Mergers & Alliances: 26/06/09

 

COMPANIES OPT FOR COST REDUCTIONS & EFFICIENCY IMPROVEMENTS
Rajiv Memani
The Economic Times

With the global economy in the grip of a downturn, corporate decision-makers have shifted their attention to survival in a tough market. However, in doing so, they risk forgoing those growth opportunities which often present themselves during the times of a slowdown. As organic growth in revenues is difficult to come by and profit margins are constantly under pressure, companies have been busy with much-needed cost reductions and efficiency improvements.

But is this enough to gain real competitive advantage and find the opportunities in adversity? Clearly, given the fact that most people are in business for the long-term , there must be a balance between the fight for survival and the quest for growth. A carefully identified and structured Merger & Acquisition (M&A ) transaction can accelerate growth by providing access to new markets, customer segments, technologies, human resources and economies of scale.

The current M&A activity, or the lack of it, needs to be viewed in this context. According to Bloomberg estimates , Indian M&A volumes have dropped from USD 42bn in 2007 to USD 33 bn in 2008 and just USD3.7 bn in the first three months of 2009. This is a worldwide phenomenon. Global M&A volumes are down to USD 427.4 bn in Q12009 from USD 2498 bn in 2008 and USD 4058 bn in 2007.

The reasons range from a shift in focus from growth to survival, higher risk-aversion , poor or no availability of capital for financing acquisitions, reduced private equity appetite etc. However, this really is the time for corporate strategists to consider M&A , as valuations are modest and an increasing number of companies are looking to consolidate by divesting non-core or non-performing assets and businesses.

In a recent Ernst & Young survey of 121 finance professionals in India conducted during February, 2009, a leading 78 percent of respondents thought that companies are either correctly valued or undervalued. Specifically, the metals and mining and IT and ITeS sector respondents felt that current valuations are low, while real estate and hospitality sector valuations were perceived to be still high and the consumer goods sector dominated the response on correct valuations.

Some recent M&A transactions in India where companies appear to have cashed in on low valuations include American Tower Corporation's acquisition of Xcel Telecom; TCS buying the BPO division of Citigroup and Sodexho's acquisition of Radhakrishna Hospitality. But generally, these have been few and far between.

A majority (63 percent) of our respondents felt that the slowdown will result in a consolidation in their sectors. Interestingly, the majority (58 percent) of our respondents in the above-mentioned survey told us that they would consider M&A as a prudent strategic decision for business growth during the slowdown. Yet, M&A volumes hardly reflect this conviction.

Non-availability of capital has been the biggest challenge. While banks have been reeling under a global liquidity crunch, private equity investments have dried up. Also, the Indian M&A boom had been driven by crossborder transactions, which have become much fewer due to lack of capital and increased caution. Further, market uncertainty has resulted in a widening of the bid/ask spread, where bridging the gap between buyer and seller expectations has made deal closures difficult.

Consequently, we are beginning to see some significant changes in the way transactions are financed and executed . With lower leveraging opportunities , promoter contribution has become important and banks may require additional comfort from borrowers . This will significantly reduce highly leveraged buyouts. Maximum debt levels are likely to be between 2.5-3 X EBITDA (post acquisition) vis-à-vis levels of 4-5 X EBITDA, structured through multiple levels of senior , subordinate, quasi and unsecured debt instruments.

Some of the solutions which can be considered include cashless transactions via the share-swap and asset swap route, delayed payment schemes, "earn-out" strategies, upside sharing and minority sales. A large number of all-share mergers could happen. Also, sovereign wealth funds, who continue to be more optimistic, can be considered as an alternate source of finance. Generally, with acquisition financing a challenge, big-ticket transactions may be fewer.

The author is Country Managing Partner, Ernst & Young

 

 

HAS THE TEMPLATE FOR A SUCCESSFUL JV CHANGED?
Arati Menon Carrol
The Economic Times

A year and a half ago, against the backdrop of a thriving Indian economy and an automotive market on overdrive, the Hero group announced a Rs 4,400 crore joint venture partnership with Daimler Trucks, a division of Daimler AG, giving Hero the opportunity to enter the commercial vehicles segment in India. In April this year, however, the Munjals unexpectedly announced a pull-out. Speculation had it that financial constraints forced them to re-focus on their core business of motorcycles; Hero Corporate Services chairman Sunil Kant Munjal blamed crashing demand in the commercial vehicle segment.

News of failed JVs has been doing the rounds; Britannia-Fonterra, TVS Group-Wabco and UTI-Shinsei Bank are among those who are either reviewing or have called off partnerships. Larsen & Toubro (L&T )'s plans to enter the non-life insurance business through a JV with US-based Travelers Insurance have also reportedly fallen through and engineering and construction company Punj Lloyd is exiting its two-year real estate business JV; chairman Atul Punj has admitted that a bad real estate environment prompted this decision.

