FINspeak

There are few more overplayed terms than “green shoots”, but I could not help myself and ended up joining the fray in this review on Private Equity (PE). IPOs are one obvious exit for a portfolio holding company and would indicate some life back in the market. Considering that year to date numbers have been so dismal, it is good to see things picking back up even at this slow rate. Many PE firms I have been talking to feel their portfolio holdings will be expanding long before contracting so there is rapid recovery going on here. However, what is interesting to me is how well one particular buyout firm is looking to do in the short term.

KKR may have the darling of the IPO market in the US with Dollar General which has been performing extremely well in this tight market. Speculation continues about the timing of KKR’s own pending IPO which appears to be following the infusion it will get from floating Dollar General. KKR also has stakes in Avago, HCA, TDC AS and Toy “R” Us which are all slated to go public. This should bode well for the KKR funds and their cash positions for acquisition activity. Bain Capital and Permira will get some relief with their stakes in HCA, Dunkin Brands, Toys and TDC AS, Bird’s Eye, Acromas respectively. Obviously, the size of the IPO is more important than the sheer number in terms of return, but it is an indicator that assets are being moved. Providence Equity Partners also has some activity pending from their stakes in TDC AS and Education Management Corp. Another notable transaction would include United Biscuits in the UK, a Blackstone holding that should be a larger deal. There are many other private equity owned firms in the pipeline to be floated as well, just will be smaller individual deals. Overall, this is at least a positive uptick in my opinion.

A contrarian view to this situation is that PE needs cash and is simply pushing these companies out the door sooner. Fair enough statement, but PE needs returns and not cash due to the considerable overhang left from past fund raising (see a previous post “Private Equity Dry Powder” http://www.infosysblogs.com/finspeak/2009/06/). If the asset is not ready, its poor performance will only further drag down overall fund returns. While I can somewhat believe they could be rushing, it could not be the only reason. Now let’s hope this ‘V’ movement doesn’t become a ‘W’, with is a subject for a different time.

Posted by Jeremy Kloubec at 04:27 PM | Permalink | Comments (0) | TrackBacks (0)

In last few months, there has been two distinct strategies around captives by two different category of Captive IT centers. First category is the one which has invested in the captive couple of years ago and second where clients are just setting it up.

Sell vs. Scale. What is the strategy?

Most of the captives, who have been around for some time and have established a mature service delivery model, want to sell out. This would help monetize their investments.

Interestingly a lot of them are also trying to establish and scale up their captive IT centers in India. This will most likely last for another couple years before they hit a maturity curve and decide to sell it.

In my view, some of the captives will probably continue to scale and will sell it based on the efficiency and value it brings to the overall group operations. Some of them have been around for almost ten years and they seem to be doing well.

Posted by Mritunjay Singh at 06:36 AM | Permalink | Comments (0) | TrackBacks (0)

This is the third and final part of my interview with Paul Hilger and William Gole. 

 

(Q) Have you seen any major shifts in the divestiture process since you first started? (e.g. use of virtual data rooms)  

[PH]  Technology, for sure.  You mention virtual data rooms as an example.  I have mixed feelings about them, though.  As a seller I like them because it gives me very good control over access and I can look at usage patterns to see how thoroughly buyers are (or are not) looking at the information.  One can also shorten the sales cycle by having multiple buyers going through the data simultaneously, so they’re great for auctions.  As a buyer there are advantages, too.  One can have more people in more locations go through the information – you can bring in experts to look at very specific things.  But there is also a risk of compartmentalization of the due diligence effort and things falling through the cracks.  While looking through boxes in a conference room is highly inefficient, it does have the advantage of bringing the diligence team physically together, prompting the human interaction that is necessary (in my view) for an effective due diligence effort.  When there is a virtual data room, I suggest the buyer make sure to promote active information sharing and interaction amongst the diligence team.

[BG] Completely agree with Paul’s comments.  I do believe that VDRs accrue more to the advantage to the seller, but offer some efficiencies to the potential buyers.  Also, it’s worth noting that VDRs add cost to the process and there are some situations (such a small transactions or a limited number of potential buyers) in which they may be hard to justify.

 

(Q) Did you look at any particular firms that you felt really did this right or were excellent in their execution?

[PH]  Interestingly, we heard and read a lot about firms that had well-established acquisition processes, but not much about firms that were really good sellers.  I guess nobody wants to be seen as really good at divesting – maybe that gets back to the stigma around this whole area.  The best thinking we came across came informally - from the expertise of a network of colleagues with whom we worked closely over the years, folks who had done a lot of deals on both the buy and sell side.     

