Theory of Pattern Recognition in action.

Theory of Pattern Recognition in action.

My mother abandoned me a few days after my birth, silly woman. Why anyone should go through the trouble of giving birth only to give up the child for adoption is beyond me, but that’s the way it is in the social strata I come from. However, luck was on my side and I was adopted by a decent man with sophisticated tastes in things. As you have guessed by now, this story is about Ranjan Mudaliar and not about me. When Ranjan took me into his household, his son Vikram who was just a few years older than me was already there,. Naturally, Vikram and I took to each other and we were inseparable from day one. We went to the park together, we ran around the playground racing each other and ate all our meals together. Fair to say, I was treated very much like a younger son in the family and spoiled silly. In all matters except one, and that still irks me after so many years. When it came to schooling, Vikram was sent to Don Bosco the best high school at that time, and poor me was simply home schooled. Probably, Vikram’s father thought I was deficient in some noticeable ways and a proper school was not the right place for me. There is a phrase for it in these politically correct times: you will agree ‘differently abled’ is a posh way of saying I was dumb.

Years rolled on, and I grew up to be a strong, hulking boy. Fast and powerful. I left Vikram, poor chap, far behind in the race track. On top of it, thanks to my lineage I had a majestic stance which while non threatening seemed to say ‘I can take care of myself, thank you’. I know I am showing off a bit, but what the hell, I was happy about the way I was shaping up. I may not know the alphabet, neither arithmetic, but I had developed by then a knack of assessing people and situations. If you don’t believe me, come with me and I will demonstrate it for you. I can go into a room, observe the people in there, quickly study their facial expressions and physical stances and tell you what is going on there. I can spot the baddies in no time at all, and instantly assess a developing situation, able to predict where it is going to go. Yes, the more bookish of you would call this skill pattern recognition: what people get at the age of fifty or thereabouts, I had it me at the age of eight. How is that for an unschooled brute of a boy.

Is this leading anywhere, some of you are asking. Be patient. Pattern recognition is everything to do with this story I am going to narrate. Before we do that, a few words about the man who rescued me from the fate of an abandoned child. Ranjan Mudaliar is what I would call an intelligent investor in the private equity format, taking controlling stake in struggling companies along with a syndicate of investors, manage them for better performance and then divest them for 5x or even 10x returns. No, no, he is not an investment banker a much derided specie. One of the Allens, Charlie or Herbert I forget which one, once memorably said ‘I can teach my dog to be an investment banker on a long weekend’. While there is some truth in what Allen said about I-bankers’ lack of skills, he maligned dogs rather unnecessarily in my opinion. Coming back to my story, Vikram’s father in sharp contrast to an I-banker is a quintessential turnaround artist, adding value to companies by infusing management bandwidth to run them properly. As I said, he works together with other investors, a diverse bunch of them, depending upon the deal at hand. Therefore a sound assessment of his fellow investors in a project is as much a pre-requisite for success as doing proper due diligence of the investment proposal itself. If the key investors who put up bulk of the money for an investment are not aligned in their expectations of what they want to get out of the project, and more crucially how to go about getting their returns, the investment consortium will break up in no time. It is in the finer aspects of judging people our man suffers from a fatal weakness: Vikram’s father, for all his investing prowess, has a blind spot there and in his keenness to see a project through, he sometimes consorts with unsavoury characters. From time to time, he has been cheated by his fellow investors a few times, and in those instances he escaped with some loss of profit, with no more serious damage than a bruised ego. Observing him closely, I was telling myself ‘one of these days our man is going to get it in the neck’. And boy, did the day come sooner than I thought.

Soon enough, in walked a truly bad character named Malhotra, bringing with him an investment proposal with a tantalising prospect of making a killing if we did it right. Malhotra is as polished as they came, good accent and all, with a good turn of phrase suiting the occasion. As he came into the library, which is where Ranjan conducted most of his official work, he was a little taken aback to see a grown hulk like me in the room. Ranjan did the introductions in the usual format saying, ‘Molly, I would like you to meet Jimmy, my second son for all practical purposes. He is with me day and night and keeps an eye on things around here’. If Malhotra had any opinions on seeing a dog in the middle of discussion on sensitive financial matters, he kept them to himself. That was my first moolakat with Malhotra, and I must say I didn’t like the vibes coming out of him. 

