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.