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A Year of M&A; PE in Distress

shruti — Thu, 19 Jan 2012 07:06:50 +0000

While it is expected to be the year of mergers and acquisitions, private equity is in deep distress, said a panel at a Grant Thornton event to discuss a ‘New Economic Global Order and M&A and PE Strategies’.

Calling 2012 the year of M&A, Professor Jagdish Sheth, Charles H. Kellstadt Chair of Marketing in the Goizueta Business School at Emory University said that the companies that have large amounts of cash on their balance sheet are going to have an advantage when it comes to mergers and acquisitions. The importance of consulting lawyers and accountants, over bankers, will rise, considering the legal situations companies can be faced with due to laws enacted by governments in emerging economies.

Private equity investments made in 2007-08 are coming to the close of their cycles. This will result in increased M&A activity as well. There will also be buyouts and companies going through bad phases fuelled by the economic conditions which will also lead to heightened activity on the M&A front.

Private equity players are finding it tough to find good investment opportunities. Also with the market not showing signs of recovering from the IPO lull for another six months, an exit route for private equity players seems to be running dry.

Entrepreneurs in India, particularly owners of family run businesses have also increasingly opened up to the idea of selling their businesses, fuelling a rise of M&A activity. Prof. Sheth discussed a problem with family run businesses saying that most family run businesses tend to diversify into too many sectors, and are competing with a different set of competitors in each. The businesses need to reduce this diversification and sell off businesses that are not core to the company.

Private equity can make money by restructuring and breaking down a business brutally. There are more and more hostile takeovers expected towards approaching this end. PE players have gained an increasingly negative image because of this change in attitude. PE players need to consider how a business they are investing in can be nurtured and not only look to restructure and make a quick profit, Prof. Sheth said.

A trend in M&A expected, according to Prof. Sheth is that “companies in emerging markets will look to acquire in other emerging markets.” The sectors in terms of M&A which are expected to see hectic activity are pharma, IT, real estate and infrastructure. He added that “India will become a second sourcing destination for manufacturing.”

According to Grant Thornton’s Deal Tracker, a record of all the major deals in 2011, M&As and PE deals put together, 2011 saw a total of 1,026 deals in India, totaling $54 billion, down, however, from 2010’s figure of $62 billion, which was clocked through fewer deals at 971. Another reversal of trend was the fact that in 2011 inbound deals were more than outbound.

Message for Entrepreneurs: Resist VC Money, Innovate in Business Model

Team Entrepreneur — Tue, 17 Jan 2012 11:34:16 +0000

It’s 2012, and a challenging year ahead for entrepreneurs. But the general view among experts seems to be that money is there to back ventures if the business model is innovative. Too many me-too ventures are cluttering the market, with a focus on e-commerce, but the future will have to see start-ups innovating on both the business model and execution.

The general consensus at a discussion at the recently concluded Wharton India Economic Forum panel discussion on “Entrepreneurship in India” was that the next ten to twenty years will be very different for entrepreneurs in India than what was seen in the past, where ‘irrational exuberance’ ruled and consequently many ventures could not sustain themselves. But despite the current challenges, this is a great time for entrepreneurship in India.

The panel – comprising Manish Sabharwal, co-founder and CEO of Teamlease, Kunal Bahl, co-founder and CEO of Snapdeal.com, Sandeep Murthy, former CEO of Cleartrip.com and India Head of Kleiner Perkins, Gautam Gandhi, head of new business development, Google India and Sandeep Singhal, managing director, Nexus Venture Partners – discussed a wide range of issues from venture funding to social entrepreneurship to bootstrapping. Here are some of the thoughts they shared:

A lack of respect: Unlike the US, the Indian entrepreneurial journey does not command great respect. There are pressures from the family, it’s hard to get capital, there is a lack of protection and it’s a big black spot on the resume if a start-up fails. Indians are excessively focused on the end-result, not the journey.

Preparedness is critical: Entrepreneurs don’t enter the fray well prepared, and there’s little innovation taking place in the entrepreneurship space in India. Consequently, the e-commerce space is flooded by me-too products and services. But there are cases where such ventures have also succeeded, in spaces like job listings, travel sites etc. Utility-focused models are working these days.

