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

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

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

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?

The Times News Network today reported on the possible findings and suggestions of a committee set up by SEBI (Securities And Exchange Board Of India) which could have a significant impact on the M&A market within the country. According to the news agencies, the panel is expected to announce some significant changes including changes in the distribution or abolishing altogether the “Non-Compete Fees” which is usually paid to promoters as part of the acquisition deal. While the details of the announcements will become clearer over the coming days here is a quick overview of the expected changes:

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The only thing constant about markets is change! Perhaps, nowhere does this change manifest itself as clearly as in India where the economy and urban lifestyles are undergoing rapid evolution. As businesses  looking for investment opportunities in newer, brighter, upcoming segments with promises of steep growth rates and quick returns, there is no dearth of good acquisition targets. With the buzzword among companies seeking rapid growth being “boom” we often hear of a ‘boom in the retail sector’, a ‘boom in the housing markets’, a ‘boom in the consumer electronics space’ and similar financial headlines. This is often followed by a frenzy to tap into these opportunities and overcrowding in many cases. Finding themselves in a situation not as promising as they envisioned, exits are sought making it all the more difficult for companies to acquire the right assets. So how do you know if the business you’re looking to acquire is going to stay on the high growth path or struggle?

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The Euro may have weakened and European heads of states and finances may appear to be scrambling for solutions to the economic issues on news channels but all is not grim as far as business interests between India and Europe goes. Despite what appears to be tumultuous times for everyone involved, there is an upside for Indian investors seeking asset acquisition to play in the European markets. Likewise, there are reasons for European investors eying the Indian market to be optimistic about their prospects as the corridor.

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According to a recent survey by Ernst & Young 54% of the Indian companies surveyed said they are likely or highly likely to acquire other companies in the next 12 months. It’s not just acquisitions of local businesses but in recent months the interest in overseas business acquisitions as a means of expanding into global markets has also been on an upward trend.

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Despite initial skepticism in India during President Obama’s election campaign (owing to his stand on outsourcing and losing jobs to other countries) United States-India political relations are at an all time high and it’s reflecting in the market places with cross border business investments as well as acquisitions. Congressman Jim McDermott’s report “How America Benefits from Economic Engagement with India” which was released recently would come as a surprise to those who believed the US-India business relationship was a one sided flow of jobs and investments out of the US and into India.

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