New Delhi: Ajit Balakrishnan , founder and chairman and managing director of Nasdaq-listed Rediff.com, has got board approval to buy Vubites India Pvt.Ltd, a firm owned by him. He said in a phone interview from Central America that he fails to understand why this is being viewed negatively. The deal is driven by the urgent need to expand the business, he said. Edited excerpts:
What is the aim behind the acquisition?
Online display advertising, the business that Rediff.com currently addresses, is about Rs300-400 crore in India. It is growing, but is relatively insignificant compared to the television ad market. Over time, I have been thinking of a way of using Internet technology to address that market.
Combining synergies: Balakrishnan says investor outcry will happen only if a process is not explained, but in this case everything is being done openly and there is no secrecy. Hemant Mishra/Mint
When I started this business two years ago, I was not clear whether this would fit in with our advertising agency Rediffusion DY&R or Rediff.com. But, looking at the industry evolve, it fits in more with Rediff.com, which is why we said let’s combine the two businesses with shareholders’ permission.
What synergies did you see in the two companies?
It allows Rediff.com to address new market segments. It’s a new platform of growth.
Did you look at other alternatives which could have added to your business?
The online business in India is just too small and I think there have been several attempts to expand it. The big urgency for companies like us is how do you grow it. This is the 14th year of our existence and our revenue is still in the range of Rs60-70 crore a year. So, how do you grow in such an industry is a problem.
Doesn’t the possible parallel with the Satyam-Maytas episode bother you?
It’s unrelated. Satyam being a software company was trying to acquire a real-estate firm. And acquiring a promoter-owned firm is not necessarily a wrong thing. You have to make sure that the transaction is transparent. If you follow the US process, you make sure that independent valuations are done with reputed firms; you have to make sure that synergies are established. You also have to make sure that the board and shareholders approve it. I am not able to understand why people are viewing it negatively.
So, you are not expecting any investor outcry?
The investor outcry will happen only if you don’t explain it or you don’t follow a process. I don’t understand the concerns around the deal. We are doing everything openly and there is no secrecy.
But this model has not seen much success as broadcasters do not want to swap national ads for local ads.
Every business has its risk and rewards. It’s not risk free.
When was Vubites formed?
I think two and a half years back, most of the time has been spent in product development.
How much is its revenue?
I can’t give you that because I don’t want to disclose anything that we haven’t in the SEC (US Securities and Exchange Commission) filings. Current revenues are small as we work with one channel and four-five advertisers.
Has Vubites reached the break-even point?
No, it is just out of the product development stage.
Why did you not wait for the company and business model to be successful before acquiring it, which would have probably been received in a much better fashion.
It will get more complicated if we try and merge it next year. The valuation will become many times of what it is today. At the moment it is being virtually transferred at cost.
How much did you invest in the company?
In the product development, the cost to the company is around Rs15 crore, which is the value which has been put on the company.
Why did you ask the board to approve an interest-free loan of around Rs13.6 crore to Vubites, money which would eventually come back to you?
We asked some third-party company to put a value to the business, and they put a value of Rs15 crore. And then it’s a question of how to pay for it, you could have also paid outright for the shares. I had funded Vubites by advancing an interest-free loan to it for three years for around Rs13 crore.
How was this money used?
It was spent in product development essentially and for salaries etc.
How will the loan money for Vubites be repaid to Rediff shareholders?
After the acquisition, Vubites will be a wholly-owned subsidiary of Rediff.com and all the revenues and profits will come to Rediff.com.
So, the loan will also be paid-off from the balance sheet of Rediff.com?
The loan money includes Rs1.2 crore for stock options...
That is for the staff inside Vubites, there are about 10-15 people and it’s a stock option for them. When people joined, they were given stock options in Vubites so when we complete the acquisition, their stock options will be replaced by Rediff.com’s stock options.
Who has the done the valuation?
It’s one of the big four, but we can’t disclose the name.
What is the process of the valuation?
What they do is that they make projections on revenues, cost etc, its straight out of a text book.
By when do you expect Vubites to start making profits?
It’s a forward-looking statement and I would refrain from answering.
If the acquisition goes through, how will Vubites operate within Rediff?
It will be a wholly-owned subsidiary of Rediff.com but the management will be common.