Choose funding carefully: Raising money is a ‘humiliating’ process. And the colour of money is more important than the quantum of funds. Resist venture capital funding as much as possible, because VC funding ‘changes everything’.

Bootstrapping vs external funding: Bootstrapping a business is generally a better option than seeking funding from external investors to begin with. Angel investors are also coming in large numbers. “If you have an idea, there is money to back it. And money can come in from anywhere.”

Social enterprise: There are several ways of creating companies that do social good. India is at a juncture where firms can find themselves at the unique confluence of doing well and doing good. But it is important not to nuance the term social entrepreneurship too much. Firms are, in some way, social enterprises because they provide employment. There are ventures which can be fun, profitable, and yet good for India.

Be ready for the harsh realities: Don’t ignore the smaller aspects. After getting funding, the biggest challenges are office space and infrastructure. Start-ups must focus on these relatively smaller aspects to get cracking.

Product, brand, people: It is critical to get the product right, invest in the brand and in people. It is critical to keep investing in people and scale up the venture. There are also some sectors where entrepreneurship opportunities are likely to be higher. The food and beverages industry is one of them.

Shakeout imminent in PE space

Team Entrepreneur — Tue, 10 Jan 2012 06:32:32 +0000

With over 500 registered private equity funds registered, and challenges looming large in the economy, a shakeout in the PE space is imminent, as players warn of ‘crash and burn’ for some. However, it’s not an entirely doomsday scenario, since some of the largest PE players still say that they are cautiously optimistic about the Indian market and say differentiated offerings will work and get rewarded in the future.
As the Indian PE space gets ready for some serious introspection, some of the top private equity players exchanged notes on the scenario and what would be the best recipe for the road ahead at the Wharton India Economic Forum on Monday in Mumbai.
The line-up was impressive: Manish Kejriwal, former Temasek India boss and now managing partner, Kedaara Capital, Naveen Wadhera, India Country Head, TA Associates, Sandeep Naik, India Co-head, Apax Partners and Nainesh Jaisingh, managing director, Standard Chartered Private Equity. The verdict: the time has come for a change in mindset on both sides. While PE players must realise that momentum-based investing will now be replaced by fundamentals-based investing, companies will increasingly have to understand that the capital market, despite the odds, will reward companies which keep a tight watch on costs and efficiency of operations in these times.
Limited Partners (LPs) are currently changing their view on Indian companies significantly – over the past few months – as Indonesia, Vietnam, Thailand and, of course, China offer alternatives and India’s policymakers grapple with challenges creating a policy paralysis. “Trying to tackle supply side inflation by jamming demand is not going to work,” the PE majors point out.
Those like Manish Kejriwal, who, in his Temasek avatar has funded several major Indian companies, among them ICICI Bank, are still bullish in general about the Indian scenario. “There are solid companies, promoters are shaky but want stability. So it’s a great time for private equity. I feel the 2012 vintage of funding will be much more rewarding than the 2008 vintage,” explains Kejriwal. But the general consensus is that the current slowdown will differentiate the men from the boys, both for companies and for PEs.
Fund-raising will be tough, but funds once raised will fetch attractive returns in this market, says Kejriwal. Wadhera says earlier, the role of PE funds was not entirely understood by Indian companies, but that has significantly changed now. “It used to take ages to convince entrepreneurs once the term sheet was out,” he explains, “but that has now changed.” PE funding has helped create the Business Process Outsourcing (BPO) success story in India and companies like Suzlon and others, the PE majors point out. The mid-sized entrepreneurs had an alternate source of funding during the boom of 2006-07, though the euphoria of those days is well and truly over.
What does the future hold?
The next two years, some of these large PE players feel, could well be the golden years of PE despite the shakeout and the challenges as a focus on correct valuations, governance and people get priority and lessons are learnt from the bubbles of the past. There are several high growth companies outside Mumbai and Delhi where the spirit of entrepreneurship is alive and well and these companies will be the stories to watch for PE funds. “There are stories in cities like Nagpur, Jalgaon, Ahmedabad…”, point out the top PE players. The current period will, therefore, be “the busiest, the craziest, but fun.”
Will PEs also look at distress sales as the economy gets challenging for corporate India?
That, most PE players believe, is unlikely. The public sector banks work like safety nets for entrepreneurs who therefore have little fear of failure. “If there is trouble in the business and a fear of problems, it’s time for a cup of tea with the general manager of your public sector bank and all will be well. Corporate debt restructuring will solve the problem,” they point out. Distress investing won’t work in India until there are clear foreclosure laws, greater governance and accountability. PE majors recall that even in 2008, when PE funds expected corporates to fail and hence were “literally running around, chequebooks in hand”, this cosy relationship between state-owned banks and entrepreneurs ensured there were hardly any deals done even when valuations were plummeting.
India, therefore, is an unique market. And the faster the PE investors realise it, the more profitable their engagement with the Indian market will be in the coming days. Going by the views of some of these top players, many of them are quick learners.