As I curled up in my favourite corner, faking sleep, I kept an ear open for what was discussed. Malhotra was clearly overselling the proposal, which was already a very good one to begin with. The company he brought in was very much underperforming, therefore if it was managed well after acquisition it had a potential to provide returns big time. This is exactly where Ranjan Mudaliar had the opportunity to prove his management skills, and earn a premium separate from the usual investment returns he would get for his money. Management gurus would tell you that acquiring a company is easy but running it after taking it over is the more difficult part. Integrating the management after acquisition is where Ranjan makes his money by bringing his secret sauce which ensures all performance assumptions are achieved. Naturally he charges a premium for his work. Malhotra and Ranjan were therefore dicking around on the relative share of the spoils in the deal. Ranjan was putting up a good fight. ‘Look here, Molly, while this company has a good potential, right now it is in the dumps; unless someone, which means me, brings out the positive features in this deal by turning the company around, we will only get small time returns. Therefore, for my management efforts I must get a seven percent premium on the increase in top line valuation after our acquisition. Please note, this is in addition to the returns on the five percent stake I am willing to put into the consortium. Seven percent is only fair, given the amount of hard work I have to put into this project’. ‘Come on, man, I am the one bringing this deal in and I should also get a premium then’ Malhotra countered Ranjan’s arguments. Finally they settled at a five percent premium on the top line valuation increment. Five plus five is a phenomenal amount of money, let me tell you, when you consider that the increase in market cap is expected to be around a thousand Crores. 

While Mudaliar might have got what he wanted, or nearly enough, I didn’t like the way Malhotra was playing the deal. It looked to me, from where I sat, that Malhotra was too keen to conclude the deal and get Ranjan involved in the management aspects of the company. He appeared to be overly enthusiastic, too salesman-like for my tastes and I could see that he didn’t put up enough of a fight to contest the premium. Was he taking the premium to be paid seriously or what, I remembered thinking at that time. If you don’t have any intention of paying, you don’t waste time arguing the point, is my short point. Anyway, mark it down as my data point number 1 in this episode. After the meeting was over I gave Ranjan a meaningful look, openly disapproving of this Malhotra character; but he was too absorbed in a deal induced euphoria to notice my discomfort. 

The acquisition went through, with everyone including Ranjan putting up their upfront investment to conclude the deal. He went to work right after that, lining up first class team members to man positions like the CEO, CFO and the CTO; together they executed a classic turn around manoeuvre with focus on costs, efficiency, quality and customer service. The exact details are unimportant here, but Ranjan’s magic seemed to work. Within a few quarters, one could see the once moribund company coming to life in at dramatic fashion. On key factors like sales increase, gross margin percentage and financial ratios, the company was hitting numbers once thought to be unattainable. After about six quarters it was clear that Ranjan was going to beat the threshold limit for the premium and that thought was making Malhotra very uncomfortable. While he was pleased that their joint financial bet on the company was going to yield results big time, he could not stomach Ranjan getting a payout much bigger than his.

There were of course many meetings during this time between Ranjan and Malhotra, which I silently witnessed from my perch in the library. These meetings were notable for decreasing levels of cordiality, primarily on the premium account. ‘While I am happy that the company is doing well and we are well on our way to beat the initial expectations, I am still pissed off, Ranjan. At your performance premium of five percent you sneaked into the deal for yourself. You made it appear that the management inputs are very difficult to achieve at that time. And here we are now. Within a few short quarters, with a few selected manoeuvres you have pulled off the turn around. If it was all so easy to do, what then is the point of the premium? You have simply cheated the members of the consortium’ Malhotra was going in this vein. In every one of the monthly investors meeting. On those occasions Ranjan would would patiently explain, ‘Molly, you are intentionally over looking a simple fact. Which is, when we took it over the company was a basket case, with no hope of revival. It was looking so hopeless, there was no other investor on the horizon who would touch the company. And that is why you got it at a bargain basement price, let us not forget that.’ Malhotra countered saying, ‘if the job was so difficult how did you get the company to turn around so fast? There is something fishy about it, then’ 

Ranjan looked at Malhotra with disgust and said, ‘Man, you don’t seem to understand the rudiments of management. It appears simple to you, but the whole effort has many years of experience, intelligent observation and matching the right actions with the needs of the situation. I brought in the right team, man, and pressed the right buttons for action to get this result. Now that you see spectacular results, it all seem very simple to you. Think for a moment, what if we had failed to get these results, or get them much more slowly. Who would you have blamed for lack of results? I have no doubt that you would be first in line to blame the whole thing on me. So why crib about what is rightfully due to me after getting all these good results?’

