For the past few years, we’ve seen quite the drop in savings and a gloomy period all around. Most companies have seen a distinct, if not severe, contraction in business. Obviously, as can be seen, the situation is experiencing a turnaround now. Private Equity [PE] firms are now keen on indulging in buyouts again and their attitude is hopeful. Their interests lie mainly in consumer and retail, financial services, industrials and services like outsourcing and logistics where buyout opportunities are largely prevalent in all these sectors.

Some PE firms like to buyout others owing to an active style of investment. In such scenarios, they prefer to get a controlling stake so as to make changes in the company and turn it around to suit their needs or meet their targets or visions for the company in question. For instance, Paras Pharmaceuticals was growing 12-15 per cent year-on-year before Actis took over. They raised stake to do so and replaced their CEO and other professionals. They also made operational changes and today Paras is growing 30-40 per cent year on year.

The problem with buyouts in India that most PE firms are facing is that the Indian Economy is primarily a growth market and if one is on the rise, why would one wish to sell out? That having been said, a huge chunk of Indian businesses are family run businesses. It has been said that a number of buyouts in India are owing to succession issues where in third or fourth generation of successors in the family run line or Hindu Undivided Family (HUFs) who are not too keen on continuing to run their inherited businesses owing to a plethora of reasons. It is largely believed that India has entered an era of rapid economic growth making it a exceptionally desirable country to target business acquisitions. Large local companies are willing to partner or sell out to global partners as the domestic industry has its own concerns.

Previously, buyouts in India have been rather limited. However, with the upward turn that markets have taken, firms that had expanded too fast during the previous growth period are likely to consider divesting entire companies. Another issue that has arisen is to do with promoters. Promoters that are personally over-leveraged may be strained to sell controlling stakes in companies causing them to be discontent.

In terms of general conviction, however, there is a surety in investment in India Inc. There will be growth; that is certain. Before the meltdown, investments for India were lined up. Theses got backtracked owing to the economic state of affairs. An accepted truth is that India has come out of this crisis unscathed. As such and it is like I said earlier, the turnaround is promising and one can hope for further buyouts in the Indian market and even more so by the Indian firms that will cause a desirable shift in the Indian arena.

Posted by Girish Narasimhan

Almost twenty years have passed since the Indian market was liberalised and hence opened to foreign investment. Ever since then, the Indian economy had continued to carry out businesses related to Mergers and Acquisitions without any real checks on anti-competitive practices. Although MNCs from the world over swamped India, the Monopolies and Restricted Trade Practices Act failed to hold its own. While it had been initiated to limit dominance and cartelisation, it gave little emphasis to anti-competitive practices and their impact on Mergers and Acquisitions.

It was because of this and other shortcomings that the MRTP Act was repealed and in its place The Competition Act was instated in 2002. The remaining provisions of the new law will be brought into use in phases. This act regulates different forms of business through the Competition Commission of India which behaves as an anti-monopoly watchdog. The Commission is a corporate body consisting of a Chairperson and two to ten other members appointed by the central government. The duties of the CCI include elimination of practices having adverse effect on competition; promoting competition and sustaining it. They are also responsible for protecting interest of consumers. The Act frowns upon actions that have ‘appreciable adverse effects on competition’ (AAEC)

To safeguard consumers from such actions and in order fulfill their duties, the CCI has jurisdiction to enquire into anti-competitive agreements, enquire into abuse of dominant position, regulate combinations and undertake competitive advocacy. Sections 3 through 6 cover these circumstances.

In a nutshell:

• Section 3 provides for prohibition of entering in to anti-competitive agreements.

• Section 4 prohibits abuse of dominant position by any enterprise.

• Section 5 deals with combination of enterprises and persons: Acquisition of one or more enterprises by one or more persons or acquiring of control or merger or amalgamation of enterprises under certain circumstances specified, shall be construed as combination.

• Section 6 provides that no person or enterprise shall enter in to combination which is likely to cause or causes an appreciable adverse effect on competition within the relevant market in India.

Eight years have gone by since the Competition Act was instated. On having said that, key provisions of this Act that were meant to empower the Competition Commission of India (CCI) are still to be notified. Concerns regarding Mergers and Acquisitions are yet to be acknowledged by the Indian Government which has been working at a glacial pace. The Government notified Sections 3 and 4 in May but it is yet to notify Sections 5 and 6; a direct result of which was that numerous combinations that should have come up before the CCI have gone through undetected. With the rate of deals in the space on the rise and the rapid changes in the space, the pace of the legal framework evolution for M&A will have to keep up.

