Commentaries and insightful analyses on the world of finance, technology and IT.

July 03, 2009

Making $$$ through Cloud

There is sustained interest with Large Entreprises and SMEs on where the cloud seems to be leading us....

I and my colleague Bhavin Ruchaira will be presenting a Seminar with NASSCOM EMERGE Forum on July 10th at the Infosys Hyderabad Campus on how entreprises could only save money but make money through these clouds.

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July 02, 2009

And the US M&A Winner is.... Healthcare

Thomson Reuters just published their Q2 M&A report which also covered first half 2009 M&A transaction value and volume. As noted in previous entries for this blog, Healthcare was noted as the sector to watch for new activity and would the first to recover from the down economy. According to the first half numbers, it has not disappointed by accounting for approximately $130B in deal flow from 321 deals. It was the only sector to outperform the previous year and did so with a 60% increase. This could be viewed as a flight to quality or simply taking advantage of what the market is giving you.

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June 23, 2009

Private Equity Add-On Acquisitions and Adjacency Innovation

Pitchbook had posted a statistic a few weeks back that according to their numbers there have been 111 add-on acquisitions so far in 2009. Considering that add-on acquisitions help to bolster core business or provide access to complimentary markets, it should stand to reason that add-on acquisitions should be at an all time high.

Interestingly enough, Pitchbook also provides figures for the historic percentage of add-on to total acquisitions, 32%, and the current pace is right in line with historic averages. Additionally, Q1 saw 71 add-on deals with Q2 only 40 which means there is a potential to dip below the historical average (June started quick so that remains to be seen). This is even more interesting considering recent comments on the type of innovation to pursue now made by Vijay Govindarajan, an expert on innovation and strategy from the Tuck School of Business at Dartmouth, on how corporate resources should be spent in a recessionary period. Mr. Govindarajan recommends that businesses in a recession should spend 70% of their time on the core business, 25% on adjacency innovation and 5% on break-out (high risk/high reward) innovation. Considering that an add-on acquisition is in effect adjacent to the core business, this makes the above trend even more counter intuitive. My guess would be that there is still a gap between buyer and seller expectation in addition to downward pressure on deals due to interest rates moving back up. Either way it is one more confusing indicator to compare against the other “green shoots” that are being touted by many as signs of economic recovery.

June 19, 2009

Private Equity Sector Trends- Predicting Recovery by Year End?

J.P. Morgan and Thomson Reuters published a recent report on the Era of Globalized M&A which had a number of interesting items evident in their data (download or view here http://www.scribd.com/doc/16482515/The-Era-of-Globalized-MA). What I liked about the analysis was that the graphs in many cases went back 10 years to 1998 or all the way back to 1990 to see reactions to other market adjustments such as Tech melt down to draw comparisons for today’s market. While the report has a focus on global M&A trends, I found the sector data more interesting.

The most obvious findings were that M&A increases with the equity markets as companies have cash to spend on acquisitions (however prices are higher) and that peak M&A correlates to a bubble (not helped due to the last point). The data also suggests that Healthcare and TMT (Telecom, Media & Technology) will be the first sectors to pick back up with consolidation efforts coming out of the downturn. If you consider pharma part of Healthcare, this has held true in the case of the Pfizer-Wyeth megadeal earlier this year. Telecom activity has been flat with the T-Mobile UK to BT rumor not panning out, but Tech has been active albeit from Cisco and Oracle mainly driving the market. Financial M&A activity is shown to move counter cyclically which has played out in an enormous and hopefully once-in-a-lifetime way with Merrill, Lehman, WaMu and Wachovia vanishing and further Private Equity fueled activity for regional banks (BankUnited) or bank carve-outs (Fifth-Third payment processing). This historical data also shows a predicted eight quarter slowdown on M&A which would pull us out of the current stall later this year. However, in the past contractions, the financial system was not almost brought to its knees and I hope it will not be enough to derail these past tendencies to follow the script with a drift towards recovery. David Rubenstein of Carlyle Group recently made similar predictions for market recovery later this year so I hope he and the numbers from the Globalization report are right.

