THE ACQUISITION EFFECT

Rs 300 crore: Savings in marketing costs as UB and SWC cease to be rivals 74: Manufacturing locations; to be pruned to improve throughput and per unit realisations 60 per cent: Combined market share of UB in the Indian spirits market 4: Spirit companies, McDowell, Herberstons, SWC and Triumph to be brought under new entity United Spirits Rs 15,000 crore: Tax and excise that will be paid by merged entity every year

Companies that come out on top of a bruising acquisition-play often lose focus soon after, the very act of winning making them ignore the truism about integration being far more difficult than acquisition. The UB Group, then, seems off to a start with its acquisition of Shaw Wallace & Co. (SWC) for some Rs 1,300 crore. Reason? Although Chairman Vijay Mallya (right) partied hard on his yacht, Indian Princess, moored a few nautical miles off Mumbai's Gateway of India on the night of March 21 (the day the acquisition was announced; and truth be told, the man actually doesn't need a reason to party), neither he nor his A-team had lost sight of the work that needed to done.

Mallya has reason to be chuffed about the acquisition: on a personal front, he finally got his hands on a company he has been after since 1985; on a professional front, the carefully negotiated financial backing for the deal ($300 million or Rs 1,320 crore, from ICICI Bank), and the terms of the settlement with the Chhabria family showcased his ability as a dealmaker; on a competitive front he outplayed deal-meister Ramesh Vangal and Newbridge Capital, Kyndal, even Komal Chhabria; and from the point of view of hubris, the acquisition makes UB the second-largest spirits company in the world (in terms of number of cases sold) after Diageo.

"The deal is timely," says Ravi Nedungadi, President & CFO, UB Group. "From a macro-economic view-point, we are well placed." His reference is to plateauing liquor consumption in the First World, and the emerging importance of markets in Asia, largely India and China.

Demographics are on the company's side as well: According to Nedungadi, about a third of the 500 million people currently below age 18 in India will move into the company's market ambit over the next six years.

One of the first things Mallya did after the acquisition was to announce his desire to consolidate the spirits businesses of the merged entity under one company. Thus, McDowell, Herbertsons, Triumph and SWC will together become United Spirits. Over the next 18-20 months, he hopes to be able to rope in a financial investor in United Spirits. "We will be creating so much value as a leader in the market that in two year's time somebody will be willing to write a fat cheque for a slice of the company," says Nedungadi explaining the timing. He adds that he has already been inundated with calls from investment bankers on behalf of companies willing to do this.

The timing is also significant because repayment for the ICICI bank loan starts around then. Mallya, who is launching his airline venture Kingfisher Airlines in May this year, seems to have worked out his numbers. Expect more yacht-parties then.

-Sahad P.V.

The BT 50 Index
The market is in a stable mood, but oil worries continue.

After an all-too-brief correction, the BT 50 has moved up to 250 levels. With the options and futures settlement (this happens on the last Thursday of every month and was one trigger for the correction) over, the market is back in a stable mode. The main worry now is the escalating price of crude; it has already reached $58 (Rs 2,552) levels and threatens to go even higher. Anyone wishing to understand long-term trends in the stock market would do well to try and comprehend the oil market.

Our flagship free float methodology-based index-BT 50-has completed two years now. The free float methodology has several advantages: first, it considers only the value of stocks freely available in the market (after excluding the part held by promoters and other strategic investors) and the weightage assigned to individual shares is more representative than the market capitalisation-based methodology; second, it takes care of the perpetual selection dilemma regarding closely-held companies. For instance, the inclusion of these companies may distort the index based on total market capitalisation methodology, but dropping them altogether may reduce its representative character. The free float methodology facilitates inclusion of large closely-held companies but assigns them a lesser weightage. After the success of our broad market free float index (that the Sensex subsequently decided to adopt this is testimony to the efficacy of the free float method), we decided to launch sector indices using the same method. While the general index captures the overall movements (covering several sectors), sector indices capture the movements in individual sectors. All these indices have a common base period (January 1, 2002). The weightages are reassigned every quarter after companies declare their ownership details. The base value of all BT indices is 100.

-Narendra Nathan

The Risk-Return Equation
Dr. Reddy's Labs ropes in a partner to fund R&D.

Lifesaver: ICICI Venture's CEO R. Ramnath

Necessity, they say, is the mother of invention. Dr. Reddy's Laboratories (DRL) couldn't agree more. In a pathbreaking deal late last month, the NYSE-listed drug major roped in ICICI Venture to bankroll its R&D. The private equity firm will fund the development, registration and legal costs related to commercialisation of ANDAs (abbreviated new drug applications, or permissions to launch generic copies of branded drugs) filed or to be filed in 2004-05 and 2005-06. DRL is expected to file 30 ANDAs, of which, some analysts assume, 12 could involve challenging patents held by innovator companies.

Once the generic drugs hit the market, DRL will pay ICICI Venture royalty on net sales for a period of five years. The private equity firm, reputed for doing innovative deals in sectors shunned by traditional venture funds (think biotechnology, retail, real estate), is bringing in $22.5 million (Rs 99 crore) in the first phase, with an option to invest an additional $33.5 million (Rs 147.4 crore) in phase two. "This model will enable us to share the product development costs while leveraging our global scale and infrastructure," says G.V. Prasad, Executive Vice Chairman and CEO of DRL. "We saw an opportunity and did not want to miss it because a structure did not exist," adds a top official of ICICI Venture, which is already considering more such deals.

