ECONOMIC SLOWDOWN - Specialist i-banks face tough times as VC, PE deals dry up
13 Jan, 2009 | The Mint
BY D EEPTI C HAUDHARY
If 2008 showed how a sluggish market could impact the deal-making business, this year looks even more bleak for specialist investment bankers who help put together venture capital (VC) and private equity (PE) deals as also help sow up services and products for emerging companies.
Such specialist or boutique investment banks (i-banks) account for 25-30% of the investment banking business in the country, which saw fees from the activity fall 36.4% to $757.7 million, or around Rs3,682 crore, in 2008 from $1.2 billion in 2007, as share sales and debt offerings fell, according to data from Thomson Reuters.
The year gone by saw robust deal-making activity in the first six-eight months, before the global financial crisis set in September with the midmonth collapse of Wall Street icon Lehman Brothers Holdings Inc.
The total value of deals- mergers and acquisitions (M&As) as also PE-in 2008 (until 15 December) dropped 41% to $41.13 billion, com pared with $70.14 billion in 2007, according to preliminary data from Grant Thornton. The number of deals dipped by 25% to 751 in 2008 from 1,000 in the previous year.
"We are realizing that it will not be all rosy in 2009 as the number of deals will be less overall," says K. Ramakrishnan, executive director and head of investment banking at Spark Capital Advisors (I) Pvt. Ltd.
Investment bankers such as Ramakrishnan are an important link matching companies seeking funds and VC or PE firms vying for investment opportunities. Experts say up to 40% of investment opportunities are helped by such intermediaries, who make money by charging 2-3% of the capital raised.
"Overall there will be a drop of 15% in PE and M&A deals, while values will fall by 30% to 40%. (Both ways) it will impact us," says Ranu Vohra, managing director and CEO, Avendus Advisors Pvt. Ltd.
Still, some in industry believe a shake-out in the market will help them in the longer term. "Men will be separated from boys," says Spark's Ramakrishnan, adding that classical banking will come into the forefront, which will not be deal driven. Only people with aptitude to "create deals" by providing advisory services will survive, he predicts, with long-term associations and deal history playing key roles.
With deal makers scrambling for a handful of deals, their ability to spot a deal, see value in it for both promoters and investors and help them in achieving it, will become decisive in their survival.
"Last year, a lot of investment bankers came up, few will be active in 2009, as the correction was too sharp and caught every one unaware," says T.R. Srinivas, director, real estate and energy, Ozone Capital Advisors Pvt. Ltd.
Such investment bankers are waiting for the March-quarter results, which will allow them to calibrate expectations for the second half of 2009, given that deals are taking as many as six months to close, compared with two-three months earlier, they say.
M&A activities will be more prominent this year as a number of companies that diversified into unrelated areas may look at opportunities to get out of them, they say. Mergers could also get triggered by necessity as a few companies may look at the option of liquidating assets to generate working capital.
"Last year, our revenues from PE/M&A were in the ratio of 50:50. This year we expect the ratio to change to 30/ 25:70/75, as PE deals will be less than M&A," says Ozone Capital's Srinivas. Experts say valuations are attractive among information technology service firms (as it will continue to grow at 20%) and quite a few mid-sized US companies are interested in acquiring Indian firms.
Significant M&A activity will also take place in real estate and infrastructure sectors as new firms try to take over projects from cash-strapped incumbents. Clean technology, education (school chains), engineering services, niche manufacturing firms, pharma, retail and health care, will generate interest, too, investment banking executives said.
Also, a lot of Indian firms will acquire overseas entities, particularly in Europe.
"Through such acquisitions, Indian firms not only get a geographical reach, but also equity and a brand name. We are now getting four-five such deals every day," says Srinivas.
His firm is currently advising an Indian power company on acquiring a manufacturing firm in Europe, he said, declining to give details.
Most of the boutique investment banking firms are readying for a tough year. "We are budgeting ourselves for hard times. We are trying to hold on to cash and are preparing ourselves for the next two years," says Srikanth Narasimhan, director, Veda Corporate Advisors Pvt. Ltd.
There are others who will start providing new services to cater to capital needs. Avendus Advisors, which had 26 deals last year, says it will look at alternate areas and products to grow this year. "In 2009, we will look at providing advisory on debt and products like alternate capital through structured debt, convertibles, etc.," says Vohra.
Viedea Capital Advisors Pvt.
Ltd, a Bangalore specialist investment bank, which facilitates VC deals, will move to larger deals now, including late stage deals, according to Deepak Srinath, director and co-founder.
RASILANT TECHNOLOGIES - Parking tags bring sense of security
BY N AMITHA J AGADEESH
Radio frequency identification, or RFID, solutions company Rasilant Technologies Pvt. Ltd has seen a rise in demand for its security solutions since the Mumbai terror attacks.
The Mumbai-based company has devised TagPark, a vehicle identification and parking system that integrates RFID technology with application software.
The tag ensures that only authorized vehicles are allowed to enter a restricted area or a parking lot. A reader at a secure location accesses the tag as the vehicle approaches and the gates open only if the vehicle is authorized.
