Four big deals in a year involving family business sell offs. And it’s probably time to ask whether Indian family enterprises are now comfortable hanging out the sale board.
The year 2010 in a flashback appears interesting: Ajay Piramal divested his core branded generics business to Abbott Laboratories for $3.8 billion. Vallabh Bhansali and Nemish Shah surprised markets by emerging their investment banking business the mainstay of Enam Securities with Axis Bank. Similarly, Girish Patel and family bowed out of Paras Pharam after months of speculation. The latest ones to walk that plank were Pramod and Vinod Mittal, ceding management control of Ispat Industries in an ownership changing deal with JSW Steel. And now, there are talks of Patni brothers looking to exit from India’s seventh largest IT services firms Patni Computer systems.
Investment bankers and deal watchers are taking cues and building arguments on the road ahead for family owned businesses. But they all agree that Indian business house and entrepreneurs are too savvy to follow trends or to be swayed by momentum Talking ideal with them has never been easy, which is probably a reason why several large domestic conglomerates continue with non core activities despite divestment.
The fact remains that many families have grown faster than their businesses. There are factors like divergent shareholder interests and what their next generation would prefer doing. It is important for these families to accommodate the aspiration of the new generation.
JM Financial executive director Bhavesh Shah argues that what happened in the course of the year is perhaps a beginning and not a broad pattern to be followed in the coming year.
Most promoter families are going to ride on the back of an economy growing at 8-9% for some more time. The capital markets have been kind to them and liquidity is not a concern. Many of them have worked out a succession plan which is critical.
JSW Steel’s Sajjan Jindal came up with these thoughts after effecting Ispat takeover earlier this week. The Indian steel industry is highly fragmented with 2,000 steelmakers who are mostly family owned. Their egos are high. They may be sinking and take their shareholders along with them, but they will not sell the business. JSW is the best fit for Ispat.
Family run businesses will have to manage punishing growth in a hyper competitive industry and in a market of value buyers. In that context the key will be to figure out what the family’s objectives are in relation to their business interests and how these can be matched with the rationale of deal making. There was clarity and discussions initiated on the first night of Navratri which culminated in a deal just before Diwali.
Step back into history bit and take the case of the Zal Balsara family, which sold Balsara group makers of Promise and Babool toothpastes and Odomos mosquito repellents to Dabur for Rs 200 crore in 2005. One of the reason for the Parsi family to exit the business was intense competition and it coudn’t match the deep advertising pockets of multinationals. Another businessman who exited the hyper active packaged drinking water segment –a category where there are many unorganized brands – was Dadi Balsara. He sold Himalayan mineral water brand to the Tata Group. Similarly the year 2004 saw the sale of Parry Confectionary to Korean candy maker Lotte, and Godrej snapped up another family run firm Nutrine a few years later.
There have been bigger family exists in the past. Narottam Seksaria family – Singhvi’s promoter at Gujarat Ambuja sold to Holcim triggering one of the biggest consolidation play in the domestic cement industry. JM’s Bhavesh Shah says increasing private equity play and maturing industry growth rates would unleash consolidation across sectors in the not so distant future.
One would see far greater family exits then after having maximized growth potential.
Excerpts from The Times of India