For the embattled drug-maker, which has seen its stock halve since January last year due to falling sales and profits, the deal is a virtual lifeline. Filing an ANDA costs an estimated $1-2 million (Rs 4.4-8.8 crore) and those that involve patent challenges (called Para iv filings), significantly more. By agreeing to share DRL's research risks (and hence returns), ICICI Venture has put DRL on a stronger footing. So why isn't the stock market enthused? "There are still uncertainties relating to growth," says an analyst. In other words, there are no big generic drugs in DRL's pipeline this year. Then, there are three blockbuster patent challenges (for Eli Lilly's psychotic disorder management drug, Zyprexa; GSK's Zofran, an anti-nausea drug; and Sanofi's antherosclerosis drug Plavix) where a DRL win isn't guaranteed. It would be a pity if the deal were to prove merely novel, not life-saving.

-E. Kumar Sharma

NIFTY
Two-way 3G

Openera's Ayaz: Do you see what I see?

Imagine you are in tiffany's in new York and suddenly spot a diamond ring that you think your wife will fancy. Instead of e-mailing her a picture of the ring, you simply call your wife, switch on the video camera on your mobile phone and "beam" the picture across to her handset. Sci-fi circa 2050? Hardly. As early as second quarter this year, NEC in Japan and AT&T Cingular in the us could be rolling out this See What I See (SWIS) technology as part of their 3G-based mobile telephony services. And one of the developers of such "two-way" software is a Bangalore-based company called Openera, earlier known as IndTelesoft. Although barely 200-employee-strong, Openera claims to be a leading player in the 3G IP Multimedia System (IMS) client software, with clients like Vodafone, Nortel and Lucent. Among its software: interactive mobile gaming that'll allow mobile phone users anywhere in the world to game real time, and an active phone book, much like the Yahoo! Messenger, with status indicator and control options. Says Jawad Ayaz, MD and CTO of Openera: "For the first time, with IMS, service providers can customise and differentiate their services from one another." Let the game begin.

-Venkatesha Babu

Q&A
"The New Relationship is a Win Win"

"For the first time, IBM is allowing another company to use its brand name"

Late last year, when IBM announced that it had signed a deal with Lenovo of China to sell its pc business for $1.75 billion (Rs 7,700 crore), there were two points of view. One, that IBM had managed to sell a clunker at a very good price and exit a commodity business. The other, that a Chinese company, hardly known outside its own country, was suddenly handed over the mantle of becoming the third-largest pc player in the world. The unstated fear: China's manufacturing prowess and the IBM brand would give Lenovo enough muscle to conquer the global pc business. Andrew Sotiropolous, Vice President for IBM Personal Systems Group in Asia Pacific , who has been designated as the new head of Lenovo (where IBM will hold 18.6 per cent) for the region, was in India to reassure customers and employees. BT's Venkatesha Babu caught up with him to get an overview of the roadmap ahead. Excerpts:

Why has the integration taken so long?

There were regulatory hurdles to be cleared. Only recently did the Committee on Foreign Investement in the US give the necessary clearances. We are on track as announced and it will be through by the second quarter.

Did IBM get out of the PC business because it was increasingly getting commoditised?

No, no. It was a question of strategic fit. IBM has always been in the value-add rather than the commodity space of the business. That is why our focus was on business and enterprise rather than the consumer space. Also, we have always stressed on innovation. With this deal, Lenovo becomes the third-largest player in the pc market, gains a highly regarded partner and a respected brand. It is a strategic business alliance and the new relationship is a win-win all around.

Are there any misgivings from customers that IBM's personal computer business is now part of a Chinese company?

That is exactly what we want to convey. Simply put, there will be no change. Customers will continue to enjoy the same quality of service and support from the same set of people as they did with IBM. Even the customer-facing people don't change. The confidence IBM has (in the deal) can be indicated by the fact that for the first time in its history it is allowing another company to use its brand name which it has assiduously built. Do you think IBM would have done that if it did not have confidence?

Brains To Wallets
TI now sees India as a big market.

TI's McCreary: Picked your brains; now for your cash

Texas Instruments (TI) pioneered the global it gold rush in Bangalore in 1984 when it set up a research and development centre in the city. Other us giants followed its lead and the rest, as they say, is history. "It's probably safe to say that all our products have at least one Indian component in them," says TI's Worldwide Sales and Marketing Head Jeffrey McCreary.

But it's not only Indian brains (it employs 1,300 people in Bangalore) that this $12.58-billion (Rs 55,300-crore) semiconductor chip giant is interested in. It wants a piece of Indian wallets, too. And the country's growing appetite for mobile phones, digital entertainment systems and broadband (all of which use TI products) have whetted its appetite.

"We sell when our customers do. So when Elcoteq talks of putting up a mobile manufacturing plant (for Nokia) or Solectron or LG or Samsung do so, we want to be on the ground from day one," McCreary says, adding: "If a customer wants to build a phone for the Indian market, we want to work with him on it."

Two decades back, TI made the right call on India's it capabilities. Lots of people are hoping that its second call is as prescient.

-Venkatesha Babu