So has the global economic meltdown found its latest victim? Strangely enough, industry pundits say this is a false alarm; partners aren't necessarily pulling the plug on JVs just so they can shore up revenues or cut costs. "If JVs are not working out it's less a sign of the times and more a factor of partners going their separate ways over the inability of the Indian partner to match investment dollar for dollar or a mismatch in business strategy," says Akil Hirani, managing partner at top law firm Majmudar & Co.

Ranjan Biswas, partner and national director India, transactions advisory services at Ernst&Young says a weak global economy does put pressure on JVs but not necessarily enough to break large numbers of them, but adds that for a joint venture to stand up to the event, both parties need to have thrashed out the harder parts of their partnership right at the start.

Hirani actually believes the opposite might be true. "A lot of Western multinationals are looking to beat the blues in their jurisdictions by partnering with Indian companies to leverage existing manufacturing or distribution networks in India." He might be right—news of fresh JVs has started doing the rounds.

IT training solutions provider Aptech is betting big on the Latin American market by entering into a JV with the Falgo group to set up IT training centres in Brazil.

So global recession may not have played spoilsport on this front but what it is having a significant effect on, says experts, are the foundations upon which partnerships are built. "The global recession is actually a great leveler. Traditionally the Indian promoter has always had his eye on taking the lion's share of profits by putting in the least amount of money.

So, has the template for a successful JV changed? Everyone agrees that the transparency factor will be key. Bajaj offers his advice: "If you have the right balance between aggression and focus on profits and follow similar corporate governance standards you're on the right track." Everyone agrees that there's likely to be less tip-toeing around common irritants like management and financial control and exit strategies.

Crucial issues that were just left open in the hope that they would be solved later on will now likely be knocked around at the outset. At the end of the day though, says Biswas, every JV has a shelf life. "The average life expectancy of a US company is 32 years. Recession or not, it's unreasonable to imagine a JV will continue in perpetuity."

 

Mergers & Alliances News: 25/06/09

 

EDUCOMP ENTERS 50:50 JV WITH UK-BASED PEARSON
Mahima Puri & Paramita Chatterjee, New Delhi

 Financial Chronicle  The Asian Age  The Hindu Business Line  DNA  

Education software solutions provider Educomp has entered into a 50:50 joint venture (JV) with the UK-based publishing house Pearson, said a person with direct knowledge of the development. The JV will offer vocational education business leveraging Educomp’s learning network and Pearson’s education content. An announcement is likely on Wednesday.

Pearson would be pumping in $17.5 million in the JV and an agreement has been signed in Singapore on Tuesday, a person familiar with the development said. He added both the companies are likely to invest an additional $20 million in the next five years in the new business. When contacted, Educomp’s spokesperson declined to comment.

The JV will provide Educomp access to Pearson’s content on vocational education. For instance, Pearson’s content on Spoken English alone has 3.5 million users globally. Besides, Educomp would be able to use Pearson’s content on vocational training in sectors such construction, automobiles and hospitality. "The JV will benefit both the companies tremendously," said a senior executive of Educomp, who asked not to be named.

Pearson will be able to tap the vocational education market through Educomp’s network. Pearson, an international media company, with businesses in publishing, education and business information, plans to aggressively expand its footprint in the Indian market. Recently, it reportedly picked up a strategic stake in TutorVista, a Bangalore-based e-learning firm for about $15 million.

In May 2008, Educomp had set up two JVs with Raffles Education Corp, a $2.78-billion private education group in the Asia Pacific region, covering India and China. The Indian JV offers study content for professional courses, while the Chinese JV was for K-12 business initiatives.

SUNGARD MULLS ACQUISITION IN INDIA
Mumbai
The Economic Times

Having acquired 160 companies globally since inception in 1982, Pennsylvania-based software and services firm, SunGard, today said that it was looking for an acquisition in India.

"We are always looking for opportunities for that will help us to expand our portfolio solution and acquire incremental customer base," SunGard India's Chief Operating Officer Akila Krishnakumar said here.

The largest privately held business software and services company on the Forbes list of private businesses, SunGard, had recorded USD 5.6 billion revenue in 2008. Only two percent of that came from the Asia-Pacific region.

SunGard provides software and processing solutions for financial services, higher education and the public sector.

Krishnakumar said that the acquisition in India would be in the areas SunGard has expertise, but did not divulge any further details.

"We are actively looking for acquisition. When it will happen and what will be the deal size -these are all difficult to answer now," she said.

