Indian business strategy - Follow up

This is how TATA wants to buy Corus – a leveraged buyout. It entails creating a SPV and raising debt on the strength of the to be acquired company i.e Corus and then transferring the shareholding of the acquired company to SPV. Though this is a less risky strategy as the debt so raised are not the acquirer’s books, it does have many pitfalls especially in case of Indian companies like TATA who are fond of acquiring much bigger companies then themselves.

Stock markets worldwide are on highest ever and so are commodity prices. This may not sustain for long especially in a commodity like Steel which has a highly cyclical demand.Once price of steel and profitability drops so will market valuation and the trouble starts.

Nevertheless if there are substantial benefits that can be accrued from the acquisition like economics of scale, cheap raw materials ( TATA have access to captive mines) and opening up of new markets , new technology etc then it is worth it.

The Grand Indian Business Strategy

So now Indian companies are on a buying spree across the world . One can see TATAs , Ambanis ,Vijay Mallyas,Videocon, Bharat Forge, Ranbaxy and even grand old PSU powerhouse BHEL contemplating outrightly buying US and European Companies. In fact TATAs have taken over roughly 30 companies in last five years. That is Great no doubt about it!

Going through the strategy adopted by Indian companies reminds me of the strategies adopted by Japanese and Korean companies about decades back .Koreans created so called chaebols – a group of family owned companies with a bank as the central company .What followed was very interesting .The risk with these chaebols is if the central bank collapses, it takes the chaebol with it and the risk materialized with many of them. Take the Japanses. They created capacities in last 90s with hope that they can utilize them and overtake US within a decade. But the capacities were never utilized and what followed was a prolonged recession.

Now lets look at the theory.

A merger/acquisition will be successful only when certain conditions are fulfilled :

• The so formed entity is better off Financially or Technologically. In case of technology , it should either suppress emergence of new technology or make a leader in a particular technology or bring down R& D costs .However all this should finally reflect in better financial performance.

• Opens up or creates retail network or increases shelf space or reduces the same for competition
• Reduces Overhead costs substantially
• Brings about consolidation in either market or suppliers or both and thereby causes expansion of margins
• Opens up a potent new market or brings up the prospect of rapid expansion in a new market

All these benefits should come at the right price for an acquisition or you carry a huge risk of carrying a debt in case you are financing the acquisition through borrowing.

Looking at Indian companies it seems that they do carry a huge debt repayment risk as most of them are financing the acquisition through borrowing. In fact acquisition has become more of a fashion nowadays . It causes so much nostalgia and xenophobia . It makes big headlines and everybody loves that .But then nothing succeeds like success and I just hope that Indian companies are not carried away by the hype. But there is no room for celebretisation and I hope they understand and imbibe the basics.

Complex problems AND Simple solutions

I was going through the report submitted by a committed to HRD ministry about reforms changes and new additions to IIT’s. list A few existing colleges will be turned to IIT’s etc,etc But what caught my attention was this suggestion that all graduate level courses in IIT be converted to integrated post graduate five year duration courses for example, there will be five year integrated M.Tech. instead of flagship four year B.Tech and one and half year M.Tech. I think this is a very welcome and practical step.

For one it imparts what IIT’s are meant for .Serious Engineering education for serious and interested Technology students. But there’s more than what meets the eye. It’ll also discourage students who want to do change field and do MBA or IAS. They can well do B.Tech in other engineering colleges and save a precious year .What about students who want to peruse PG courses abroad especially in US? Well now students coming out of IIT’s will all be PG and as such there’s no need for these courses for these students. Some ambitious ones can do that but they would have lost one year to their peers from other engineering colleges. A dreaded prospect indeed ! Come out of a premier technological institute and be still behind by a year to your batchmates !!

This is really a win - win formula. Those who just want to do their base degree as engineering can do that from any other engineering colleges so that IIT’s are spared for only the one who are interested in Technology .Seems interesting!

For years academicians were asking for some restrictions and measures be put on brain drain and non serious technology students in IIT like asking these students to do a compulsory job in India for five years etc sighting reasons like waste of taxpayers money and resources of a poor country. But we did not put these restrictions even during hopeless period of 1970-90 when we had literally no hope for ourselves with the so called Hindu growth rate of 3% . But then putting such socialistic practices may really not be the best option in a democracy .A clear cut policy like this which gives you options will ensure that there is no imposition of frustrating rules while ensuring that real objectives are met .

That’s what I always say .It ‘s all about options!

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