Jet - Sahara synergy failure
The point of concern is the latest event unfolding where the proposed acquisition of Air Sahara by Jet Airways failed to secure. There analysis needs to be done as why it could not work out. We have seen many M&A’s failed to secure the synergy they hoped and targeted to achieve, viz. AOL – Time Warner. Are we about to see similar M&A’s failures in India? That is surely not a good sign for growth!
Well that just might be the case, as many Indian companies are on buying spree. Number of acquisitions in these couple of years has grown dramatically. Let us consider the subject matter, why this move was made by Naresh Goyal, chairman of Jet airways. Air Sahara was making loss for past two years. Their market share had reduced from 20 odd % to about 10%. Their capital was shrinking, cash flow had dried out. They simply had lost competitive edge. This series of events shows the fact that they were on the verge of being bankrupt or bought out.
Jet airways considered this to be good opportunity to grow inorganically. Till now everything was right, but somehow Jet evaluated Air Sahara at whopping $500mn i.e. Rs.2300cr. Many financial experts raised scruples about this valuation, as just prior to this Kingfisher airways had tried to acquire Air Sahara with about $180mn. This price seemed a little on lower side, so it had to be appreciated, but $500mn could only be explained with term ‘Irrational exuberance’. And that is what it turned out to be. Naresh Goyal backed this pricing by mentioning the parking bays available to Air Sahara, the local and international destinations they had additional to Jet and their fleet of 26 aeroplanes. And that Jet was not buying any liabilities from Sahara.
But there is catch in everything. Jet could have got the parking bays at main airports in country and also local destinations, but there was problem about the transfer rights of foreign destinations due to security reason, especially because Naresh Goyal is an NRI. There are no amendments in Indian law for such rights transfer. Also most of 26 carriers working under logo of Air Sahara are on lease and not owned by them. And last and most delicate point of acquisition: human resource and company culture. Air Sahara has fundamentally different company structure and work culture, which is far from that of Jet. There was never a chance of synergy between their human resources. Even Naresh Goyal did not see any of these factors, but the shareholders did not fail to see them. Amidst the correction in share markets, the price of Jet’s shares fell from Rs.1200 odd to Rs.700 odd i.e. more than 40% fall. And this for surely made Naresh Goyal to review his decision. And he concluded by backing off, but not before losing Rs.100cr in procedure and Rs.500cr still stuck in escrow account, fate of which will be decided by gruelling court case. And now we are poised to see how both of them recover from this misadventure!
The point of concern now is that will other companies take any lesson from this, without suffering first hand experience? Will the ‘Irrational exuberance’ be curbed and business rationality be restored?
Well that just might be the case, as many Indian companies are on buying spree. Number of acquisitions in these couple of years has grown dramatically. Let us consider the subject matter, why this move was made by Naresh Goyal, chairman of Jet airways. Air Sahara was making loss for past two years. Their market share had reduced from 20 odd % to about 10%. Their capital was shrinking, cash flow had dried out. They simply had lost competitive edge. This series of events shows the fact that they were on the verge of being bankrupt or bought out.
Jet airways considered this to be good opportunity to grow inorganically. Till now everything was right, but somehow Jet evaluated Air Sahara at whopping $500mn i.e. Rs.2300cr. Many financial experts raised scruples about this valuation, as just prior to this Kingfisher airways had tried to acquire Air Sahara with about $180mn. This price seemed a little on lower side, so it had to be appreciated, but $500mn could only be explained with term ‘Irrational exuberance’. And that is what it turned out to be. Naresh Goyal backed this pricing by mentioning the parking bays available to Air Sahara, the local and international destinations they had additional to Jet and their fleet of 26 aeroplanes. And that Jet was not buying any liabilities from Sahara.
But there is catch in everything. Jet could have got the parking bays at main airports in country and also local destinations, but there was problem about the transfer rights of foreign destinations due to security reason, especially because Naresh Goyal is an NRI. There are no amendments in Indian law for such rights transfer. Also most of 26 carriers working under logo of Air Sahara are on lease and not owned by them. And last and most delicate point of acquisition: human resource and company culture. Air Sahara has fundamentally different company structure and work culture, which is far from that of Jet. There was never a chance of synergy between their human resources. Even Naresh Goyal did not see any of these factors, but the shareholders did not fail to see them. Amidst the correction in share markets, the price of Jet’s shares fell from Rs.1200 odd to Rs.700 odd i.e. more than 40% fall. And this for surely made Naresh Goyal to review his decision. And he concluded by backing off, but not before losing Rs.100cr in procedure and Rs.500cr still stuck in escrow account, fate of which will be decided by gruelling court case. And now we are poised to see how both of them recover from this misadventure!
The point of concern now is that will other companies take any lesson from this, without suffering first hand experience? Will the ‘Irrational exuberance’ be curbed and business rationality be restored?
posted by umeshsant at 11:59 am
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