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June 15, 2009

Negotiating Downturns : IT Optimization via Innovative solutions

A number of CIOs, at both large and smaller firms, have told that they are now left much smaller staffs than they had just 18 months ago. However, the demands placed on them have not just remained unchanged it has actually increased. That leaves many looking outside their own firm for help in delivering the type of service and infrastructure needed to compete in this volatile market. Many in the industry believe that cost cutting efforts will result in a jump in the use of global IT sourcing as well as a significant shift in sourcing strategies.

Platform Based Solutions offering a breadth of services will drive the true business value. For high investments innovative solutions, Joint IP model will enable the client and vendor to share risk and reward. Collaborative Delivery Model in a changing Service Delivery Landscape will drive significant cost reduction.

Non linear pricing will be the norm as it gives flexibility to client to pay per use and to vendor to lower the cost.

Innovative solution bundled with synergetic pricing is the need of the hour.

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June 08, 2009

Anything you can do, I can do better

About two weeks ago, the American auto industry, wading through the uncertainty of a pending bankruptcy and a proposed merger with an Italian auto giant, was informed of new fuel economy standards by the Obama Administration.  These standards increase the minimum fuel efficiency standard to 35.5 miles per gallon with a mandatory achievement date of 2016—a date pushed forward four years. 

While the American auto industry of ten years ago would have scoffed at such regulation, the new fuel standards will be embraced and provide further impetus to transform the industry with smaller, greener, and more fuel efficient vehicles complemented by leaner, more agile business operations.

Certainly, the auto industry isn’t the only entity taking notice and developing actionable plans in response to new fuel efficiency standards—many economies have recently responded with tougher fuel efficiency standards of their own.  Interestingly, China is developing legislation for fuel efficiency requirements more stringent than the United States.

With 168 million motor vehicles on the road in China and a dwindling supply of domestic oil, China’s planned modification to its fuel efficiency standard is driven by sustainability.  The rate in which Chinese vehicles consume gas, especially popular SUVs, was unsustainable and required policy change to limit excessive fuel consumption. 

Surely, China is still playing a game of catch up when it comes to emission standards but it’s positive to see the third largest economy in the world toughen their regulation on fuel efficiency.  I hope to see other countries follow the lead of China and enact tougher efficiency standards as the world shifts its dependence on oil.

Now, the real question is:  Can China build a fuel efficient Hummer?

To learn more, check out this article from the Business Insider.

 

June 03, 2009

Private Equity “Dry Powder” at Record High $400B

PitchBook in partnership with the AMAA (Alliance of Merger & Acquisition Advisors) recently published a report on the available capital or “dry powder” available for investment by Private Equity. What is surprising from this Overhang Report (delta between funds raised and put to use) is not hitting this record high number, but the 10 year run up to this point where every year with the exception of 2003 and 2007 saw significant year end overhangs which further added to the accumulating available capital (view the report www.pitchbook.com/library.html).

Larger fund sizes, easier credit terms and a rolling pot of available capital enabled PE to make larger buyouts and take bigger bets to chase returns. However, this massive accumulation cannot be attributed to the mega-funds themselves. The mid-market must have burgeoning coffers as well to put this money to use for larger acquisitions correct? Interestingly enough, the answer is surprising. The mega-funds will decrease their target acquisition size taking some opportunity away from the mid-market, a few funds at the higher end of the mid-market will beat the mega-funds at this game since they have always pursued a higher volume of transactions and could potentially make that leap as a larger “player”. What this leaves is a significant portion of the mid-market (and VC community) that has funds they cannot commit, may not have the ability to exist on their fee structure and are unable to raise enough capital to make acquisitions or placements in this more competitive market since new investors would not see a return with such a large amount of uncommitted capital is just waiting to be deployed. You end with up with stranded available investment that will need to be cleared with some mechanism and put to use. I don’t have the most optimal answer to accomplish this task, but it would go a long way towards jumpstarting the current economy.

