is tremendous scope for increasing productivity of land with existing technology, if the right kind of farming practices are adopted. There is need to have more (public) expenditure and also better implementation in areas such as irrigation, watershed management in rain-fed areas, production and distribution of seeds, and providing technical knowledge to farmers , particularly on soil nutrition, which is necessary for bringing about scientific application of fertilisers. We also need to develop infrastructure that will support agricultural diversification.
When it comes to the objective of increasing farm output, what are the segments that should get high priority?
The projected farm sector growth of 4% is not expected to come from food grain sector, which needs to grow at only 2% per year. It’s the non-food grain sector, which will grow at 6-8% and result in 4% overall growth. This sector —comprising horticulture, dairy, livestock, poultry, fisheries etc — produces perishable goods, and to have an expansion of this segment of agriculture, it is very important to develop marketing linkages, logistic and transportation capacities. These are areas largely in the domain of the state governments. In this regard, many states have already reformed the Agriculture Produce Marketing Committee (APMC) Act, but some of them haven’t yet notified all of the relevant rules for the reform to be implemented. While better management of public expenditure is crucial for farm sector growth, it is also necessary to involve the private sector in its development. We need to have mechanisms for contract farming that can help link farms to markets and also a system for transmission of technical knowledge. Improvement in rural road connectivity is also important. All these areas are being addressed through a variety of government programmes.
Have you in mind any specific measure that could make a big difference to the agriculture sector?
We need to use the resources being made available for the National Rural Employment Guarantee Scheme — around Rs 18,000 crore a year — for improving land productivity and thereby increase farm output. The NREGS is already performing a really useful function of generating employment. Converging the NREGS resources with schemes to increase land productivity would be a sensible way to increase farm incomes and employment. All this, of course, will have to be supported through sufficient expansion of agriculture credit. The UPA government has done an excellent job when it comes to expansion of agriculture credit and this is reflected in the major increase in credit flows to the sector in the last three years. In addition there has been a one-time loan waiver for a large number of farmers.
When it comes to increasing farm productivity, balanced use of fertilisers is very important. It’s only recently that a new investment policy for the fertiliser sector has been announced, even though the sector has been witnessing an investment famine for the last few years, making the economy much more vulnerable to the high prices of imported urea.
The new investment policy (in the fertiliser sector) gives incentives to the right kind of fertiliser production. But for the full results of this new policy, we’ll have to wait for another 3-4 years. As an immediate priority, we need to focus on utilising as much of the (existing) capacities as we can, and also taking timely steps for needbased imports of fertilisers.
Off-budget liabilities like oil and fertiliser subsidies, it is estimated, would be 5% of GDP this fiscal. Ideally, these should also be reckoned as fiscal deficit.
I think the 5% estimate is from the EAC report. Whether to bring these off-budget liabilities on the book, or to keep them off the book is essentially a question of accounting. The important point to note is that most of this (off-budget) deficit is really due to the very large increase in international prices of petroleum and fertilisers. We’ve passed on some of this price increase to the consumers, absorbed a fraction by reducing taxes and also forced the producers to take a hit. But a very large part of this price increase has not been passed on and this enlarges the subsidy bill. Clearly, it is not a sustainable solution to maintain this level of hidden deficit (off-budget deficit) year after year. The objective of policy should be to bring down the total deficit, sum of off-budget and on-budget deficits, to a comfortable level. Right now, it (the total deficit) is definitely not comfortable.
What happens if global prices remain high?
If that happens we will really have to take some hard decisions. The ability of the economy to grow at a healthy rate will depend on our ability to take these hard decisions. I’m not pessimistic about India’s ability to grow even with high global oil prices, provided we take the right policy decisions. If we are moving on to a world in which the medium-term prospects are that of expensive energy, we must make sure subsidies are meant only for the needy. There’s a need for lifeline availability of energy at affordable prices, and we should assure that. But beyond that, energy should be fully priced. If the Rajiv Gandhi Gramin Vidyut Yojana is properly implemented, it can potentially bring down the use of kerosene for lighting and therefore, largely obviate the need for subsidy.
Despite the ambitious targets set for power gen eration in the Eleventh Plan, the situation on this front doesn’t seem to be encouraging, despite Ultra Mega Plants .
The dip in generation growth that you are referring to is a transient one, which I don’t regard as pointer to the medium-term prospect in this regard. In the last Five Year Plan, we could add just 21,000 MW to the generation capacity. I’m reasonably sure that in the 11th Plan we will add three times of that to the generation pool, even if we fall slightly short of the target of 78,000MW. As for ultra mega power plants, they will mostly come up during the 13th Plan, but we have other projects that will help meet the target.
As regards the viability of the power sector, coal sector reforms are very important. So, too, are measures for addressing the investment torpor in the distribution sector.
Yes indeed, a rational approach to energy must cover all relevant sectors. Having said that, it is not the case that there are no reforms in the coal sector. By allowing captive mining of coal for power production, we have allowed new private investment into the industry. This is a substantial reform measure that we are closely watching to see if the process of allocation of captive coal mines is being accelerated.
I also agree that the single most important challenge facing the power sector is the one concerning distribution. The AT&C losses continue to be 35%. No system can survive with losses of that magnitude. The 10th Plan target was to reduce these losses to 15% but we could not achieve that. Now, the 11th Plan target, again, is to cut these losses to 15%. Some states like Andhra Pradesh (18%) and Tamil Nadu (20%) have brought down AT&C losses substantially. We’re encouraging other states to learn from the experiences of these states.
Attracting investment in the power sector won’t be a problem if we cut the AT&C losses and also accelerate the move towards open access. Open access is to become mandatory from January 1, 2009. However, it is important that wheeling charges are made reasonable. Unfortunately, most of the electricity regulators continue to have a public-sector protection mentality and this hampers open access initiatives, which, if properly carried out, could have brought distribution companies under competitive pressure.
The ambitious project to attract $500-billion investment in infrastructure doesn’t seem to fully fructify. The target is to increase infrastructure investment from 5% of GDP now to 9% by the end of this Plan. This corresponds to investment of $500 billion, over the five year period. This means attracting an additional $150 billion over what would happen with normal growth.
That is indeed ambitious, and most of it will have to come from public sector corporations making an extra effort, and from public private partnerships (PPPs). Fortunately, we now have a policy in place that has generated a lot of interest, but there are also problems. To generate the massive flow of investment, transparency and better project preparation are vital. We have to do more in this area.
Many state governments are doing a very good job in this regard; some are seeking our help to structure the projects. Andhra Pradesh has demonstrated an outstandingly successful pure PPP model for a metro system by bidding out the Rs 12,000-crore Hyderabad metro to a private party without requiring the centre or state governments to pay anything—in fact, the state will get some revenue from the proposed metro. The revenue model of the project involves land associated with the metro being aggressively developed to subsidise the metro.
Do you think the pending Bills of financial sector reforms will pass muster in the tenure of the UPA govt?
Let me not speculate on what will be passed by the Parliament. In fact, we have a very clear agenda on financial sector reforms – the bills pending in parliament are a small part of that agenda. We need to take a much broader approach to financial sector reforms. The Planning Commission is about to receive the report of the high-level committee headed by Dr Raghuram Rajan, which is expected to outline a ten-year road map for reforms. This should be the basis for intense discussions on the next steps in reforms. We will put this in the public domain to elicit views and stimulate discussions. It should be noted that India’s savings rate is much lower than China’s and so, for us to grow at 9-10%, we need much greater financial sector efficiency than China. This makes financial sector reforms especially important in our context.
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