The season of cashing out for brand creators

Written by Sourav Majumdar | Updated: Feb 2 2006, 05:30am hrs
Just days after he signed a deal selling his 47% stake in DSP Merrill Lynch to Merrill, I asked Hemendra Kothari how it felt to get a $500 million cheque. The quintessential investment banker that Kothari is, he said with a smile: It would have been $200 million two years ago, and $1 billion three years later. That, in effect, is exactly what right timing is all about in this age of mega acquisitions and stake sales. One wrong move, and you could end up foregoing millions. On the other hand, if you wait for the right opportunity, you could gain much, much more.

Quite a few, in fact, are now realising the worth of exiting at the right time, as the Indian economy and corporate sector matures and attracts global players in large numbers. In fact, of late, quite a few mega deals have been in evidence, cutting across sectors. Whether it is Rajeev Chandrasekhars decision to exit BPL Communications by selling out to Essar, C Sivasankarans move to exit Aircel, or the latest move by the Sekhsaria-Neotia families to sell a 14.8% stake in cement major Gujarat Ambuja, its almost as if were entering a season of deals where creators of brands and corporations are preferring to cash out at the right time.

Investment bankers agree the time has come when the Indian markets will see more exits of the sort being witnessed of late: stakeholders assessing the market, choosing the right timing, and exiting at the right price as valuations hit the roof. Many reckon this will be more pronounced in sectors where growth prospects are high, but are accompanied by increased competition and where capacities will hold the key.

In the case of the Rs 2,100-crore Holcim-Ambuja deal, for instance, the reasons were clear. Holcim had already done business for a year with the Sekhsarias, and wanted to seal its entry with a firm foothold in Gujarat Ambuja itself. Having got into ACC, it only made economic sense for the Swiss cement major to quickly get into Ambuja, since that would give it a clear edge over other global majors planning entries into the country. Besides, the cement industry has been showing promise and Holcim obviously didnt want to waste time. From the Ambuja promoters point of view, it was a case of what investment bankers call compelling valuations: a $200 economic value per tonne breaks all records.

Indian businessmen getting lessemotional about their businesses
As a result, they are no longer afraid of moving out at the right time
Entry of global giants, need for capacity-building, will also drive this trend
Telecom, financial services, even steel are being seen as areas where such competitive and valuation pressures will see some exits taking place at the right price, and at the right time. While overseas interest was chiefly confined to banking in the past, retail financial services has emerged as the new flavour which foreign majors want to get a scoop of. That justifies the valuation paid by Merrill Lynch for Hemendra Kotharis stake, and the hunger for the investment banking giant to get into the drivers seat in the Indian investment banking firm.

Ultimately, any decision to sell out will be determined by whether the valuation is significantly related to the present value of future returns which the business can generate. If the potential seller is confronted with a situation where the buyer is offering a value significantly higher than that, there is a compelling case to sell out. With the phenomenal valuations being witnessed across sectors for foreign majors coming infrom Merrill to Maxis to Holcimthe deals are going through thick and fast.

The other important thing is, Indian businessmen are now learning to delink emotion from business decisions. Investment bankers agree that more and more businessmen who have created valuable companies are now ready to get out of the drivers seat and try new things, given the right exit price. Selling, these days, is becoming a pure business decision. No longer is control a good enough reason to hang on to a business. Many, like Rajeev Chandrasekhar, are even venturing into new areas after exiting the old business.

Businessmen, investment bankers reckon, are going to increasingly decide to act immediately, rather than let a good opportunity pass. Look at it this way: if the value of holding a 10% stake in a business now is more than that of holding a 25% stake some years ago, why would businessmen not choose to hold lesser stakes and make money in the process And since valuations may just be peaking, its better to act now than later. A smart businessman knows this only too well.