[BG]  We were able through our research to get a sense who the more active divesters are (e.g., GE, Clear Channel Communications, and UTEK Corp.) but were unable to get any real insight into the quality of their processes.  It’s reasonable to assume that those who have very active portfolios, like these organizations, probably have systematized their divestiture efforts, but we saw no tangible proof of that.

 

(Q) Why is there not more material written about divestitures?

[PH]  You'd think there would be a lot more - these are extremely common transactions - corporate divestitures represent something like 1/3 of all M&A transactions.  I can only guess that some might think that the sell side is simply the mirror image of an acquisition, and there is plenty of literature addressing the buy side.  Perhaps it may also be due to the psychology that sometimes is associated with a divestiture - that it lacks the sizzle of an acquisition. 

[BG] I believe the sizzle factor is an important influence.  The literature, or lack thereof, appears to reflect the attitudes of corporate managers.  As Paul says, there is an apparent absence of appreciation for how different a divestiture is from an acquisition.  When involved in an acquisition, access to the owner of the transaction (generally the operating company CEO) is pretty easy to get and often, in fact, is initiated by him or her.  With divestitures, there can be an out-of sight out-of-mind attitude.  It’s hard to draw a straight line from that mentality to the literature but I believe that there’s definitely a relationship.

 

(Q) What is next?

[PH]  We just finished collaborating on a second book with Wiley, this one will be on acquisition due diligence.  Earlier, I mentioned the risk of compartmentalization during due diligence, just one of the many things that can go wrong on the buy side.  In our second book, Bill and I attempted to take a holistic and integrated approach, thinking about how M&A due diligence should flow from pre-acquisition planning, and then influence post-acquisition activities as well.

[BG]  Our collaboration has been a very positive experience, but having written a book addressing the sell side and another the buy side, we have no immediate plans insofar as writing is concerned.   We have tremendous respect for the challenges that deal teams face, especially within corporate structures which ask the same individuals to manage M&A transactions in addition to their ongoing responsibilities.  If we do decide on another project, we would stay within the confines of what we know best – offering practical, experience-based guidance for busy professionals.  That’s where we believe we can make the most meaningful contribution.

 

I want to thank Paul and Bill again for their participation with this interview and best of luck on their upcoming book release. 

 

Posted by Jeremy Kloubec at 03:07 PM | Permalink | Comments (0) | TrackBacks (0)

Interest in Social Banking has been gaining momemtum momentum with Financial Services firms for past couple of years. Social Banking refers to suite of Web 2.0 technologies from Financial social networks (FSNs) to general social networking including blogs, wikis, podcasts, and mashups. These technologies provide opportunities for the banks to interact with their customers in a more personalized manner.

Needless to say that there is huge need to KEEP the customers you have and to rebuild the trust which was lost in the recent past. The non-bank competitors are moving into banking and investment services . In such an unprecedented environment, traditional banks will need to move quickly to leverage the Social Media strategy to adapt their current business models to suit consumer passion towards social banking.

A very comprehensive list of such intiatives listed by a social media agency shows that there is huge push by various banks accross globe already in place. This just proves the response from the banks to this trend.

What banks could look at is as follows:

• A Clear Social Media Strategy; A core team focused on the same;
• Senior Managment sponsorship and enthusiasm
• Investment on customer segmentation analysis and create targeted social media investments based on usage patterns and demographics data
• Invest in enterprise relationship management (ERM) systems which can link corporate network, public network, and internal systems like email so that internal networks can better leveraged in a 'LinkedIn' type model and to rebuild trust with customers.
• Evaluate patnership opportunities with Financial social networks (FSNs)

What else are you hearing on this area? Look forward to hearing from readers on the same.

Posted by Srinivas Prabhala at 07:16 AM | Permalink | Comments (0) | TrackBacks (0)

I presented at NASSCOM Emerge Forum last Friday evening, The topic of the presentation was on "Cloud Computing: Balancing Economics and Innovation". This is an event which was well attended by executives from Microsoft, Google, and many others.  

The focus of this session was to elaborate on the current Cloud Computing Dynamics, the past and present of where the technology is headed, the key players in the arena, some key case studies of successful implementations with both Large and Small enterprises and risks involved in the cloud implementation.