TUTORVISTA TIES UP WITH CHAUDHARY GROUP
Peerzada Abrar and Sarah Jacob, Bangalore
Mint  Deccan Herald  The Times of India (Bangalore edition)  

Online education services company TutorVista has formed a joint venture with Nepal-based Chaudhary Group, a $250-million business group. The joint-venture company is in the final stage of acquiring the management of a chain of schools in Nepal, which will be re-branded as CG Manipal Schools, a TutorVista official said in an interview.

The Chaudhary Group is currently in the business of snack foods and beverages, automobile distribution and real-estate in Nepal. “There is a strong, unmet demand for quality education in Nepal. Manipal K-12 Education required a local partner to extend this education expertise into schools there,” founder and CEO of TutorVista, K Ganesh, said. ManipalK-12 Education is concerned with providing technology solutions as well as building and acquiring management of schools. This alliance will help TutorVista to expand outside India.

Based in Bangalore, TutorVista services around 10,000 students, primarily in the US, through over 800 Indian teachers. In order to establish its presence in the domestic market, TutorVista had acquired e-learning curriculum content provider Edurite Technologies in 2007. In February this year, Manipal Education and Medical Group (MEMG) invested around $15 million fresh into TutorVista, ET had reported earlier. As a result , Edurite Technologies was rebranded as Manipal K-12 Education.

“Internet-based education has worked very well in the US, but the internet and PC penetration in India and the mindset to be tutored online is very low. This is why we have used a hybrid model for the Indian market, where we combine technology with class-room teaching,” Ganesh, said.

INDIAN FIRMS ACQUIRE 143 US COMPANIES, CREATE 30,000 JOBS
Washington
Deccan Herald

Indian companies made 143 acquisitions across various sectors in the United States over the last two years, bailed out many companies on the brink of closure and created some 30,000 jobs, according to a seminal new study.

In 2007-08 alone, 94 deals between the range of $0.8 million and $1,005 million were concluded with the disclosed value in 55 deals totalling $4,432 million, according to the joint study released by the Federation of Indian Chambers of Commerce and Industry (FICCI) and Ernst and Young.

In 2008-09, Indian companies were involved in 49 US-bound acquisitions. Of these, deal values were disclosed in 24 cases and their value totalled $960 million. The size of the deals were in the range of $0.70 million and $172 million, the report noted.

Indian Ambassador to the US Meera Shankar released the study titled "India Contributes to Employment, Capital Growth and Tax Revenues in the US - Direct Investment by Indian companies in 2007-2009" at a function at the East West Centre.

Speaking of a transformation that the India-US bilateral relationship had witnessed in recent years, Shankar highlighted the complementarities and convergences in the relationship.

The US being the largest economy in the world was naturally a key economic partner for India, she said pointing out the growing two-way investment between both countries.

FICCI President Harsh Pati Singhania and Secretary General Dr. Amit Mitra also spoke about the developing economic ties between India and the US and the numerous opportunities for further cooperation.

The study shows that IT & ITeS (information technology and information technology enabled service), consumer products, pharmaceutical and manufacturing are the key sectors where companies are active in outbound acquisitions.

However, the IT & ITeS sector is the sector where a majority of the deals took place. The IT & ITeS sector, in fact, accounted for 50 percent of the total number of deals in 2007-08 and 40 percent of the total number of deals in 2008-09.

The report attributed the rise in Indian outbound investments to the US to strong economic growth, and easy availability of debt finance for companies.

Several Indian multinationals are still looking at acquiring US companies, despite the economic downturn, which has raised the cost of overseas acquisitions.

INDIAN IT'S TOP ACQUISITIONS
The Times of India

Indian IT is facing challenging times with its biggest market US reeling under economic slowdown and its largest vertical BFSI sector in a global turmoil. However, the tough times has not decreased the industry's acquisition appetite. With falling valuations and market cap due to global recession, analysts have been calling the time ripe for acquisitions.

Indian companies too seem to be in a mood to cash on the opportunity and expand their presence across the globe, especially US, as a recent report shows. According to a joint study by Ernst & Young and FICCI, during the two consecutive financial years, 2007-08 and 2008-09, Indian companies made 143 acquisitions across various sectors in the US.

In 2007-08 alone, 94 deals were concluded (the value of the deal was disclosed in 55 cases and stood at a total of $4,432 million). The size of the deals was between the range of $0.8 million and $1,005 million.

The Indian IT industry too cashed on the opportunity and made some crucial acquisitions during the period. Here's looking into the key acquisitions made by Indian IT companies over the past few months.

Wipro acquires Citi Technology Services

In December 2008, Wipro Technologies, the global IT services business of Wipro has acquired Citigroup's subsidiary, Citi Technology Services (CTS) formerly called Citos for $127 million. CTS, the technology and infrastructure outsourcing arm of Citi provides information technology services and information to Citi entities worldwide.

