The Indian business process outsourcing (BPO) sector has recently been in the spotlight, thanks to renewed interest by private equity (PE) players. However, one deal failed to make a buzz — the acquisition of Mmodal (formerly CBay Systems) by JPMorgan’s PE partner One Equity Partners for $1 billion.
Announced in July, it was one of the largest PE deals in the BPO space this year. Another big-ticket deal came a month later, in August, when PE player Bain Capital announced the acquisition of 30 per cent of Genpact’s stock for $1 billion.
One Equity Partners’s acquisition of MModal saw the exit of founder Venu Raman Kumar and PE player SAC Private Equity Group, both together owned 31-34 per cent in MModal.
MModal started its journey in 1998 as CBay Systems, providing medical transcription services to hospitals, healthcare networks and physician practices across the US through its India-based work force. It had operations in Annapolis, Maryland, and Bangalore.
Kumar, an Indian Revenue Service officer, started out as the assistant commissioner of income tax. Later, he joined the Essar Group. In 1998, he started CBay with $100,000. By the time he sold his company to One Equity Partners, it had revenue of $475 million. The company’s name was rebranded.
JPMorgan’s PE arm paid $14 a share in cash for MModal, or 8.3 per cent more than the stock’s July 2 closing price. The acquisition valued MModal at 8.46 times earnings before interest, taxes, depreciation and goodwill amortisation and almost 30 times its net profits.
In 2007, when CBay Systems was listed on AIM exchange in London, it had a turnover of $60 million with a market capitalisation of $90 million and employee strength of 4,000, most in India. After this, Kumar set out on an aggressive acquisition path. He partnered SAC Private Equity Group to acquire 70 per cent stake in MedQuist, a company seven times the size of CBay Systems, from Royal Phillips of Netherlands. In 2011, CBay Systems was listed on the Nasdaq as MedQuist Holdings with a market cap of $500 million. In 2010, CBay Systems acquired Spheris, a Warburg Pincus-invested company.
The road ahead
Having sold the company by successfully scaling it up, Kumar is now in India but in a different role. He will be wearing three hats — private equity investor, an angel investor and an entrepreneur. “I have set up two funds that will cater to the domestic market and the international market. The domestic fund is of Rs 100 crore and the international fund is Rs 200-250 crore ($50 million). I am looking at investing in technology and non-tech based companies in both the start-up phase and the secondary market,” said Kumar.
While Kumar is an executive partner with PE firm Siris Capital Group, he has also set up his own group company called Aeries, which will manage all his investments. He says that he will not invest in the e-commerce segment, which has of late become a darling of the venture capital industry.
“Some of the models that are out there are just not viable and involves too much of cash burn,” he said.
As an investor, Kumar has already made his first investment in India in security solutions provider Zicom. He acquired a 20 per cent stake in the company, which is listed on the Indian bourses for about Rs 15 crore. “The total revenue of the company is around Rs 500 crore, and I feel it can touch a revenue of Rs 5,000 crore in the years to come. I prefer to invest in companies that have intellectual property (IP) and where I can have operational say as well. I am not interested in becoming just a financial advisor to firms,” said Kumar. He would ideally like to have five to six companies in his India portfolio.
Kumar has already spotted his next big idea. “I am close to signing a deal with a company that has incubated at the University of Waterloo (where Research in Motion started its journey). The company has been in existence for eight years and it has created IP that adds analytics to voice and which can then be embedded into chipsets. The founder of the company is a professor; it is a small setup of 15-20 Phd engineers. But though they have the IP, they are yet to make the products; they have to work on a go-to-market strategy,” said Kumar. He, however, is not ready to disclose the name of the company or how much he intends to invest in it. Nor does he share the name of the PE player who will take about 10-15 per cent in the company. “We are not interested in moving this company into India. We will let the R&D unit continue to work from Canada, but the productisation of the IP will happen from India,” said Kumar.