BDA Managing Director Rohit Singh article published in March/April issue of “The Diplomat”

March 3, 2009

The Tiger’s Tale
Rohit Singh

In these financially difficult times, senior management of multinational corporations are trying to protect their own turf rather than thinking about investing in new regions. But growth economies like India are as relevant for multinationals in recessionary times as they were in the expansionary phase. India’s AUD1.7 trillion economy, which is fueled primarily by strong domestic demand, is still estimated to have grown at 6.5 percent for the financial year ending March 2009. This remains an enviable achievement.

In January 2008, most Indian CEO’s were upbeat about their growth plans. The BSE Sensex had reached an all time high of 21,206 and companies were raising capital from private equity firms at stratospheric valuations to fund domestic investment and their overseas acquisition ambitions. Time – tested valuation multiples had lost their relevance in the deal making euphoria. Most Indian companies were acquirers in the global mergers and acquisitions (M&A) context rather than targets.

Now, though, the mood of Indian promoters seems to have changed. They are more realistic about their growth plans and are busy stress testing their assumptions based on the new ground realities. Some of them are even willing to entertain discussions that could lead to a majority stake sale in their companies, which would have been close to unthinkable 12 months ago.

The private sector in India is still dominated by family owned businesses which have adapted themselves remarkably well from the erstwhile “license quota raj” to the current free trade environment. Indian companies, even small – medium sized ones, have competed strongly against well capitalized multinationals. Most are underleveraged compared to their global peers and have the wherewithal to cope with a downturn. When approached by a foreign company, they are typically in no hurry to sell and demand a full and fair price – the memory of the good times fades slowly. Even recently, we have seen several M&A deals fall through due to a mismatch of valuation expectations between buyer and seller.

Structures to bridge this gap have become common, such as earn out agreements, whereby a foreign company acquires an upfront majority stake in an Indian target and then buys out the remaining stake over a period of time at pre-agreed performance-based valuation multiples. This mechanism also ensures that the target management team transitions its responsibilities or integrates into the new management over a longer time frame.

Since the Mumbai terrorist attacks, many companies are asking themselves if this is the right time to invest in India. They are sceptical about the unforeseen risks of investing in a developing economy. I was in New York when 9/11 occurred and also present in the Oberoi hotel a few hours before the Mumbai attacks, and my view is that all large cities share similar risks of becoming a soft target for terrorist activities. The people of Mumbai showed great resilience during the recent crisis and the city got back on its feet within 24 hours of the attack. People went back to work with a determination that they will not allow the free sprit of the city to be curbed by a few terrorists. It is this unflinching attitude and determination to succeed that will fuel India’s growth over the next decade and foreign companies will do themselves good to participate in that growth story.