“Skill the workforce”

Team Entrepreneur — Mon, 09 Jan 2012 09:56:55 +0000

Is the Indian growth story a reality or a concoction of various reports compiled together to reach a figure which is ambiguous? Is the India Shining picture a true one or a creation of people with vested interests? These are some of the issues which were addressed during an interesting first session by K.V. Kamath, Chairman, Infosys and non-Executive Chairman of ICICI Bank. Speaking at the 16th Wharton India Economic Forum today, Kamath said that the true picture of India’s growth will only emerge if we get a clear report on all the sectors of the economy. The unaccounted-for money also needs to be accounted for, he added. Delving into the past for a bit, Kamath said that the future lies in building a successful social and physical infrastructure in India, thus ensuring healthcare and education needs of all Indians. “Vocational training and skilled labor are the need of the hour and one cannot exist without the other. Skills need to be taught from an early age-say, high school. The workforce has to be skilled in order to ensure better productivity. When we meet the aspirations of a large number of Indians, across states and regions, then we can ensure proper growth will take place in the economy,” said Kamath. “As India Inc. scales up, there will be an increasing need for people with the right skills. That is an area of concern that needs to be addressed urgently,” he added. He gave the example of the IT sector, where such an exercise has already begun.

Utility Vehicles Steal the Show

Team Entrepreneur — Fri, 06 Jan 2012 06:18:39 +0000

Things are certainly happening differently this year. While small and compact cars were the preferred option last time round, this year’s Delhi Auto Expo is clearly veering towards launching more and more Multi Utility Vehicles (MUV) and Sports Utility Vehicles (SUV).

Yesterday morning Maruti Suzuki unveiled its compact SUV XA Alpha. The company plans to bring in a production level car in the next two years. Today Suzuki will unveil the Ertiga, a multi-purpose vehicle while French carmaker Renault will introduce its Duster SUV. Hyundai India showcased its new Sonata sedan, while its MUV Hexa Space also made its debut.

“SUVs and MPVs are lifestyle products which India is today ready to accept,” said Arvind Saxena, Director of Sales and Marketing, Hyundai India.

Across the hall, Nissan Motor Co. introduced its MUV Evalia, while American GM displayed new versions of its Chevrolet Captiva and Tavera that will be sold later this year. Not to be left behind, Toyota introduced new versions of its Fortuner SUV as well as the Innova MUV.

Hyundai Sonata

Mahindra & Mahindra Ltd., which has acquired South Korean Sangyong Motor Co., is participating in an auto show for the first time. The company now plans to start selling the SUV Rexton by the middle of this year while another SUV, Korando C, is expected to follow in 2013.

German auto major Mercedes introduced the new M-Class SUV while Audi AG introduced the Q3 SUV, following the success of models like the Q5 and the Q7 in India. Another German company, BMW AG, stayed away from the bigger utility vehicles and instead chose to introduce the high-performance M5 sedan at Rs.95.9 lakh (ex-showroom) and the iconic hatchback, convertible and Countryman models from its Mini brand.

While Ford had already unveiled its EcoSport SUV on Wednesday, it decided to do it once again in front of a larger crowd. Powered by a 1.0-liter gasoline engine, this vehicle will be produced in the country from the latter part of this year. The new entrant on the block, French carmaker PSA Peugeot Citroen, explained that while its Sanand plant starts production only in 2014, it may start selling its cars in India ahead of its original target by importing 508 sedan and the RCZ sports car.