Posted by Girish Narasimhan

As a founder or promoter of a private equity venture virtually of any size, the first thoughts associated with the thought of adding an investing partner is loss of stake, interference, more opinions, increased pressure and the possibility of conflicting ideas. However, that isn’t necessarily the reality of many situations and more often than not great businesses are the results of building the right partnerships.

The addition of an investing partner whether silent or more so one in an active operational role can have a tremendous impact on the venture itself and the challenges are mostly lie in locating and getting connected with the right investment partners for you. The right investing partner brings something valuable to the table and the upsides far outweigh any fears a promoter may have about the partnership.

While the primary reason to seek out a partner who can contribute with an investment is raising capital, some of the upsides of adding a good investing partner to your venture management team are:

• Experience. A partner, especially a highly experienced one within the space you’re operating in can bring in that experience to your venture. With the added experience, you can avoid mistakes, work smarter and get guidance which could be invaluable along the journey of growing your business.

• Expertise. Everyone has their areas of core expertise across various functions of a business. For some it could be operations, others marketing and revenue generation and still others …technology. Selecting the right partner isn’t only about who can bring how much to the table, it’s also about what other value in terms of expertise can be brought into the venture to give it an added edge. A partner with great cash flow management skills may be able to help build a better business than one who just brings in cash.

• Perspective. While promoters may argue that adding a partner can cause conflict and differences of opinion, often a fresh perspective or new opinion from someone not as ‘emotionally’ attached to the business as a promoter or founder can be very helpful. Having too many opinions may be unproductive but having an extra viewpoint or two brought to the management of a venture can do a lot of good.

• Value perceptions. An investing partner also creates stakeholder value creation stirring events such as IPO, M&A opportunities and similar events which could help enhance the value of the business. The addition of a partner like this can be seen as reassuring among stakeholders and have a positive impact on management and corporate governance. This could be invaluable in attracting and retaining better talent as well as increasing confidence among customers, employees as well as future investors.

• Risk. Spreading the risk rather. Adding a partner helps reduce the risk to an extent by sharing it. This can actually make a venture stronger.

• Gains. Adding a partner who brings in capital as well as contribution to the growth of the venture can help boost growth and add financial value to the business which may not have been viable without exploring partnerships. In the long run, this could result in a business more profitable than one steered alone.

The upsides of adding an investing partner are clear and worth looking into if you’re looking to build additional value into your private equity venture. When you need an investor or a partner it’s not so much about selecting one who offers the biggest investment in your company, it’s about finding the right person who can add the most value, contribute and help you take your business to the next level, helping you build a great business.

Posted by Girish Narasimhan

It’s often assumed the reason for scouting the mid-market space for business acquisitions is a simple investment move. You have a reserve of capital or cash in hand and look for a profitable business which can be acquired to ensure that additional cash is adding value. That isn’t however the only reason to actively keep an eye on mid market companies which may be worth acquiring. The second or lesser considered motive is to keep an eye open for businesses that may be able to add to your company’s capabilities through an outright acquisition. In such cases even a moderately profitable or even loss making business may still prove to be an asset and result in extended capabilities for your business and contribute in a huge way to growth.

A hypothetical example would be if your company has a fantastic product which has the potential to leave competition in it’s wake but you face a challenge while trying to build a nationwide distribution channel for it and in the time it would take to, you stand to lose precious market share. In this kind of a scenario locating, evaluating and acquiring a comparatively unprofitable business in the same space but with a well established supply and distribution network could turn into an invaluable asset in your existing growth plan. In this case the motive is operational synergy.

According to an NYU Stern paper written on acquisition motives:

Sources of Operating Synergy

Operating synergies are those synergies that allow firms to increase their operating income, increase growth or both. We would categorize operating synergies into four types.

1.     Economies of scale that may arise from the merger, allowing the combined firm to become more cost-efficient and profitable.

2.     Greater pricing power from reduced competition and higher market share, which should result in higher margins and operating income.

3.     Combination of different functional strengths, as would be the case when a firm with strong marketing skills acquires a firm with a good product line.

