Hexaware Deal: Why is Citi reducing outsourcing to the company?

As follow up to my earlier post on "Why Hexaware sale may not happen" (at least not in a hurry) it seems we must add one more reason. Citi which is probably the biggest client of Hexaware is, rumored to be reducing outsourcing to Hexaware creating further nervousness in the minds of the investors/potential buyers.  As a result the stock has been underperforming the market in the last 3-4 days.

However, it would be interesting if the news is true, as it was earlier rumored that Hexaware (or atleast the PE investors) in Hexaware had awarded the sell mandate to Citi. However, later the contract was given to two other MNC investment banks (CS and MS).  Not sure if there is a link between the two, but this could potentially be the reason why there is sudden talk of Citi consolidating spending away from Hexaware.

Hexaware Sale. Why I think its not happening?

Why I think Hexaware may not get sold soon?

I think that any buy out deal on Hexaware is going to be difficult, and my reason is simple. Its peers, NIIT Technologies, Zensar, Infotech Enterprises each of which have comparable (if not higher revenues than Hexaware) are trading at less than half the valuation of Hexaware. Take NIIT Technologies for example. NIIT, like Hexaware, is focussed on niche verticals (BFSI, Travel), has been growing really well and had large deal wins announced during last year, stellar and stable margins over the past several quarters and rea venue runrate higher than Hexaware, is trading at market cap of less than 1500 Crore. While at today's market price, hexaware is close to 3500 Crore.

Any financial or strategic buyer looking to consolidate will look at this and simply baulk at the valuation gap, making the deal severly unlikely. Unless, the promoters and existing funds invested in Hexaware agree to sell at a discount to market price which is unthinkable and never done especially in India.

Kale Consultants - Accelya Deal

The promoters have sold their 36% stake in Kale Consultants to Accelya at a price of 172 per share. The deal also ensures that Vipul Jain (co-promoter and CEO) continues in his role. As discussed in my previous post they could have got a higher price, especially with the restructuring (slump sale of their loss making logistics business to promoters)

The deal will trigger a mandatory open offer to acquire at least 20% of the company. It will be interesting to see what the open offer price is as that would determine the total upside to minority investors.

Applabs - Strategic Sale: Analysis

VCCircle reported that Sequoia-Backed Testing Firm AppLabs is a considering strategic sale
http://www.vccircle.com/500/news/sequoia-backed-testing-firm-applabs-considering-strategic-sale

MNC and Indian suitors may be interested in the Hyderabad-based testing firm, which may attract a valuation of $150mn.

Sequoia Capital-backed AppLabs Technologies Pvt Ltd, a privately-held software services firm focused on the testing space, is considering a strategic sale paving a way for a full or partial exit for the five-year-old investor. The company had earlier looked at initial public offer (IPO) route as an option, however, it seems to have abandoned the IPO plans and is looking at a trade sale instead.

Sashi Reddi, the founder of AppLabs, holds substantial stake in the business while Sequoia Capital is a significant minority shareholder. Sandeep Singhal, managing director of Sequoia Capital India, holds a board seat in the company.
Sources familiar with the development told VCCircle that AppLabs was actively pursuing a plan to attract new buyers, a move that may also result in stake divestment by the investors and the founder. AppLabs is believed to have mandated a global investment banking firm to carry out the exercise. AppLabs, it is learnt, initiated the strategic sale move a year back but it was shelved on account of market conditions. In effect, that process has been revived now, sources said.

It is understood that AppLabs has received good interest from both domestic and MNC technology companies who are looking at a sizeable opportunity in the lucrative testing services segment. Research firm Gartner has reportedly pegged the opportunity for Indian offshore testing companies at around $8 billion at the end of 2008. Now, the company, which is reported to be close to the $100-million revenue mark, is looking at a valuation of $150 million (or 1.5 times the top line), the sources added.

E-mails sent to both Sashi Reddi and Sandeep Singhal last week, seeking comments on strategic sale plans, elicited no response at the time of publishing this story.

Sequoia (then WestBridge Capital) first invested $7 million in 2004 in AppLabs followed by a subsequent round of $10 million in 2006. Founded in 2001 by Sashi Reddi, AppLabs claims to be the world’s largest software testing company with a head count of over 2,000 employees across US, UK and India. AppLabs provides testing services in a range of areas such as performance, ERP, security, certification, test automation and managed testing.

