A Company A Day...

weekend ruminations

Want to know what is really going on in the world of Indian business? Try this selection from one days headlines in the business press last week: SAIL may shut old units, offer fresh VRS; Voltas sells thermostat unit to UK-based MNC; BASF to sell 51% stake in Dr Beck to US firm; SBI may divest stake below 75% in SBH (State Bank of Hyderabad); Sale of Chennai property kept GEC out of the red; Shell in talks to pick up 49% stake in Essar Power; Modistone nod for asset sell-off; Mahindra group decides to shed 40% in IIL (International Instruments Ltd); Bhilwara Spinners & Rajasthan Spinning merge.

 

There has been more of the same thing on other days in the week, including reports on the Nirma bid for Gujarat Heavy Chemicals; a French ad agency planning to pick up a stake in Triton Communications; GTE to buy 10% of Essar Communications; Prakash Industries facing over 15 wind-up suits in the High Court; and no takers for JK Synthetics Kota and Jhalawar units.

Two things seem obvious from this list. The first is that headline writers need to improve their skills (Ive spelt out some of the original headlines so that they make sense). The second is that Indian companies are going through an unprecedented churning process, brought on by the unforgiving forces of open competition.

A market for companies had been forecast as soon as the reform process got under way, but few could have imagined a dozen headlines in a day; which translates in a year into two or three hundred companies changing hands, or going through some other radical change.

At one level, this trend means that companies and groups are shedding peripheral or non-core businesses. At another level, it might well indicate a shake-out in the market and a consolidation of market power. Certainly, the bigger pharmaceutical units (Ranbaxy and Nicholas Piramal) have been gobbling up smaller ones. At a third level, surplus labour and unproductive assets are being shed. All three underline a drive towards greater efficiency in companies and in the market. In other words, reform is working.

A more pessimistic scenario could also be painted, of course. That the economic downturn is forcing otherwise healthy companies to sell businesses, shed assets and workers, or pull down the shutters altogether in case buyers cant be found. That the shakeout is in fact a direct result of the slump. And that if the business climate were more upbeat, the picture would be quite different. After all, the Indian economy is very much on a growth curve, not the flat mature economy that is typical of Europe. So the shake-out is not a sign of greater business health, it in fact points to a deeper malaise.

Both theses could be valid. India is nothing if not a bundle of contradictions. But equally important are the changes that must be accompanying the emergence of a market for companies. For when markets are more competitive and losers go to the wall, you are more likely to see honest businessmen doing well; those who cream off their companies are likely to be the losers. Also, when companies have to be valued because they are being bought and sold, the accounting and auditing functions get stronger. Third, the days of the diversified dinosaur are probably over. Fourth, true capital accumulation will now come primarily through delivering shareholder value; in other words, by maximising the market capitalisation of your company. Among other things, this increases your ability to raise fresh capital a decided advantage when you need to dip into deep pockets to achieve global scale. All four factors point to the underlying trend: competition places a premium on corporate governance.

This is not to suggest that business is about to become a morality play. No one is fool enough to believe that there wont be a fair share of both fools and knaves. But it still seems obvious that the increased buying and selling of companies points to a business climate which encourages both greater efficiency and also corporate morality. Which is another way of saying that the face of Indian business is changing.