 "Buyers in FMCG not prepared to pay outrageous price: Robert Davis")
The Mumbai-based investment bank- Avendus had strengthened its operations in Europe by hiring Robert Davis, who was the M&A head of Nomura, in 2011 as Head of M&A -Europe. Robert has played a key role in a handful of cross border deals between Indian and Europe. Robert, who has over two decades of advisory experience, speaks to Reghu Balakrishnan over Indian appetite for cross border deals, post-merger integration etc. Excerpts:
How do you see the recent developments – regulatory uncertainties, GDP growth fall in India?
From a European perspective I think the long term view, certainly the growth in India of about 8% over the 6 or 7 years was built on previous deregulation and structural reforms that they’d put into place.
What reflections you have seen in cross border M&As, following the down turn?
In terms of asset valuation, it has come down within Europe first. And to be honest, that’s primarily a function of availability of credit. Price determination is often driven by private equity, and obviously strategic bidders have to compete with private equity.
As there was no credit available, prices came down quite a lot. There’s much more credit available now but it’s still quite fragile whereas in the past even for quite standard industrial companies, acquisition finance was available at 8 times EBITDA. Now it’s much lower, 2.5 to 3 times EBITDA. But it’s the maximum that’s available and that’s impacting asset valuation significantly.
Today, how aggressive are Indian firms on overseas buyouts?
In term of large acquisitions, you can almost segment the Indian interest into two categories – one of which is IT services and BPO, and the other is everything else. UK market is not a homogeneous market, there are language barriers, but most importantly, culturally, the corporates weren’t open to outsourcing, ten years ago.
The European corporates now realize it can work, and are working very successfully under the increasing pressure to reduce their cost. With some of the issues in Europe at the moment, there’s a lot more openness to outsourcing from the European side. And the Indian IT services and BPO companies are very underweight to continent Europe.
And in the last 6 months Cognizant and Infosys have made acquisitions in Germany or rather German speaking countries such as in Switzerland.
Have other markets become a threat to Europe over inbound deals in India?
The Japanese are definitely coming. And I’ve seen that over a period of time – during my 9-years at Nomura, the Japanese
perception of India changed noticeably. I think the increasing concerns in Japan are that they are too dependent on China and there’s also a lot of Japanese manufacturing happening in China at the moment.
And China’s not necessarily their friend. And there are political issues there. And India – a lot of large Japanese companies have adopted a manufacturing strategy for China plus one, creating their second manufacturing hubs outside of China. And India is increasingly becoming somewhere they look out for that.
Considering inbound transactions, valuations for FMCG is unbelievable. What's buyers' view on the Indian consumer growth story?
If you go back 10 years ago every significant European company had to have a clearly defined and articulated China strategy. But today it arguably needs to be changed to China & India strategy or it could be a BRICS strategy considering the investor demands of the company.
They’re prepared to pay a good price but they’re not prepared to pay an outrageous price. And there are sometimes vendors whose expectations are close to outrageous. And one very specific case in question, the asking price was 10 times the revenues –a $ 100 million company for a billion dollars. There were special circumstances, but that’s an enormous price and it won’t find buyers at it.
Compared to Indian markets, how do the neighbouring markets like China look as far as valuations are concerned?
I think all the same issues apply in developing markets. I think India is as attractive a destination as other markets, if not more so. And good prices are achievable.
Most investor companies have already made their China plays – predominantly talking about BRICS – with Brazil GDP growth last year at below 1%, and 0% in the last quarter of the last year, and Russia is a much smaller market than the others but it’s also perceived as being a market only for the brave. So against those, India is still a very attractive investment destination.
Post merger integration is another area of concern. What changes did take place?
There were acquisitions in IT services in continental Europe and acquiring fully established systems to integrate. But their plan was to essentially use it as sales front end and outsource all of the development work immediately straight into India. And that’s obviously a very difficult acquisition strategy – if you target to tear the heart out of the business and reach the sales or the local sales force.
More recently we’ve seen the number of Indian buyers who are acquiring that integrated European business and their changing the mix of work in terms of as the business grows – all of the new jobs are being off – shored into India but the people are also still being retained.