AppLabs has also followed an inorganic growth path to add to scale, competencies and customers. In 2005, it acquired KeyLabs, a software and hardware testing company, followed by a $37-million purchase of UK-based testing consultancy firm IS Integration in 2006.

Interestingly, serial entrepreneur Sashi Reddi is also the founder of a game development company FX Labs, which recently released the Ghajini game, after the Aamir Khan Bollywood flick. Sashi Reddi’s hands are quite full, it would appear, as he is actively engaged in running two companies in niche and fast-growing outsourcing spaces. Is that triggering a deal at AppLabs? That is the question some are beginning to ask.
According to Sashi Reddi’s profile in the company website, he started two other companies prior to AppLabs. EZPower Systems, which was a developer of products for building large web applications, was acquired by DocuCorp and then eventually by Oracle. Subsequently, he founded iCoop, a group purchasing dotcom company which went bust.

 
Here is my analysis:
 

1. With ebitda margins at around 12 percent (Estimated) and Revenues ~100 Mn, Valuation of 150 Million looks steep (unless there is large amount of cash, which I doubt). Therefore sale to a financial  investor is unlikely (more reasons below)
2. A large strategic investor may take a view that it can cut costs and improve margin. It offers size and entry into Testing vertial . Rules out Tier 1 Indian players (have size and testing teams already). However, given the fact that one could qualify Applabs itself as a rollup operation (it has acquired scale through acqusitions- funded by Sequoia and other investors- at much lower valuations why would they pay a premium price)
3. Applabs' value proposition (or at least Sales pitch) has been that it is an independent testing company ie someone else builds the app and Applabs tests as independent third party and therefore/potentially does a better job does not Gel with a Services provider.
4. Possibly, a company like MindTree could have stil acquired it but it has already made an acquisition
5. TechM may have considered it but there are still trying to digest Satyam
6. It already claims to be the worlds largest independent tester, so little chance of a pure play testing company acquiring it.
   
7. Promoter is serial entrepreneur so he is looking for an exit
   
8. CEO is professional manager so this aids a strategic sale
   

Likely End Game

1. IPO by Applabs
2. Someone would overpay (overzealous M&A team)  
3. Re-Capitalization (Don't happen everyday in India but may be the most preferred option / should be explored)
   

 

Google - Yelp: Deal Analysis

Reuters:

"...Google Inc is in talks to buy Yelp Inc, the popular website for reviews of local businesses, in a deal that could help the Internet search leader tap a lucrative local ads market, media reports say.

Google may pay more than $500 million for Yelp, according to reports confirmed to Reuters by a person familiar with the situation. It came as the Web giant embarked on an acquisition spree that has netted at least five companies since August.

By swallowing privately held Yelp, Google would own one of the Web's most popular repositories of local restaurant and small-business information, including more than 8 million reviews penned by Yelp's users.

That trove of content and a heavy focus on local businesses could provide a valuable foothold for Google as it seeks to convince local merchants to shift their advertising spending to the Internet.

"The local advertising market is a multibillion dollar market that for all intents and purposes is still untapped on the Web," said Needham & Co analyst Mark May.

In July, Internet portal Yahoo Inc teamed up with AT&T Corp in a partnership that involved the phone company's 5,000 sales people selling Yahoo advertising inventory to local businesses.

News of the recent talks between Google and Yelp -- backed by Benchmark Capital and other venture capital firms -- and the $500 million price tag were first reported by the blog TechCrunch.

The source familiar with the situation said talks were currently bogged down by concerns among some Yelp investors that the company could be selling itself prematurely, and that it could be worth far more than $500 million if it had a chance to develop its business.

The source added that Friday's news stories may have been floated to put pressure on for the deal to be consummated at a price that was too low.

Apparently, Google has had its eye on Yelp for some time. According to one former Google executive, the Internet company had had "early discussions" with Yelp about an acquisition several years ago, but ultimately passed on the deal.

"Yelp doesn't monetize very well, so it's always a bit hard to justify an acquisition," the person said.

