A lack of hard-nosed valuations in the M&A was a distinct feature. “An interesting point is that most of these over-excited M&A were done by seasoned, matured business houses rather than the young, first-generation entrepreneurs,” reports Jagannadham Thunuguntla.

1. M&A are cooling down RIL-RPL merger
holds promise
17
on all fronts
ADC Business
AFTERNOON DESPATCH & COURIER
WEDNESDAY, MARCH 4, 2009
BY MANIK K. MALAKAR deliver expected results and they
are starving for cash now.
M
UMBAI : Rupert Pennant- In the later years, however, the
Rea a former Deputy Gov- feeling of euphoria came into
ernor of the Bank of play and acquirers were not both-
England once quipped, “At the ered about how much they are
Bank of England we have the abil- paying. “Most of the transactions
ity to mess things up, and our of 2006, 2007 were out of adrena-
record shows that we have often line-rush than out of rationality,”
used it.” he said.
A tional flexibility as big merger
s said by Alok Agaral,
That is a sentiment which com- The only sector in the M&A
gains , besides efficient
CFO, Reliance, the RIL-
panies that went in for the merg- space that has proved to be an ex-
utilization of combined
RPL merger “is all about cre-
ers and acquisitions (M&A) during ception to the rule has been the
cash flows” and higher valua-
ating a larger or integrated
2005-2008 must be richly sharing. telecom sector. Thunuguntla ex-
tion of for the merged entity..
energy major, it gives us the
The bull market of that period plains, “It was an inbound acquisi-
Though a few analysts were
ability to take on projects
made quite a few companies go in tion where Vodafone has acquired
surprised by the timing of
much larger than done be-
for M&A activity. They may yet be a five per cent stake in Bharti-Air-
what they said was an ex-
fore.”.
living to regret their decision. tel. The sector in which it’s present
pected move, most said
Other than the size, the
A MTM (mark to market) report and the elegance of management
merger made strategic tech-
merger gives Reliance a huge
indicates that M&A activity has has ensured there are very modest
nical and financial strength
lost a whooping 53 per cent of losses in the stock in comparison elbow room to scale its opera-
their value. This information was to collapse of rest of the market. for RIL.. Goldman Sachs ana-
tion according to demand and
compiled by Jagannadham This has enabled Vodafone’s five lysts said on Monday the deal
fine-tune its plans of how
Thunuguntla, who is the CEO of per cent acquisition of Bharti turn- will be strategically positive
much of each project to make
SMC Capitals, one of India’s lead- ing out to be a profit-making deal, for RIL as it would give the
. As for as country’s needs are
Jagannadham Thunuguntla,
ing financial services companies. in comparison to other disastrous company access to about $
concerned, RIL can fuel India
CEO, SMC Capitals
Indian companies in the period M&As.” 1.5 to $ 1.8 billion of RPL’s an-
2005-2008 took part in M&A activ- But coming back to tends, how- nual cash flow (on full ramp-
ity worth $ 45 billion dollars (of ness houses rather than the young, ever, the rest of the M&A scene up for its various planned
listed Indian companies and a deal first-generation entrepreneurs,” does not offer comfort. “Globally,
projects)” and “Chevron’s
size of more than $100 million). reports Thunuguntla. This under- 95 per cent of the M&As fail,” is
concomitant exit from RPL (at
This value is now down to $ 20.96 lines the point that even seasoned Thunuguntla’s stark statement. In
Rs 60 per share) adds margin-
billion This represents a loss in businessmen get influenced with light of this statistic Indian M&A is
ally to RIL’s valuation and also
the trend rather than exception.
gives RIL’s promoters full con-
Jagannadham Thunuguntla
trol and of the future direction
sounds a very cautious note.
of the company.”
