5 june - 18 june 2009 4ps BuSIneSS AnD MARKeTInG 29

coluMn

During 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.

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.

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

become a strict no-no with the bankers and companies alike, constraining availability of funds. With overseas economies still contracting, no one is sure whether the valuations have hit the trough yet and the companies con-tinue to follow a wait and watch ap-proach. Further, with the technology in India being two or in some cases three generations behind, ceos are unsure if they will be successful in importing and integrating these advanced tech-nologies that they acquire, in India.

one definitely feels that there are some promising opportunities that ex-ist in the overseas markets. However, the Indian corporates are more into an exploratory mood and are not going ag-gressive with their overseas investment plans. The ghosts of the recent deals are still fresh in peoples’ memories, and the ceo’s are still learning what went wrong in those deals. one may expect more number of small size transactions; especially those that offer niche attributes, as companies would still not mind taking minimal risks in their balance sheets. cash rich compa-nies are better placed in this regard. one may have to wait for some time before the euphoria that surrounded the multi-billion dollar overseas buy-outs to come back. But then, will the much talked about MTn- Bharti trans-action pave way for bigger things? It remains to be seen.

The views and opinions are those of the authors and do not necessarily rep-resent the views and opinions of KPMG in India. The information provided is of a general nature and is not intended to address the circumstances of any par-ticular individual or entity.

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!

A ‘Strategically fit’ target – necessary or

simply a want?

Kalpesh DesaiCEO, Agile Financial Technologies

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