Bailing out the king?

Team Entrepreneur — Fri, 23 Dec 2011 12:22:48 +0000

By now, you must have all heard and read about the fiasco with a big Indian airline owned by one of the most ‘enigmatic’ businessmen in the country. Chances are that by the time you read this, the whole thing would be dead and buried. And its planes would be flying again with those lovely airhostesses, which he does not fail to tell you a few times, that he has ‘personally’ selected.
To be clear, I neither have the domain expertise nor the consolidated view of the sectors that policymakers enjoy. Hence, any solution I serve up to this mess would hold little significance in boardroom discussions, which I am sure of. Even so, I do have my own little opinion about the airline boss expecting a government bailout and asking banks to take a haircut, at a time when most of them are under intense pressure with broader economic factors.
First up, why would man so much in distress still be up to all the usual when all is not usual with his business? Let’s step back and take a look – our man has a F1 team, an IPL team, a yacht or two, a sprawling holiday estate in Goa (there maybe others, we know), a bevy of beauties and photographers flying off for a calendar, a TV channel or at least branding on one, and tons of real estate everywhere.
Take your own haircut first, sir. Sell some of those cars and some of that real estate if you are really awake to the impact of your airline failing. Cut down all that vanity spend and pay your dues. But first, pay your employees. I am sure an open letter or two are on their way if you’re still studding your way through this.
I also have an issue with the whole thought process about a bailout, and why not giving one will put Indian aviation in a mess. It won’t. If the airline fails, then so be it. The government has no business interfering in a free market, where you place your bets, work hard, hope for a little luck, but if you don’t make it, you cut your losses and run or are usurped by the better competition. Eight airlines in India have packed up since the 90s. Some like Paramount Airways were wound up not more than a couple of years ago. Aviation survived all through. Those planes will fly again under a different banner. We will still fly. The Indian economic engine that is spurring airline travel is just too strong.
Lastly, I just don’t know why a thought for a taxpayer’s bailout exists for a fat, unprofitable, over expanded airline for whom conditions were made ideal by a certain civil aviation minister, but not for the state-owned airline that was profitable until it was messed about by him to make conditions ideal for others.

AUGUST SHARK is a once-failed, second-time successful bootstrapper who resides in Mumbai. He can be contacted at august@stumpspeak.com.

Land Ahoy!

Team Entrepreneur — Sun, 01 May 2011 04:30:08 +0000

Hello, dear Indian entrepreneurs. How is it hanging today? Any orders come through? Any got cancelled? Is that licensing still six bribes away? Is that vendor sticking to his deadlines? Has the bank again rejected your application for a loan? Civic authority creating problems again?

You could go on and on about the troubles Indian entrepreneurs face in this country on a daily basis. There are romantics who call this part and parcel of doing dhanda in India, and what makes Indian entrepreneurs a cut above others. But that is all rubbish.

To those who yearn for better infrastructure, better regulations, better funding rules, and better support systems, I present the entrepreneur’s version of the IT worker’s Great American Dream: the Startup Visa. Yes, a visa for entrepreneurs. Still awaiting to be passed in to a law, the Startup Visa legislation is being spearheaded in the U.S. by a couple of Senators who know that the way out for the U.S. economy is to get more companies on the floor. And immigrants must be armed with an opportunity to do so.

The legislation says (credit to the TechCrunch piece by Vivek Wadhwa of Berkley, Harvard, Emory and Duke here) that entrepreneurs living outside the U.S. will be granted a visa to set up companies there if a U.S. investor agrees to sponsor them with a minimum investment of Rs.45 lakh. It further says that workers on an H1B visa, or graduates from U.S. universities in science, technology, engineering, mathematics or computer science will also be eligible for the Startup Visa, provided they manage an annual income of at least Rs.13.5 lakh or assets of at least Rs.27 lakh and have had a U.S. investor commitment of at least Rs.9 lakh in their venture. The Startup Visa will also be available to foreign entrepreneurs whose business has generated at least Rs.45 lakh in sales from the U.S.

