MITTAL-MIKATI Marriage

What does the CEO of a company do when its best growth years are behind him, when the recessionary times fear even the greatest of the visionaries? If you're Sunil Mittal, who runs giant Bharti Airtel, in the world's fastest growing telecom market, you go shopping.

MTN would have been a significant acquisition target for many Telecom players as it is present in many developing countries and showing an impressive revenue growth of almost 40%, even higher than Bharti Airtel.

The deal if happens will provide long term benefits to Bharti Airtel as it would be able to ride the emerging market bullishness with the help of MTN, and creat a telecom powerhouse for the economies in making. The overall efficiency of Bharti would come in handy while managing the global behemoth operations and thus taking its India growth story forward to the whole world.

The deal came at right time for Bharti when after recently acquiring its 100 millionth subscriber, it could see that next 100 million customers would be far more difficult for Bharti to bring in.

TechM... Heads I win Tails You loose!!!

When back in 2005 Roubini said that the home prices were riding a speculative wave which would soon sink the economy, he was called a Cassandra. Cut to present, and he is a sage.

Satyam fraud hit the India Inc when the global economy was in shambles and ours had caught this bad cold because of their fever. But one's loss is a gain of the other. There are a plethora of those who understand that the best and infact the only way to grow given the current scene is through mergers and acquisitions. Of all, Tech Mahindra grabs the lucrative deal of purchasing a 31 equity in Satyam at Rs 58 a share which is a tenth of pre-fraud-hit satyam share price. The company is betting it can plug the leak, cut the flab and yet make a meal out of Satyam Computer Services.

The actual cost for acquiring Satyam is just the money that has to be paid towards open offer. The fund being used to subscribe to the equity will anyway be with the company itself. With the expected Rs 200 crore profit, it would take about five years for Tech Mahindra to get its entire money back. In fact, it is a low-risk game for Tech Mahindra. Satyam will also bring in non-telecom expertise for the company. TechM plans to finance the deal through debt.

The main challenge for Tech Mahindra is to maintain value proposition to Satyam clients. It needs to iron out conficts of interest. It would be useful to examine how the implicit walk away option can prove so damaging to the current Satyam shareholders and how it can be hugely beneficial to Tech Mahindra. This analysis confirms what has been argued for some time now: the decision to sell a partial controlling stake instead of selling the whole company was not in the interests of the shareholders.

The implied valuation of probably less than six months revenues for the transaction is quite low except for the unknown liabilities of the company in several US class action law suits. It is these unknown liabilities that make the walk away option hugely valuable. What makes walk away feasible is the fact that Satyam’s value is not in the form of tangible assets, but largely in the form of its customers and employees.

Over a period of two to three years, Tech Mahindra which is itself in the same industry could transfer the entire Satyam business to itself. This could be done as new contracts are signed or existing contracts are renewed. Over the same time frame, the employees of Satyam could also be shifted to the Tech Mahindra payroll. Once this process is complete, Satyam would have some cash and other assets and potentially huge liabilities.

The walk away option is that if the liabilities turn out to be larger than the cash and other assets, Tech Mahindra can walk away and put Satyam into bankruptcy. If the liabilities turn out to be small, then Tech Mahindra can merge Satyam into itself and absorb the surplus assets. Option pricing theory teaches us that the more the uncertainty (volatility) the greater the value of this walk away option. Since the uncertainty today is huge, the option is hugely valuable.

The fact there were (as some people put it) only two and a half bids for Satyam suggests that a number of potential bidders who thought that they would never exercise the walk away option (for reputational or other reasons) chose not to bid at all. Without the walk away option, the risks were simply too high.

There are two other reasons why Tech Mahindra would prefer to transfer the Satyam business to itself. First, it owns only 51% of Satyam and therefore earns only 51% of the revenues of Satyam. If the contract is renewed with the parent company itself, it gets 100% of the revenues. Second, Satyam commands a low valuation in terms of price-revenue multiples (less than 0.5 at the bid price) while Tech Mahindra commands a higher valuation (about 1.0). Moreover with the Satyam acquisition, Tech Mahindra would try to position itself in the league of the top tier software companies which command multiples of about twice revenues.

