Tata Steel’s Corus Poker

This article is in response to the latest events unfolding after Tata Steel made an offer for acquisition of UK based Corus Steel with the initial valuation of $8.2bn, costing 455 pence per share. This itself was a mesmerizing piece of event, as the market cap of Tata Steel is $3bn, and in addition to this outrageous offer, the finance used for this acquisition does not come from the kitty of the company but it’s borrowed. So there will be huge debt on the new amalgamation right from the 1^st day of existence. But the lucrativeness of the deal for Tata Steel was that they would be jumping to 9^th spot in the world, capacity wise.

This was never an easy task, but to add to the misery Brazil based Steel giant CSN started showing interest in the company. Speculation was that they were to offer 475 pence per share raising the valuation to $8.56bn. the fact that it was just a speculation and not a formal offer made to the management. The Corus management was happy receiving the offer from Tata Steel, this new involvement was a windfall for the shareholders. This shows the real worth of the company expected in the local market. There was no real hope of the company growing to that extent. Here started the game of poker between Tata Steel and CSN.

With this new speculation in the market Corus postponed their EGM (Extraordinary General Meeting) where the proposal was to be kept in front of the shareholders for consideration and confirmation. But before CSN could make formal offer Tata Steel raised the stakes higher to $9.16bn with 500 pence per share. The game was getting hotter but the fact is that Tatas were showing immaturity and rookie inability to bluff. They just blinked too soon and as a consequence CSN came up with 1^st formal offer of 515 pence and valuation of $9.6bn. CSN comes with firm financial support, so the chances are that they could still raise the stake higher. Now Tatas should be showing sense and calling the game instead of try and call bluff on CSN and go in for more stake.

Tatas are already biting more than they could chew, they should not try and bite more, or else they’re bound to lose their teeth. There are and will be other options available for them to acquire, they should try and find them, as there is apparent need to consolidate by inorganic means, with the way shown by Mittal Steel. Let us hope there will be no more hopeless search for synergy only for the sake of it.

IPO Era is Back

Today Aug 28, 2006 we just saw an amazing listing of Tech Mahindra shares on our big stock exchanges. They had issued 15mn shares and the offer price was Rs.365/-. Today it was the D-day for Tech Mahindra as its shares were to be listed today. And guess what, it opened huge 47% above the issue price and later ending the day on price of Rs.554/-.

What does that signify? One – the setting of price band was too low. Reason – may be because of recent IPOs performance. Many of them couldn’t even get fully subscribed. Latest was Deccan Aviation, which still is trading around 2/3^rd of issue price. These incidents could have forced the Financial experts to set the price band little lower, so as to get oversubscribed. But if you consider US point of view, they consider that if an IPO gets oversubscribed, then that means that the experts failed to assess the market sentiment. But here we consider that more the oversubscription, the better. In a sense this kind of sentiments allowed the IPO scam in the first place.

Two – it’s about time that we will again be seeing huge IPOs and even bigger gains on listing and in turn money laundering. Just hope that we don’t go back to the IPO scam. Now SEBI needs to be even more cautious as now have IPOs like DLF. We might see another listing where the market cap would soar in matter of days.

Reason to this could be that we are nearing the all time highest level of markets, so the secondary markets seem out of steam and not attractive any more. So the investors are turning to the primary market. So next time you get the opportunity to invest in an IPO, don’t let it go. You might be missing out on huge profit.

Shallow Pockets

If you have not noticed, Reserve Bank of India (RBI) has raised the interest rates again by 25 basis points. Well, for the start I was confused whether this concerns to Finance or Economy! But certainly this has to hurt more to the pockets of salaried class than the country as on whole-scale. And we got proof of it yesterday (Aug 1, 2006). HDFC Bank and PNB raised interest rates for home loans. Now floating rate is 9.50% and fixed rate is 11.00%. For better understanding here is table with courtesy of The Indian Express, dated Aug 2, 2006.

For 20-year Rs. 10 lakh loan
Old EMI	New EMI	Monthly rise	New rate
FLOATING
8997.26	9321.31	324.05	9.50%
FIXED
9983.80	10321.88	338.08	11.00%
For 15-year Rs. 15 lakh loan
FLOATING
15214.00	15664.00	450.00	9.50%
FIXED
16581.00	17049.00	468.00	11.00%

Times have changed drastically, you remember once the Floating rate was 7.00% and fixed rate was 8.00%. What does it imply? If you have taken loan with 7.00% floating rate it now works with 9.50%. So your EMI would now have increased by about Rs.2000-3000 or if you want to keep the EMI constant, the repayment period would have increased by about 4-6 years on a loan of Rs.15 lakh. Now you can tell how much it would have hurt to a normal salaried employee. And this is not enough the prices of fuel have soared by about Rs.15. The prices of essential commodities have gone up taking inflation to 5.5%. Added to that, the real estate prices are soaring without any prevailing sense. It would be stupid enough to buy a house at this point, but tt is the height of absurdity to buy a house on home-loan at this stage.

