column
A ‘Strategically fit’
target – necessary or
simply a want?
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!
D
uring times of economic un-
certainty most prospective
buyers would consider acquisi-
tions 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 in-
vestor confidence. Emerging markets
are showing positive growth with mar-
kets 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, strength-
en 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 com-
petencies and increase their reach in
new markets through significantly un-
derpriced acquisitions.
These are also very interesting times
and we can see the investor commu-
nity and the industry working hand-in-
hand. 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 re-
ceived strong management inputs from
their investors and are in different
stages of a growth and maturity cycle.
Kalpesh Desai
CEO,
Agile Financial Technologies
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 possibil-
ity of partnering and becoming part of
larger and nimble enterprises which
will support their priorities, compli-
ment 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 busi-
nesses 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 perfor-
mance, and not just a PE Multiple. Top
line and book profits do not count un-
less the business can generate cash,
and enterprise valuations are back to
including the fundamentals of cash ef-
ficiency and cash generation. M&A ac-
tivities 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
5 june - 18 June 2009 4ps BUSINESS AND MARKETING 29
You will notice enterprises with strong
balance sheets still pursuing acquisi-
tions 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 re-
cently experienced.
Having said that, acquisitions should
not be pursued just because valuations
are down. An enterprise must examine
if the company or business being ac-
quired is a strategic fit with respect to
imbibing new technology, skills and the
ability to penetrate a market. Acquisi-
tions just to accrete revenues and prof-
its 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, inte-
gration 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 be-
tween 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 dia-
monds in the dust – invest, grow, nur-
ture and bring out the sparkle. Now is
the time for even mid-sized Indian en-
terprises to spread their wings and make
their mark in the global arena. 4Ps