What’s the catch? For all three, the startup must have created a specific number of new American jobs, and either have raised over a certain amount in financing or be generating more than a minimum amount in yearly revenue. I like the sound of this. Sure, there is the great India story to stop you from heading to the U.S., but there are many pros to this act. For one, it’s a boon for Indian students going to the U.S. and wondering if they will get hired there or will have to return to India to pay off heavy education loans on a much lesser salary. Similarly, it will help those zombie-like H1B workers dive into the startup sea. And thirdly, the job scenario in the U.S. might be down, but it’s still a market with enormous purchasing power and consumers who are ready to try new products/services—especially all things tech.

And heck, the ecosystem for startups is much more mature in the U.S. Things will get really interesting if this legislation goes through.

AUGUST SHARK is a once-failed, second-time successful bootstrapper who resides in Mumbai. He can be contacted at august@stumpspeak.com.

©Entrepreneur April 2011

Budgets Don’t Love Startups

Team Entrepreneur — Fri, 01 Apr 2011 04:30:41 +0000

I woke up this morning to an image of the U.S. President meeting Mark Zuckerberg during some trip he made to Silicon Valley. Apart from the fact that Mark actually shed the floater-jeans-crewneck look for something more presentable like a suit, there was not much that struck me. It was a lazy Monday morning.

Reading up later, I found out that this meet was part of a much bigger initiative to push innovation in the U.S. It seems our friends in the West had just passed something called the Startup Visa Act. The Act grants a temporary work visa to any foreign-born entrepreneur. Conditions? He must be able to obtain an investment of at least Rs.45 lakh from a VC or a qualified “super angel” investor in an equity financing of not less than Rs.112.5 lakh. To gain permanent residency, the entrepreneur must create five new U.S. jobs within two years, raise more than Rs.4.5 crore in venture capital, or generate sales of more than Rs.4.5 crore annually. Personally, I think the Act is a bit flawed when it assumes that all entrepreneurs need VC or angel money; but the Act is not what I am focusing on here.

Here is what I am saying: Please, dear entrepreneurs of India, get yourselves off to the U.S. At least there is somebody talking about entrepreneurs and the value they bring to the economy there, be it a struggling one. Somebody as high up as the President wants more entrepreneurs to boost the economy, rather than throwing more subsidies and bailouts. Here, in India, days away from the Union Budget, we only got in the news issues like service tax rates, sugar prices, onion prices, tax exemptions, fuel taxes, custom reforms, etc. Even when there is talk of the budget in relation to SMEs, there is a clear indication that we are talking only about MEs.

Hey, Mr. Finance Minister, can’t you notice the small guy? How about not listening only to the big firms when making your budget? How about a new funding mechanism for first-time entrepreneurs? How about more grants for innovation-led startups? How about reactivating those dead, state-owned venture capital firms? How about setting up huge shared spaces for entrepreneurs? How about telling your banks to lend funds within a fixed timeframe if the documents are in order? How about reducing the number of documents in the first place? Can you also please stop ODing on IT businesses? Maybe look at giving other sectors a tax break? How about leaving proprietorship firms alone in their first five years? How about letting home-based businesses be?

I am not sure what is feasible and what is not. But you should know—you are the Finance Minister. At least get on the wagon, for God’s sake!

AUGUST SHARK is a once-failed, second-time successful bootstrapper who resides in Mumbai. He can be contacted at august@stumpspeak.com.

Are You Listening, Sir?

Team Entrepreneur — Tue, 01 Mar 2011 04:30:53 +0000

I recently read three seemingly unrelated articles in one of the business journals. What intrigued me was that despite no correlation between them per se, there appeared to be a common theme—an inherent message of how we wish to conduct our business.

The first article was about a global FMCG company with an emerging food business in India. The company had announced the launch of its new offerings for Indian breakfast, stating that in its interactions with customers across sections and geographies within India, it sensed an unarticulated and unmet demand for more healthy, ready-made breakfast options. So far, it has been confined to cereals with various forms of flakes, be it corn or wheat. So, the company customized these western offerings to suit the customary Indian light breakfast requirements, making them wholesome and yet not compromising on the flavor.

