2014 provided clues if India should cling to the time-tested model of state benevolence or look forward to uncertainty
By Mohan Sule
It is not only investors who face the classic dilemma of choosing between a glorious past and a hazy outlook while zeroing in on a stock In the fading year, even the Grand Old Party had to confront this existential dilemma. Nothing brought the turmoil in sharp focus than the celebration of the 125th birth anniversary of our first prime minister. The giveaway was the jaded overseas dignitaries gracing the occasion as the great man’s great grandson without an iota of charisma of his illustrious lineage gave an angry speech about the angry new rulers of India that was becoming not recognizable day by day from the era of royals dipping into the public coffers to write off loans, subsidize essential items and distribute freebies. In return they got unquestioned loyalty from the common man, believing that remaining poor and deprived was an un-escapable fate, brushing aside any doubts of a cynical ploy to nurture vote bank politics. It was left to the worldwide web to chip at this wall of resistance, tweet by tweet. Acerbic and irreverent, Indians at last found a platform to listen to others’ opinionated voices and give vent to the innermost and often seditious thoughts about the serial scandals of the UPA government. So there was a strange spectacle of the silent troika of mother-son-and-loyal retainer being downgraded to ordinary politicians from their sanctimonious pedestal by a raucous citizenry discovering its new power to effect change. And India took a U turn.
No one understood the power of communication better than the vendor selling hot brew on a railway platform in Gujarat. If an ordinary commodity like tea could be packaged and marketed with the promise of a shakeout from the slumber of pessimism, then surely the country was ready to buy a dream of electricity on tap, smooth roads, low-cost houses and jobs aplenty. The capitalization of the demographic dividend paid off in May, at least for the investors. After the scare of food inflation going out of hand due to below-normal southwest monsoon, the market surged on expectation of bumper earning going forward. Steps to open up to more FDI were seen as transformational, never mind the small issue of retail. The surest sign of a bull market is when tech company incubators switch to dishing out stock tips guised as investor services startups offering clarity on macro mumbo jumbo. Like the mesmerizing babas, some of them now ensconced behind bars after revelation of their human foibles, how many corpses are littered behind the barricade of pay walls built by these Internet investment gurus, with their attention spanning intra-day, will be known only after a Sebi crackdown. Serendipitously, oil prices nearly halved from the peak and the wholesale price index growth dropped to zero by mid December. The taunts of missing-in-action acche din by the opposition soon lost resonance as bond buyers made merry at the expense of a stubborn central bank. Instead the attention of the nation was riveted by celebrities taking the broom for a Swachh Bharat. The Digital India, smart cities and Make-in-India campaigns reverberated around the globe despite no breakthrough on land acquisitions, environmental clearances and labor laws. Yet, the social inclusion program of Jan Dhan Yojana, without a rupee of giveaway, proved to be a smashing success, shutting up the nitpickers, and throwing up the nation’s first Teflon head of the government and second only to the US president of the Good-Morning-America fame.
But every dream has to end. Even after six months of an energized establishment, Corporate India is still awaiting a trickle, leave alone the anticipated gush, of infra orders. The market that seemed unconcerned about the US central bank raising interest rates next year and the resultant slowing of foreign inflows into emerging economies, got panicky on Chinese blues and Russia’s rouble rout and skidded along with the currency. Eruptions in the euro region fuelled anxiety about how oil exporting countries would cope as their revenues shrink. A low-cost airline appeared to be grounded soon after the aborted takeoff a high-cost one. Hardly had one PSU sale flagged off than the market looked poised to upend, raising worries about fiscal deficit, on the mend due to the commodity price crash, if the divestment target is not met and if the exercise is jinxed. Once coveted, then becoming a laughing stock, the global turbulence hinted of a comeback of gold as a safe haven just as the dollar was post-2008 credit crunch. Why stocks are tumbling despite low inflation and loss-making digital businesses getting cash infusion, while offline entities are not sure if the primary market will be enticed by historical performance, perhaps answers the question nagging investors whether to cling to the past or look forward to an uncertain future.
