Home >Market >Mark-to-market >Equity deal killing 101: courtesy Serum Institute

Serum Institute of India Ltd has been in news lately, and in the most unusual manner. Last Wednesday, Serum’s chief executive officer Adar Poonawalla told Bloomberg Business that the firm is in talks for selling as much as a 10% stake, at an enterprise valuation of $12 billion. This Tuesday, he told Reuters it has halted these plans because global market volatility has dented the appetite for big-ticket investments.

It’s true current market conditions aren’t ideal for placing equity. But if there were any hopes for a deal, here’s how Poonawalla’s public comments ensured they were dashed:

#Deal-killer 1: Tell investors they have to be crazy to invest at current valuations, or something to that effect.

“This would be just capturing the crazy valuations right now that information technology companies and pharmaceutical companies are getting," Poonawalla told Bloomberg. “Looking at all this, we decided: why not unlock some value if the valuations are good?"

Some of us think paying upwards of 30 times earnings for pharma firms is indeed crazy. After all, even Serum, despite its bright prospects, aims to grow at a compounded annual growth rate of only 16% in seven-eight years. But you’re supposed to be hush-hush about this crazy gap between growth and valuations, especially if you’re the person trying to sell equity. Unless, of course, you’re not in the least interested in a deal. In that case, it might make sense, as Poonawalla did, to go public with a news agency that’s among the most popular with global investors.

#Deal-killer 2: Charge investors for crazy valuations and, at the same time, try to talk-up valuations.

Poonawalla told Bloomberg a $12 billion valuation will value Serum at about 30 times earnings, plus an additional 20,000 crore for its product pipeline. In other words, the option value of yet-to-be launched products is at least $3 billion.

You can’t both charge investors for crazy valuations and then resort to exotic option values in a bid to talk up valuations. Besides, the time-honoured tradition is that the task of talking-up valuations is best left to merchant bankers. Their fee depends on it, and they do a good job of making crazy valuations look palatable.

#Deal-killer 3: Tell investors they can check-in at crazy valuations, but checking-out is, well, under consideration.

Poonawalla told Bloomberg that Serum could provide an exit for the investor in about seven years, either through a merger with a listed company or an initial public offering. He later told Reuters, “We don’t want to go to the public domain and be accountable to other shareholders and base our decisions on what the market would expect us to do. We want to keep our independence on making our decisions."

Keeping private equity investors guessing about your IPO plans is, well, a good way to keep investors away. The thoughts about staying private are nice and well-articulated, but hardly helpful in attracting private equity investors, for whom an IPO is one of the most popular exit strategies.

#Deal-killer 4: Send confusing signals to investors about what they bring to the table.

“The incoming investor will get one board seat," Poonawalla told Bloomberg. But his thoughts about accountability to other investors and independence beg the question, “Will the board seat make any difference?"

A private equity firm or a sovereign wealth fund that is expected to shell up to 8,000 crore may not particularly warm up to Poonawalla’s ideas of independence in decision-making.

In fact, if Serum decides to pursue an equity deal when markets stabilize, it will first need to clarify its stand on these matters. Even if it does, valuations may still, unfortunately, come in the way. “Naturally, we weren’t going to accept a lower valuation just because there is a liquidity crunch on," Poonawalla told Reuters.

But then, who knows, with central banks printing money like crazy and with all liquidity sloshing around, Poonawalla may still get a very good deal, in spite of his refreshing candour.

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