The second article was about another leading FMCG and food company. Upon being questioned about its fast declining market share, the negligible success of most of its recent offerings, and the need to change its strategy to get first-hand responses from customers, the company said that it will continue to follow the management policy and practices they have followed globally and in India for a few decades.

The third article was about a near-announcement by a government department about its almost final decision to not allow any withdrawals from the provident fund by employee beneficiaries before retirement. There was also the possibility of discontinuing the current practice of partial withdrawal/loans from the provident fund for specified exigencies. To the credit of another government department with authority on the subject, the need to continue with the practice of allowing withdrawals was pointed out, especially in view of the lack of any social security along the lines of the American 401(k) plans or public health plans. Up until the time of writing this piece, the debate is still on.

While it is utopian and naïve for one to expect a government department to treat employee beneficiaries of the provident fund scheme as its customers, an important point must be considered: Where is the consultation process with the stakeholders who are going to bear the direct impact of this measure? If not as a customer, doesn’t anyone care about his voice as a stakeholder whose money is the subject of the policy here and on whose behalf the decision is being made?

The other two articles I had read reflect contrasting examples of reaching out to current and potential customers. They spoke about probing into the customer’s stated and unstated needs and attempting to design solutions based on identified needs while continuing to take feedback from various classes of the masses. At the same time, they also pointed to self-fulfilling, audacious prophecies of “knowing” the requirements of the “defined” customers and acting upon a kind of self-knowledge of what suits the customers. It was a rather curious and interesting contrast.

While there’s no denying the fact that one cannot be everything to everyone, have we done enough to know which segment we wish to cater to? Why have we chosen this segment as our target market? What do we wish to offer this chosen segment and, most importantly, does the range of our offerings reflect our views of the needs of the segment or the views of the segment itself?

Ultimately, the basic question is this: Is one listening enough to one’s customers?

The views expressed here are personal.

Test Tube Tamasha

Team Entrepreneur — Tue, 01 Mar 2011 04:30:07 +0000

Some time ago, I ended up attending a conference on entrepreneurship at one of our very prestigious B-schools. I was not speaking as part of any panel at the event, but rather an attendee like other students and entrepreneurs. I, however, wish that I was speaking there. There was some real bull flying across the hall that someone needed to splat on the wall.

The B-school had recently started its own incubator; an ‘e-cell’ which it claimed showed its commitment to launch a surge of entrepreneurship both inside and then outside the school. The dean firmly believed that entrepreneurship could be taught and that his school was always one in support of it from the beginning.

I had some views that I wanted to air right there and then, but I stayed true to my role of always being the silent one during conferences and forums. I also wanted to give the dean, whose baby was that incubator, the benefit of doubt. Maybe he had something up his sleeve that was yet to be shown.

I did float around the incubation center and meet up with some of the kids who had, while doing the course, decided to start up. The process was simple. They applied to the center with their business ideas and plans somewhere mid-term; the center picked the ones most viable, and then put them on a two-year clock. During these two years, they would get paid as well as get to use the center’s facilities for free. After that, they were on their own.

Fair enough. But two things struck me. For one, some of the startups had business ideas that were clearly unviable and un-scalable. I dare say, some of them were laughable, with all respect to the entrepreneurs. A few peers and I wondered, what were the academics at the center thinking, encouraging these startups?
Secondly, the guidance provided was a lot of theory, little practical testing, and almost no market research. This, I agree, could perhaps be the case only with this center. The most that the startups ended up doing, besides developing the product, was talking to the VCs who attended conferences, professors, peers, and people like me who were around.

What is an incubator’s role? What are its responsibilities? What should an incubatee get back from the incubator? I fear none of these roles were fixed at that time. I went back to the center recently. The two years had just ended. Of the six to eight startups I had met out of the 10-odd there, three folded with the entrepreneurs going back to sit on placements (that is always an option in incubators; I wish it wasn’t). The rest are still running, but at least two look nothing like the original businesses they had started out as; they are clones now. Sans one, the rest do not seem to have moved along. Perhaps it’s time to review the role incubators are playing. Perhaps in the next article.

AUGUST SHARK is a once-failed, second-time successful bootstrapper who resides in Mumbai. He can be contacted at august@stumpspeak.com.