These monthly meetings went on the similar format, with Malhotra demanding the retraction of the performance premium for Ranjan with increasing vehemence. I would say these were data points 2, 3, 4 till 10. After every meeting which ended like this Ranjan was muttering under his breath, ‘why have I got into this deal with this sleaze bag? I should have taken Jimmy’s signal from the very first meeting.’ Anyway there was an end in sight when the investment consortium gets out of the company through a sell-off.

After nearly three years of building up the company, the day for big pay-offs arrived. There was a buyer in the horizon for the company willing to pay about 12 times what the consortium paid earlier. The investment consortium was pleased with the offer, as it would mean great returns for all its members. All but one, I mean. Malhotra was still irked by the fact that Ranjan would be eligible to get his 5% premium for his performance, and was determined to get his way. He pushed for a final meeting with Ranjan to resolve this matter once and for all. Ranjan invited Malhotra for a friendly chat one evening. He hoped that Malhotra would soften up a bit looking at the final gains he himself was making in the deal; he offered him a large shot of Bowmore, a top of the line single malt, before getting into details. I was in my usual corner, acutely aware this was going to be a crucial meeting, putting an end to all this rubbish talk about withdrawing the premium clause.

All these fine pleasantries cut no ice with Malhotra. Right off the bat he started off in a threatening mode, ‘Look here, Ranjan. If you don’t withdraw the premium for yourself, I will not allow you to proceed with the sell off. This is your last chance’. Ranjan was of course unmoved, ‘Come on, Molly, you can’t be serious. Why should all other members of the consortium, including myself, suffer for your unreasonable attitude? If you pull any stunt like blocking this deal, I will invoke the majority decision clause on any deal closure. You know very well that the majority of consortium members, more than 75%, are itching to close the deal and they have no objections to my hard earned premium, whatever you say’. ‘Why don’t you at least lower the percentage from five to two? That would be fair, given how quickly and effortlessly these results were achieved’ Malhotra persisted. Ranjan gave a derisory laughter at this suggestion. ‘Molly, things look simple and effortless after they are achieved; if they were so easy, why didn’t the earlier management team achieve them?’ It went on like that for about a couple of hours. By then it was close to midnight. Ranjan said with a pained expression, ‘Molly, I won’t budge from my five percent, which is rightfully owed me as per our agreement. Frankly, I am beginning to get pissed off that you would deny me my well earned returns, without looking at how much you are going to make yourself. Anyway, do whatever you have to do with this deal, I am through with you after this deal’.

Malhotra realised the finality of these words from Ranjan. His face distorted with anger he shouted at Ranjan, ‘Oh, is that so? You will have to answer for this, man’. So saying he pulled out a bluish revolver from his coat pocket and was beginning to wave at Ranjan. At that very moment, I executed a clean and powerful jump, kicking my hind legs on the carpet, and caught Malhotra’s arm holding the revolver. I told you already I am well built chap who packs a lot of force. Writhing in pain, and looking at the blood spurting out of his arm, Malhotra was crying out in panic. In that melee and confusion the gun went off and he shot me, the son of bitch. As I was blacking out, I could hear the movement of servants coming into the library, overpowering Malhotra and taking the gun away from him. 

If you are into analysing why disastrous airplane accidents happen, you would know there is always a sequence or cascade of events finally culminating in the big boom. No big accident happens by itself all of a sudden without giving a pattern of clues as to what is going wrong in the system. Now look back at the pattern of interactions between Ranjan and the wretched Malhotra. If a dumb creature like me could foresee what was going to happen, why couldn’t a well educated and sophisticated man like Ranjan figure it out? That is all I am asking. 

A V Ram Mohan.                   16 October 2022