The Indian business process outsourcing industry in the recent times have been in news due to renewed interest shown by private equity industry. However, the one deal that missed creating the buzz was the acquisition of MModal, earlier known as CBay Systems, by One Equity Partners, JPMorgan’s PE partner for $1.1 billion.
The deal that was announced in July this year would be one of the large PE deal in the BPO space this year. A month after that, in August, PE player Bain Capital announced the acquisition of 30 per cent of Genpact’s stock for $1 billion.
The acquisition saw the exit of founder V Raman Kumar and Private equity player SAC Private Equity Group, which together owned around 31 – 34 per cent.
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, who started his professional career as the Assistant Commissioner of Income Tax having joined the Indian Revenue Services, went on to work with Essar Group, and in 1998 started CBay with a capital of $100,000. By the time he sold his company to One Capital, MModal had revenue of around $475 million. The company's name was rebranded as it acquired MModal in Feburary 2012.
One Equity Partners, 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 amortization 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 capitalization of $90 million and employee strength of about 4000, most of them located in India. Post this listing Kumar set out on an aggressive acquisition path, first by bringing in SAC Private Equity Group to fund the acquisition of MedQuist, a company that was almost seven times larger by comparison, by acquiring 70 per cent stake of Royal Phillips of Netherlands in MedQuist. In 2011, CBay System 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.
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 about Rs 200-250 crore (around $50 million). I am looking at investing in technology and non-tech based companies in both the start-up phase as well as in the secondary market,” said Kumar.
While Kumar is an Executive Partner with private equity firm Siris Capital group, he has also set up his own group company called Aeries, which will manage all his investments. Kumar is clear that he is not going to invest in the e-commerce segment, which has in the recent times been 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 he has already made his first investment in India in security solutions provider Zicom. He acquired 20 per cent stake in the company that is listed on the Indian bourses for around Rs 15 crore. “The total revenue of the company is around Rs 500 crore and I feel it can touch 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,” added Kumar. He would ideally like to have five to six companies in his India portfolio.
Meanwhile, as an entrepreneur 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 (that's where Research in Motion started its journey). The company has been in existence for eight years and they have created IP that adds analytics to voice and which can then be embedded into chipsets. The founder of the company is professor, it is a small set-up of 15-20 Phd engineers. But though they have IP they are yet to make products and have to work on a go-to-market strategy,” said Kumar.
Kumar is not ready to disclose the amount he intends to invest into the company, nor the name, he does shares that he along with a PE player will take about 10-15 per cent in the company. “But 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.