4.     Higher growth in new or existing markets, arising from the combination of the two firms. This would be case when a US consumer products firm acquires an emerging market firm, with an established distribution network and brand name recognition, and uses these strengths to increase sales of its products.

Operating synergies can affect margins and growth, and through these the value of the firms involved in the merger or acquisition.

Unfortunately, unless an organization has an agenda to actively seek out acquisition opportunities which can help them explore operational synergies, a lot of good acquisition prospects fly under the radar and get overlooked which could have added value at some part of the operational chain. While decisions to explore options for building on capabilities only come by from time to time when there is a realization that there is a challenge, good acquisition prospects are worth keeping a tab on at all times.

When the motive is beyond looking for an attractive and profitable venture to acquire as a direct financial opportunity even one which seemed financially ‘one to pass on’, may in fact have been the perfect opportunity to add on operational strength that could take your business to the next level. Value after all, isn’t always found in the accounting books!

posted by Sayantan Bhattacharya

When you’re in the market for private equity investments for your business it’s important to be able to identify with what factors private equity investors have at the back of their minds while sizing up your business. While every entrepreneurial professional has supreme confidence in their own business plans, they have to be able to put themselves in the investors shoes and think about “what could be the ‘golden tickets’ and the potential deal breakers” from their point of view.

With the right perspective and ensuring you have a water tight plan to present deals should fall through and investors will join in. Here are some of the things on private equity investors mind when they evaluate a business:

Large Or Exploding Market – Market size is a critical yard stick for investors and a limited or restrictive market is always a potential deal breaker. On the other end, a massive potential market or one that’s rapidly growing or even exploding is a hallmark of a good investment target.

Threats To Growth & Sustainability – As an investor it’s always natural to look ahead in time and watch out for any risks or threats to the business going forward. Is there a chance the business may become redundant as a result of emerging changes in technology or within the field? Is there no entry barrier for competitors’ which could pose a problem in the near future and impact market share? Is the business much ahead of it’s time even perhaps and may not find buyers as quickly as estimated? For an investor a business needs to be relevant, within an emergent or growing market and have minimal risks to it’s growth and sustainability over the coming years.

Industry & Market Conditions – The prevailing and predicted industry and market conditions often influence private equity investments in any business. Travel related businesses suffered setbacks in investments post 9/11 the world over. In contrast, a large number of investors are eager to find opportunities in clean-tech and green solutions businesses with the current opinions on climate change and movements around sustainable solutions for energy and other areas.

Strong Team & Management – When an investment is made its done taking into consideration who is at the helm of the venture and the management along with the team is perhaps given the highest weight age. “Who am I investing in?” is really the question on private equity investor’s minds and the people behind the business can make or break a potential deal.

While every investor has his or her own unique parameters for measuring confidence in a business, if you keep in mind the above checklist and come out strong on each one of these, you’re on the path to closing a deal when you come across the right investors.

While India’s biggest draw for travelers in the form of the Commonwealth Games in Delhi is heading for what appears to be a complete disaster, elsewhere around the country the hospitality industry is looking extremely upbeat. In private equity as well as M&A circles, the $357 million worth of deals that took place this year alone indicates hospitality investments are heating up.

A recent post published by VC Circle.com announced VC Hunt’s investment in a hotel chain through a 27% acquisition valued at around 32 crores. Quoting the article:

Gautam Seengal, Managing Partner, VC Hunt, told VCCircle, “There is good potential in the Indian hospitality industry. As India is a hot destination for both tourism as well as business, there is a continuous flow of visitors, which keeps the hotel industry a better destination for investments.” Seengal is also the Managing Partner for private equity fund Acumen Capital, which has invested in VC Hunt.

While the rise of both business and tourism visitors to the country is creating a demand for additional room capacity across numerous cities and destinations within India, investments in new hotel properties isn’t the only opportunity we at CFA India have been upbeat about. There is a significant opportunity for acquisition, upgrading, renovating and re-branding existing hospitality properties and chains to meet the need for the up-market clientele. The demand increase for luxury or even higher end budget hotel rooms can be met by strategically buying out existing properties and smaller groups which are falling behind in terms of quality of infrastructure and service with the objective of overhauling them to suit today’s requirements. With some capital as well as offering restructuring, perhaps some capital injection and re-branding, these properties can be turned into highly profitable businesses.