The Regional Director of NASSCOM, Bidhan Kankate invited the executives from various organizations including Microsoft, Google and others and set the context of the presentation.

This was followed by engaging presentation by Bhavin Raichura on the Economics of the Cloud Computing Model. We provided interesting case studies from large enterprises that are pursuing Cloud Computing and continued with the opportunities on Innovation in the areas of cloud computing and provided some examples of successful ventures in this area.  There was active participation from various participants on the opportunities and risks associated with cloud computing.

 We also took a quick survey among the executives–
·         >95% of the executives had basic understanding & awareness about cloud computing
·         >25% of the executives were evaluating different cloud computing options
·         >95% of the executives had concern over security aspect of cloud computing
·         >90% of the executives agreed that cloud computing can help them in reducing the cost or improving the time-to-market

It was interesting that when a poll was taken in the beginning of the session about how many of them thought that cloud computing could benefit them vs in the end of the session; the answers varied significantly and people left room with lot more comfort about the benefits of the technology.

·         Pre-Session blog: Making $$$ through Cloud

·         Post Session blog: Where you gonna keep your gold?

·         NASSCOM web site entry:  Cloud Computing: Balancing Economics & Innovation 

The forum provided an excellent opportunity for technologists from various organizations to network and shares their experiences.

Posted by Srinivas Prabhala at 06:50 AM | Permalink | Comments (0) | TrackBacks (0)

This is the second part of my interview with Paul Hilger and William Gole. Part III to follow soon.

 

(Q) You write quite a bit about completing the internal sales process for the divestiture target, how can companies overcome that initial inertia?

[PH]  It’s tough to generalize, but I think a psychological obstacle may emerge within an organization if a divestiture is viewed as a failure on the part of management to deliver on the promise of a given business.  If, instead, a potential divestiture is evaluated in context of the organization’s growth strategy, the divestiture can be thought of more objectively - as a way to redeploy capital into a market opportunity that offers better growth and returns.  

[BG] Agreed.  In all divestitures, some managers will be relinquishing turf and some may view it as personally damaging to their professional reputation.  The more you can make the transaction about strategy, the less personalized the decision becomes. 

 

(Q) Is there a stigma with completing a divestiture from a sense that an outsider has to acquire that asset in order to get value? Sometimes there is just a mismatch or you can unlock that asset in the public market. 

[PH]  Great question and, again, difficult to generalize.  I think that if a given business is not, for whatever reason, seen as part of a corporation’s future growth strategy, it is probably not winning its fair share of internal growth capital and strategic attention.  As one example, there may be additional synergistic acquisitions that, in a different ownership context, could help a given business.  Additionally, the divested business may have been isolated within the corporation’s business portfolio and not benefited from synergy with other parts of the corporation.  The question of how value can be unlocked is probably one of the first and biggest questions that the corporate seller has to field from prospective buyers.  It is a challenge for the selling organization, having just convinced itself why it does not want to own a given business, to help build the investment case for prospective buyers.  This is an area where the expertise, vision, and enthusiasm of the management of the divested business unit can create a lot of value for the selling organization – it’s another reason why I stressed their importance earlier. 

[BG]  This is a good follow-on question to your question about selling the deal internally.  A shift in strategic direction when articulated well can obviate this concern.  Thomson’s shift from print to electronic media is an excellent case in point.  The divestiture of newspapers, textbooks, magazines, and newsletters to focus on electronic databases was recognized by most, both internally and externally, as a reasonable business decision.  And, there were a number of obvious buyers who were strong players in the print sector of the market, and were keen to have an opportunity to expand their share.  Given these conditions, there was not a lot of second-guessing about the decision.  As Paul notes, it’s hard to generalize and the perceptions of observers can vary with the facts and circumstances surrounding any given transaction.  However, I do believe a lot rides on the ability of the seller to properly position the sale in the context of its strategy and to be thoughtful about targeting likely buyers.

 

(Q) Do you see a sweet spot for divestiture deal size or is it really just a matter of the leadership on the deal team?  

[PH] While the deal team can make or break any transaction, in a divestiture I think a lot is dependent on the quality of management of the unit being divested.  That team, after all, is often what the acquirer is buying - buyers discount what the corporate seller's deal team says - they want to hear from the folks who will transfer with the business.  The divested business management also has a significant operational challenge in terms of disentangling the business from the infrastructure and support services of the former corporate parent after the transaction closes.  In my mind, businesses with more than 100 employees are a good size because it is more likely that there is a whole team to showcase and rely on versus one or two key individuals.  Smaller deals can be simpler in terms of the transaction structure (e.g. doing an asset sale, avoiding expensive and time-consuming audits), but the transaction team may lack the internal management resources to address the operational aspects. 

