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Buyout barons with blank cheques

Mumbai/New Delhi, May 4: A new breed of buyout barons is on the prowl in India ' and it’s being bankrolled by investors in American bourses.

A clutch of non-resident Indians has teamed up with a few leading Indian businessmen to float so-called blank cheque companies to raise funds through first-time flotations on the US bourses and use the cash to buy up promising start-up companies in India.

Blank cheque companies are a fairly recent phenomenon in the US: promoters of these firms, which have no source of income, raise funds to acquire small companies across a vast swathe of industries. The hot favourites are information technology and IT-enabled services.

Two groups

Two groups of Indians have now floated blank cheque companies and are in the process of raising funds to snap up companies here.

The first is Phoenix Indian Acquisition Corp, which is headed by Raju Panjwani, a former managing director with Morgan Stanley. The other partners include investment banker Ramesh Akella, technology analyst Shekhar Wadekar and former merchant banker Rohit Phansalkar.

The other is Millennium India Acquisition Co Inc which has been formed by Jacob Cherian and Suhel Kanuga who have worked in the financial services division of CSC (Computer Sciences Corporation, a Fortune 500 company that is touted as the world’s third largest IT solutions company).

Who’s who

Interestingly, Cherian and Kanuga have roped in C.P. Krishnan Nair, founder of the Leela group of hotels, and intend to stump up about $90 million to buy up one or more existing companies in India.

Millennium’s filing with the Securities and Exchange Commission (SEC), the US capital market regulator, says Nair is a director and holds 20,000 shares in the company. Millennium’s shares will list on the American Stock Exchange.

Nair, the 84-year-old doyen of the hoteliering industry, told The Telegraph, “Millennium India Acquisition Company wanted eminent people to be part of its board. The company's promoters invited me to join the board and I have accepted their proposal to be a non-executive director.”

The Leela group chairman said he was not a financial investor in the company and had no role to play in either its administration or its decision making.

This is typical of blank cheque companies which have no track record: they pad the board with high-profile individuals to help them hawk the shares to investors who have an appetite to take risks.

Others on board

The Millennium filing mentions Kishore Mirchandani as one of the promoters of Millennium. Mirchandani is a chartered accountant and used to work with Deloitte & Touch' in London before moving to New York where he is a president with Outsource Partners International which acquired KPMG’s BPO arm back in 2002.

Outsource Partners has its headquarters in Los Angeles and services centres in Dallas and Bangalore. Last year, it opened a BPO arm in Kochi.

“I know Kishore Mirchandani who is my tenant in Kochi and is involved in BPO operations,” said Nair.

“We are going through the registration process in the SEC. Therefore, we are in the silent period. We cannot disclose our business plans till June when the registration process is expected to be completed,” Jacob Cherian said over the phone from New York.

Cherian, Kanuga and Mirchandani hold 27.1 per cent each in Millennium. Lawrence Burstein, president of Unity Venture Capital Associates, a private investment company, holds another 9 per cent. After the issue of 11.5 million shares at an offer price of $8 per share, Cherian and his partners will find their stakes drop to 5.4 per cent each, provided they can get enough American investors to bite the bait. Burstein will presumably fade out of the scene. Millennium’s promoters 'who filed for an IPO only on April 4 ' are hoping to raise $92 million.

Phoenix ahead

But while Millennium is still looking to raise the cash, Phoenix India Acquisition Corp already has. The blank cheque company ' which like Millennium has been incorporated in the State of Delaware ' raised $57.38 million on April 5.

Phoenix was incorporated on July 13 last year as a blank cheque company “to acquire, through capital stock exchange, asset acquisition or other similar business combination, a business within the information technology, IT-enables services, knowledge process outsourcing and BPO sectors”.

“Mergers and acquisitions are difficult in India. We are doing a lot of research to narrow down the companies in which we are interested. We have begun talks with a few target companies,” said Panjwani over the phone from New York.

Deadline pressure

Phoenix has 18 months from the date of consummation of the IPO ' that is April 5 ' to buy up a company. This time period can be extended up to a maximum of 24 months if stockholders agree. The public shareholders can opt out if they don’t like the look of the target company to be acquired. In such an event, the stock will be redeemed at $7.65 per share plus pro rata interest on the $54 million that is being committed to a trust fund which can invest the sum in six-month US treasuries in the interim period till a target company is found.

Millennium move

Unlike Phoenix, Millennium is casting its net really wide. It says it “intends to focus on privately-owned businesses within the financial services, healthcare, infrastructure, consumer retail and hospitality sectors that offer innovative cross-border growth opportunities. We currently do not intend to seek a target business that is primarily engaged in either business or knowledge process outsourcing”.

Cherian and Kanuga plan to move to Mumbai by June to start searching for an appropriate target company, says the SEC filing. Millennium also has an 18-month window within which it has to acquire an Indian company ' but this is extendable to 24 months if the shareholders agree.

Even odds

Blank cheque companies have a high failure rate and the Millennium filing recognises that the odds are stacked against it. “From August 2003 through March 31, 2006, approximately 51 similarly structured blank cheque companies have completed public offerings, including one with a specific focus on Indian target businesses (referring to Phoenix),” says the Millennium filing. Only six have consummated a business combination.

“We expect to encounter intense competition from other entities having a business objective similar to ours, including venture capital funds, leveraged buyout funds, operating businesses and other entities and individuals, both foreign and domestic,” says Millennium.

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