The answer to the growing demand for quality hospitality properties may just come from existing rooms which could benefit from new ownership or investors. With the right opportunities spotted at the right time, careful valuation of these individual properties or chains and the right deals put together, there is a clear underlying opportunity within the existing hospitality industry to tap into the new found, growing customer base.

For now, hospitality investments are on the rise and this is going to be an exciting deal space to keep an eye on!

Posted by Akshay Hoshing

Business valuation strategies in every place are highly influenced by the tax laws that govern a state and India with it’s complex tax structures is no exception to this. While what may appear to be a straightforward valuation process at first look can always take a turn when you bring the tax effects into the equation which is why it’s critical to identify every factor which needs to be considered.

For example: When any company is acquiring a loss making Indian company, the organization carrying out the valuation need not only be bothered about the ability of the target company to make profits in the future, due consideration needs to be given for the losses that have been incurred in the past, as that will have a valuation impact. Let’s try to throw some light on the aspect of business loss and unabsorbed depreciation:

1. As per the IT Act 1961, the reading of the following sections is a must:
a. Section 2(1B), which defines ‘amalgamation’ in relation to companies
b. Section 72A, which deals with provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation.

One must note that the Act makes a distinction between accumulated loss and unabsorbed depreciation. The distinction and reason is explained below:

Eg. Consider company ABC acquiring company XYZ, which commenced operation on 1 April 2008.

For FY09, the loss is INR 5 million. This component has to be divided between ‘unabsorbed depreciation’ and ‘unabsorbed loss’. Consider the EBITDA for FY09: INR 10 million. Depreciation for FY09 is INR 15 million. The EBITDA can absorb depreciation only to the tune of INR 10 million. Thus, depreciation to the tune of INR 5 million remains unabsorbed. Further, since the loss is INR 5 million, it means that this entire amount is attributable to ‘unabsorbed depreciation’ and there is no ‘unabsorbed loss’.

For FY10, the loss is again INR 5 million. This component has to be divided between ‘unabsorbed depreciation’ and ‘unabsorbed loss’. The EBITDA for FY10: INR 22 million. Depreciation for FY10 is INR 12 million. The EBITDA can absorb the entire depreciation of INR 12 million. Thus, there is no unabsorbed depreciation. Thereafter, there is an interest expense of INR 15 million. However, profit attributable to absorb this loss is only INR 10 million. Thus, interest expense to the tune of INR 5 million remains unabsorbed. Also, since the loss is INR 5 million, it means that this entire amount is attributable to ‘unabsorbed losses’ and there is no ‘unabsorbed depreciation’.

Why is this distinction necessary? This distinction is necessary because the Act makes a distinction between ‘unabsorbed depreciation’ and ‘unabsorbed loss’ and states that the lower of the two can be set off against the profits of the business.

If you think this is the end of your valuation woes, you are sadly mistaken. This is just the beginning.

Why? The reason is section 115JB. This section is know as MAT (Minimum Alternative Tax), which is applicable to all companies. First a definition of a few terms will help:

1. Tax profits: business profits computed as per the provisions of Income tax Act.
2. Book profits: As has been defined in Sec 115JB
3. MAT credit: Defined in section 115JAA(2A). Computed as = Tax paid under MAT-tax which would have been paid under normal IT provisions, had MAT not been applicable. This MAT credit can be carried forward only for 10 assessment years.
4. Set off on MAT credit: Set off will be allowed only in the year in which tax is paid as per normal provisions of IT Act i.e. not as per provisions of MAT or in other words in the year in which tax profits>18% of book profits. Also, sett of will be available keeping in mind the criterion of 10 assessment years. The amount of set off will be the tax computed as per normal provisions of IT Act-tax computed as per provisions of MAT. This basically means that in the year of set off, minimum tax payable will be tax computed as per provisions of MAT i.e. tax @ 18% + Surcharge+ Education Cess (which works out to 19.93%) of book profits.

In brief:

The table below shows the tentative steps to be followed:

With all the right tax nuances considered during the valuation process you can breathe easy knowing you’ve considered all the important factors before arriving at your valuation.

Posted by Priyanka Divekar

Valuation Indicators For A Sound Acquisition Or Merger

Perhaps the last thing an investor wants is to find out their recent business acquisition needs to be injected with more capital and investments to get back on the growth path they expected from it. The financial books looked promising during the valuation process and yet, often buyers find themselves in a situation where after acquisition, everything is not what it seemed and the effort to get the business back on track may have them questioning their decision in the first place.

