Assessing Value: To a 100% acquirer of the business!

[Donald]

@vml

I understand that Kaveri’s germplasm is a moat, and it would take another company a long time to duplicate something like that. But it is doable, and you might say that if I invest so much time and money I can do the same thing.

Not at all. This india-native-Germaplasm is the Intellectual Property that MNCs like Dupont or Monsanto or Bayer do not have. It is also the intuitive knowledge bank of successful breeders - that crossing this germaplasm with X trait with another of Y trait - may produce a better yielding, better drought-resistant or better-flood resistant hybrid.

It takes upwards of 10 years to produce a really successful hybrid with thousands of carefully strategised crossings. And how many companies have been really successful - only a handful like Ajeet, Nuziveedu, Kaveri, Rasi. All others have failed to produce something with stellar charactics like a Jadoo or ATM. And many of the seed companies in India have been investing in this from upwards of 20+ years.That is why a Kaveri will be very valuable to a MNC buyer!

So success is not guaranteed - even given time and all the money. Unlike say investing in building a distribution network from scratch - where I will agree - most people with resources can do it!.

[Donald]

@vml

It is not obvious to me that brand-name, talent are the same type of enduring moats. Reputations/trust are easily lost, talented people can leave (Infosys is a recent example - even Steve Jobs was booted out of Apple).

There is a difference between iconic brands and any brand. You are right if you say HUL does not have any enduring brands in Soaps and Shampoos…except may be a Dove. If they increase their prices which pinches, we will easily shift to brand B shampoo or soap from a competitor.

But an Asian Paints brand or Fevicol is enduring even in commodity chemical space like Paints and Adhesives. These are iconic brands just like a Colgate or Horlicks or Coca-Cola is.

Of course for Brands - you need to keep re-investing in them. just as you need to for Talent. in John Kay’s words if your business has the right Architecture, it will keep re-investing in and nurturing Talent and Teams and knowhow.

Nothing will be enduring, if you do not keep investing in protecting your turf - whether Brands, Intellectual Property or People.

Hope this helps.

[atulgarg]

@Donald

Not at all. This india-native-Germaplasm is the Intellectual Property that MNCs like Dupont or Monsanto or Bayer do not have. It is also the intuitive knowledge bank of successful breeders - that crossing this germaplasm with X trait with another of Y trait - may produce a better yielding, better drought-resistant or better-flood resistant hybrid.

How useful Kaveri’s germaplasm is for itself. isn’t the germaplasm crop specific.

How easy it will be for Kaveri itself to duplicate the success of cotton in other hybrids like rice given the germaplasm bank it has.

[Donald]

Atul - this question id for the scientists

What I have understood is, certain traits like draught-resistance, water-resistance or specific-pest resistance are traits exhibited by certain plants that have been observed to be draught-resistant, and so -on.

So when you want to create a high-yielding cotton hybrid that also exhibits draught-resistance, water-resistance and sucking-pest resistance, You need all 4 in your Germaplasm bank. First the high-yielding varietal (non-hybrid) cotton plant which now you proceed to cross with the desired traits.

Certain plants lend them easily to Mutation like Cotton and some like Wheat or Pulses are very difficult to hybridise. Red-Grams is the only pulses to have been successfully hybridised.

My educated guess is therefore you need the high-yield varietal for the specific crop (say Maize, Bjara) and you also need extensive bank of plants/hybrids with original parental lines with desired traits to create the desired hybrids over long periods of educated trial & errors over a number of years.

Once you have a successful hybrid in one crop say Cotton, it is easier to create a better hybrid with an incremental trait - so ATM is supposed to be an improvement with better sucking-pest tolerance - you are crossing for incremental traits, retaining the earlier. Chances of success are much higher than say starting from scratch.

Now of course Kaveri can’t suddenly create vegetable say Lady Finger hybrids - it may not have the right varietals in its Germaplasm like it has traditionally had for Cotton or Bajra or Maize. It will have to choose and acquire from Agricultural Institutes or from another company that has the right varietals/hybrid parental lines.

[atulgarg]

Donald,

Thanks for the a thorough and lucid explanation.