[BG] Also, the concept of economies of scale is applicable.  The amount of time, effort, and expertise needed for a deal is not proportionate to its size.  Small deals may require as much or nearly as much resource as a larger deal, with clearly not the same pay-off.  Also, it has been our experience that the smaller the deal, the more disinterested senior management.  They just want the deal to be done.  So, I agree with Paul, the 100 employee benchmark is a good one. 

 

(Q) In your experience, what were the greatest pitfalls in the divestiture process?   

[PH] I think it would be going to market with inadequate preparation – it’s difficult to put the cat back in the bag.  Once a prospective deal is announced, the business is subject to scrutiny from multiple parties – and missteps have potentially significant consequences.  For example, consider a case where a seller decides to announce a divestiture before the completion of the financial audit of the business and instead distributes preliminary, unaudited financial information to potential buyers.  If the audit results in significant adjustments to the financial statements, this can destroy confidence and potentially undermine the deal’s value.  Likewise, if a seller has not thoroughly analyzed the time and costs required to separate the operations of the divested business from that of the corporate parent, it can set itself up for some nasty surprises later on in the sale process.

[BG] Planning, preparation, and disciplined execution are the keys to optimizing results.  This also implies the appropriate level of support.  If these are seen as the keys to a successful transaction, their absence can dramatically elevate the risk profile associated with the transaction.  This really takes us back to the structure of the book.  Our approach reflects this emphasis on front end prep.  The biggest risk can be expressed as the “ready, shoot, aim!” approach.

 

Please be sure to look for Part III of my interview with Paul and Bill to be published soon.

Posted by Jeremy Kloubec at 06:35 PM | Permalink | Comments (0) | TrackBacks (0)

I recently had the pleasure of reading "Corporate Divestitures: A Mergers and Acquisitions Best Practices Guide" (http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470180005.html) written by Paul Hilger and William Gole. It is a practical, step-by-step guide for those responsible for the sell side of M&A transactions. I was also lucky enough to meet the acquaintance of Paul and Bill who graciously agreed to an interview with our Private Equity blog.

Before we start, some quick background information on Paul and Bill.

Paul Hilger was in corporate financial management for about 25 years, most recently as CFO of Thomson Healthcare, a $500 million division of Thomson Reuters, Inc.  Currently, he advises organizations about various aspects of their M&A transactions and is involved in writing, educational, and training projects. 

Bill Gole held a wide range of executive positions, including CEO of Frost & Sullivan, an international market research company; SVP of Worldwide Sales and Services for Thomson Scientific, a provider of data to the international research community; and SVP of Planning and Business Development for Thomson Healthcare, a provider of information to healthcare professionals.  Presently, he devotes time to writing, teaching, and selective consulting activities. 

 

(Q) What was the genesis for writing “Corporate Divestitures”? 

[PH] During our tenure at Thomson Reuters, there was a push to sharpen the strategic focus of the corporation’s business portfolio.  This was an organization that was perhaps best known for its information databases (such as Westlaw and Thomson Financial), but which also owned newspapers, magazines, newsletters, textbooks, a travel services business, and even North Sea oil interests at one point.  Increasingly, the strategy was to focus on electronically-delivered information solutions for professionals: to divest unaligned businesses, even if growing and profitable, and then to redeploy the proceeds into acquiring better-aligned businesses.  This strategy got the corporation some notice (it was profiled in Larry Bossidy and Ram Charan's book Confronting Reality), and equity analysts eventually began to see Thomson as more of a pure play.  This strategy was implemented throughout the entire corporation at a fairly granular level so, if one wanted to be involved in acquisitions and divestitures, Thomson was a pretty good place to be.  Back to your question - Bill and I found out through experience that there were significant differences between acquiring a business and divesting one - such as the organizational psychology, the availability of resources, the operational aspects of disentangling the business, and the factors that impact the valuation.   In our transactions, we tried to manage them in a methodical way, emphasizing in particular all the planning and preparation required before bringing the business to market.  We thought that we had learned some lessons about the do's and don'ts of divestitures and thought that a book on the topic would fill an apparent gap in the business literature.

