Thursday, June 12, 2008

Shopping for Success - Mergers and Acquisitions

Shopping for Success

Mergers and acquisitions are all the rage in corporate India. But are such deals good only for the big boys or can startups and small companies too take the plunge?

Education and training firm Career Launcher made its first acquisition in the seventh year of its existence. For a small company that had begun with one offering, the buyout brought diversification, de-risked revenues and overseas customers. In the six years after that, the firm has made three more acquisitions, the latest one in the United States. IIM-Calcutta alumnus R Satya Narayanan, who founded Career Launcher, says acquisitions are a key driver of growth for the company.

He, and other successful small companies, have demonstrated that mergers and acquisitions are not just for the Tatas and Birlas. Even startups, not just those who have already tasted success but even the greenhorns, can buy and manage the integration of outside businesses. But, M&A deals are a risky affair with low potential for success even in the case of multi-billion dollar companies and why should startups venture into them? And if one must, how and when does an entrepreneur decide to go in for acquisition?


When pharmaceutical industry employee K Hari Babu was considering starting on his own in the mid-1990s, he noticed a number of sick drug units in Hyderabad city. Far from discouraging him from his entrepreneurial aspirations, the sorry state of these units only made him sense a rare opportunity. He could spend the time, money and effort to build his own drug factory or buy one of those units cheap and start from day one. He took the latter option and more than a decade later, his venture, Anu Laboratories, has blossomed into a profitable company with Rs 200 crore in annual revenues and exporting to some of the world’s best known drug makers.

But then, why did he choose to acquire to start? “When you are walking on the road and need a car, you don’t sit and build one yourself. You just hire a cab and take the best way out,” says Mr Haribabu. He points out that pharmaceutical industry is one of those sectors that involve a lengthy regulatory approval process for a greenfield project. An acquisition in such industry can make the entry quick and trouble-free.

Laura Parkins, executive director of National Entrepreneurship Network, lists hotels and high-end financial analytics businesses as attractive for early acquisitions by startups. It is difficult to get the land and approvals to build hotels and restaurants and it is easier to buy out. “It is difficult to find skilled people. Hence acquisition is best here and you inherit an already set HR base,” she says.


Education service businesses typically start in one city with one offering. Some coach candidates for civil service exams, other train them for MBA entrance tests and still others for courses abroad. Most of these centres remain that way, but those who grow do so by setting up their presence in several cities and expanding the range of training they provide. To achieve scale and breadth, acquisitions can come in handy. On the other hand, setting up coaching centres in each city and letting them grow on their own could be a time-consuming process.

“When you are in your growth stage... when you are near 80% capacity utilisation, that should be the time you start giving acquisitions a serious thought,” Mr Hari Babu says. So many small companies grow up to a point and fail to grow further. They can choose to remain that way — a mom and pop shop — or they can break that barrier with an acquisition.


Whether rookie entrepreneur or a growing company, startup acquisitions have to be made with own cash, typically. In India, banks are not allowed to lend to domestic M&A deals, going by the socialist principle that it is their job to lend for asset creation not transfer. While they lend vigorously for cross-border acquisition deals by large companies, lenders vanish before the word loan can be uttered when it comes to acquisition by an entrepreneur. Giving away stock to the owners of the business being bought can be considered, but it can dilute the startup founder’s control. So, pumping in hard cash is really the hassle-free way to acquire. If there is not much money in hand, going for acquisitions would be one hell-of-a-risk any way.

Small company heads and first generation entrepreneurs don’t have experience in the foggy world of corporate valuations and risk paying too much for a target business, says a Mumbai-based investment banker. For this and other reasons, they must rope in professional help to decide an acquisition strategy and specific deals. One thumb rule, in all cases, is the cashflows of the acquired company should be able to finance the buyout cost over time, a banker said.


For a small company, domain knowledge and leadership skills are the biggest assets. In any acquisition, employees of the acquired firm can lose morale and look to change jobs. In a startup scenario, the feeling of uncertainty is even more intense. An acquisition would be meaningless if the target firm’s key personnel were to leave within a few days. So, the acquirer must find ways to bind the best workers to the company at least for some time.

Take the case of Globsyn Technologies, which acquired the promoter stake in Mumbai-based Synergy Log-in Systems. Globsyn was a small firm in education and training and the buyout brought it banking software expertise. It made strategic sense and all looked rosy. But soon after the acquisition, two senior overseas employees left the company taking their contracts with them. “I had to start building the company again from scratch,” recollects Globsyn chairman Bikram Dasgupta. “Some of the existing customers were also very upset with the firm and were thinking of taking their contracts elsewhere. The business had been neglected and nobody was servicing them. I had to convince them to stay on,” he said. Today, Synergy has survived and is making profits, but it has not been an easy bite to chew for Dasgupta.


Just like it can make sense for some companies to acquire, it could be good for others to be acquired. Smart entrepreneurs don’t cling to their pet startups that can flourish better under somebody else’s care. They sell out and look for alternatives.

“Acquisitions are more about the mindset, and entrepreneurs have to be open to the idea of M&As being bi-direction if they are thinking abut achieving scale through this means,” Manak Singh, executive director at The Indus Entrepreneurs, says.

Buying or selling, a transaction has to fit in with the strategy and vision of the business. Cultural integration is an issue even in small groups of people. Most acquisitions fail because two different sets of employees don’t see eye to eye on what they want to achieve together. For a large company, a failed acquisition may be a mere headache, but for a startup, it will be cancer. So, unless the small business leader is absolutely confident of the strategic purpose and the firm’s ability to digest a buyout, the effort to acquire should not be made. There are always options such as strategic alliances to achieve some of the growth needs, experts say.

The success story of the world’s largest software company, Microsoft Corporation, started really with the acquisition of DOS, the Disk Operating System, in 1981 for a mere $50,000. Though the company paid Seattle Computer Products another $1 million later to settle a dispute, the whole thing was a jolly good investment for the company. Who knows, the next killer acquisition may be yours and the opportunity may just be round the corner.

Article Resource:
Author: Ritwik Donde (With inputs from N Shivapriya) is the cheif editor in the Economic Times and the article appeared in one of their successful columns in "Start-ups".

Mergers and Acquisitions
The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.

Distinction between Mergers and Acquisitions
Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". Both companies' stocks are surrendered and new company stock is issued in its place.

In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable.

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