How easy/difficult it is for a company like Kaveri to acquire the right varietal parental lines. Is it ok to assume the germa plasm for desirable traits like draught resistance, pest resistance & water resistance will be availble rather easily as these will be well known and couple of other seed companies like monsanto, nuzivedu, Ajit have already used them successfuly.

Based on this understanding, Does it make sense for some one to acquire Kaveri just because of the germa plasm bank.

For me the scientists behind the hybrids and company specfic processes would be more valuable an asset.Please share what do you think.

Thanks.

[Donald]

Obviously both the Germaplasm/process-knowhow (read Strategic Asset) and the Company’s distinctive capabilities - Architecture (read people, production-farmer linkages, distribution chain) - will be important to any acquirer. Its Industry standing (read Brands & Reputation) & Innovation track record will only get it higher ratings.

Hope this helps.Let’s not clutter up this valuable thread with too many company-specific questions.

[Administrator]

Prahlad.

If you want, please start a thread on Jayant Agro.

Do not clutter an important Valuation thread with unnecesary company specific details. Members have complained that you are spraying multiple threads with the same information on Jayant Agro.

Please read the forum guidelines properly. Please be mindful that repeated violations like this may result in your membership suspension.

Your above posts are being deleted.

[shanid]

Guys,

Anybody got Ambit capital report mentioned by Donald.

I send mail asking for the report…have not received any reply.

Regards

Shanid VH

[vml]

@Donald: Thanks for all the clarifications. I am still making slow progress through the Capital Allocation and other threads, and it is heavy work for me.

My question had more to do with the original thesis of this thread - While we all agree that brands and architecture are important, how do you quantify an intangible?

I feel intellectual property like germplasm, or some patented molecule maybe easier to quantify than something more touchy-feely like brand-power or star-talent. How do you even put a number to things like trust, relationships or imagination?

I share the same difficulty as @Atul:

If a rival of a company like Kaveri Seeds was forced to choose, would it be more interested in its intellectual property, or the group of scientists that came up with the idea and did the work? My guess would be that the IP is easier to quantify, but star-talent maybe a better long-term investment. If motivated, they may come up with far more valuable innovation.

Like mentioned earlier in this thread, I think any value would be subjective - in the eyes of the acquirer, because they may have different visions of the future or different goals [neither of which may come to pass ]

[Donald]

Random Walker,

The ART side of Valuation takes time - but there are big rewards for persisting with and clarifying your thought process through qualifying/slotting companies in a Business Quality/ Management Quality hierarchy, if you will.

The central thesis of this thread is NOT to so much as quantify the Intangibles, but to establish the Value Chain of the Intangibles. Can you establish a value-chain-hierarchy of the Intangibles in some way?

An example…that may help illlustrate

Think of xyz pharma company which has had some domestic success with new combination drugs - they manage to introduce 10-15 novel products in Indian market every year - where they enjoy a 6 month kind of exclusivity run before others catch up. Then think of Alembic Pharma which was successful in producing Resperidone (if I remember the drug name correctly) in a novel process - they got FTF (First to File) exclusivity for 26 months (normal exclusivity is only 6 months for an ANDA) in the US Market, because of the novel process - period of exclusivity discretion rests with USFDA depending of their evaluation of having added lot of value.

Its another matter that Alembic’s drug couldn’t succeed (a combination right Marketing Folks and drug nature was responsible - it was a psychiatric drug; patients who were leading a normal life with the Innovator company drug were very reluctant to change to the generic drug cheaper by 30%) in the US Market.

Which pharma company will you say has a higher pedigree of R&D Scientists? Alembic most probably, right. You valued Alembic much higher on the R&D Quality (process know-how and top-notch Team) Intangible.

Hope this helps.

As you rightly said, this is not a numbers thing, it is a FEEL thing!

But you can get your fingers around FEEL things too (Most of Capital Allocation Forum threads are FEEL items), if you have a process of turning many such stones …looking for the Quality of the Intangibles …through a lot of worthy companies…and trying to grade them/slot them in some way.

Its not good enough to say it’s tough! Of course it is tough to put a Value chain to Intangibles - but that’s exactly why it is worth doing? Some very smart people are able to get this right so many times. There is no reason we too cant get to the right mental models, in time!