The India-based Citi Technology Services (CTS) provided IT infrastructure management and application development services to Citigroup. The acquisition gave Wipro access a pool of 1,650 employees who are on the payroll of CTS and another 400 contractual employees. The new entity has historically operated at margins similar to or greater than Wipro, according to Wipro’s management.

TCS acquires Citigroup Global Services

In October 2008, India's largest IT services provider Tata Consultancy Services (TCS) beat business process outsourcing (BPO) majors like Genpact and IBM to acquire the back-office operations of Citigroup for $505 million.

The acquisition broadens TCS's portfolio of end-to-end IT and BPO services in the global banking and financial services (BFS) sector. With Citigroup Global Services under its fold, TCS became the second-largest BPO player globally, after IBM.

Along with the sale, Citi also signed an agreement with TCS to provide process outsourcing services worth $2.5 billion over the next nine-and-and-a-half years. Citi will be the first global bank to have outsourced its entire banking processes, including core banking operations, to a third party.

HCL-Axon deal

For the first time in Indian IT industry, India's two top firms rivaled each other to buy UK-based Axon, one of the major SAP consulting players with about 2,000 consultants. In August, Infosys made a 407 million pounds bid for Axon. A month later, (in September), Noida-based HCL Technologies offered an 8.3 percent higher bid at 650 pence a share in cash to acquire Axon Group.

Infosys Technologies, which had first made the bid for Axon in August, said that it won’t raise its offer price and thus moved out of a possible bidding war. HCL's bid was considered expensive when it was announced and the worsening business environment led to further skepticism.

Wipro acquires Infocrossing Inc

In August 2007, Wipro expanded its presence in the United States as well as its offering of services through a $600 million acquisition of Infocrossing, a US-based infrastructure management services provider.

The $232.44 million New Jersey-based Infocrossing, which was founded in 1985 and its wholly-owned subsidiaries provide IT outsourcing solutions to companies, institutions and government agencies in the US.

Just two months after the acquisition, Wipro Infocrossing won a $275 million multi-year outsourcing deal to provide BPO and IT services to Missouri HealthNet Division, an agency run by the state government to provide health care services to Missouri residents.

Before Infocrossing, Wipro has made eight IT acquisitions primarily to gain access to new markets in Europe and the United States. However, the company typically paid about $50 million for each of those acquisitions.

3i Infotech buys Regulus Group

In the year 2008, Global information technology company, 3i Infotech acquired US-based Regulus Group and its subsidiaries, an independent remittance and document processing services provider.

The cost of acquisition was $80 million with an additional consideration of up to $20 million which was linked to performance parameters. The company acquired 100 percent stake in Regulus Group including its products, trademarks and brands.

California-based Regulus handles over 2.1 billion paper and electronic transactions annually. It has a nationwide network of 10 processing centres in California, Georgia, Illinois, New Jersey, North Carolina, Iowa and Texas and has over 1,300 employees.

Accentia Technologies acquires DenMed Transcription

In 2007, Mumbai-Based business process outsourcing company Accentia Technologies acquired Oregon-based medical transcription services provider DenMed Transcription. DenMed Transcription was acquired for $66 million. DenMed had revenues of $1.5 million.

Accentia director Pradeep Viswambharan said that the acquisition would add to the company’s portfolio in the healthcare receivable cycle management.

DenMed provides services including Electronic Medical Record (EMR) solutions, System-customized EMR exchange, Electronic record conversion and transfer.

Accentia Technologies buys GSR Physicians Billing/GSR Systems

In 2007 again, Accentia Technologies acquired two more US-based healthcare BPOs. The company bought Florida-based GSR Physician Billing Inc and GSR Systems Inc in cash-cum stock deals.

The deal value was estimated to be $63 million. The GSR group companies reported revenues of $3 million each. The company hoped to add nearly $10 million to its topline by way of these acquisitions.

GSR/Physician's Billing Service provides billing and collections services, coding consulting, and medical software. The company was formerly known as GSR Systems, Inc. GSR/ Physician's Billing Service was founded in 1996 and is based in Cooper City, Florida.

Mascon Global buys Jass & Associates Inc/SDG Corporation

New Delhi-based IT services firm Mascon Global (MGL) acquired New York-based Ebusinessware Inc last year, which offers IT solutions and consulting to financial services firms, for about $35 million.

Ebusinessware provides technology solutions and services in areas like credit risk management, market risk management, credit derivatives, business process management and reference data management.

The company had then said that acquisition will bring in additional revenues of $60 million. Ebusinessware has over 1,100 employees, of which approximately 750-800 are based in India and the rest in the US.

Following the acquisition, Ebusinessware was rebranded as MGL Finance and all MGL businesses catering to financial services clients brought under the same.