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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India - An Analysis ( Independence Dy Special)

On the occasion of India's Independence day would like to share some thoughts about India

What we need to do?

• Grow continually to be a economic superpower and lift millions out of poverty
• Get rid of corruption
• Set our administration right - make it professional
• Build world class universities and education system
• Create a good social security system . It is almost non existent today
• Be ahead in cutting edge technology and innovation and build a society based on scientific temper
• Get rid of ' we were old superpower and have world's best culture mania' and learn to respect others culture
• Think big and do Bigger things
• Develop strong and independent institutions like Election Commission, Supreme Court. We need more such institutions. Look at CBI,Dept of Revenue and Tax like CBDT, CVC

What we can be proud of:

• Financial services system - one of the best in the world .I think this is the biggest asset that we can leverage currently
• Technically sound manpower - though very less as compared to our population we have one of the very best. Another asset .We know it all
• Judicial system - for financial and dispute resolution ( we have a very bad system for criminal justice)
• A good democracy - though most of it is dominated by politicians of 60's and 70's mentality. It can be considered a big success if we look at our neighbours. Most of them are either autocratic states or banana republics.

What can we hate about us:

• Castism - this is the biggest problem and worst baggage of history that we have
• Regionalism - another old baggage
• Corruption - endemic
• Indiscipline and bad etiquette - we do not follow any rules from standing in a queue to traffic rules .We also have to improve a lot on mannerism. Just look how our leaders talk filth.
• Tag of a soft state - we really do not value a life
• Indian crab mentality - this has always pulled us down
• Not taking ownership - we blame everything on government and conveniently forget that we only elected it .Can we take some matters in our control?

Fighting for Nothing

I was just going through India’s boundry disputes recently with its two big neighbours China and Pakistan. They are Aksai Chin, Arunachal Pradesh with China and Siachen , Sir Creek with Pakistan. I can find a very basic similarity with all these places geographically. Aksai Chin currently under Chinese control is a barren white desert where there is no vegetation and in fact it’ll be challenge to find grass in this region. Arunachal Pradesh is a sparsely populated hilly and remote north eastern part of the country. Now comes the famous and known ones . Siachen glacier is world’s coldest battle field with more soldiers dyeing because of cold than by battle fatalities.Sir Creek is a marshy island which is difficult to demarcate and is a bone of contention between India and Pakistan.

So as a country we are fighting for pieces of real estates in which nobody will be interested . This really makes no sense economically although we fight because we think it is our land , basically for pride and national honour etc. Though this sounds incredibly correct we must recognize that we are spending resources and energy where it is least required.

Indian Economic Reforms? Can they be hold hostage by allies?

In the past few days Central Government has been forced to withdraw disinvestments in Naveli Lignite Corp by belligerent allies. Media has branded that the reforms have come to a standstill given the developements. Such comments by the media sometimes make me wonder whether disinvestments in super profitable PSU's only means reforms. Such views only give a lopsided and false view of structural adjustments needed for the Indian economy.

SO what can the government do in face of stiff opposition from the allies? Can the reforms be made in current situation where government has the constraint of allies and left.

Well...It is all about creating options... being sincere to the purpose

I think using disinvestment as a tool to bridge fiscal defecit is not going to solve any purpose. Britain sold it's most profitable PSU's in 80's under Iron Lady Margaret Thacher now find that they now control none of them. I don't know how much did this selloff help to bridge fiscal defecit, but selling these companies at bargain price is not a good idea.

The fiscal hole is too big to be bridged by selloff of profitable stocks. This will neither help solve the fundamental probs faced by PSU's.

I think government has to look at the option of strengthening the PSU's by:


allowing to raise money from the market rather then selling own share

This will raise money for PSU's which they can use for their expansion plans and investments etc. In fact even common minimum prog of UPA supports this.

Giving operational autonomy to PSU's

This is an old and off repeated issue. But franky speaking without giving autonomy to PSU's and asking them to face the competion is like hitting a person with his hands tied in the back.
I sicerely believe that PSU's have never been allowed to run as business ventures. What PSU's require are good management and consequently good resources . The very first step is then bringing all PSU's under one ministry I call PSU ministry.This ministry can also act as an agency to make the PSU's to follow best practices that it can itself set. I hope this will also free PSU's from 750 odd laws and regulations that they have to follow currently.
The second step would be to lift the ristriction on salaries though I think this can be achieved by the proposed ministry.

Looking at these options I do not think any ally will oppose these reforms as they are inherently do not cause any opposition.

My Image

Failed State Called Maharashtra

This title itself would make many wonder how the so called most developed state in India a failed state!! Maharastra y no means is Bihar or UP. I must be jonking Right.Well I'm not.

Consider these Facts:

Vidarbha has only 4% agricultural land under cultivation as compared to about 80% in western Maharashtra.Per capita income is 30% of that of western maharashtra.About 600 farmers have committed suicide in the region in last one year alone due to failed crops and still counting.. The region has to cope up with Naxal problem in Gadchiroli,Chandrapur and Bhandara.

Now go straight to Mumbai.

There has not been a single big Infrastructre project for Mumbai in last century! except for metro rail this year.Travel by local rain here is simply inhuman. Country's commercial capital has a marginal growth rate when country is experiencing double digit growth. 65% of city's population is living in slums .More people are shifting to slums as it becomes more and more difficult to live in a flat due to cost of living. All this because there has been no focus on Mumbai . It has been milched for money for so long and since people here are professional they are not bothered about all this.


What ails Maharatra?

Well the state is simply unmanageable if you do not have priorities.The challenges that Mumbai faces are not the same as what Western Maharastra faces, Vidarbha has very different developemental needs as compared to other parts of the state so does Marathwada.
The govt is only interested in developement of Sangli,Satara, Pune ...In fact the only region that has benefitted because of creation of Maharashtra is Western Maharastra thanks to so called 'Sugar King Politics'.

What can be done?

If I think from most efficient administration point of view :

Seperate states Vidarbha, Mumbai Metroplitan Region , Marathwada and Western Maharasthra and Konkan - based on administration challenges.