DARE - Because Entrepreneurs Do

A patient approach, an attractive target, a sensible intermediary and a proper due diligence could help you close a lucrative deal.

As Tenon, a major player in the facilities management business, got into talks to acquire Rotopower’s business arm earlier this year, the latter’s CEO Vaibhav Dayal sat patiently through the process closely analyzing the pros and cons of the impending deal.

While the talks slowed down, broke down and then picked up over the period of six months before the deal was finalized in June this year, Dayal wasn’t perturbed. “It is a patient game. It is more of a mind game rather than anything else,” says Dayal, who has retained his role in the company post-acquisition by Tenon, the AIM-listed firm that now has over 20,000 people on its rolls. “Typically these things work better when you don’t rush into it. The moment you rush it, you take a knock,” he adds.

India’s M&A scene has witnessed big action till the end of the 2007 but dampened slowly in 2008 and so far in 2009. This has been due to the global recession and it ripple effect on the Indian market. According to a KPMG report, the Indian M&A (including PE) market witnessed a 14 percent decrease in volume in 2008 vis-a-vis 2007 with 863 deals, as against 1001 deals in 2007. In volume terms, it means a 41 percent dip from $71.7 billion in 2007 to $42.2 billion in 2008. The first quarter of 2009, the report says, has seen a 63 percent dip in volume over Q1 of 2008. With markets now picking up, there could be renewed interest in M&As and some cross-border deals could be in the offing.

DARE/key sectors

In case of a merger, two firms come together to form a new company. The operations of both entities merge as a single operation

In the case of acquisition, one company takes the ownership of another company after paying the price for it to the owners or shareholders of that company. The acquired company becomes the subsidiary of the buyer company

The Indian M&A (including PE) market witnessed a 14 percent decrease in volume in 2008 vis-a-vis 2007 with 863 deals, as against 1001 deals in 2007

The first quarter of 2009 has seen a 63 percent dip in volume over Q1 of 2008

The decision on an M&A should not be taken in haste. There should compelling reasons to support it

Communication between both parties should be as transparent as possible

Going in for distressed assets is not a good idea. The buyer could end up burning his fingers

Final valuations are arrived at after due negotiations between the two parties

The role of an intermediary in an M&A is very important. It can make or break a good deal

Merger Vs Acquisition
In case of a merger, two firms come together to form a new company. The operations of both entities merge as a single operation. Besides this, the customer and employee base also unify, as in the case of Arcelor-Mittal, the world’s largest steel manufacturer. The company was formed in 2006 after the merger of Arcelor with Mittal Steel.

In the case of acquisition, one company takes the ownership of another company after paying the price for it to the owners or shareholders of that company. The acquired company becomes the subsidiary of the buyer company. Thus the company that acquires, gains complete control of the firm it buys. “In case of an acquisition, you are a big company and you are acquiring a small company. For instance, if A buys B, then A will remain, B will vanish. Take the case of HDFC purchasing Centurion Bank of Punjab,” says Jagannadham Thunuguntla, Equity Head, SMC Capitals.

Assessing your readiness for M&A
Every company aspires to grow both organically and inorganically. The M&A is considered by many as a quick way to expand by adding new customers and more revenues and profits. It could also emanate from the desire to enter newer geographies that are more promising. It is important to have compelling reasons to go in for an M&A and that it would meet the desired results. Sometimes, a poor performance by a company could make its promoters feel that an M&A could help them rake in profits. This would be one of the worst reasons to acquire or merge with another entity. Sometimes just to take on the competition, one might want to go in for M&A. This strategy might work but only if it is supported by other good reasons such as a significant value addition to the current business.

“One should not do an acquisition only for the sake of doing it. Every M&A should mean something. It should either bring in new technology or new customers or footprints into new geographies, a new market or a better team,” says Thunuguntla of SMC Capitals. “Most M&A (98 percent of them) globally have failed,” he adds. This is because most of them are done in haste and without assessing proper synergies, he adds.

Having an intermediary is fairly important to the success of M&A. The intermediary should understand the business of both parties. - Vaibhav Dayal CEO, Rotopower Engineers

Identifying a target
The first step should be to shortlist the target companies that would be well suited for an M&A. This would require a thorough research on the companies in the sector, their products, customers, revenues, employee base, etc. Once the list is ready, it would be easier to zero in on the potential targets. Networking comes in handy as some key employees could use their contacts to get some crucial information on potential targets. The other way could be to outsource the work to investment banks who would do the job at a cost.

But you cannot buy or merge unless someone is ready to do so. Just like you have compelling reasons to buy or seek merger, the other party should also have good reasons to get acquired. This could be as varied as persistent losses, or loss of good customers or simply the promoter’s desire to sell off.

The Deal Process

Shortlisting the target Zeroing in on the target Sending feelers through an intermediary Due Diligence Valuations Negotiating on the value and other aspects of business Raising money to fund the deal Discussions on payment schedule Finalizing the terms of the deal Signing of the agreement Closing of the deal

“An acquirer should not look at buying distressed asset,” says Thunuguntla. “What he should be looking to buy is good assets but from the distressed seller. For e.g.: if he is under loan obligation, etc, which means he is selling a good asset at a distressed sale price. Ideal combination is to buy a good business from a distressed seller at a distressed sale price,” he adds.

Reaching out
Once you have zeroed in on the target, you got to send feelers to the promoters of the target companies. In some cases, the company that wishes to get acquired or wants to merge itself with your firm could approach you.

This communication is best done through an intermediary. “If the acquirer himself approaches the target companies, his negotiable power will go down. So there is no point approaching directly. The ideal way is to approach through the investment banker,” says Thunuguntla.

“Having an intermediary is fairly important to the success of the M&A. He needs to understand what business the two firms are in. He also needs to be clear why the acquirer wants to acquire, and why the other wants to get acquired,” says Dayal. The intermediary must also be able to generate confidence in both the parties. Depending on the size and nature of the transaction, the intermediary could be paid anywhere between one to five percent. If the transaction is larger (Rs 1000 crore or above), then it could be less than one percent. “The fee is paid by the party that engages the intermediary. In several cases it is the buyer,” says Dayal.

In case of an acquisition, don’t buy distressed asset. Instead buy a good business from a distressed seller at a distressed sale price Jagannadham Thunuguntla Equity Head, SMC Capitals

Due Diligence and Valuations
The due diligence process involves the assessment of every aspect of the company to be acquired. It involves assessment of accounts, markets (customers), HR processes, legal aspects and production prospects. “It has to be done by the detached party and not by the attached party,” says Dayal. The cost of due diligence varies on the size of the material. “Due diligence of any size would not cost anything less than Rs 10-15 lakh,” he adds.

Once the due diligence process is over, the deal price comes into discussion—the valuation of the target. Although there are several formulae that are used to arrive at a figure, it is all theoretical, says Thunuguntla.

“It is based on your top line, bottom line, etc. The spade work is you do the valuation and the real work is that you agree on it,” says Dayal. A good acquirer would have a fair idea as to what value he would be willing to pay. Thus, even though a figure is assigned by a third party, the final negotiations could end up quite far from the quoted price. “This is the time when other things come into play. Things which are off balance sheet — the softer aspects of the business — what value you assign to the human resource, what value you assign to relationships, what value you assign to customer stickiness, etc,” says Dayal.

The final deal
Once the value of the deal is agreed upon, the two parties would work towards closing the deal. It would significantly involve the role of the lawyers to work on the terms and conditions of the deal. It would be penned down in black and white. The agreement would talk of the terms of payments, and integration of staff, technology, customers, policies, etc.

< Prev		Next >