Never say Never

Reading this article on Aditya Birla Group’s (ABG) decision to buy, or more importantly, Mr. Kishore Biyani’s decision to sell Pantaloons took me 6 years back in time when I was doing my MBA.

We had a course on M&A in the 2^nd year and one of the major course evaluation components (50% weightage) of the course was a presentation which involved choosing a company, making a case for M&A - either it acquiring a company or it getting acquired - and then undertaking the valuation exercise. Now the faculty for the course was a very senior professional from the industry who, among other things, had the distinction of playing a pivotal role in the Hindustan Zinc acquisition by the Anil Agarwal led Vedanta Group. Needless to say, he was extremely well networked and hobnobbed with the who’s who of the industry. So, for our presentations, he decided to go the extra mile and give us contacts from our chosen companies. This was intended to help us get some management perspective on our chosen companies so that the analysis and presentations turned out better than the end product coming from a complete outsider’s understanding of the company.   

We decided to choose Pantaloons - an easily justifiable choice when one considers the year in question - 2006. Lehman Brothers was years away from collapsing and the India story was still going great guns. Research report after research report analysed the Great Indian mall dream, how footfalls were continuously increasing, how Indian consumers were increasingly visiting malls and how they were expected to shop (till they drop). It was hard to find a flaw in this reasoning - after all, that’s what you and I were doing and hopefully that’s what the entire country would be doing too. One could almost visualise the glee on the real estate and store owners’ faces.

Meanwhile, Reliance had entered into the retail sector and reams were being written between the Goliath Reliance and the David Pantaloons - how Pantaloons would continue to have the first mover advantage by dint of locking in real estate at cheap prices years before the property boom, Reliance’s deep pockets notwithstanding. ABG Group also soon entered the fray with pundits professing that the pie was big enough for more players. However, talks had already started of a possible sellout by Pantaloons to Reliance or a strategic alliance between the two. All in all, the retail industry was (and probably still is, opposition to FDI in retail notwithstanding) the ‘sunrise’ industry to be in. With this background and having done our homework on Pantaloons, our group prepared to call our contact at Pantaloons - a very senior non-promoter, who also had a sizeable stake in the company. Our brief was simple - among other things, we were supposed to ask our contact his views if the company in question was to be acquired and who he thought would be the best acquirer. The following conversation ensued after pleasantries had been exchanged and we had explained the purpose of the call

Us: Sir, if at all you had to sell Pantaloons, who would you want the buyer to be?

Mr. Investor: Sell?!? (Angrily) Are you out of your mind?!?

Us: (Oh ho… wrong question…we tried to pacify him): Err Sir, this is just a conjecture…as we explained you, this is a part of our project.

Mr. Investor: So what?!? Why would we ever sell Pantaloons? That day is never going to come. Don’t ever think that such a possibility will ever materialize

Us: (in full damage control mode): Err Sir, you are getting us all wrong. Pantaloons is a great company and we are sure the promoters are never going to sell out. But, this is just a view that we are seeking: if say Pantaloons were to merge (please note the complete absence of the word acquisition) with another entity, who do you think the other partner could be?

Mr. Investor: Look, we will never allow any company to acquire or even merge with Pantaloons. So your conjectures and assumptions are all balderdash.

The conversation went downhill from there and we quickly decided to call it a day and thanked the gentleman for sparing his valuable time. But we couldn’t help wonder at the strong sense of ownership he had with the company, inspite of being a non-promoter. So, one could only conjecture what Mr. Biyani views would be like :)

As it turned out, the Indian story went into a tailspin. People did come to malls as predicted, but who said anything about buying stuff. Footfalls just didn’t translate into sales. The same Pantaloons, now saddled with the burden of high debt it had used to expand, was frantically trying to find a way out. Eventually, Mr. Biyani chose to give a controlling stake to the Aditya Birla Group. This incident only reaffirmed something that I have come around to believing - in business, politics and life in general, never say never.

Just how Mr. Kumar Mangalam Birla convinced Mr. Biyani is again a nice lesson in people management.

Great jobs?