[BG] The only thing I would add is that the gap in the literature seemed to us to be quite significant.  We found very little in the literature on the topic when we were heavily engaged in disposal activity and, when we started to discuss the possibility of writing the book, we did fairly exhaustive research on the topic that confirmed that fact.  The coverage that did exist was generally a chapter or section in a strategic planning book or a book on corporate restructuring, and much of that was dated.

 

(Q) Often times these types of books have an academic slant or are based on other people’s experiences, approximately how many deals were you involved with before creating this book? 

[PH] Our book seeks to look at deals from the inside – that is from the view of corporate managers who must coordinate internal resources and external advisors as well as interact with prospective buyers and their advisors.  We saw that there is actually a lot that needs to happen operationally both before and after the short window of the transaction that often does not get sufficient analysis in case studies of past deals.  Bill and I have worked together on M&A since the early 1990’s – over that time dealt with several hundred prospects and closed multiple dozens of transactions ranging from acquisition or sale of individual products to entire business units.

[BG] I would add that the mix of deals gave us insight into important differences (between acquisitions and divestitures) and variations on the divestiture process related to transaction size.  For example, we have had experience with working with boutique business brokers, generally on smaller deals, and large investment bankers on larger transactions.

 

(Q) What makes your book different? 

[PH]  If this makes any sense, we tried to write this book for people who don't have time to read books.  We present a step-by-step process and how-to tools dealing with pretty much every aspect of divestitures we could think of, including operational aspects that are sometimes given insufficient attention in the heat of the transaction.  It is meant to be a practice aid, so there are lots of outlines and illustrations that one could use as a starting point or to ensure that something was not overlooked.  We tried to anticipate exactly when in the process one was likely to need to know about something and presented topics within the context of the transaction flow.  We thought our best contribution would be to offer a tool that could help people save time and reduce risk.

[BG] Yes, this was not a book designed to be read from cover to cover.  We designed it with the intention of providing as many entry points as possible.  For example, in considering retention plans for key employees, someone working on a deal could go right to that section and access all of the information we consider critical.  We also included a Key Points section at the end of each chapter for those who just want to quickly scan our bottom-line thoughts for each phase of the transaction - it provides a view of the process flow, the main considerations for each step, and a cross-reference to the more detailed treatment in the chapter.

 

Please be sure to look for Parts II and III of the interview with Paul and Bill.

Posted by Jeremy Kloubec at 06:18 PM | Permalink | Comments (0) | TrackBacks (0)

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.

Theme: Balancing Economics & Innovation

Every wave of technology innovation is perceived as “opportunities for small & medium enterprises (SMEs)” and “paradigm-shift for large enterprises”. The key observation is that - the SMEs have higher appetite for risks & innovation; however, they are constrained by limited budget. In response to the technology innovation waves, questions & concerns from the Entrepreneurs do not change:

• Revenue: How cloud computing can become a new revenue channel?
• Expenditure:  How cloud computing can help optimize current IT expenditure and improve ROI efficiency?
• Competitive Edge: How cloud computing can accelerate service innovation for competitive edge that attracts funding investments?
• Market Penetration: How cloud computing can help me penetrate the market and increase business growth?

Cloud computing brings business value in all the 4 dimensions – it acts as a “catalyst” for evolution of new biz start-ups and it also acts as a “survival pill” for many Enterprises in this economic down-turn. The important thing is that - the value of cloud computing can be more clearly articulated with the help of concrete business-cases and ROI models for faster decision making – this is what CXOs need , the bottom-line is “show me the money”.

Sounds interesting???

If so, please join us to share your experiences with this evolving trend.

 

Posted by Srinivas Prabhala at 05:41 AM | Permalink | Comments (0) | TrackBacks (0)

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.

Financials can in second with $38B in value on 611 deals. This half of the deal value from the previous year and surely reflects the significant decline in financial assets, not a simple desire for smaller acquisitions. This number is even more startling when you consider that the Barclays Global Investor acquisition accounted for $13B of that number which means the other 610 deals were considerably smaller. The other stories of interest where the dramatic YOY decline for Consumer Goods (approximately an 80% drop in deal value) due to decreased consumer spending and Technology having the largest number of deals (657) with a low total value of $19B, You can check it out the report for yourself at the below link:

(http://www.pehub.com/wordpress/wp-content/uploads//2q09-ma-financial-advisory-review.pdf) 

Posted by Jeremy Kloubec at 03:57 PM | Permalink | Comments (0) | TrackBacks (0)