On the other hand the interest rates of Fixed Deposits are about 8.00% for 1-year onwards. The signal is clear from the RBI. It wants people to stop borrowing money from the banks and instead wants them to save money in FD’s. It is a signal to dampen the spending of the consumeristic market. If this signal from the RBI is not heeded and the borrowings keep going higher then overheating of economy is guaranteed, that would spell trouble for Indian Economy and in turn to normal person’s pocket.

So for the time being sensible thing would be to retain money as much as you can, no matter how deep your pocket is! Obviously, this condition is not eternal, it will change back, but we have to give some time for them to change. So don’t venture into buying houses now, just sit on the wall for the time being!

Jet - Sahara synergy failure

The point of concern is the latest event unfolding where the proposed acquisition of Air Sahara by Jet Airways failed to secure. There analysis needs to be done as why it could not work out. We have seen many M&A’s failed to secure the synergy they hoped and targeted to achieve, viz. AOL – Time Warner. Are we about to see similar M&A’s failures in India? That is surely not a good sign for growth!

Well that just might be the case, as many Indian companies are on buying spree. Number of acquisitions in these couple of years has grown dramatically. Let us consider the subject matter, why this move was made by Naresh Goyal, chairman of Jet airways. Air Sahara was making loss for past two years. Their market share had reduced from 20 odd % to about 10%. Their capital was shrinking, cash flow had dried out. They simply had lost competitive edge. This series of events shows the fact that they were on the verge of being bankrupt or bought out.

Jet airways considered this to be good opportunity to grow inorganically. Till now everything was right, but somehow Jet evaluated Air Sahara at whopping $500mn i.e. Rs.2300cr. Many financial experts raised scruples about this valuation, as just prior to this Kingfisher airways had tried to acquire Air Sahara with about $180mn. This price seemed a little on lower side, so it had to be appreciated, but $500mn could only be explained with term ‘Irrational exuberance’. And that is what it turned out to be. Naresh Goyal backed this pricing by mentioning the parking bays available to Air Sahara, the local and international destinations they had additional to Jet and their fleet of 26 aeroplanes. And that Jet was not buying any liabilities from Sahara.

But there is catch in everything. Jet could have got the parking bays at main airports in country and also local destinations, but there was problem about the transfer rights of foreign destinations due to security reason, especially because Naresh Goyal is an NRI. There are no amendments in Indian law for such rights transfer. Also most of 26 carriers working under logo of Air Sahara are on lease and not owned by them. And last and most delicate point of acquisition: human resource and company culture. Air Sahara has fundamentally different company structure and work culture, which is far from that of Jet. There was never a chance of synergy between their human resources. Even Naresh Goyal did not see any of these factors, but the shareholders did not fail to see them. Amidst the correction in share markets, the price of Jet’s shares fell from Rs.1200 odd to Rs.700 odd i.e. more than 40% fall. And this for surely made Naresh Goyal to review his decision. And he concluded by backing off, but not before losing Rs.100cr in procedure and Rs.500cr still stuck in escrow account, fate of which will be decided by gruelling court case. And now we are poised to see how both of them recover from this misadventure!

The point of concern now is that will other companies take any lesson from this, without suffering first hand experience? Will the ‘Irrational exuberance’ be curbed and business rationality be restored?

Opportunities in Finance Sector

The finance sector is getting trickier day by day, as it is booming. There are numerous challenges as well as opportunities thrown in for prospective candidates.

Starting from base: Banking, insurance. There is no end to the need of these to fields. Retail banking is catering to more and more strata of people. As the global economy is growing with 4-5% per year, people are getting more money and that inevitably involves banks. Added to that the growth is promoting industries to invest more for growth, again banks play an important role. Common as well as corporate people are beginning to understand the need of insurance against natural and unnatural calamities. There is great scope in these two sectors for innovation, planning and strategising to generate better returns. There is lot of competition in market for these fields and only innovation can go the distance. If you feel you have the flare for it, there is unlimited scope. These fields won’t dry out for years to come.

The global growth is promoting more opportunities for finance sector, Non-banking finance corporations (NBFC) viz. Equity, venture capitalist. As the world economy is growing, peoples’ savings are growing and they are turning to equity for better returns. There are many asset management companies entering in equity. Through equity one can invest in global share markets, real estate, and commodities. So fund management is booming field to get into if you can predict of near future to get better returns for the fund. The same goes for venture capitalists. They are called private equity investors. They provide finances to companies and work parallel to money providers like share markets or banks. If you can predict which business is going to fetch better returns for your company, you can certainly get into this field. Combining these two fields, it is called investment banking or I-banking.

And conventionally if you are good with financial planning and managing to get investment in, then you can work in finance departments of any industry. This job is getting trickier to as the interest returns are changing up and down. Market response is changing. Costs are increasing. So it’s getting tougher to maintain and increase profits. Difficult part here is maintaining company’s cash flow. You might be earning profits but not generating cash, due to the credit policies.

In addition to all these, there is growing tendency to outsource the financial management. There are many financial consultants growing by riding this outsourcing boom. These consultants provide all sorts of services regarding finance sector, from planning, implementation, feedback to audit. This job encompasses the whole finance sector and offers great experience as one gets to work with different companies in different sectors and on different grounds.

From the current outlook, it seems the better days for finance sector are just here and it’ll get better. The key point is innovation.

- UMESH SANT