Deal Making in current times

Contribution by: Manan Agrawal, CFA

The Delhi chapter of IAIP organized this Speaker Event in New Delhi on 22nd Feb 2014 where Mohit Satyanand,  Consulting Editor, Outlook Money, shared learning from his practical deal making experience and discussed practical aspects behind successful deal making.  The event was very well attended and appreciated by IAIP members, and members of IVCA (Indian Venture Capital and Private Equity Association).

In any deal, either party can benefit by understanding the economic value of the deal for the other party, and the compulsions of the other party. This can help get a better price. To avoid getting squeezed on valuation, Promoters should raise cash when they can, not when they need. For example, Uncle Chipps was worth Rs 100 cr to Fritto Lay but the promoters got only Rs 30 cr because they were bleeding. Deals happen because people value businesses differently. It is critically important to understand the nature of this difference because such an understanding can help the promoter in getting a better price.

For example, a foreign acquirer can give a higher value to an Indian business because of various reasons. For example, the expected growth rates in India are much higher than in developed countries. So, a foreign acquirer might pay a “Growth premium”.

Foreign acquirer might be receiving valuable economies of scale from the M&A. For example, when any foreign company acquires any Indian brand, it gets the revenue from the brand with no additional distribution costs and overhead. A foreign acquirer may get access to cheaper raw materials. For example, sale of Amrit Banaspati to Bunge. A foreign acquirer has a lower capital cost, and uses this to achieve economies of scale. A foreign acquirer may have better technology using which it can further improve quality while reducing production costs.

Turning attention to Private Equity deals, Mohit discussed how PE deals take a longer time to cook. The biggest concern for the PE firm is Corporate Governance issues. Therefore, any company viewing itself as a target for PE funding should prepare itself atleast a couple of years before it can look out for PE funding. For example, in case of DFM Foods, they did the following preparation: They set up an investor relations function 2 years before the deal happened, they ensured complete transparency about related party transactions, they hired a Big-4 Auditor, they started conducting investor/analyst calls and they started putting up call transcripts online with a high level of detail and clear roadmap of business developments.

Promoters also need to understand fully what they are getting into when accepting PE funding. Any PE firm acts like a partner with all its caveats. PE firms also need to be clear on some issues. Firstly, if a PE firm is focused on exit, its short time scale may not match the product cycle and business cycle, and therefore it will put inconvenient pressures on business growth. For example, Education businesses (such as schools, universities) are a horrible candidate for PE firms with a short time scale.

Secondly, PE firms should understand that providing Capital does not equal Growth. For growth to happen, it takes the right people with the domain knowledge and it takes time to build quality and reputation. For example, Education businesses that tried to build scale merely with capital failed. Thirdly, PE firms should avoid imposing minimum return obligations (such as Liquidation Preference) on promoters. PE firm should decide whether it wants to act like a Banker or an Equity player. It is unfair to the promoter if a PE firm acts like both.

Finally, Mohit elaborated on some of the personal issues involved in Deal making. He suggested the following: First, one must always keep in mind a walk-away price for a deal. Then, one must focus on a couple of “Deal breakers” because absent this focus, negotiations can be endless. When families are involved in any deal, every family member must speak in one voice. Finally, for any non-critical issues, one can always respond with an “I’ll get back to you on this”. 

– M A

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