 

May 29, 2009

What’s Old is New Again: Private Equity Carve-Outs

While the Private Equity buyout firms made their mark unlocking value from carving out underperforming corporate assets, many had shifted in recent years to simply buying the corporation outright thanks to larger fund sizes and relaxed debt structures. This move towards whole company acquisitions started shifting back around the 2003 timeframe and accelerated until the recent financial collapse (using data from Dealogic). With liquidity tight again, we should see that trend reverse as more PE firms look for more affordable business unit-level acquisitions, but executing a successful carve-out has its challenges.

The obvious benefit of purchasing an entire company is that you get the entire support infrastructure so you can focus more simply at trimming the excess while operations continue to function. With a carve-out, the acquirer has to look at which staff will move over, mandatory Day 1 functions that need to be separated, how to set up a Transition Services Agreement (TSA) with the parent for technology or infrastructure support, etc. While this transition period is much more complicated, in my opinion, it offers a greater chance to realize value of the acquisition. My reasons are that are allowed to immediately cut non-core activities or have those activities performed by a third party with a lower cost basis since they simply don’t have to exist in their old form. It is much easier to remove operational costs from a newly designed firm than an existing entity. The trick is to balance the desire for a functional transition against keeping enough subject matter expertise with more “virtual” or variable cost resources (in addition to any specific expertise you may have paid for in the acquisition). This model creates a more rapid time to value and better returns for the acquirer.

At Infosys, we have looked very closely at this unique scenario for supporting carve-outs and have developed specific approaches to ensure we are reducing as much risk as possible for the acquiring firm. It is just another way we try to add value by combining our skills in new ways from an operational and technical perspective to best benefit our customers. M&A activity can be a healthy contributor to well functioning markets and should be supported.
What are some of your carve-out experiences?

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May 19, 2009

Effect of Limited Partner Investment in Private Equity Buyout Funds

In the current market conditions, it becomes harder to find a safe haven for any investment. One particular investment segment that has come under scrutiny is placements into Private Equity buyout firms. As a diversification strategy for large portfolios, some money managers have chased outsized returns with Private Equity to balance other less risky (less rewarding) investments. Acting as a Limited Partner (LP) for a Private Equity Buyout fund has historically been one way to aggressively put your money to work and generate returns that significantly outpace the overall market.

However, being a Limited Partner, just as the name implies, makes you are a true partner of the buyout firm. LPs often times invest in multiple fund vintages from the same Private Equity firm with the assumption that some disbursements from previous funds would roll forward to fund future obligations in addition to providing liquidity back to the money manager. This riskier partnership and the Private Equity investment class in general has rewarded those investors with outsized returns in the past, but has flat lined in this current market. Regardless of the fund return, LPs are still legally bound to fulfill their full capital funding obligations (often putting 20% or more upfront) during the life of the fund with capital being drawn down to make acquisitions or buyouts (sometimes those obligations can be sold to a secondary buyer at a discount, just like any other asset). Unfortunately for LPs, many are experiencing interrupted disbursement cycles due to fund losses or an inability to divest fund holdings. This puts significant stress on the LP as they will continually be required to place money into these funds without planned payback.

This may sound like a bad deal as there has been an uptick in the number of articles written about the stress that these Private Equity relationships have put on LPs from this capital call arrangement. I have even seen quotes to saying that they [LPs] would rather not see any new buyouts so those capital calls would not have to be funded. While it may be an interesting human angle and generate some sympathy for LPs, I am a bit confused as to the problem. Risk is rewarded by higher returns. An indefinite higher return is free money and nothing is for free so I don’t understand the worry about these LPs since they should have modeled downsides into their investment strategy. If they have not, then we may see a period of underfunding for buyout firms (in addition to LP portfolio strategy changing) which could limit buyouts in a 1-3 year window if a number of LPs take a haircut via forced liquidation to secondary firms which reduces their appetite during future fund raising. Interestingly enough, I really feel this is much ado about nothing and don’t believe it will have a drastic impact on most buyout firms. I am basing my assumption on the fact that there is still a significant amount of uncommitted capital or “dry powder” and deal sizes will be smaller since banks will not be backing mega-buyouts so that capital will go farther. While I can’t appreciate these LP concerns over losses, my bigger worry is that some LPs are also state retirement funds which becomes a completely different story…