It was a breakthrough that put India on the corporate world map.
In 2007, after nine gruelling rounds of bidding, India's Tata Steel acquired the Anglo-Dutch steel maker Corus, a company four times its size, for US$12 billion (Dh44.07bn).
The alliance gave Tata access to Corus's strong distribution network in Europe and allowed the European manufacturer to make inroads into the lucrative Asian market. Overnight, it catapulted Tata from the world's 56th-largest steel maker to the fifth largest.
The deal also prompted euphoria in India as the largest foreign takeover by a company from that country.
Until then, it was considered impossible for Indian enterprises to acquire stakes in European companies, let alone buy them. That perception changed overnight.
"It is officially a two-way street now," Kamal Nath, India's former commerce minister, said at the time. "Not only is India seeking foreign investment but Indian companies are emerging investors in other countries."
The Corus deal started a chain reaction for global acquisitions, which now form a major part of corporate strategy at several major Indian companies.
The hunger to enter new markets and the quest for natural resources and commodities to feed industrial growth is pushing India's cash-rich companies to prowl overseas.
"The drive of Indian industries to go global, access new markets and technology, coupled with the fact that good targets internationally are still available at relatively depressed valuations provide excellent opportunities to Indian businesses to expand their footprints globally," says Sayantan Bhattacharya, the associate vice president at Corporate Finance Associates India, which specialises in merger and acquisition (M&A) deals.
Citibank says outbound M&A deals in the Asia-Pacific region shot up by 166 per cent last year to a record $126.1bn.
Standard Chartered estimates M&A activity in India this year is expected to surpass last year's record $71bn total, which was led by oil and gas, metals and mining companies.
After two years of relative slowdown in global deals after the economic crisis, overseas acquisitions by Indian companies accounted for more than half of the total M&A volume last year.
Ernst & Young ranked Indian companies as the seventh most acquisitive in mining and metals last year, up from 14th in 2009.
Last June Bharti Airtel, India's largest telecommunications operator, announced a $10.7bn acquisition of the Zain Group's African telecoms operations.
The acquisition gave Bharti Airtel, headed by the billionaire tycoon Sunil Mittal, access to the Kuwaiti telecoms company's 42 million subscribers in 15 African nations. Bharti became the world's third-largest telecoms operator.
Indian companies also became targets last year. The UK-listed metals and mining giant Vedanta signed a $9.6bn agreement to acquire between 51 and 61 per cent stake in Cairn India, a subsidiary of the Edinburgh oil and gas exploration company Cairn Energy.
Essar Power, the parent company of which is listed in London, acquired Navabharat Power, a 2.25 megawatt coal-powered plant in eastern India for $2bn.
But funding for domestic and overseas M&A targets remains a critical stumbling block.
China is known to fall back on its vast foreign reserves to fund overseas acquisitions but in India, most high-priced acquisitions are funded through the leveraged buyout option, which is borrowed money with the assets of the acquired entity as collateral.
"The major concern is that Indian banks are reluctant to fund overseas acquisitions and Indian domestic debt market is highly illiquid," says Ashok Banerjee, a professor of finance at the Indian Institute of Management Calcutta.
"There is an urgent need for a well-developed debt market in India to help fund both domestic and overseas acquisitions."
Tata's acquisition of Corus strained the buyer's finances severely. It raised $6.17bn of debt to pay for the deal through a new subsidiary of the acquired firm called Tata Steel UK.
Analysts said the deal, which coincided with the global economic slowdown, was highly overpriced. The stock markets reacted unfavourably and Tata Steel lost more than $1bn in market capitalisation after it announced its intention to buy Corus.
"Empirical evidence suggests that acquisitions add shareholder value only when these are cash acquisitions and the premium paid is reasonable," says Prof Banerjee. "It is still not clear whether Tata's acquisition of Corus will deliver long-term shareholder value."
Investors interested in domestic companies have long called for an easing of limits on foreign direct investment to help M&A transactions.
"Foreign insurance companies make a case that they are often the vehicles to expand financial markets in this manner but are limited until India limits its 26 per cent cap on foreign ownership of such entities," says Gunjan Bagla, the managing director of Amritt Ventures in California, an adviser to global companies that wish to do business in India.
"I expect the M&A spree to continue this year and beyond, limited only by their ability to raise capital to fund acquisitions."