The local businesses that Yelp sells online advertising to are more interested in promoting their businesses through coupons than online ads, he added, noting he believed Yelp was still an unprofitable business.

Yelp was founded in 2004 and has received $30 million in funding from Benchmark Capital, DAG Ventures and Bessemer Venture Partners.

The acquisition talks are the latest in a string of recent deals by Google, including the $750 million acquisition of mobile ad firm AdMob announced in November, that are designed to extend Google's reach into new advertising markets.

The world's No. 1 Internet search engine generated roughly $22 billion in revenues last year, but has seen its top line growth slow from the 40 percent-plus clip it was managing as recently as early 2008.

Google has stepped up efforts to court local merchants recently, encouraging businesses to register their information on its small-business online directory.

But some analysts say Google will have its work cut out trying to sell online ads to local merchants more comfortable with traditional channels like local television, newspapers and the Yellow Pages.

Needham's May estimated that Yelp, which had 8.9 million unique visitors to its site in November according to comScore, is generating revenue at an annual rate of $15 million to $20 million.

"That's a pretty tough nut to crack," May said about selling online ads to local merchants. "Whether Google can crack the code on it, is still to be seen."

..."

Here is my analysis of the (potential) Google - Yelp Deal

 Google:

1. With growth slowing down, it is becoming difficult to justify the high revenue multiple on its stock price, so its seems it is buying growth or, at least in this case, a (potential) growth engine
2. Google has been trying to tap the locals market for some time but has not been able to make a splash despite its obvious strengths in search. Hopes Yelp would help it make a dent. 
3. 8 million + reviews (on Yelp) are useful (think user reviews on Amazon),  but you know, these are not exactly like product reviews on Amazon. Restaurants change and so do people's tastes. So while there is a network externality, it may not be as strong.  
4. If Yelp's reveneus are really only 15-20 million then the quoted price ($ 500 Mn) is really over the top.  Am sure if Google really commits even half of the money on local search it can do a better job.  (Build Vs Buy)
5. Surely, its not to get another bunch of great engineers ( Not at this price)

End Game:

I think this deal (if it goes through) would be paid for mostly through Google Stock. One over expensive stock (currency) for another. Perhaps it would be best for both companies. Yelp's investors would happily cash out by selling Google stock in the open market and as for Google, it would  would have acquired another growth engine where it has been unable to make a huge headway by itself.

 PS: On second thoughts, Yelp + AdMob could be an explosive combination and help Google recover the price paid, many times over.

HDFC Credila: Deal Analysis

HDFC has acquired 41% in education loan provider - Credila Financial Services from DSP Merrill Lynch for $2.2 Mn. The transaction values the Mumbai based company at $ 5 Mn.


Promoters - Anil Bohora and Ajay Bohora hold the remaining 59% in the company.

The deal marks HDFC's entry into Rs 30,000 Cr education loan market, which is expanding at 30% per annum. At present, HDFC Ltd offers very specialized education loan to students in select institutions like ISB, Hyderabad, IIM Ahmedabad and Symbiosis, Pune.

Formed in 2007, Credila has disbursed loan of Rs 16 cr in 2008-09. It currently has offices in Pune, Bangalore, Hyderabad, Chennai, Delhi and Nashik.

Unlike bank education loans, Credila’s loans are all secured. The company insists on one or more creditworthy co-borrowers for all disbursals. It has also entered into agreement with a students tracking agency abroad.

Before founding Credila, the Bohoras founded a healthcare claims processing company called ClaimsBPO in January 1997 with a US joint venture partner. In 2003, ClaimsBPO was sold to WNS Global Services, a Warburg Pincus-owned company, listed on NYSE.

The promoters are both engineers who have relocated from executive positions in the US. Ajay was earlier with MetLife in its New York office, while Anil had worked in senior positions in AOL Time Warner and Pitney Bowles.

The Education loan space have seen good credit growth in the recent past. Most of the players have reported over 25% growth in the student loan portfolio.

Union Bank of India reported 40% growth for the quarter, while Bank of India and Bank of Baroda reported 24% and 29% growth respectively in their education loan porfolio.


