- Strong cash flow
- Cut the unnecessary areas
- Set tangible assets against collateral loan
- Capital requirements
- Exit Strategy
- Cost savings
- Number of shareholders are less
- No shareholder intervention
- Tax benefits
Starting of a new age of LBO’s in INDIA
Leverage Buyouts are relatively a newer term in India. LBOs came into existence in the 1950s and 1960s where their business was limited to medium sized organizations. The real phase of LBOs started from 1970 and gradually emerged as a strong entity. In India LBO works different from the rest of the world. Due to liberalization the general tradition followed in India is, companies acquires other companies and invest capital in it and then after some years subsequently move out with a high rate on return on their investments.
The very first buyout that took place in India was when Tata Tea acquired Tetley (US based) in March 2000. The transaction took place for 271million pounds. Vijay Mallya’s UB Group’s acquisition of Glasgow-based whiskey maker Whyte & Mackay is just another example.
LBOs operate in India in 3 Steps:-
Stage 1 is made up of raising the cash required for the buyout. The Investor Company funds about 10% of it and about 50-60% of the cash is raised by debt backed by the company’s assets.
Stage 2 consists of the organizing company buying the outstanding shares of the company and forming a new company. Or a private company purchases the assets of the company.
Stage 3 the funding aspects of the company being taken care of. The management works towards increasing profits and cash flows by reducing operating costs and altering marketing strategies to meet the set targets.
Root of LBOs – Private Equity firms
The role of private equity firms in mergers and acquisitions has been more than significant. This investment of private equity firms in various business structures started as early as in the late 1970s. It started from just one firm learning, progressing and then guiding other firms in the same path. In today’s time lower interest rates, change in policies and regulations has facilitated private equity firms in acquiring and investing in businesses all over the globe. Largely these acquisitions are aggravated due to inflation, deregulation, commodity shortages, and demographic changes and so on.
Private equity firms are more active in LBOs than in any other segment. The favorable banking schemes and changing regulatory rules have facilitated their involvement in market. Although the risk factor in private equity mergers and acquisitions is high the success of reputed firms makes it very tempting and a viable solution when the firm is not working up to its efficiency or there may be several other reasons as well.
Kohlberg Kravis Roberts and company- Successful PE firm Specializing in LBO -KKR’s Indian Impact
The Aricent Group – Founded in 1991 as Hughes Software Systems, it’s among the largest privately held companies in the Silicon Valley, USA being the headquarters. The company is widely known for developing software and providing technology services to application, infrastructure and service providers with functioning in about 19 countries worldwide.
The private equity firm KKR who expertise’s in Leverage Buyout started its active operations in India since 2006. Their investments exceeded $1.1 billion in various companies in India. KKR acquired the India –US based company Aricent for $900 million which is said to be largest buyout in the history of India. Although Aricent is a California founded company majority of its employees are based in India (about 6500 out of 8000). A further $60 million has been raised by Aricent from KKR in the last round. KKR India is centered on providing Indian businesses with a steady capital structure. KKR has put forth tremendous support for Indian companies to grow by executing a variety a deals buyouts.
Other companies where KKR has actively invested are Bharti Infratel (2008), Max India Group (2009), Coffee Day Resorts (2010), Dalmia Cement/Avnija (2010) and JSW Group (2010).
An analysis is prepared to estimate the current value of the company to a financial buyer. This analysis will forecast the debt repaid by the by the company during the relevant period and make assumptions about the multiple earnings after which the business will be sold off after a period ranging from about 3 to 7 years. Constant returns along side with the firm’s historical results will result in LBO analysis providing an estimate of what purchase value a buyer will be willing to pay in accordance with the analysis.
CA Maneet Pal