PS: xyz Pharma Company is Ajanta Pharma - which also was part of some 11 companies that got approval for Resperidone (different salt, and under normal ANDA category not FTF)! now that’s a googly

[vml]

Ah I get it! So the question is on how to deal with intangibles and what are the right mental models - even when you know that not everything can be pinned down.

So you could look at factors like

• Motivation, and willingness to fail

• Knowledge base - Either the group of people involved, past products or patents

• Brands - how does a product connect emotionally or culturally with an audience.

• Network effects - MCX, Visa, Ebay

You could look at past history and hope that it is a good indication of the future, but also be prepared for cases where passion, hope and luck triumphs all.

A good story comes to mind (http://www.thehindu.com/todays-paper/tp-in-school/getting-it-wright/article3671205.ece) where a pair of bicycle mechanics did something that the best minds from the Smithsonian could not - make human flight possible.

[Administrator]

Guys,

A request - kindly take care and maintain the discipline not to clutter important threads like this with unnecessary and irrelevant comments.

A few comments have been deleted - that had nothing to do with - valuing the Intangibles in a business, but were all over the place about stock-picking philosophies.

While we generally have a liberal approach to encouraging free-flowing discussion, please allow us the discretion to to be very vigilant about discussion quality in some earmarked discussion pieces.

Please ensure that you are asking a question or providing inputs within the specific main context of the thread. Thanks for your co-operation.

[vml]

As an approach to understand this in greater detail,

• Are there sub-categories within each? Types of brands or network-effects? We already saw knowledge either being more tangible in the sense of intellectual property, or the star-talent who generated it.

• Ranking: All other things being equal, when and why would you choose one over the other? My first instinct is to choose network effect over brand. For instance I am forced to use Microsoft Office even though I dislike it. I think Amul is a great brand, but I dont use their products much

• How do they interact with each other? Would a company with a great brand be desperate to generate a type of network effect among its consumers? If a company has a great network effect, is it restricted in the types of advertising or the self image that it creates? When do they collide - either within the company, or between rivals? An example that comes to mind (mentioned earlier by Prahlad, I think) is how Coca-Cola bought ThumsUp to destroy the brand, and establish itself.

[vml]

To understand network effects, I can think of two contrasting cases:

• The Fan-base: Even very early on, Apple created a very small but loyal set of customers. Even in the 1980s, Apple was known for computers with great fonts and graphic capabilities. With innovation in printing, they became the go-to system for desktop-publishing and graphic design. Their brand revolved around beautiful design, innovation, and ease-of-use. The network-effect created by their desktop-publishing software implied that all graphic designers HAD to use their system, not that anyone complained. Their sales may have been low, but always had very high margins. You can think of it as a network with very strong connectivity. Any new product was lapped up by the masses and they bonded very strongly with the brand. (http://graphicdesign.stackexchange.com/questions/28974/why-are-apple-macs-used-so-much-in-the-graphic-design-industry)

• The marketplace: Microsoft and Google’s Android come to mind. Both sacrificed immediate margins and distributed an essentially free product to create a large base of dependent consumers, then they turn(ed) the screws to control and extract value from the network. Microsoft was initially very accommodative about software piracy. The quality of their software has been generally poor, but then it was the default and you got used to it - despite horrible performance, and frequent crashing (lookup BSOD on google). Once they had a large enough consumer base, with consumers trained in Excel/Word, then they became harsher with enforcing anti-piracy measures. Android is also on a similar path - where they made their software freely available to mobile manufacturers. The early versions of Android were bad until Google created, manufactured and sold their own branded devices - the Google Nexus. This allowed mobile manufacturers to jump onto the smartphone bandwagon without too much software coding on their end. Many mobile manufacturers ended up killing their own software architectures (Samsung BADA, and Nokia’s Symbian) to replace it with Android. There were far too many mobile customizations that prevented you from upgrading your mobile phone whenever Google came up with new updates. Over the last year, Google has being taking back control over the software platform in Android 4.4, where they can bypass restrictions from mobile manufacturers and update your phone. Now your Androids belong to Google (Evil laugh!)

