Case Blog

Mumbai, India 7/26/07

During my final year with Reed Business, I served as vice chairman, with a focus on establishing new joint ventures or subsidiaries in China, India and Russia. Our team found an excellent partner in Infomedia India LTD, which is listed on the Bombay Stock Exchange. I am writing this, as I return from an annual shareholders meeting and also a board meeting for Infomedia. I joined their board in January of ‘06. Delta’s recent introduction of a nonstop flight from JFK to Mumbai has made this a much easier journey. (Delta’s strategy, since emerging from bankruptcy, of flying long haul international routs versus fighting the north/south are wars in the US looks like a winner and one that should be closely watched by the other large carriers that have suffered since 9/11.)

The Indian economy is on a growth curve that comes close to matching China’s. The current government has encouraged foreign investment, which is a significant change from the early ’90’s and has contributed to the strong growth in GDP, over the past several years. Many of the larger PE firms have now entered India and they are starting to invest in buyouts, which are done in a similar fashion to those that have become so popular in the United States and Europe.

Infomedia is an interesting case study, in that for many years it was the printing operation of the Tata Group, a very large conglomerate, with varied holdings in a number of infrastructure industries. (Its AGM this week was its 52nd.) Several years ago, ICICI Ventures, which is part of ICICI Bank, one of the two largest banks in India, under the leadership of Ms. Renuka Ramnath, shifted its focus to private equity from early stage venture capital. Ms. Ramnath has been with ICICI Bank for many ears and has very deep contacts within the Indian enterprise sector. Under her superb leadership, Infomedia India LTD, was spun-out of Tata and began trading on its own. ICICI Ventures controls slightly more than 60% of its shares. Ms. Ramnath and her team recruited Prakash Iyer, who had been the Managing Director of PepsiCo, in India, to become the CEO. He brought with him his CFO, Jayaraman Shashidar. Together they have provided the leadership and built a strong team, that has clearly established them as the leading Yellow Pages publisher in India, as well as, the largest special interest consumer and B2B publisher in India. Today under their clear focus and strong leadership the earnings have grown significantly and through targeted acquisitions they have also built a strong Business Process Outsourcing or BPO division, which is also contributing to the dynamic growth, in both revenues and EPS, they are experiencing in ‘07. They are also putting into place a strong digital strategy, across each part of their business and they are working hard to bring strong global brands, such as Disney, into the Indian market.

I am also pleased that Reed Infomedia LTD continues to grow, as many of the strong brands from the US and UK enter the Indian marketplace, through this new partnership.

My colleagues at Infomedia are always outstanding hosts and on one visit last year they discovered my love of wine, when I complimented them on the interesting white wines we were having at a press conference. While I am very knowledgeable regarding California wines, as well as, French and Italian wines, I had to admit that I did not know anything of this fast growing industry in India. As the middle class expands, wine, as it is the world over is becoming more of a “social drink” for both men and women and the country is moving beyond malt whiskies. On my next visit, I was delighted when they announced that we were going to take a day trip to India’s wine country in Nashik, approximately 180KM northeast of Mumbai. My colleagues from RBI-US, Jason Cassidy and Jeremy Pomeroy, joined me for and exhilarating full day visit to wine country. The ride to Nashik was long and we just made it back to Mumbai, in time for our flight home, by taking Air Deccan, another ICICI Ventures portfolio company.

During my current visit, I once again enjoyed the comfort of the Taj Mahal Hotel in Mumbai. This 100+ year old hotel knows how to make a guest feel welcome, especially a returning guest. It is always up-to-date and its WiFi service is superb! Within the past year they have acquired the “grand old Ritz Carlton”, across from the Public Gardens in Boston and Campton Place in Union Square in San Francisco. I highly recommend this outstanding establishment.

I also realize each morning I wake in the Taj in Mumbai that this is a culture that still reads newspapers and I find four excellent papers outside my door! Are newspapers still growing anywhere else in the world? It is very clear that there are private equity opportunities in India for media, transportation and infrastructure companies and that more and more of the western funds will be making investments in this vibrant market, over the next twelve months.

I was reminded over the past several days how important retaining customers is to a business’ long term health & growth. My wife Mary Claire & I spent several days in wine country, Sonoma & Napa Valley, with our friends, the Bryants, who were visiting from Florida. Natalie Bryant was celebrating a “special birthday” & we decided some time ago it needed to be celebrated with a very memorable evening.