Even if we consider a price to revenue multiple of 1 for the parent and 0.5 for the subsidiary, a dollar of revenues at the parent adds a dollar to the market capitalization, while a dollar of revenue at the subsidiary adds only 0.25 to the parent’s market capitalization. The financial motivation for shifting business to the parent are very high even without the walk away option.

What this means is that while today’s sale is great for the employees and customers of Satyam and for the Indian software industry, it is not so great for the shareholders. They get very little money now (except for the 20% open offer) and might find after three years that they own shares in a shell company that has little or no value.

The shareholders would certainly have preferred a sale of 100% of the company that gives them cash now.

Gobama... faux pas???

Republicans say he will bankrupt the country... Inspite of Obama scrambling to woo top bankers and financiers to back its latest bailout plan, including the famous/infamous 'not acting in anger'maxim for the AIG bonuses, he could not escape the skeptical Americans, with the businesses from startups to global giants to drugmakers and farmers gearing up to fight the Prez's spending plan with ad campaigns and public protests...

The question: Can the markets digest this enormous amount of new paper without pushing up interest rates on longer-term securities or crowding out private sector borrowings, as investers choose the relative safety of Treasury notes over corporate bonds? If this flood of new supply hits the bond maket amid insufficient demand, bond prices will fall, driving their yields higher in order to attract buyers. The yield on 10-year Treasuries has risen from 2.1% two months ago to 3% on Mar 4, a factor that has kept fixed-mortagage rates higher than they would be otherwise.

In the current economic climate, however, the administration should be able to finance its stimulus efforts with little difficulty. That's because Treasury rates turn on two things: investors' expectations of inflation and their appetite for risk. Deflation is more of a concern right now.

By asking only the richest 2% of Americans to pay more, Mr Obama is building his vision of a more activist govt on a shaky foundation.

Then there is another school of thought which opines that it is hard to fathom how they are going to make a profound impact on reducing the deficit at a time when they don't know the extent to which govt. will need to ensure the stability of the markets and economy...

The massive spending plan in the midst of a prolonged recession.. would it actually leave the next generation with a country too inexpensive to live in ?

Funday@Delhi

What do you do when you feel the world is meaningless, when the nihilistic thoughts take over, and somehow you still want to live and are searching for that elusive reason and purpose,when the beauty of life just appears false and simply subjective and you realize you can just as easily reject and hate everything, as you loved them. But you should love life, there is no other way of living, other than perfunctory existence they say, which appears and rightly so, logically true. It’s not always about the deeper meanings and reasons, sometimes all we can do is live for the moment and pamper our hedonistic selves. So we had a day of a fiesta coming this Sunday (i.e. today), giving into which actually made us thank ourselves later...

This day was marked by our visit to local sight-seeing to Delhi, and even the scorching capital heat could not dampen our spirits to explore the places and get clicked with the gigantic moghal gifts to us... Looks like we are geared up all again for the stiffly week ahead...

Messy, precarious and percecuting... yet we are lovin' it here...

Morn folks! n with this we introduce you to the first ever blog of the first ever batch of RGIPT with an insight into the hum-drum yet ever more fascinating lectures, repetitive yet engrossing events, painfully regular yet with those 'Moment of Clarity' presentation pressure points, those never ending and ever spurring campus chit-chats and link-ups.. :P and indeed lots more, giving you a glimpse of the life@RGIPT

When the Guest Speaker, Dr. Ashok Jhanwar, asked the crowd a few questions to which no one had an answer, I knew it then there was something very big coming our way! Lately I realized that use of jargons is not limited to the MBA crowd. We were introduced to a gamut of new terms such as GRM, Petrocrats, Qualitative learning and Authentic Listening. The only difference between an MBA jargon and these terms was that we could relate to these terms, both in the semantic and emotional context.

The eponymous institute of ours, named after one of the pillars of the illustrous Nehru-Gandhi dynasty, having seen the light of the day, has yet to be taken to the zenith, with the culmination of the 2 yr program of the maiden batch of the institute... We being our own torch bearers, resort to optimism, replacing mere emotions with pure motion and breaking the Murphy's law...

Keep hitting this place to read more of my batchmates... Adios for now...