Here's My Analysis

1. Provides HDFC with an excellent platform for expanding into education loans.
2. Enters a high growth market: HDFC needs to create more growth engines to keep its growth momentum
3. Buy vs build approach gives them quicket acess to market. Credila's conservative approach (all loans are secured) to lending, gels well with that of HDFC's
4. Backing a winning team with their skin still in the game.


End Game
Behoras are serial entrepreneurs and would probably be bought out by HDFC over the next couple of years. HDFCs huge reach and brand would give them the leverage to expand, create value and exit.

PVR - DT Deal analysis

Multiplex chain PVR Ltd has announced twin deals. It has acquired the cinema exhibition business of DT Cinemas Ltd, a subsidiary of real estate major DLF, in a cash-cum-stock deal. As per the structure of the deal, PVR will pay a cash component of Rs 20.02 crore and allot 2.55 million shares to DT Cinemas.


Simultaneously, PVR has also raised Rs 42.19 crore through a preferential share allotment of over 2.55 million shares to Major Cineplex Group Plc. of Thailand. The deal involves an overall stake dilution of 18.18% by PVR, with both Major Cineplex and DT Cinemas getting 9.09% stake each

PVR already has a joint venture called PVR bluO Entertainment Ltd with Major Cineplex for setting up bowling alleys, karaoke centres and ice-skating rinks.
Here is my analysis
 
PVR: 
1. Low risk capacity addition (they know the kind of revenue generation run rate DT has)
2. Gives them virtual monoply in certain regions (Gurgaon for example)
3. Gets closer in size to Adlabs - Gives them greater bargaining power over producers
4. DLF and PVR have also entered into an agreement by which the latter will gain exclusive and unlimited access to the multiplex space in all future mall developments of the DLF group
5. Ties Major Cineplex's interests to growth of PVR and thus increasing coordination for their JV
 
DLF:
1. Gets a strong anchor partner for new shopping mall and recreation properties
2. Reduces cash requirement for non core businesses
 
Currently, DT Cinemas operates 26 screens with three more screens expected to start in the next six months. This will add to PVR's existing 108 screens and further strengthen its position in the National Capital Region (NCR).


DLF and PVR have also entered into an agreement by which the latter will gain exclusive and unlimited access to the multiplex space in all future mall developments of the DLF group. The deal further re-affirms company's strategy to rapidly grow in the film exhibition space and to be a dominant player in all key markets, it said, in its filing to BSE.

The preferential issue has been made at Rs 165 per share. The shares of PVR Ltd closed at Rs 139.8 today, up by more than 1%. Taking today's closing price, DT Cinemas stands to get another Rs 35.74 crore over its the cash component of Rs 20.02 crore.

DLF, which is looking cut its debt of around Rs 12,000-13,000 crore, has been shedding its non-core assets and plans to raise Rs 4,500 crore through this process.

Captive M&A

Captive M&A is the current hotspot for deal making activity in India. Some of the recent deals include the following

Cognizant - UBS India - $ 75 Mn
Mphasis - AIG Systems Solutions - NA
Wipro - Citi Technology Services - $ 127 Mn
TCS - Citigroup Global Services - $ 505 Mn
WNS - Aviva Global Services - $ 228 Mn
EXL - American Express Business Travel - $ 30 Mn

EXL American Express Deal Analysis

Nasdaq listed EXL has signed a deal with American Express to acquire the global travel service center operations located in Gurgaon, India, from American Express Business Travel (AEBT) for approximately $30 million. The deal follows the trend of sell off of technology captives by large multinationals. For a seasoned outsourcer like American Express, you would think that this would have happened sooner than now.

Despite being a big outsourcer Amex has always had a strong internal IT department. This department is responsible for outsourcing and vendors get little direct access to business (except IBM)

Now, for EXL, this is certainly a step up, both in terms of deal size and that it gives them a marquee customer in the travel industry as well as ready access to new capabilities that they can put to use in other deals.

However, I am surprised by the fact that we did not hear of IBM vying for this. IBM is a deeply entrenched player in Amex’s technology operations (Credit Cards and Travel). It even provides office supplies, or at least used to a few years ago, to Amex. This effectively shuts out IBM from at least this part of the business for the next 8 years. I would not be surprised if IBM attempts to buy EXL at some point in the near future.