“Shareholders should always care-
US energy firm Chevron
fully assess and watch any big-
Corp. decided on Friday to sell
ticket M&A transaction, especially,
its 5 per cent stake in RPL for
when the target company is two
times bigger than the acquiring $ 260 million at current ex-
company,” he said. change rates’. Another
The severe not continues. Ag- favourable point of the merger
gressive M&A activity on the part worth mentioning is that
of Indian companies was wrong as there is no tax or depreciation
for 5 to six months making it
they spent all of their hard earned benefit from merger that was
less dependent on imports.
profits. “Globally, in developed largely to boost RIL revenues –
The merger is a move that
countries, M&As are very preva- a fact that Agarwal confirmed
will create the world’s com-
lent because the markets in those
in the press briefing.
plex to convert crude oil in pe-
countries are extremely saturated
“The merger is not for tax
troleum products at a single
and matured. In such economies,
saving. The merged entity will
location. The company said
the scope of organic growth is very
be tax-neutral and we do not
on Monday, that it would offer
limited. Hence, the only way the
see any impact. of additional
one share for every 16 shares
companies can exhibit growth is
depreciation.
held by investors in Reliance
value of a staggering $ 24.04 bil- ‘false promises’ of bull market. through M&As in the form of inor-
The rating agencies on their
Petroleum Ltd (RPL), its refin-
lion. Obviously not a small Continuing with this evaluation ganic growth,” stated
part reaffirmed their ratings
ing subsidiary.
amount! of M&A valuations, it is to be noted Thunuguntla.
for RIL debt after the merger
RIL will issue 69.2 million
“Companies usually ventured that M&A activity of 2005 has per- Needless to add, M&A is no
was announced.
into the M&A route either for busi- formed (relatively) better than that longer the flavour of the month. new shares to RPL sharehold-
ness compatibility, R&D, access to of 2006-2008. “This probably be- M&A activity is now on the slow- The relative importance of
ers, increasing the equity cap-
raw materials, access to cus- cause by the time of 2005, the in- down. “Companies that have been RIL in all the stock indices will
ital by 4 per cent to Rs. 1,643
tomers, new product line, and fluence of bull markets is not in bitten once are twice shy now,” he rise after the completion of
crore. RIL’s own 70 per cent
other factors,” said Thunuguntla, full swing and the acquirers were said. merger with Reliance Petro-
share holding in RPL will be
when asked about the rationale not paying hyper-valuations,” ex- There is opportunity in every leum. This is because all the
extinguished. The company
behind the M&A activity. plains Thunuguntla. adversity, notes Thunuguntla. For indices are based upon the
says the merger will increase
The bull run of the period start- “However, in the euphoric the cash rich corporate this is the market . capitalization of its
the earning per share in the
ing from 2004 was also a factor in mindset, the Indian corporates opportunistic time to do some constituents and post-merger,
combined entity
boosting M&A activity since In- had bitten the cross-border M&A smart M&As. “As rightly put by
with RPL shareholders getting
“I cannot think of a better
dian businesses had large profits bug and they are now paying a Warren Buffet, we should be fear-
RIL stocks, the market capital-
time for the merger. RIL share-
and accumulated reserves. heavy price,” he said. Cash-rich ful when others are greedy. And,
ization of RIL will rise.. It is a
holders will benefit from
“The vaunted ‘Indian Growth conservative groups have now ex- we should be greedy when others
technical positive for RIL since
bringing in an asset that is
Story’ campaign was yet another hausted all their profits, their over- are fearful,” Thunuguntla con-
its weightage in the bench-
complete now and has mini-
factor that led to some of India’s seas acquisitions have failed to cluded.
mark indices is likely to go
mal project risk ( the RPL re-
business houses venture into big
up,” said a Goldman Sachs re-
finery) and RPL shareholders ,
ticket M&As,” continued
port.
by being part of the parent
Thunuguntla. The additional
Commenting upon the
company, can again form
global attention that these deals
treasury losses RIL that RIL is
bring to the companies and their (the) latter’s gas and oil port-
promoters was another catalyst. rumoured to have incurred in
folio, and can get all the bene-
M&A activity was both domestic its futures contracts, Agarwal
fits from KG Dt6
as well as foreign. On current valu- said” “We had bought oil at $
(Krishna-Godavari) gas fields)
ations, domestic MTM transac- 10 a barrel in 1999 and $ 125
which is so closed to produc-
tions have lost 42 to 43 per cent in 2008 and still consistently
tion,” Agarwal told reporters
while overseas ventures lost 60 per maintained higher gross refin-
after announcing the merger
cent. The cumulative loss averages ery margins than industry
m deal on Monday.
out to 53 per cent. benchmarks. We would jot
The counted synergies in
A lack of hard-nosed valuations
have got there if we do not
crude procurement, product
in the M&A was a distinct feature.
know how to manage the
placement, supply chin opti-
“An interesting point is that most
volatility in risks..”
mization and greater opera-
of these over-excited M&A were
done by seasoned, matured busi-