These tags also store information on vehicle details, entry and exit timings. "We are now servicing 10 office buildings and have received enquiries from another 15," says executive director Sahil Anand.
Anand started the company soon after leaving college three years ago, with his classmate Shiloditya Mukhopadhyay.
The company has since serviced diverse customers, from auto makers to educational councils.
It devises a customized solution, procures the equipment, writes the front-end software application and deploys the tags.
On one of its early projects, it devised an inventory tracking and management solution for auto components at the Pune plant of Bajaj Auto Ltd to speed up the assembly line. In another application, it partnered with the country's medical, dental and pharmacy councils to monitor faculty enrolment in 3,500 colleges across the country.
"At times, colleges show a certain number of teachers only on paper, but in actuality, there is a lot of defaulting and duplication," says Anand.
Rasilant has integrated the RFID cards with a biometric system-that requires thumb prints for validation-to detect such misrepresentation.
A large part of its revenue comes from channel partners in India and West Asia. Its wide range of applications has helped Rasilant post a revenue of Rs10.5 crore in the fiscal year ended March against Rs45 lakh in fiscal 2007.
Rasilant competes with and acts as vendor to large technology firms such as International Business Machines Corp. and Bartronics India Ltd.
A big challenge for the firm is the high cost of the hardware required to deploy RFID solutions. Compared with barcode stickers that cost a few paise, an RFID tag could cost anywhere between Rs5 and Rs1,000, depending on the application.
"Pricing is a hindrance," admits Anand, "but we are trying to make up for it by catering to niche sectors and showing a good RoI (return on investment) model to clients." The company was started with angel investment from a benevolent uncle. As it scales up, Rasilant says it will look for external funding. In the coming days, it wants to set up an exclusive research and development lab to come up with innovative RFID solutions.
Rasilant Technologies and Evam Entertainment Pvt. Ltd are among the nominated companies at the Tata NEN Hottest Startups competition, of which Mint is the official print media partner. Details of the competition can also be accessed at www.livemint.com/ hotteststartups
EVAM ENTERTAINMENT - Taking plays to unusual venues
BY D EEPTI C HAUDHARY
A rt meets money at Chennai-based Evam Entertain ment Pvt. Ltd. Run by two young marketing management graduates, the theatre enterprise is all set to change the perception that the stage makes for a pauper, instead, making serious money doing English stage plays.
"We wanted to be in the business of storytelling. Our idea was to make people's life easy…give them something to laugh about, not just in the auditorium but also when they think about the play," says Sunil Vishnu K., one of the two Evam founders. He co-founded the business with fellow Mudra Institute Of Communications, Ahmedabad, graduate Karthik Kumar in 2003.
Evam puts up both adaptations and original productions and runs about 70 shows every year across Chennai, Hyderabad and Bangalore, selling at least 30,000 tickets annually.
It also runs the "Happy Factory", wherein it organizes workshops for firms, schools and colleges, taking care of all their entertainment and training needs. The workshops are basically plays, full of humour, targeted at employees and students, designed to energize individuals and bust stress. It also creates customized content for a brand, where they get the chance to tell their stories using theatre. "We are playing a game for a bigger audience.
Theatre is a performing art.
There is no reason why it should be run on grants," says Vishnu.
Evam's future plans include going national with their next two public shows, which are based on Chetan Bhagat's novels-One night @ the Call Center and Five Point Someone.
With these plays, the firm expects to sell 150,000 tickets. Its future plans include "d sound" and "d light"-wherein Evam will show and train people on how sound and light can add drama to life. Evam plans to add cinema to its portfolio in two years. "We would like to make a Khosla ka Ghosla kind of movie," says Vishnu, referring to a 2006 comedy hit.
The firm, which turned in revenues of Rs65 lakh in fiscal 2008, expects Rs1.5 crore this fiscal and Rs7 crore in fiscal 2010. Vishnu says, though Evam, a profit-making entity, would like to raise capital to scale up, it doesn't have an immediate plan. "We don't want to give up a stake at this juncture." Going public is their long-term plan.
Vishnu says one of the biggest challenges he faces is getting urban Indians to try out theatre. In order to attract people to their plays, Evam gives out free passes to colleges and companies. "Once they come to our show, I'm sure they will come back. The battle is to bring them in for the first time," he says, counting a cable TV connection, a Shah Rukh Khan movie, a mall, or even a beach as competition.
Investor Tripat Preet Singh says Evam has a unique business model taking theatre into offices and educational institutes. He, however, feels it is important for the firm to concentrate on a few areas and become successful in them, such as public and corporate shows.
"The firm needs to grow to a level of maturity. It is still at a very early stage. They need to create success in their verticals to make their venture attractive to investors," says Singh, senior associate, NEA Indo-US Ventures.
Evam has brand associations with Royal Sundaram Alliance Insurance Co. Ltd and Bharti Airtel Ltd. It has six full-time employees and the actors are mostly professionals, working with them on a contract basis.