Recent trends in post acquisition capital restructuring

Abstract

Indian companies have come out bold and stronger over the past few years, and have acquired several companies of the developed nations. Therein lies a sense of pride for the India Inc. However with the global meltdown and the current financial crisis, the financing, refinancing and the operational costs: all went up. The reduction in operational costs due to synergies and access to newer technology turned out to be lower than expected. With the huge slump in demand, revenues declined despite access to newer, developed markets. These caused a double whammy to the companies, with their margins squeezing and the credit ratings deteriorating. This extreme situation has witnessed the emergence of several trends in capital restructuring: some of these trends have short term placebo effects, whereas some are expected to have long term repercussions. Through the study of 8 major acquisitions, we have focused our study in the identification if these trends, their causes and their implications. Thereon, we have evaluated the framework of the valuation models used for these deals, and have tried to point out certain pitfalls and fallacies in conventional assumptions, methodologies of valuation and predicting cash flows and the contribution of the investment banks in exaggerating the bias towards higher than correct valuations. Though this global meltdown was a Black Swan event: an event having high-impact, but highly rare and highly impossible to predict, we believe that retrospective analysis like ours has yielded helpful insights.