The business valuation process is critical in the acquisition or merger move and needs to be a multi-dimensional one. While some buyers can make their decisions based on a review of the current year and previous years financials extrapolating them to determine the potential of their acquisition or investment, it’s a good idea to get a more intensive valuation done from a third perspective to cover all bases. Valuation of a business especially in today’s context when customer acquisition strategies and assets have evolved so rapidly is not a one dimensional process. While the financial numbers are an important consideration and indicator of a sound acquisition, one needs to look under the hood so to speak and analyze the engine that propelled the business to those figures. More importantly for acquisitions, one needs to ensure that engine has what it takes to drive that business into the coming years.

The engine under scrutiny here is the ‘marketing assets’ of the business. All things being equal in terms of financial figures over the past few years, a company that has built very solid marketing assets which are working to bring in the revenues is likely to be a better buy than one that’s relied on some very talented sales resources who have managed to pull in a good amount of revenue before the sale of the business. The marketing assets depending on the type of business in question can range from:

CRM database
Brand Equity
Online Brand Value
Website Traffic & Community
Distribution Network
Channel Network / VARs
Lead Nurturing System

…and more. The important factor being, they all contribute to a system which ensures a pipeline of future business on an ongoing basis. While this may seem all to simple, they are often ignored in the valuation process and as a result critical indicators may be overlooked during the evaluation stage which should have been spotted.

A technology business with a large online community and a popular blog could translate into a steady channel for inbound leads in future. A second technology business that financially has been growing at the same rate due to a talented sales team and few big contracts that are due to expire in a years time would need more effort post-acquisition to keep up the growth rate. Similarly a mid-sized budget airline that has consistently been building a robust CRM database and developed a lead nurturing system to reach out to customers regularly is more likely to have steadier growth as compared to one that doesn’t.

A thorough, multi-dimensional business valuation can make all the difference in an acquisition or merger bid. Once you have read between the lines and know that nothing has been left to chance, rest assured the right deals can be made.

(For more on Business Valuation download : Valuation: Getting The Right Price When Selling Your Business)

posted by Sayantan Bhattacharya

It’s so much a part of what we do as representatives of our global and local customers here in India and such an understated part of the mergers, acquisition and investments process. Aside from our expertise in investment banking and financial advisory services we find often find ourselves being the effective communication and cultural integration facilitator which is a critical factor in successful M & A activity and often overlooked.

The nuances of Japanese business culture are popularly thought in the curriculum of management institutes and business schools across the globe and yet doing business in India which comes with it’s own share of peculiar working culture and communication code is often best learnt through experience. Unfortunately, most businesses in an acquisition or merger scenario don’t have the luxury of time required to learn those nuances and this can create a cross border communication gap hindering the process. That’s perhaps one additional benefit of having a local presence through our offices here and have us bridge that gap.

Just the other day at a local government office a visitor from Europe in the process of acquiring the ‘required paperwork’ for his business was asked by the help desk clerk to meet the head of the department in his office to get his signature. Now just as one would assume is the right thing to do, he strolled right into the chief authorities office and sat himself down on one of the two vacant chairs by his desk. Instead of the “how can I help you?” that was expected he experienced the wrath of the official who was irked by the fact that this man could walk straight into his office and sit down without his permission.

Now you may say “What am I missing?” but what was expected (and no one questions why) was the official would summon the man through his assistant who stands outside his office through a wave of hand. Needless to say, this simple oversight on the part of a visitor from another place who obviously would have a clue this is how it works would cost him the chance of getting his papers done in time. A small detail but potentially deal breaking simply because the way things get done in one place need not be the same as they get done in another.

Communication gaps and cultural nuances are a part of M & A activity when it involves people around different corners of the world. Just as it’s good to have someone greet you at the airport when you land in a place which speaks a different language, it’s good to have partners who speak the language and understand the culture where you plan to do business. Since when have differences stopped anyone from doing business anyway?

You wouldn’t expect to find the terms “overvalued acquisition” and “fatter wallet” in one title but this is exactly what appears to have happened for the India based Pharmaceutical company Fortis in the past few days. Making the financial front pages across the country today is news of Fortis’ exit of Singapore based Parkway Holdings Ltd in a deal that would have them net $85 million over what they shelled out to acquire their 23.9% stake just a few months ago this March.

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