care as well as their lack of real commercial experience.

Sastry immediately set out to strengthen the commercial management of the company while trying to preserve its well-deserved reputation for focusing on caring for patients. After the first year the company was already recognised as a much stronger marketer and was beginning to pick up new service contracts (see Exhibit 1). Sastry realised early on, however, that the only way the company would be able to grow significantly was to make one or two strategic acquisitions and then expand its services from a larger base. Thus in late 2003 Sastry began to study carefully the competitors in ActiMeds market niche. V Kasarla Pvt Ltd There were only three companies of significant size that interested Sastry, and V Kasarla Pvt Ltd was clearly the one with the most potential, with a full range of prosthetics and prosthetic limbs. Still owned by the family whose ancestors had started the company some two generations earlier, Kasarla was a wellknown and highly regarded name in its industry. Recently, however, the company had slipped substantially in the marketplace and was rumoured to be in serious decline. While still owned by the family, the company was no longer run by a family member, and no one in the family was close to the business, relying instead on the management team to run the company and deliver the annual dividends. Sastry had approached the non-executive (and non-family) chairman of the company prior to buying ActiMed, but at the time there was no interest in selling the company. Now, however, there were signs that the company was not able to adjust to recent competitive changes in the marketplace, and it was losing business to competitors.

The Opportunity Sastry had made a point of staying in regular contact with Kasarlas chairman, and when it became apparent that he was no longer closing the door on a possible sale, Sastry pursued him relentlessly (though sensitively). His persistence paid off, and in early 2004 Sastry was invited to make a serious offer. Kasarlas chairman emphasised, The family had an unsolicited offer in late spring 2002 from another company that was very attractive, but were not interested in selling. The business has changed since then and two of the older family members have suffered illnesses, but they remember that offer and would expect you to recognise the value inherent in the company and its reputation. They know I have spoken with you and have said they will consider an offer from you, but theyre not going to be interested in wss2c anything that is silly. Sastry knew that he had the inside track that the family would prefer not to sell to one of the other two major competitors because of long-standing bad feelings but he took the chairmans caution at face value. He would have to make an offer that would make sense to the family, or they might seek competitive offers. ActiMeds investors had already indicated their willingness to fund any reasonable acquisition, but Sastry also recognised that the price paid would have to make sense in order to count on that support. Information Problems Sastry suspected that the company was in worse shape than anyone had indicated, and this was confirmed when he received the management accounts from the company (see Exhibit 2). First, the latest accounts (for the first ten months of F/Y 2004) were four months old (and apparently were produced more quickly than usual). Then Sastrys questions revealed a weak understanding of the

ActiMed Pvt Ltd

numbers on management.

the

part

of

Kasarlas

Over the next few weeks of analysis and questioning, it became apparent that only when the audit was performed each year was it truly clear. Yet despite the obvious shortfall year-to-date and a recent announcement that the company had lost another large service contract, Kasarlas managing directors insisted that the company would achieve its forecast profit for the year of Rs. 5.8 Crores. There was also a big question about whether some items in the balance sheet were accurate. For example, when Sastry asked about the companys high level of stocks, the answer was that the company had to continue to carry parts for all older products that it had manufactured because of the specific medical nature of those products. While he understood the argument indeed ActiMed faced a similar, though less significant issue with its stocks Sastry was surprised that there seemingly had been no cleaning out at all, and he wondered if the company had even conducted a proper stock take. While he saw this as one of many opportunities to improve the company, at the moment Sastry was only concerned about coming up with a realistic value for the company. Preparing to Make an Offer At this stage, Kasarlas management was reluctant to provide Sastry with much information until it saw a serious offer. The view was that Sastry knew the industry, he knew Kasarlas reputation, he had their financial information (sketchy though it was), and he should be able to decide what to pay for the company. Detailed due diligence could take place later, once a serious offer had been agreed.

