Idea fall: Birla M&As take time to impress markets, but they eventually do

Soon after the $21-billion merger between Idea Cellular and Vodafone was announced, shares of Aditya Birla group’s Idea Cellular collapsed nine per cent, leading to a destruction of shareholders' value.

When asked, Kumar Mangalam Birla, chairman of Aditya Birla group, said that the mergers and acquisitions (M&As) by the group over the years have added value to shareholders’ wealth and as the transactions are complex, the markets take some time to grasp the schemes. “If the management has taken hundreds of hours to put a scheme like this, it would certainly take the markets time to understand this transaction. The stock correction is a knee-jerk reaction,” Birla told Business Standard.

Birla might be partially right. While some of Birla's M&As did indeed create value for shareholders, his biggest bet overseas – the acquisition of Novelis by Hindalco for $6 billion at the peak of the commodity cycle – failed to cheer shareholders even after a decade. Idea’s acquisition of Spice Communications assets also failed to create value, though the subsequent events in the telecom industry also added to investors’ ire.

An analysis by Business Standard on the Aditya Birla group's M&As shows that after being in the red for years, most of the group's acquisitions are now in the money – thanks to an uptick in Indian markets in the last one year. The incremental rise in market capitalisation now exceeds the initial cost of acquisitions for most of the group companies. 

The various group companies have now added around Rs 1.9 lakh crore to their market capitalisation. This figure is nearly two and a half times their cumulative spend on M&As during the past 10 years — a figure which stood at around Rs 68,000 crore on acquisitions, both domestic and overseas. Among individual companies, Ultratech Cement has been the biggest value creator, adding nearly Rs 99,000 crore to its market capitalisation — nearly six-times it’s M&A spend during the period. This includes its Rs 11,500-crore deal to acquire Samrudhi Cement, the erstwhile cement division of Grasim Industries, in November 2009.

It is followed by its parent Grasim Industries, which has added around Rs 12,000 crore to its market capitalisation since its first acquisition in April 2008. The company has so far spent Rs 1,851 crore on a clutch of acquisitions during the past decade. According to a scheme announced in October last year, Aditya Birla Nuvo will be merging with Grasim. The financial services business owned by Nuvo will be listed separately on the stock exchanges. The promoter’s stake in the merged entity will rise to around 60 per cent. Corporate governance advocates have panned the merger and have asked the institutions to vote against the proposal saying that the merger would result in promoters shoring up stake in the merged entity.

However, the group's biggest bet, the $6-billion acquisition of Novelis in 2007 by Hindalco, remains under water. Hindalco Industries' incremental rise in market capitalisation still lags its initial cost of acquiring the American aluminium major. (See chart). 

The analysis is based on the completed M&A deals by the various Aditya Birla group companies. The sample only includes those deals where the transaction value was disclosed by the group companies. In all, our sample includes 23 deals by various group companies. The acquisition cost is based on the monthly average rupee-dollar exchange rate at the time of acquisition.

The group companies have been big gainers in the recent rally with the combined market capitalisation of the top five group companies up 22 per cent in the past 12 months, rising faster than the 15.4 per cent year-on-year rise in the benchmark Sensex during the period. This has added nearly Rs 45,000 crore to the group companies' combined market value during the period.

Hindalco and Idea Cellular, however, remain laggards with their share price lagging behind the benchmark index since their first acquisition in the past decade. For example, Hindalco share price has appreciated at compounded annual growth rate (CAGR) of four per cent since its multi-billion dollar acquisition of Novelis, much lower than the 10 per cent CAGR rise in the Sensex during the period. Idea Cellular has done even worse with its share price now being lower than when it spent around Rs 5,250 crore on acquiring Spice Communications in June 2008.

Acquirer	M&A spend#	Current market cap	Incremenal market cap growth*	Share price return*	Sensex return*
	(Rs crore)	(Rs crore)	(Rs crore)	(%)	(%)
Aditya Birla Nuvo	2,712.9	19,968.6	7,018.1	11.1	8.5
Grasim	1,851.2	34,176.7	11,787.7	9.4	6.2
Hindalco	2,6978	42,206.2	26,016.6	4.0	8.4
Idea Cellular	5,252.6	31,602.7	7,067.5	-0.7	9.3
Ultratech Cement	15,255.9	1,08,565.1	98,151.6	23.7	7.7