On Monday evening we went to Thomas Keller’s “The French Laundry”, which has been consistently rated the number one dining experience in the country, by most major food critics, over the past decade. From the moment we entered, Mr. Lawrence Nadeau, the Maitre D’, made us feel very welcome, particularly when he referenced, greetings, from the concierge at Per Se, Mr. Keller’s other excellent restaurant in New York City. Both restaurant staffs are trained by Mr. Keller to focus on even the smallest detail to make certain that the dining experience meets one’s expectations. For example, early in the ordering process, you are often asked if there are any food allergies that the chef should be made aware of. The assistance one is given in deciding on which “tasting menu” to have is always attentive and never solicitous.

The wine list, which is wonderful, in its depth and has many of the best wines from the smallest producers, who are also perfectionists, is superb. Our meal opened with a Marcassin Three Sisters ‘02 Pinot Noir (RP96). This is from Helen Turley, the well known wine consultant’s personal vineyard and as always, her wines met our high expectations. We followed with the Arietta Variation One, also ‘02 vintage, from the team of John Kongsgaard & Fritz Hatton (RP95). This is a very unique Syrah/Merlot blend and this small winery produces, consistently, some of the best wines that I “lay down”, in my cellar. We closed with a Blankiet Cabernet Sauvignon Paradise Hills ‘01 (RP 92). This wine was also made by Helen Turley, who supervised the first 8 releases from this small vineyard. The vineyard development was done by the renowned viticulturist, David Abreu, who is also known as someone who leaves no detail to chance, as he plants & nurtures a vineyard.

Each of the 11 courses provided a unique dining experience that one savored, while waiting in anticipation for the next course. One never felt rushed, while the service was always attentive. We closed the evening with a visit to the kitchen, where some of the best future chefs in America are being trained in how to create that “special customer experience”.

Thomas Keller and his teams, at both The French Laundry & Per Se, know the true “life time value” of a customer and make certain that one always anticipates their next visit to these pantheons of American cuisine. We are very fortunate to live in the Bay Area & New York City and to have access to these wonderful “customer experiences”.

Now I am back at work looking for “high growth” media acquisitions, on the west coast for another week & I must admit that I find it a bit odd that Rupert Murdoch’s offer for Dow Jones has not been accepted by the Bancroft family or their representatives and the board of Dow Jones. I join the former ceo of Dow Jones, Peter R. Kann, in wondering why Ron Burkle, a supermarket magnate & Eric Greenspan, former ceo of Intermix, the original parent of My Space, would make better owners than Mr. Murdoch, who has spent his entire career in the media space & clearly wants to invest and expand the Wall Street Journal franchise.

Many of the largest media companies, today, are portfolio plays that combine content with distribution. At one time this approach was very fashionable, particularly in the late 80’s and ‘00. Time Warner (TWX) is the example that is often brought forward & its failed merger with AOL. Over the past two years, with some prompting from Carl Icahn, Time Warner has started to demonstrate a more strategically focused play by spinning off, as a public company, Time Warner Cable (TWC), in which it remains the majority shareholder. It continues to own 100% of AOL, in spite of the calls from Mr. Icahn & Steve Case, AOL’s former ceo, to “set it free”, to allow it to be more competitive with its peer group, which includes Google, Yahoo & Microsoft. I believe that an incremental approach may give the appearance of a more “focus play”, but in the end will not satisfy investors who believe that a story that has more clarity will drive a higher PE ratio.

The media industry is not alone in this conundrum. Phil Purcell, former ceo, of Morgan Stanley (MS) long resisted the call to spinoff Discover (DFS), because he also believed that its distribution channel, combined with Morgan Stanley’s traditional strength in investment banking would create greater value. Unfortunately, this approach kept Morgan Stanley from aggressively investing its own capital, for example, in the buyout or private equity sector and they fell behind their traditional competitor, Goldman Sachs (GS). John Mack, who replaced Purcell, after studying the issue for a year, made the right call and on June 30th spun-off Discover. He is also now pursuing a similar strategy to Goldman, with more of the firm’s own capital being invested and yielding significant returns, as demonstrated by their most recent earnings release.

I believe that the CEO’s of our largest media companies could unlock similar value by reviewing their portfolios and not taking Time Warner’s incremental approach, but following the approach of John Mack at Morgan Stanley and carving out or spinning off divisions that do not derive synergy and find their growth potential denied, within the current corporate structure.

Obviously, I have a personal interest in working with many of these companies in helping them become more focused and creating greater shareholder value, by acquiring and restructuring the assets that they decide are “not strategic” to their core business. I know from experience that employees of these non-core businesses will be much more productive and innovative in an environment that they feel more in control of their own destiny. This is why many divisions that have been spun-off, for example Hertz from Ford, have been able to create significant shareholder value under new ownership. Will Discover Financial Services be the next Mastercard? Would AOL once again be defining the internet, as opposed to following the leaders, if it was “set free”?