Edition Q2 2016
Welcome to the sixth edition of the quarterly newsletter of SeaLink Capital Partners. 
 
The growth engines of the Indian economy are the approximately 12,000 mid-sized businesses across cities and towns.  These businesses, which are between US$25-125 million in revenues, fill crucial need gaps in various industries.  For many of them, this is the just the start as they seek to scale further.
 
In our interactions with these mid-size businesses, several conversations have been on the subject of acquisitions.  For businesses in this size segment, an acquisition represents a way to turbocharge growth, enter into a new market, acquire a new technology or even new customers, and gain scale.  But acquisitions aren’t easy.  For one, there is the financial cost associated with them.  Secondly, there is a significant amount of management bandwidth that is spent on them – both before and just as importantly, after an acquisition is made.  Despite the hype (and champagne flow), which often surrounds these transactions, research suggests that the odds of success for an acquisition are only about 50%.  While a large company with a failed acquisition can put finances and bandwidth to work to fix or absorb the problem, the stakes are much higher for a mid-sized company, which doesn’t have the same kind of resources. 
 
So, should mid-size companies stay away from acquisitions?  No - that isn’t what we advocate.  M&A can be a very effective growth strategy for these companies.  But we do believe that in order to make the most of an acquisition, it is important to approach it with a well thought through plan, a detailed blueprint and flawless execution.

We’ve chosen to shine a spotlight on the attributes that can help enhance M&A success rate for a company in this issue of our newsletter.  If you have any additional insights or comments on it, do let us know. 
Maximizing success in M&A
 
Research indicates that only half of mergers and acquisitions succeed – implying that the odds are similar to a coin toss.  Moreover, more than 80% of companies surveyed globally, who have gone through an M&A transaction, report that they have failed to achieve the stated goals of the merger.  Based on these sobering statistics, one would expect that CEOs, investors, and boards of companies would shy away from M&A as a source of growth and focus instead on deploying capital and resources towards generating growth and profitability organically. 
 
However, if anything, M&A activity in India continues to see a significant uptrend.  Deal tally in 2015 rose to 970 deals totaling a transaction value of US$26.3 billion.  For domestic deals, the average transaction size is US$21 million implying that many deals are happening in the mid-market space.
 
M&A can be a very successful means for jump-starting growth or for achieving scale for a mid-size company.  But it has to be done for the right reasons and in the right way.  Else you’re better off not tossing the coin. 
           
(Click here to read more
Value Creation - A recent success story
 
SeaLink Capital Partners estimates that there is an annual US$1 billion shortfall of capital for mid-market businesses in India ($25-100 million in revenues). The segment is in crucial need of “smart money” and investors that will serve as mentors, advisors and thought partners.  We’ve often said that in investing, the most crucial decision is partner selection, and we believe it goes both ways – for the investor as well as the portfolio company.  Investing is not a spectator sport where one waits on the sidelines to see how a selected portfolio company performs and occasionally cheers on the management team.  Rather, it’s one where you work alongside management and support them in their initiatives across functions.  While the company management remains the primary owners of the initiatives, the investor can supplement their efforts in those areas, enhance the strategic focus and strengthen corporate governance, all of which can help the business (and the investment) reach the next stage.  A recent affirmation of the value creation approach was demonstrated in the successful sale of Alliance Tire Group to Yokohama Rubber. 

The founding team of SeaLink Capital Partners (Heramb and Karthik) had been intricately involved in KKR’s investment in Alliance Tire Group three years ago (from sourcing to international expansion strategy and execution, supply chain optimization, warehouse management and financial monitoring).  The successful exit achieved by KKR validates the importance of value creation initiatives. 

To read more about our initiatives with companies in sales force effectiveness, organizational and leadership development, and general management, please visit our blog.
Indian economy - Continues to gain steam
 
The Indian government, elected into power with a majority mandate on the platform of economic reforms and growth, is approaching its second anniversary in office.  The report card on its performance is largely positive, but there are certain areas for improvement.
 
On the positive side, India has overtaken China to become the fastest growing major economy in the world.  For the fiscal year ending March 2016, most estimates peg GDP growth at 7.6%, which is particularly positive in light of two consecutive years of poor monsoons.  Benign oil and commodity prices have led to a controlled level of inflation, reduced fiscal deficit and enabled the Central Bank to reduce interest rates. 
 
Opening up of sectors such as railways, defense, insurance, medical devices to FDI, has helped attract record levels of foreign investment, which should be further augmented by recent announcements on FDI increases in e-commerce marketplaces and other online business models.  In a recent E&Y survey, India was ranked as the most attractive investment destination in the world, ahead of China and South-East Asia. 
 
The “Make In India” program, which aims at making India a global manufacturing hub, has attracted over US$400 billion of overseas investment commitments. The “Skill India” program is targeted towards ensuring that enough trained workforce is available to meet the manufacturing demand. 
 
While ensuring attractiveness for India as an investment destination, the government has also kept its promise of meeting fiscal deficit targets – an achievement that has been lauded by many.   
 
However, political logjam has made delivering on other promises harder for the government.  A much-awaited reform on a central goods-and-services tax, aimed at creating a single market with improved efficiencies across India, remains stalled.  Land acquisition and labor law reforms are also on the back burner.  Weak exports due to tepid global growth and a hangover from bad loans on the books of banks have led to muted capital investments and dragged earnings growth, which have also had an impact on equity markets.  Overall infrastructure and ease of doing business, while improving, still have much room for enhancement.
 
Considerable ground has undoubtedly been covered in the last two years.  Many believe that that next decade (and more) belongs to the country.  With all eyes trained on India, the government clearly remains focused on continuing the reform momentum and leveraging the growth opportunity. 

News & Updates

SCP Fellowships

SeaLink has a robust Fellowship program (3-6 month positions) to attract and develop high quality talent.  Over the last year, SCP Fellows have contributed significantly to the Firm while also gaining an opportunity to get hands-on experience in private equity investing in India.  

We are excited to welcome Siddharth Misra as our most recent SCP fellow.  Siddharth joins us from Nomura’s London office where he was part of the investment banking team.  Siddharth received his Bachelor in Technology from VJTI, Mumbai and a Masters in Management from Jamnalal Bajaj Institute of Management Studies.  He is headed to University of Chicago’s Booth School of Business for his MBA this fall. 

Conferences

It was great to see many of you at the private equity conferences in New York, London, Mumbai and Singapore over the last quarter.  The investment interest in India, in general, and in the mid-size sector, in particular, continues to be on the rise. 

We are scheduled to be in the US and Japan in the next few weeks.  In case you would like to hear more about SCP and mid-size investing in India, do let us know. 

 
For previous editions of the SeaLink Capital Partners newsletter, please click here
Facebook
Twitter
LinkedIn
Website