The Blackstone Hypothesis
Change Agent
At Intelenet, consulting firm McKinsey evaluated 20 parameters to gauge a call centre agent’s productivity. Some recommendations were difficult to implement. An agent was only allowed three bio-breaks for 15 minutes each and every other minute had to be accounted for. Says Amit Dixit, Blackstone’s investment manager for Intelenet: “The process was painful.”
Since Blackstone acquired the firm, Intelenet has been in acquisition mode. It paid $75 million for a Mauritius-based BPO firm that ran two businesses with centres in the US and India. The intent is clear: “Intelenet will now be the pivot for all our investments in the space.”
Network power is kicking in too. Intelenet is negotiating a deal that may well be its largest outsourcing contract—at least three times larger than its current $50 million deal. Chip Shore, an Intelenet board member, is patching up the BPO firm’s executives with senior management in companies in the Blackstone family. “The introductions were more than mail-connect kind. Blackstone actually seconded people to work with us to talk to companies,” says Kumar. With all the action in the last 18 months, Intelenet’s revenues have ballooned to $225 million in 2007-08 from $94 million in the previous year.
Brave New World?
Even as internal changes were taking hold at Gokaldas and Intelenet, the external atmosphere started to deteriorate. Blackstone investments in India have been battered by the economic and markets meltdown. Its cumulative investments of $730 million are now worth only 30 percent of the original value. Gokaldas has lost 71 percent of its value since Blackstone’s $165-million deal. Intelenet is unlisted but if WNS and Genpact’s valuation declines are anything to go by, the investment has lost two-thirds of its value.
So is the Blackstone Hypothesis a mere conjecture? Stephen Schwarzman, the head honcho at Blackstone, would be watching closely. Of the seven investments Gupta has made, his fate would rest most firmly on what he achieves at Gokaldas and Intelenet. One, both have brought management control and that means Blackstone must ensure entrepreneurial energy keeps flowing through the companies. Two, taken together, both investments account for half the total money that Blackstone has invested.
The meltdown has inspired critics to harp on their I-Told-You-So. “Not one investment of theirs is above water. And they have made these investments at the peak of the valuations. How can they ever hope to make money?” says the head of investment banking at a very large US firm.
“Akhil is trying to push water up the hill. Tell me, has the textile sector thrown up at least one company that can defy the miserable profitability and scaling challenges that the sector has? Is there an Infosys of textiles? No,” says the head of a large Indian PE fund. Such judgements may be a bit premature, considering PE is not like a mutual fund, to be evaluated frequently. However, truth be told, every investor wants returns and would not totally ignore such a drastic fall in valuations.
“In the first six months, investors in a PE fund are willing to listen to your talk about long term vision, strategy, After 12 or 18 months, they look at the prices you have invested and the current price of those investments and then they ask ‘What’s your exit strategy?’ Gupta will have to explain this as his two big investments are that old,” says the India head of a $1.6 billion US-based PE fund.
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Image: Dinesh Krishnan
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MAN IN THE HOT SEAT: Akhil Gupta's fate would rest firmly on the success of his two bets | |
A Tough Task
The only way out for Gupta is to improve the core profits of the two firms. Adds the fund manager: “If you want to play the turnaround game — sustainable over three-four years — then you really have to know the business really well and you need to have people who know the industry.”
Blackstone’s appointment of an industry expert at Gokaldas shows it anticipated this need. But will this please Schwarzman and his investors? Even in this bleak scenario, he would expect the portfolio to return 20 percent annually over the next five years. What will it take for this to happen? A lot. Blackstone invested in Gokaldas at Rs. 250 a share, at nearly 10 times earnings. Even if the same pricing multiple were to hold in 2012, the earnings per share (EPS) would have to increase to Rs. 81 for Gupta to get his three-fold returns. That’s a tough task.
“Gokaldas needs to learn a thing or two from smaller companies like Ambattur Clothing Company in migrating work to low cost locations outside India and to become a seller to China,” says a senior executive in a large buying house that deals with Gokaldas. But, isn’t Cyriac implying the opposite when he says it must grab sales from China? “Well you can try. But the Chinese are very proactive and they have closed 14,000 units in South China where costs had gone up and moving all that work to North China near the Korean border. So it may be more prudent to work with Chinese companies rather than go head-to-head against them,” says the executive. Blackstone will have to get Gokaldas to try low cost locations like Bangaldesh and Vietnam to increase margins.
Consider Intelenet. Blackstone bought Intelenet for $200 million, 12-13 times the earnings before interest, tax, depreciation and amortization. Now, orders from the West are drying up.
That’s not deterring Intelenet. A few years back, management consultancy Bain & Co estimated that if Blackstone’s portfolio companies outsourced 10 percent of their jobs, it meant at least 50,000 jobs for BPO companies. Says Kumar: “We have 3,000 seats in the sales pipeline purely on account of Blackstone.”
Not everyone agrees that companies would start outsourcing services just because their PE investor has also put money in the services companies. Each company will decide what is best for it and may choose not to take part in the network effect. “There is a stickiness about offshoring contracts and they can’t be moved around on a whim or without a proper business case,” says Walden International’s managing director Rajesh Subramaniam.
Despite all the challenges, Gupta insists Blackstone will achieve its goal, even if not in exactly five years. “We may perhaps achieve it in seven, considering the slow pace of India’s infrastructure development and labour regulations.”
Industry peers and Blackstone’s investors are impatient to see results. Garment maker Premal Udani says the Blackstone experiment could help erase old fissures in Indian business. “In the current scenario, if Gokaldas can make large buyers to source from them, the industry could learn a much needed lesson or two.”
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But one needs to be very carefull as one strong jolt of recession will jeoparadise the entire Gameplan. So I will put it under "High Risk, High Reward" zone.
