Diamonds In The Dust - Cover Story - 4ps Business And Marketing Jun 2009

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A ‘Strategically fit’ target – necessary or simply a want?

Kalpesh Desai

CEO, Agile Financial Technologies

Valuations are low during times like today & you will notice aggressive moves from India Inc. Yet, low valuations should not become the sole reason for a deal!

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uring times of economic uncertainty most prospective buyers would consider acquisitions as high risk. However for Indian enterprises with strong balance sheets, or the ability to leverage, here is some food for thought. Signs of economic recovery are just in. Equity markets have been on the upswing and that is the first sign of economic recovery and increase in investor confidence. Emerging markets are showing positive growth with markets like India targeting a 7% growth in its GDP. Valuations are still attractive and for those of us who are looking at acquisitions as a mode to add on new products, service capabilities, strengthen our core business and to penetrate new geographies – now is the time to pursue buy outs. The window of opportunity is quite small whilst valuations remain beaten down, and for those enterprises with significant cash reserves or the ability to leverage investor resources or debt, this is a once in a lifetime opportunity to bolster their offering, gain key competencies and increase their reach in new markets through significantly underpriced acquisitions. These are also very interesting times and we can see the investor community and the industry working hand-inhand. We see investors, entrepreneurs, PE Funds and VCs partnering with high-growth enterprises to support their portfolio companies that have seen the stress of the recent past. These are enterprises that have received strong management inputs from their investors and are in different stages of a growth and maturity cycle.

In current times, exits are difficult and new investors would prefer to see their cash infused into the company and not paid out of the system as far as possible. With PE Funds and banks constricting investing and lending activities, these are tough times for entrepreneurs. It is time for them to examine the possibility of partnering and becoming part of larger and nimble enterprises which will support their priorities, compliment their values and ensure that a platform and foundation will be created for what has been created by them to move to the next stage. There can be no better time than a recession to acquire and merge businesses since more time is available to transition the merged firms. These are times when valuations are reasonable and business owners are amenable to a pragmatic approach of achieving target exit values based upon actual performance, and not just a PE Multiple. Top line and book profits do not count unless the business can generate cash, and enterprise valuations are back to including the fundamentals of cash efficiency and cash generation. M&A activities have not dried up. The activity levels seem low because of the absence of private equity players in the past year.

This is the time to identify rough diamonds in the dust – invest, grow and nurture and bring out the sparkle

You will notice enterprises with strong balance sheets still pursuing acquisitions aggressively as a key component of their growth and expansion strategy, more so when the economy is facing the kind of turbulence we have just recently experienced. Having said that, acquisitions should not be pursued just because valuations are down. An enterprise must examine if the company or business being acquired is a strategic fit with respect to imbibing new technology, skills and the ability to penetrate a market. Acquisitions just to accrete revenues and profits perhaps might be a short term play and neither the buyer nor the seller may derive long term value generation by coming together. As a case in point, we include the founders of businesses being merged into our group’s core team, engage them in functions, create minimum disruption for their clients and employees and ensure that the earn-out structures are aligned to the overall results of the combined entity without creating silos. In cross-border acquisitions, integration can pose challenges if we do not take into cognizance the differences in operating styles, practices, processes and culture of the seller. People and core values are create the bridge between two enterprises and financial results are a direct result of the how disruptive or inclusive the integration process will be. This is the time to identify rough diamonds in the dust – invest, grow, nurture and bring out the sparkle. Now is the time for even mid-sized Indian enterprises to spread their wings and make their mark in the global arena. 4Ps

5 june - 18 June 2009 4ps BUSINESS AND MARKETING 29