The Great Indian Sell Off

The great Indian sell off Mani Ratnam's recent Bollywood flick, Guru, loosely based on the life and times of Dhirubhai Ambani, contains a scene that despite its cinematic exaggeration captures the ambition of the young protagonist Gurukant Desai, and the entrepreneurial mindset of the 1970s and 1980s. The young Parsi business scion Farzan Contractor and his father (evidently part of the old money, south Bombay cabal), jealous of Guru's meteoric rise, offer him a blank cheque, over a glass of what appears to be imported scotch, to buy up his enterprise . Needless to say, the hero spurns the offer, throwing a counter challenge to buy them up sometime soon. Now, its difficult to imagine India Inc's current crop of entrepreneurs passing up such an offer. Call it the sign of changing times or the evolution of Indian entrepreneurship. Not too many entrepreneurs who set up businesses in the pre-liberalisation would have plotted an exit strategy right from Day One. Business was all about building and acquiring assets. Selling a profitable business was akin to selling family gold. Ameet Parikh, who sold off his three-year-old company Axis Risk Consulting to Genpact and continues to be its CEO says he didn't have to fight any inner demons while taking the decision to sell off. "The valuations were tempting, and it's difficult to say no to the cash. Everybody doesn't have the aspirations of the Ambanis," he laughs. Throw the same question at networking management company GTL's Manoj Tirodkar, another CEO who sold his IT business to France Telekom recently and he says rather matter of factly, "I have done it before when I sold my e-commerce venture in 1999 and reaped in more than Rs 550 crores. So I understand the sell off business well." Now he is on a lookout for buyers for his BPO/KPO businesses too. While India Inc has been familiar with the aggressiveness of the acquiring companies, it's the increasingly cool attitude of sellers that's surprising the buyers. "The entrepreneurs only now realise the real worth of what they've built. There is a strong desire to monetise what they own. With globalisation, overseas buyers are willing to open the purse strings where they see value," says Raman Roy who sold his BPO firm Spectramind to Wipro to start another BPO venture, Quattro. A look at the M&A numbers shows that India Inc has sold more than 200 businesses worth nearly $18 billion in the last twelve months. The newspapers in the last few months have been littered with headlines highlighting the sale of Anchor, Deccan Airways, Matrix Labs, BPL Telecom, among scores of others. And the sell outs are not restricted to any particular sector. The divestitures vary from old promoter managed companies like Anchor, MTR and Nilgiris to new-promoter ventures like Air Deccan and Mphasis to PE Owned companies like Punjab Tractor, Global Vantedge. Then there are the MNC-owned companies like Hutchison-Essar, E-serve and JVs like JM Morgan Stanley and Intelenet. The size of the deal varies from Hutchison Essar's landmark

$11.1 billion sale to Vodafone to the $14.28 million sale of ASK securities to JM Financial. So why are companies selling? Interestingly, the single most common reason for Indian promoter owned businesses seems out to be succession and family related problems. Businesses that are family owned, like Anchor or Nilgiris, have various family members who have different aspirations. "In shared family businesses, the past few years of growth has lead to a situation where different members want to grow differently," explains Rajeev Gupta, MD, Carlyle, and one of India's foremost M&A artists. To meet the individual aspirations of their members, families are selling out, and distributing the spoils to fund the new ventures of the young scions. Moreover, deterrents like the loss of face associated with selling out have evaporated in the new environment. "Selling out is no longer a big deal it was ten years ago. There has been a big change in the mindsets," says Rajiv Memani, CEO, E&Y. In other cases of divestiture, like the JM Morgan Stanley and Kotak Goldman JV cases, the foreign partners wanted to go solo in India, so the Indian partners sold their stakes. "Foreigners don't think like we Indians do. They don't consider a JV to be like a marriage. They want to enter India and a JV is the best strategy to do it. Next, they want full control. Aspirations are different on both sides," says a senior investment banker. And it's the case of divergent aspirations that lead to a management buy-out of Intelenet too. "The management team was very clear that we did not want to be a captive BPO. We wanted to retain our third party BPO focus and wanted to grow into a global brand. After careful consideration of various options, Intelenet's management believed that partnering with Blackstone was the most appropriate way to enable Intelenet to pursue its strategic initiatives and grow towards becoming a global BPO player. In Blackstone, we saw a good cultural fit with our value system," says Intelent CEO, Susir Kumar. Soon after cashing out of its JV with Morgan Stanley, the Nimesh Kampani-promoted JM Financial has quickly rolled out its solo plans, restructuring the company into seven business units. It's tied up with the US-based hedge fund Old Lane Management to raise a $150million private equity fund for Indian markets and has also bought out ASK Securities recently. MNCs have their own reasons for exiting. For a player like Hutch it was the end of the horizon of the investment, and it wanted to unlock value at a time when the valuations are rich. For some like e-Serve the question is to be cost competitive and also scale up, so a logical move for Citibank was to divest it, as business demands more investments and management time. For PE players like Actis and ChrysCap the investments in companies like Punjab Tractor and Global Vantedge had multiplied and the fund life dictated the exit to garner returns to

their limited partners. Experts feel that there are structural issues in some sectors that are forcing players to sell out. For example, Airlines is one sector where many players plagued by incessant losses are looking for a saviour in guise of a buyer. It's a repeat of the telecom story six years back when a lot of telcos ran out of money and sold out. "Long gestation businesses, where profits take long to accrue, are susceptible to sellouts," says Gupta of Carlyle. I-bankers increasingly predict that insurance will be the next sector to witness sellouts, if the government eases regulations, as demand for investments is increasing. Marginal players in service sector like IT, financial services, and telecom will feel the squeeze as the biggies put on the heat and a sellout may be the best option. "In some sectors global consolidation is playing out. Only those with big global platforms will succeed," says Memani. Fuelling this trend is the fact that the overall environment is very conducive to sellers - high valuations for the assets, multiple buyers, coupled with multiple opportunities to invest the dough, make selling decisions a tad easier. So its not only new entrepreneurs like Parikh who want out but also promoters who are stuck in difficult businesses. "Sometimes value creation is more challenging in existing businesses so the entrepreneurs and promoters see an opportunity to sell and create new businesses where value creation is faster. They create more wealth by creating new businesses," says Sanjeev Krishan, Director, PWC. Some, like GTL's Tirodkar, find this the right time to hive off businesses and focus on one opportunity that will give better returns than a diversified business portfolio. "We want to focus on being the largest network services provider to the world. We will invest the cash in acquiring companies and growing the core business," he says. A lot of new entrepreneurs are very flexible too. Some don't mind working for the acquiring company after the acquisitions. "I am not a true entrepreneur. It was in the last three years that I tried being on my own. I have worked in large corporations all my life so the transition out of entrepreneurship has been easy," says Parikh. And there are some who want to enjoy life. "Loads of cash in the bank and golf is what many new entrepreneurs aspire for, and they are clear they are raising the company to achieve that lifestyle," says Ravi Sardana, Sr VP, ICICI Securities. The sellout phenomena will only grow in future. "Take a look at the top 200 companies. What you see today is what US was in '60s and '70s, there are lots of diversified conglomerates and now people have started asking questions whether you can run a toothpaste and a petroleum business together. So it's a matter of time before Indian businesses start thinking about what can they do about these businesses," says Rohit Kapoor, head Corporate Finance, KPMG. All this may make for another film from Mani Ratnam - which the corporate sellers just may want to invest some of their cash pile in.