Massa suffered a massive crash at the Hungarian GP, which ruled him out for the rest of the season. Then much to the delight of all F1 fans, Ferrari announced that Schuamcher would be replacing Massa for the remaining 2009 season. However, this was not to be. An old neck injury prevented the great Schumi come back and after an inspired win at the Belgian Grand Prix, Force India’s Giancarlo Fisichella won the much coveted position of the Ferrari driver for the ongoing season.

While Fisi would be driving the car in 2009, in all probability, he would only be the reserve driver in 2010. This hasn’t deterred him from accepting the position and he is perfectly happy playing the role of reserve driver with Ferrari when he could have easily been the main driver for Force India or any other team. Such great is the prestige associated with Ferrari along with the opportunities that would be available to a player after doing a stint at Ferrari.

This incident got me thinking: which other jobs / companies command such a high respect / prestige that someone would be willing to take a small role there instead of a bigger & more important role in a smaller organization: Investment Banks of the likes of Lehman, ML, Goldman (before the recession of course!) immediately come to mind as do the consultancy firms like Bain, Mckinsey etc.

Any other?

Raju nahi raha gentleman

We couldn’t have asked for a more shocking start to the New Year… just when the economies, battered and bruised from the onslaught of sub-prime crisis, recession, bankruptcies, were limping back to normalcy, came another nail in the coffin – corporate fraud…whether this is the final nail or more such skeletons will come stumbling out of the cupboard, only time will tell…

It all starts with a small lie, minute misreporting - under or over statement, to cover the losses and present a better picture… & very soon, it balloons into a huge crisis. The incident once again proves that people just refuse to learn from history… what led to Nick Leeson & Baring Bank’s downfall, now has contributed in making Satyam a junk stock with the now ex-Chairman's damaging disclosures… Problem however is that while the ECB stepped in to safeguard the beleaguered depositors of Barings Bank, the stake holders of Satyam have just about no where to go…

Satyam thus because of its misdeeds, has catapulted into the Enron league with PwC looking to go the Arthur Andersen way… looks like the ban on PwC from auditing NBFCs and banks post Global Trust Bank fiasco, lifted in Mar-08, is now back for good...The audit club just keeps on shrinking…will it be Big 3 now?

This unfortunate incident raises a lot of uncomfortable questions which we otherwise took for granted… Who has the final say on what numbers will be put for reporting, how did the entire company including the top management remain so clueless on the actual numbers, how did the auditors allow such a gaffe, how come the umpteen analysts tracking the scrip and FIIs, MFs invested in the scrip did not smell anything cooking, how come the banks took the reported numbers as final for deciding how much to lend…the list goes on…

While one can question the growth in the numbers achieved & stated in the balance sheet, how does one question the numbers itself? Entities like banks, audit firms etc. have all been set up for different purposes with each entity having separate responsibilities and system overall having supposedly stringent checks and balances. This basic premise has now been questioned as a result of this crisis (as has been the case in all crises)…What we see here is a mass hoodwinking scheme where everyone was taken for one jolly good ride (the sadist in me gloated over the fact that my bank is not one of the 6 banks to Satyam). Ironical…given that the company stood 2nd in the Asia, Pacific and Africa Region for its Corporate Governance practice in 2008…!!

The banks which had anyways become cautious on whom to lend, now will be forced to take a hard relook at all the companies balance sheets and numbers… another round of scenario analysis (the audit oversight sensitivity or fudging sensitivity now), MIS and downgrading follows…more bad news for India and the Indian growth story…

The sad truth is however that checks & balances have failed to avoid any failure in past and there is so reason to believe that future will be any different. While one can do endless analysis on a company, there really is no replacement to gut feeling when it comes to deciding where to invest or whom to lend. Seasoned bankers and investors swear by it and there definitely seems to be a lot of merit in going by one’s own judgement instead of believing some excel workings…As my friend recently commented, this is one hell of a time to be working in financial sector… people like me & my friend above, who started working 1.5 year back, couldn’t have asked for a better exposure (pun intended)…

P.S. Apologies for the extremely corny heading…suggestions for changes will be welcome…