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The case study described two major obstacles in deal making in emerging market economies-deal sourcing and negotiation. In the case scenario R. K. Sharma, the CEO of Surya Tutoring, needs to decide for one out of two offers made by private equity firms willing to finance the expansion of Surya Tutoring.
Paola Sapienza; Vineet Bhagwat; Apaar Kasliwal
Harvard Business Review (KEL679-HCB-ENG)
August 09, 2012
Case questions answered:
- Describe the advantages that ZenCap and Blackgem each bring to Surya as a potential investor.
- Compare the term sheets prepared offered by both firms.
- Can you identify the qualitative aspects of the analysis? What was Surya’s business concept?
- How big is the market?
- What competition was Surya facing?
- What were the major uncertainties? How can they be addressed? How much money did Surya need?
- Did the deal structure provide appropriate incentives and governance?
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Case answers for Surya Tutoring: Evaluating a Growth Equity Deal in India
Surya Tutoring growth strategy is based on Mr. Sharma’s vision of opulent opportunities in other markets that have yet to be tapped. This is where he needs fund and expertise from investors to help fund the growth of his business.
In order to determine the amount of money used for the expansion strategies, we can roughly estimate the amount of initial capital that Surya Tutoring need to put in in order to establish a presence in particular cities, which is around Rs. 120 crores. Sharma managed to attract two private equity firms, ZenCap and BlackGem. Firstly, we determine which one we should choose based on the fair value of Surya Tutoring. We value the firm based on the value of the other four comparable companies.
We get the suggested value of Rs. 419 crores which are in line with the valuation from two private equity firms. The total amount that ZenCap would fund Surya Tutoring in all round of financing across all securities is Rs. 44 crores, while Blackgem offers Rs. 150 crores in one round of funding using a single type of securities. Before the warrant is exercised, the ownership part of ZenCap represent 8% stake in the firm and once it is exercised, the percentage would change to 12%. In comparison, Blackgem would own a share of 25% in a single round of funding.
Secondly, we have to consider other advantages and disadvantages of both private equity firms. Surya Tutoring gains competitive advantage from ZenCap as ZenCap understands the local market and business culture more than BlackGem. This allows ZenCap to target the right customers and create better assumptions on business analysis, which enables it to make expansion more easily. However, ZenCap values the firm lower than Blackgem and provides less capital. For an analysis of BlackGem, as it is an international company with a relatively larger size, it lacks local market knowledge. Furthermore, Blackgem has acquired a majority stake, while Sharma is not interested in giving up control of his firm. However, besides from an offering of more capital, the main advantage of Blackgem is that it has more experiences and connection worldwide, which will offer a great opportunity for Surya Tutoring to expand abroad.
At the end of the day, Mr. Sharma should select BlackGem due to the 2 main reasons: First, in order to achieve his goal of expansion into 4 main cities, Mr. Sharma will need approximately 119 crores and BlackGem is willing to offer 150 crores. He could also use the excess amount of funding money for international expansion. Second, as Sharma has been in this industry in India since he was young, he already understands the local industry. Thus, choosing BlackGem would allow Surya Tutoring to explore international market which the firm has no experience.
Surya Tutoring is a company providing college admission coaching institution based in Kota, India. It is founded and managed by R. K. Sharma, who used to be an instructor at another coaching institution, Bansal Classes. The school provides coaching service for students who aspire to admit into the prestigious Indian Institute of Technology (“IIT”) by taking the joint examination exam (“IIT-JEE”). Despite the intense competition among schools, Surya Tutoring has managed to stay competitive and become one of India’s leading tutoring school.
Even with a vast amount of student already attending these tutoring institutions, Sharma still sees the potential untapped market where he can expand his business into. This is where he needs fund and expertise from investors to help fund the growth of his business. As a sole owner of the business, Sharma does not wish to dilute his equity from the private equity deal.
Some of the future plans to tap the potential market involve expansion. As Kota is currently a center for tutoring business in India while the city itself is not one of the most populous city, there are several other big cities with potential where Surya Tutoring can expand into. Sharma also looks for international expansion into countries like Dubai and Australia.
The overall Indian market size for the tutoring industry is approximately $5.3 million. The tutoring market size for student grade 9 – 12 is approximately $4.1 million. The market is very fragmented and regional, therefore, no one…
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