Source: economictimes.indiatimes.com

Reverse merger as a means to gain listing could just be gaining ground. Check these cases of the past two weeks. A small outsourcing company, six years old, employing 150 people, is getting investment from an US-based PE fund which is also making this company merge with a listed company.

Another small Mumbai-based construction services company, with FY07 revenue of Rs 50 crore, has been approached by a PE fund which wants it to reverse merge.

Now, these two instances need not make a trend, but clearly reverse merger as a method of listing and then raising public capital, is a phenomenon waiting to pick up. If it can achieve serious scales in the US and China, there is no reason why it cannot pick up in India.

To be fair, there have been expectations even in the past 1-2 years that reverse mergers will gain ground in India. Somehow, that has not come to pass yet. “Perhaps because it is easy to do an IPO in India,” says JM Financial executive director Bhavesh Shah. It does not require too much capital to list, he says.

From a PE fund’s perspective, a reverse merger remains an attractive option though. It provides instant liquidity. It is not easy to take a Rs 40-50-crore turnover company public. The cost of the issue, and the pricing you could command, could both make it unattractive. If the issue devolves, it is a serious loss of face.

If the promoter, PE or the merchant banker has to bail the issue out, then instead of providing liquidity, the issue could do exactly the reverse. “While reverse merger route has merits, it is open to abuse. For a good company, we would still advise a private placement or an IPO,” says Almondz Global Securities head (investment banking) Sharad Rathi.

Reverse mergers are far more popular in the US. There have been about 200 reverse mergers per year since 2004, according to DealFlow Media, an US-based outfit tracking alternative investments. Reverse mergers have also proved a very popular way for foreign companies to list in the US market.

As many as 150 Chinese companies are believed to have listed in US through this route in two years, according to a Businessweek article. Most of these reverse mergers are where a normal operating, but unlisted, company merges into a listed shell company.

In the merger, the operating company’s shareholders are issued shares of the shell in exchange for the operating company’s shares. Post-merger, the former operating company’s shareholders own 85-95% of the shell, which now contains the assets and liabilities of the operating company, with the remaining 5-15% owned by the existing shell company’s shareholders.

These shell companies are often companies that have either gone bankrupt or ceased to do business, but have retained their listing. The risk with such shell companies is that there could be hidden liabilities, lawsuits or collection agents waiting for the former public shell company to gain assets that could be seized. The new entity could become responsible for those liabilities.

The US capital market is also the most innovative in the world. There are investment banks in US specialising in shell creation and reverse merger. They regularly create pure shells and other special purpose acquisition companies. Reverse merger seems to have emerged as a rigorous art form in the US.

In India, there is no reason why it cannot. Remember, ICICI Bank listed through a reverse merger. There has been talk of BSNL listing through merging with MTNL. Perhaps it needs a innovative financial firm to show the way.

Source: economictimes.indiatimes.com

Mercer India head R Sankar quit to join PricewaterhouseCoopers (PwC) as executive director-people and change practice. iGATE consulting chief Hari Rajagopalachari recently joined PwC as executive director-global outsourcing advisory services.

Announcements such as these are not just about big-ticket appointments; they signal some of the challenges and changes that consultancy firms like PwC are effecting to keep pace with shifting corporate needs.

PwC sees global outsourcing and people & change practice, both relatively new practices, as the biggest growth areas, going forward. That’s where the two fit in. “We are now developing a structure around 7-8 client issues to drive our new business agenda in the country,” says PwC leader-performance improvement practice Ambarish Dasgupta.

Sankar and Hari will help PwC clients deal with some of their transformational needs in India. PwC has identified people change and global outsourcing as primary drivers of its consulting practices. Sankar will lead people and change practices within PwC’s consulting arm to help clients manage the impact of transformational assignments, on the people. While the firm has an HR practice with 20 people, Sankar has been brought in to give it a “bigger focus and scientific approach”.

Sankar, who led Mercer India since March 2002, helped shape the company’s brand and HR consulting practice in India. During his tenure the company quadrupled its revenues, expanded staff base from around 25 to 130 now and launched new practice areas of pension & and retirement benefits and healthcare consulting. “More than anything I would consider building a strong stable leadership as one of my achievements,” says Sankar.

Similarly, Hari is expected to play a critical role in another identified focus area for PwC, global outsourcing, and will lead that practice. “Our focus is to the play role of trusted advisor to all cross territory inbound investments to India in the search of an effective partnering model for outsourcing their critical operations like finance, IT, knowledge processes, other critical backend processes,” he says.

Hari has had a four-year stint as the the head of iGATE’s consulting arm and brings in a wealth of experience in global sourcing. The development with PwC is in line with the trend of most advisory firms increasing their focus on specialised areas such as HR, outsourcing and supply chain to deliver a better value to their clients.