Tuesday, December 30, 2014
Tuesday, December 2, 2014
Botched up
Regulators, companies and investment bankers have to share the blame for the crumbling of M&A deals
By Mohan Sule
Besides injecting life into the primary market, a bull market triggers mergers and acquisitions. After a demand slump, companies dust off plans to expand to capture the buoyant economic mood. Most primary market offerings are to raise funds for organic growth. Friendly and hostile takeovers cut short the incubation period of a grassroots venture. For investors, both routes offer exciting opportunities for wealth creation. A reasonably valued public offering gives ample scope for appreciation on listing as well as a few years later. The inorganic route provides an exit window for the shareholders of a weak prey or an entry into a strong company. The market is happy that cash is being utilized by the predator-company to grow its share, helping improve the return ratios. Yet there is a downside, too. There could be a sudden change in the business environment and delays in execution. A target that seemed apt could prove to be a cumbersome burden due to difficulties in enmeshing different work cultures. Depletion of reserves would mean insufficient spare change to exploit new trends. In addition to all these obstacles, some new problems have cropped up going by a few recent cases. Take the unraveling of the Rs 700-crore Bharti Airtel-Loop deal. Bharti would have consolidated its leadership position in the telecom space, with the Mumbai-based services provider’s three-crore subscriber base. Users of the struggling Loop would have got better services. Despite the obvious advantages, the agreement failed to get regulatory approval. The hitch? Loss of revenue to the Department of Telecommunications as Loop subscribers would be ported to Airtel numbers without paying the mandatory Rs 19 fee.
During the wait, Loop’s subscribers dwindled to 1.2 lakh. Bharti’s stock ended the day of the announcement with a loss of nearly 3%. Loop’s licence is set to expire end November and DoT might not get the Rs 800 crore that the services provider owes it. This is not the first time that Bharti’s shareholders have seen a botched up acquisition. India’s largest telecom company by subscribers gave up the idea of taking over MTN in September 2009 as the South African government wanted India to permit dual listing. This would have allowed sharing of revenue and profit by the two. The cash-cum-stock deal gave Bharti a 49% stake in MTN in return for the latter getting a 36% economic interest in the Indian carrier. However, the Reserve Bank of India refused to concede as the arrangement implied capital account convertibility. So the US$24-billion alliance that would have created the world’s fourth largest telcom services provider covering 24 countries with 200 million subscribers crumbled after eight months of complex negotiations. Trading in the MTN stock had to be suspended for the day by the Johannesburg Stock Exchange after slumping more than 5% on hearing the news. These two cases do not show regulators in a positive light. Many times, the market throws up new situations. Regulators have to act speedily and find a via media till the guidelines are amended to reflect reality.
DoT and the RBI could have shown some flexibility. Bharti could have been told to deposit the portability charges with the regulator till the resolution of the issue and the RBI could have asked Bharti to invest the profit share of MTN in India for the time being. Apart from the regulators, the eagerness of companies to grab opportunities to expand market share without reading the fine print is disturbing. Apollo Tyres’s $2.5-billion (Rs14400-crore) deal to acquire Cooper Tire was called off after the US tyre maker sought judicial intervention to expeditiously close the merger. The Indian company termed Cooper’s decision as “inexplicable” and “a diversionary smokescreen, an unfortunate acknowledgement” of the inability to meet the obligations necessary to complete the transaction. These instances of ambition and impatience overtaking prudence demostrate sloppy due-diligence by investment bankers. The Sahara-Jet Airways acrimony over the deal price after the merger took effect and the bitter experience of Daiichi Sankyo following the takeover of Ranbaxy illustrate that inorganic growth is much as a risk factor as a wealth multiplier. The shareholders of Apollo were saved from a bigger disaster had the Cooper acquisition gone through. Ranbaxy shareholders were bought out at a hefty premium by the Japanese drug maker. Those that remained found a new parent in Sun Pharma. Not everyone is so fortunate. May be the regulator should insist that acquirers contribute a certain percentage of the deal amount to an escrow account with a three-year lock-in to compensate for the loss in market value due to costly missteps.