[Anant]

When thinking of value to a 100% acquirer of the business isnât it important to think of who you are? Are you a PE guy with tonnes of cash or are you someone from a similar industry where the acquisition can help you in multiple ways. The distinction is important because if you are a PE guys your objective would be to stay invested until you have made sufficient gains and exit when the business deteriorates or there are better opportunities available. The business as such does not fit into some core/primary business. The ratios ROCE, cash flows etc are important in this case.

Since I have tracked technology (products and not IT Services) I have not seen these ratios matter at all for an acquisition. The acquisition is only for the intangibles and the most important intangible being the number of users besides patents, distribution network, scale, geographical reach, networking effect etc. Looking at recent acquisitions we can see what each of them offered to the acquirer:

a)Facebook buying WhatsApp: Network effect, competition with FB with 400 million active users. Microsoft, Google, FB all three were interested in WhatsApp and that drove the price significantly up.

b)Facebook buying Instagram : Facebook had little mobile presence and pictures were important to FB and others. Here too there was a bidding war between FB and Google.

c) Microsoft buying Nokia: Microsoft had little choice in the case of Nokia since Microsoftâs presence in Mobile was only due to Nokia because most other OEMs of Windows Phone had given up on it.

d) Microsoft buying aquantive: Inability to build a competitive advertising platform against a rival like Google. Here too there was a bidding war with a lot of other suitors like Yahoo and AOL interested.

e) Microsoftâs failed bid to acquire Yahoo for $42b: A very strong competitor Google (65%) stifling out two smaller competitors (30% combined). This difference of 35% actually resulted in a very large ad revenues in favor of Google.

The themes that emerge from the acquisition examples in technology are:

a) Multiple suitors with access to large cash.

b) Time taken in creating intangibles is very high.

c) Competitive risk arising for the acquirer in the absence of acquisition.

d) Network effect leading to no alternative to grow in a segment.

I think with a deeper analysis each sector would have its own acquisition model with some themes running common. In the 2008 run up I saw a lot of acquisitions reasons being geographical reach and scale.

If I look into the current set of companies from VP portfolio Kaveri and Shilpa are the only ones that I think fits the bill. Since in both these companies there are intangibles which are difficult/time taking to create and there also possible buyers with huge cash in Pharma and Agri business respectively. Polymed could be another possible one but I am not aware of as to who the potential buyers here can be. I do not track PI but I do not see Astral, Mayur, Ajanta, Avanti, Atul as possible acquisition targets. Apart from VP companies I see most of the large e-retailers being prime acquisition targets now that 100% FDI is allowed in e-retailing.

[Raghu]

Berkshire Hathaway’s appendix in 1983 annual letter on Goodwill and amortisation is a good read/relevant in this discussion. I am sure most of you would have read this already. In this he articulates the difference between a good business and a good purchase. It also throws some light on defining intangibles

[amitayu]

Can you anybody please send me Ambit Report-Ambit Strategy: Cusp of Greatness July report?

I have contacted Ambit as per the contact provided by Donald but have not received any reply . Orat least please tell me the correct google keywords to search the report.

[Donald]

Let's start exploring how to put a measure to the Intangibles. This is just a starting point for thinking more tangibly on the Intangibles :)

Note: Work-in-Progress Borrows heavily from STAR framework as described by Ambit Strategy Report : Cusp of Greatness
Strategic Assets	Describe	Rating	Distinctive Capabilities	Describe	Rating
- Patents			Architecture/Organisation Style
- Proprietary Know-how			- Customer Relationships
- Licence/Franchise			- Supplier Relationships
- Regulatory Permissions			- Distributor Relationships
- First Mover Advantage			- Employee/Team Relationships
- Legal Rights			- Co-operation across Relationships
- Monopoly/Duopoly
- Oligopoly			Innovation
- Natural Resource access			- Leader vs Follower
- Raw Material Chain control			- Doing things differently
			- Replicability/Catch up distance
			Branding
			- Price-Premium vs Peers
			- Branding-Spend % of Sales
			- Time since Leadership position
			- Media recognition

One can try and measure Astral Polytechnik on above parameters using Hindsight :)

Kitex will be taken up as a relevant practical case-study in the Kitex thread - the Valuation debate continues there!