With the business with more on – site client work, they’re getting the balance much better, maintaining the inherited value and goodwill of what they’ve acquired than in a more slash and burn strategy which on a few occasions doesn’t go down well.
How do you see the recent developments – regulatory uncertainties, GDP growth fall in India?
From a European perspective I think the long term view, certainly the growth in India of about 8% over the 6 or 7 years was built on previous deregulation and structural reforms that they’d put into place.
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But structural reform stalled somewhat and the growth has fallen as a result. Now it looks like structural reforms are coming back. And from the European perspective that is being viewed positively. If you sit in Europe with almost no GDP growth in the foreseeable future then a GDP growth of about 5% is a problem we would like to have.
What reflections you have seen in cross border M&As, following the down turn?
In terms of asset valuation, it has come down within Europe first. And to be honest, that’s primarily a function of availability of credit. Price determination is often driven by private equity, and obviously strategic bidders have to compete with private equity.
As there was no credit available, prices came down quite a lot. There’s much more credit available now but it’s still quite fragile whereas in the past even for quite standard industrial companies, acquisition finance was available at 8 times EBITDA. Now it’s much lower, 2.5 to 3 times EBITDA. But it’s the maximum that’s available and that’s impacting asset valuation significantly.
Today, how aggressive are Indian firms on overseas buyouts?
In term of large acquisitions, you can almost segment the Indian interest into two categories – one of which is IT services and BPO, and the other is everything else. UK market is not a homogeneous market, there are language barriers, but most importantly, culturally, the corporates weren’t open to outsourcing, ten years ago.
The European corporates now realize it can work, and are working very successfully under the increasing pressure to reduce their cost. With some of the issues in Europe at the moment, there’s a lot more openness to outsourcing from the European side. And the Indian IT services and BPO companies are very underweight to continent Europe.
And in the last 6 months Cognizant and Infosys have made acquisitions in Germany or rather German speaking countries such as in Switzerland.
Have other markets become a threat to Europe over inbound deals in India?
The Japanese are definitely coming. And I’ve seen that over a period of time – during my 9-years at Nomura, the Japanese
perception of India changed noticeably. I think the increasing concerns in Japan are that they are too dependent on China and there’s also a lot of Japanese manufacturing happening in China at the moment.
And China’s not necessarily their friend. And there are political issues there. And India – a lot of large Japanese companies have adopted a manufacturing strategy for China plus one, creating their second manufacturing hubs outside of China. And India is increasingly becoming somewhere they look out for that.
Considering inbound transactions, valuations for FMCG is unbelievable. What's buyers' view on the Indian consumer growth story?
If you go back 10 years ago every significant European company had to have a clearly defined and articulated China strategy. But today it arguably needs to be changed to China & India strategy or it could be a BRICS strategy considering the investor demands of the company.
They’re prepared to pay a good price but they’re not prepared to pay an outrageous price. And there are sometimes vendors whose expectations are close to outrageous. And one very specific case in question, the asking price was 10 times the revenues –a $ 100 million company for a billion dollars. There were special circumstances, but that’s an enormous price and it won’t find buyers at it.
Compared to Indian markets, how do the neighbouring markets like China look as far as valuations are concerned?
I think all the same issues apply in developing markets. I think India is as attractive a destination as other markets, if not more so. And good prices are achievable.
Most investor companies have already made their China plays – predominantly talking about BRICS – with Brazil GDP growth last year at below 1%, and 0% in the last quarter of the last year, and Russia is a much smaller market than the others but it’s also perceived as being a market only for the brave. So against those, India is still a very attractive investment destination.
Post merger integration is another area of concern. What changes did take place?
There were acquisitions in IT services in continental Europe and acquiring fully established systems to integrate. But their plan was to essentially use it as sales front end and outsource all of the development work immediately straight into India. And that’s obviously a very difficult acquisition strategy – if you target to tear the heart out of the business and reach the sales or the local sales force.
More recently we’ve seen the number of Indian buyers who are acquiring that integrated European business and their changing the mix of work in terms of as the business grows – all of the new jobs are being off – shored into India but the people are also still being retained.
With the business with more on – site client work, they’re getting the balance much better, maintaining the inherited value and goodwill of what they’ve acquired than in a more slash and burn strategy which on a few occasions doesn’t go down well.