From my time at Amex, I remember that once one of the VPs there had given a contract to a small vendor instead of IBM, to diversify risk and also perhaps to make a point that IBM needs to improve its service. However, by next quarter IBM came back in and took over this small company.

Bharti MTN Deal Analysis

The Bharti MTN deal has fallen through. While there was a lot of analysis and news reporting (often breaking) on why the deal broke down, there has been a clear lack of analysis in the media on the merits of the deal, other than the fact that this would have be India's largest M&A transaction.

Intuitively, it seems strange that you would want to acquire the largest player in the territory. Clearly, Bharti did not have the appetite to do an all cash deal. Now the largest player can only grow so much on the already large scale that it has, so how would Bharti have added value. It would, in my opinion have been much better to acquire a smaller player with licences to operate in large number of regions and build on top of it. That the market rewarded the Bharti stock with a nice gap up opening on stock closure seems to suggest that this perception was right. I guess no one would know now as to what would have been the outcome if the deal had gone through.

One fear I have is that Bharti can see growth slowing down in India (due to high base, increased competition) and therefore it wanted to use its high valued currency (read stock) to purchase assets that were relatively trading at fair (if not cheap) value. This is the only reason I can think of as to why Bharti would want to acquire / merge with MTN. There don't seem to be any cost synergies (Its not as if you could share infrastructure, towers!! across continents)

It would'nt have given Bharti greater bargaining power with vendors. You know it is not a small player anyways. Perhaps in the future, media (at least business media) can actually do some financial analysis and ask relevant questions rather than just giving in to the hype.

Satyam acquired by TechM: Analysis

TechM emerged today as the highest bidder for Satyam. While this is puts TechM in a new league, the question that must be asked is the following

• Did TechM have an information advantage as there was one common member on the boards of both the companies? Now don't take me wrong, the information passed does not necessariy have to be explicit. Just the fact that the board member, who has a fudiciary responsibility to protect the interest of shareholders not stopped techM from bidding where it did means they had an advantage.
• Had it not been the case, would it not have made more sense for L&T to have bid higher since it already has a 12% stake in the company?

If this is the case then TechM got satyam for a bargain and perhaps this explains the jump in price in TechM's shares.
IBM which was rumored to be bidding for Satyam was clearly never going to be in the race. It had the least to gain. Why should an IT player such as IBM take only a financial risk of class action suites. It already has access to customers and to offshoring (remember it already has 50K+ employees in India). Same for Cognizant (it therefore withrew at the 11th hour). Wilbur Ross (a financial player) was only going to to be interested in partnership with a strategic player and at cheaper valuations. In normal times it could have leveraged and may have been able to offer higher valuations. Then again, these are not normal times.

Tata-Corus - Analysis

Here's my analysis

Winners
UBS + Goldman Sachs: Had bought 11 percent of Corus before they pushed CSN into the bidding game.(think 0.11*11 billion *(609-455)/455 dollars ) **

CSN: had 36 million of Corus Shares. Put in a bid of 475 pence per share (and did due diligence later, can you belive it, did it get ponied by the bankers or it believed Tata would outbid it anyway)

Corus and its other shareholders: Obvious Reasons

Indian Politicians: Blowing their own trumpet

What does India (or Indian industry) gain through this publicity? Would investors be more willing to invest in India after this?

Potential Dark Horse

Tata Steel:

Got screwed ??

Yes, but it had already decided to build up capacity. Think industry dynamics (consolidation, pricing power) Paid $700 per tonne of production capacity. Would have needed double that amount to build (unless what I read was wrong, some say PV of expanding to that capacity to be $2000)

Verdict

There can be only one loser . (unless the industry consolidation wipes out smaller players) But fingers crossed?

** 400+ million dollars

Tata Corus CSN - Three way Deal?

Instead of fighting over Corus if CSN and Tata Steel combine to form a three way alliance, it may be the best for the shareholders for all three companies (at least for CSN's and Tata's). The ongoing bidding war would only mean that either of the two companies would end up overpaying for the deal and the other would miss out on the synergies.

It may be best to try a new form that companies Corus's access to markets, CSN's access to raw materials and Tata's managerial capability. But would all the managers be ready to give up personal gains for this option? This remains to be seen as the story onfolds.