Indeed Sastry did know the industry well, so he took Kasarlas financial information and began to develop a model for combining the businesses. Much of the first year involved taking substantial duplicate costs, as well as excessive Kasarla overheads, out of the company. Apart the from the stocks issue, he didnt expect any changes in working capital. After several iterations, Sastry had a forecast, which, though simple, he felt reasonably comfortable with (see Exhibit 3). He also collected as much information as he could about comparable values in the field (see Exhibit 4). Finally, he remembered what one of his business school professors, a seasoned acquisitions person, had once told him: After years of dealing in unquoted companies, Ive learned one simple rule: when youre the seller, you sell at 8 times EBIT1; when youre the buyer, you pay 6 times EBIT. Although his concerns about Kasarlas condition had not subsided, Sastry knew that he now had to come up with up with a price to offer.

Earnings before interest and taxes.

ActiMed Pvt Ltd

Exhibit 1: ActiMed Results (Indian Rupees: Crores*) for years ending 31 March Income Statement Historical Forecast 2003 2004 2005 2006 Turnover Cost of sales Gross profit Overheads EBIT 41.76 29.91 11.85 6.56 5.29 61.46 49.14 12.32 5.47 6.85 73.06 59.82 13.24 5.35 7.89 82.04 68.28 13.76 5.28 8.48

* Under the Indian system of mathematical nomenclature, one lakh equals 100,000 and one crore equals 10,000,000. Rs 100 crores equals approximately US$20 million. Balance Sheet 31 March 2004 Cash Debtors Stocks Work in progress Current assets Goodwill on acquisition Fixed assets Total assets Current liabilities Long-term debt Total liabilities Shareholders funds 4.55 6.63 7.58 1.63 20.39 10.13 3.50 34.02 10.72 10.70 21.42 12.60

ActiMed Pvt Ltd

Exhibit 2: Kasarla Financial Statements Provided to Sastry Statement of Results for Years ending 31 March (crores) 2000 Turnover Cost of sales Gross profit Overheads EBIT 167.70 88.34 79.36 74.77 4.59 2001 178.46 94.72 83.74 75.14 8.60 2002 189.47 105.43 84.94 76.76 8.18 2003 191.10 105.91 85.19 79.64 5.55 10 mo. 2004 144.44 78.15 66.29 63.66 2.63

Balance Sheet 31 September 2003 Cash Debtors Raw materials Work in progress Misc. stocks Purchased goods Finished goods Total current assets Property Equipment Automobiles Intangible assets Total fixed assets Total assets Trade creditors Other current liabilities Shareholder loans Total current liabilities Lease / hire purchase Total liabilities Shareholders funds .67 25.57 12.15 8.35 .73 10.75 21.74 79.96 2.05 7.37 3.02 .09 12.53 92.49 31.75 7.84 7.50 47.09 5.39 52.48 40.01

ActiMed Pvt Ltd

Exhibit 3: Sastrys Forecast for the Combined Businesses for Years ending 31 March 2005 Turnover Cost of sales Gross profit Overheads EBIT
*

2006 216.00 150.00 66.00 39.00 27.00

2007 226.00 160.00 66.00 39.00 27.00

2008 235.00 167.00 68.00 40.00 28.00

2009 244.00 174.00 70.00 41.00 29.00

215.00 150.00 65.00 40.00* 25.00*

Excludes extraordinary restructuring costs. Capital expenditures and depreciation were offsetting.

ActiMed Pvt Ltd

Exhibit 4: Financial Data Collected by Sastry Corporate tax rate Base lending rate, India National Stock Exchange, Mumbai NSE All Share Average P/E NSE Mid Cap Average P/E Health Care sector average P/E 30% 10% 13.34 8.25 NA as of 2004

Comparable Public Companies: (large companies with comparable divisions) Pfizer India P/E Siemens India P/E Recent trade sale of company in similar area of the industry: (based on discussion with venture capitalists) P/E Multiple of sales BDO Stoy Hayward Private Company Discount (UK) ActiMed investors desired IRR

9.85 29.50

18 1.5 39% 30%

BDO Stoy Hayward publishes a monthly report on unquoted company trade sales in the United Kingdom, comparing the valuations achieved with valuations in the quoted sector and thus showing the resulting discount at which unquoted companies are sold. No such public data were available for India.

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