By Mohan Sule
Besides injecting life into the primary market, a bull market triggers mergers and acquisitions. After a demand slump, companies dust off plans to expand to capture the buoyant economic mood. Most primary market offerings are to raise funds for organic growth. Friendly and hostile takeovers cut short the incubation period of a grassroots venture. For investors, both routes offer exciting opportunities for wealth creation. A reasonably valued public offering gives ample scope for appreciation on listing as well as a few years later. The inorganic route provides an exit window for the shareholders of a weak prey or an entry into a strong company. The market is happy that cash is being utilized by the predator-company to grow its share, helping improve the return ratios. Yet there is a downside, too. There could be a sudden change in the business environment and delays in execution. A target that seemed apt could prove to be a cumbersome burden due to difficulties in enmeshing different work cultures. Depletion of reserves would mean insufficient spare change to exploit new trends. In addition to all these obstacles, some new problems have cropped up going by a few recent cases. Take the unraveling of the Rs 700-crore Bharti Airtel-Loop deal. Bharti would have consolidated its leadership position in the telecom space, with the Mumbai-based services provider’s three-crore subscriber base. Users of the struggling Loop would have got better services. Despite the obvious advantages, the agreement failed to get regulatory approval. The hitch? Loss of revenue to the Department of Telecommunications as Loop subscribers would be ported to Airtel numbers without paying the mandatory Rs 19 fee.
During the wait, Loop’s subscribers dwindled to 1.2 lakh. Bharti’s stock ended the day of the announcement with a loss of nearly 3%. Loop’s licence is set to expire end November and DoT might not get the Rs 800 crore that the services provider owes it. This is not the first time that Bharti’s shareholders have seen a botched up acquisition. India’s largest telecom company by subscribers gave up the idea of taking over MTN in September 2009 as the South African government wanted India to permit dual listing. This would have allowed sharing of revenue and profit by the two. The cash-cum-stock deal gave Bharti a 49% stake in MTN in return for the latter getting a 36% economic interest in the Indian carrier. However, the Reserve Bank of India refused to concede as the arrangement implied capital account convertibility. So the US$24-billion alliance that would have created the world’s fourth largest telcom services provider covering 24 countries with 200 million subscribers crumbled after eight months of complex negotiations. Trading in the MTN stock had to be suspended for the day by the Johannesburg Stock Exchange after slumping more than 5% on hearing the news. These two cases do not show regulators in a positive light. Many times, the market throws up new situations. Regulators have to act speedily and find a via media till the guidelines are amended to reflect reality.
DoT and the RBI could have shown some flexibility. Bharti could have been told to deposit the portability charges with the regulator till the resolution of the issue and the RBI could have asked Bharti to invest the profit share of MTN in India for the time being. Apart from the regulators, the eagerness of companies to grab opportunities to expand market share without reading the fine print is disturbing. Apollo Tyres’s $2.5-billion (Rs14400-crore) deal to acquire Cooper Tire was called off after the US tyre maker sought judicial intervention to expeditiously close the merger. The Indian company termed Cooper’s decision as “inexplicable” and “a diversionary smokescreen, an unfortunate acknowledgement” of the inability to meet the obligations necessary to complete the transaction. These instances of ambition and impatience overtaking prudence demostrate sloppy due-diligence by investment bankers. The Sahara-Jet Airways acrimony over the deal price after the merger took effect and the bitter experience of Daiichi Sankyo following the takeover of Ranbaxy illustrate that inorganic growth is much as a risk factor as a wealth multiplier. The shareholders of Apollo were saved from a bigger disaster had the Cooper acquisition gone through. Ranbaxy shareholders were bought out at a hefty premium by the Japanese drug maker. Those that remained found a new parent in Sun Pharma. Not everyone is so fortunate. May be the regulator should insist that acquirers contribute a certain percentage of the deal amount to an escrow account with a three-year lock-in to compensate for the loss in market value due to costly missteps.
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