Market matchmaker empowers regional investors

Published: 1 September 2008

How HSBC energised Larsen & Toubro's switchgear business

Reform, investment and a dynamic business sector have raised the Indian economy to heights few imagined 20 or 30 years ago. And with the confidence of a vibrant economy at home, domestic investors are playing an increasingly important role in Asia's growth.

Since 1991, a programme of far-reaching policy reforms, designed to open up the economy and stimulate private sector activity, has helped to create a climate of entrepreneurship and high economic growth. As a result, India has emerged as one of the world's fastest growing economies. As the economy has grown, Indian companies have broadened their horizons, connecting with neighbouring economies and energising the region.

A good example of this corporate bonding across borders is the 2007 deal in which India's Larsen & Toubro (L&T) acquired Malaysian electrical engineering firm Tamco Corporate Holdings Berhad for USD108m. HSBC India acted as sole adviser in the transaction, which was signed in October 2007

With this deal, L&T acquired a 100 per cent stake in Tamco's switchgear business, which specialises in the design, manufacture, supply and support of switching equipment for electric power systems, such as generators, motors, transformers and substations.

L&T is one of India's leading industrial conglomerates, long-established, and involved in technology, engineering, construction, manufacturing and services.

Investment expands range and reach

The company also has a 40 per cent share in India's low-voltage switchgear market, but until its investment in Tamco's switchgear business, L&T manufactured switchgear only in the low-voltage range. Tamco, for its part, specialises in both low- and middle-voltage switchgear. With the purchase, L&T not only expanded its switchgear range but also its reach into Asia-Pacific and the Middle East.

The deal gave L&T four Tamco operations: Tamco Switchgear Malaysia Sdn Bhd; Tamco Shanghai Switchgear Co Ltd, in China; Tamco Electrical Industries Australia Pty Ltd, and PT Tamco Indonesia.

L&T expects to gain a 10 per cent share in the middle-voltage switchgear market by 2010. From the USD500m in annual revenue L&T currently earns from low-voltage switchgear, the company hopes to double its electrical and electronics-generated revenue to USD1bn by March 2010.

A milestone achievement

For HSBC India, the transaction was a milestone achievement that established benchmarks at several levels, said Gopal Khetan, Associate Director Investment Banking, HSBC Securities and Capital Markets (India).

"HSBC assisted Larsen & Toubro in the entire transaction commencing from showing them the opportunity to undertaking a detailed assessment of the asset and negotiating the transaction," said Mr Khetan.

Managing the investment was an exhilarating and comprehensive exercise for the HSBC deal team.

"Although another bank was running the auction process, L&T had not seen the asset. HSBC was instrumental in showing the opportunity to L&T and was able to get L&T into the process at a late stage."

For Larsen & Toubro, the HSBC-assisted deal broke new ground by extending the company's reach as an international manufacturer and services provider.

"This was the first big cross-border acquisition done by L&T, and the first successful transaction in which HSBC was associated with L&T on the investment banking side," Mr Khetan said.

"The acquisition had a strong strategic rationale given that it extended L&T's switchgear offering and provided access to the Middle East market."

The buy reinforces L&T's position as a leading player in the switchgear business: the company can now offer medium-voltage switchgear in home markets in India and in the international market, especially the Middle East.

The fact that the whole transaction took place in a comparatively short time-frame, three months, went down well with both buyer and seller.

"The transaction was completed in a span of 12 weeks," Mr Khetan said. "We began in the middle of July 2007 and the deal was announced in the second week of October. It was a very quick process, and a quick turnaround."

"The transaction involved complex due diligence and structuring issues given that the target company had four manufacturing operations, in Australia, China, Malaysia, and Indonesia," Mr Khetan said.

Bridging the gap between high-growth markets

For L&T, the acquisition means significant extra market share, and the promise of more to come. India's domestic middle-voltage switchgear market is growing at 15 per cent per annum. Against a background of liberating influences – continued reform in the power sector and the national focus on fast-tracked power-generation – the company anticipates increasing demand for middle-voltage switchgear.

For HSBC, the M&A exercise illustrated the bank's role in high-growth market investment in Asia. It is a success story about bringing together industrial players with common interests, bridging distances, and reinforcing business synergies in the region.

The L&T-Tamco deal has demonstrated, among other things, that 'perfect' deals can be realised, and that successful investments can be managed efficiently and speedily across borders, with the right combination of players.