TATHYA: Strength of Mind

TATHYA: Strength of Mind: "In the cacophony of life, each character, when translated into an adjective, becomes a relative term. Talk about “Strength”, especially of m..."

Proprietary Deal Flow (V1)

Proprietary Deal Flow (PDF), a concept very much prevalent in mature economies, is still unheard in the emerging markets.

Proprietary deal flow is a process in which, an acquisition search firm or an investment bank tries to find a target (for the buyer) that has not been approached by any other bidder/not on auction. The PDF deal has following salient features. The prospect/target company

• is not for auction
  
• is not represented by any other acquisition firm/investment firm for finding a suitable buyer
  
• the buyer has exclusivity in making bid/offer
  

In crux, PDF is an art of finding virgin targets which are unexplored and offer a better deal to the buyer. In countries like US, one can find a lot of acquisition firms / investment firms that have pioneered the concept of PDF. Most of the experienced PE firms put such deals on their radar.

PDF is preferred by the buyer (strategic or financial) as it offers a lot of advantage.

• Buyer can get the seller at a lower multiple valuations which is not the case in auction. Since, buyer is the only bidder, deal can be better negotiated in acquirer’s favor.
  
• Buyer enjoys the exclusivity in deal negotiations in terms of direct access to board members, financial data. The buyer’s in-house team can handle the deal process without the services of investment bankers.
  
• Buying the company at price lesser than the average industry rate ensures higher return to investors.
  

PDF is a simple model offered by small to mid-size acquisition search firm or boutique investment banks which still work on a traditional yet pure form of investment banking and conduct only buy-side search. Modern investment banks have made foray into financing, research, valuations and other add-on services to boast a complete package of M&A advisory.

We will try to get our hands dirty on the PDF process in the next episode. Till then, keep visiting this space.

Simple Fundamentals

Private Equity transactions in India have seen sudden splash in last few years. Many VCG / PEG see India as a hot destination. In 2005, a report from Goldman Sachs even put into the BRIC (Brazil, Russia, India, China) class of emerging economies.
The year 2007 had seen a lot of PE money pouring into Indian market. In the same year VC / PEG investments crossed the USD 17 billion mark. This huge amount of money chased few asset classes and raised the prices of few favored assets. Indian corporate (private & public) got the substantial chunk of this money. With lot of money chasing fewer avenues, valuation reached skies in no time. Riding on positive business environment PE and M&A transactions gained popularity and buyers paid good valuations for buyouts.

Then came the 2008 with all the negative cues and the business outlook changed all of the sudden. With subprime dragging US economy down, all the dollar based economies took a blow. The beginning of 2008 made analyst to revise their PE transactions estimates to lower end of the table. Many thought and even think that in amidst of global slowdown, the deal making process will get effected.

In reality we might see more number deals happening in the near future in terms of M&A or private placement. The reasons are many.

 IPO market has been hit due to the steep fall in secondary market. Investors now prefer to play wait and watch game with every IPO or FPO. If we look at past few months in 2008, many power packed IPOs got a hit. IPOs like Reliance power failed to fetch good returns to the investors. Also, the year has witnessed the golden era of charging high premium being dried-up and many companies have deferred their plans for going public. The looking for expansion are relying on PEG to fund their project plans. With domestic demand on the rise and expansion plans on the up PEG are finding lot of takers.

 The year 2007 saw valuations to touch unsaid limits. The fall in stock market has put the market price of companies to some reasonable levels. This would encourage the PEG to pick stakes in firms which were expensive sometime back. Recently, many PE firms have picked substantial stakes from secondary market in PIPE transactions to benefit from the falling prices.

 In the era of rising interest rates, corporate find it difficult to finance their projects through banks & FIs. In these cases, they approach PEG to get their plans going. PE firms on the other hand get decent deals as the target does not have many options. Also, the investors get a chance to provide hybrid financing to these businesses.

 With valuations on the more realistic fronts, the time is good for the corporate to evaluate their growth strategies. The buyers looking to diversify or get firm footing in the same market can hunt for potential targets at reasonable price. For sellers, it’s the time to identify non-core assets and focus on the real business. The time is right to align business strategies.

 Some family owned businesses have also realized the importance of going professional in today’s context. They see a need to bring in management and directors who can run the corporate on professional lines. In some cases, legacy issues might also induce the business families to look out for financial partner. PEG groups also find these deals quite lucrative as the business after restructuring unlocks a lot of value

Indian economy despite recent slowdown is in the emerging stage, where a lot of deals are bound to happen. With new sectors now being opened for foreign money, lot of Indian companies can be seen as potential targets. Also, corporate / financial buyers which are thriving to achieve abnormal growth and size with Indian growth story will be zooming their radars for potential targets.

India's Competitive Advantage

India Shining

In recent times, we have heard a lot about foreign money coming into India. It is really surprising to know the country which was failing till few years back on every economic ground seems to be one of the favored hunting grounds of many international organizations. As many of us love quoting ‘Everything has changed slowly and gradually’, India’s fortune has changed in last couple of years. The point to ponder here is how things have changed? What factors have contributed to this change? Let’s try to identify some of these factors that have really pushed this country’s fortune to new unsaid limits.

Firstly, I believe the credit goes to necessity. As we know, necessity is the mother of all invention. When our reserves stood at ~USD 6 billion in 1991, we had to open shutters to allow foreign money to enter and save sovereign solvency. It was not in actual the proactive approach but a passive approach. The wave of liberalization that started in 1991 is still on to sustain the economic growth (and not economic development)

The second reason of the high capital inflows is India’s undervalued currency. With few dollars measuring to lot of Indian money, foreign money can buy lot of stuff at the unbeatable price. From raw material to human skill set, India proved to be an attractive destination to the western world. This lead to the emergence of offshore outsourcing concept where foreign companies looking to cut down their cost and still maintaining the quality saw great opportunity in India as a low cost service provider

India’s demographic composition also aid in the growth. With population density one of the highest in the world, India not only proved to be low cost destination but a market in itself where the foreign corporate hungry for growth found a high growth market for their products. With western markets already reaching saturation in terms of growth of many products, corporate see India as a lucrative market for sustaining growth and increasing shareholder’s value.

Indian education system has contributed in building country’s competitive advantage. The colleges in India have been able to build a brigade of young professionals that provide quality work at unmatchable price to the foreign companies. Emergence of IT, ITEs, BPO and KPO is the prime example of the same. Some companies have also installed their manufacturing units to take advantage of the India’s cheap and yet quality manpower.