Picking up steam: A Corus plant in the Netherlands

Why is there a disconnect between managements and shareholders over the perceived value of these acquisitions? To put it simply, most institutional shareholders are focussed on short-term earnings, whereas the managements, especially the ones controlled by business families, think long term. Now, there's a second reason why deal valuations are soaring. Increasingly, companies from the BRIC nations (Brazil, Russia, India and China) are competing with each other for assets that can fetch them global scale. A simple reason why Tata Steel had to increase its Corus offer was the fact that Brazil's Companhia Siderurgica Nacional (CSN) decided to join the fray. In July 2002, Corus had unveiled a plan to merge with CSN but that never materialised.

It's not unusual for big M&A battles to be hard-fought. But these days, the distance that some aggressive bidders are willing to go has increased. Blame it on BRIC. Robust growth in their own economies is helping BRIC Inc. grow faster than their global peers. As a result, global investors are willing to bankroll them for acquisitions that are much bigger than the buyers' own balance sheets. Therefore, as long as the BRIC economies keep growing, there is little chance of deal valuations-at least, of those assets perceived as strategic-cooling. And there's little chance of that happening anytime soon.

Within days of Hindalco announcing its Novelis buy, there were reports that Russia's aluminium maker Rusal would make a counter-bid for the us-Canadian company. China's China National Petroleum Company has routinely pipped India's ONGC Videsh at the post for oil assets in parts of Central Asia and Africa. As is evident, BRIC Inc. is in a tearing hurry to grow. Corus catapults Tata Steel to the #5 position globally; Novelis has, by the Aditya Birla Group's own estimation, fast-forwarded Hindalco by 10 years in terms of downstream capacity. Stiffer competition will, however, mean that the buyers have to work that much harder to make the deals deliver. Should it happen that these deals don't fetch the promised value, the market will correct; buyers and lenders will be more cautious, and valuations will start looking like something that the buyer's shareholders are more comfortable with. Until then, BRIC vs BRIC will continue to delight the shareholders selling out, and not the ones buying in.

Let Gas Be

But that is not reason enough to spoil the evolving gas market. For, directing supplies to the power sector may result in electricity generation at a cost higher than that from alternate sources like coal and hydel. In turn, the power deal will leave an expensive and indelible imprint on the gas market, where demand outstrips supply by half. This is all the more relevant since the government has so far planned for future capacity addition largely on coal as fuel, where the costs are lower. This is amply reflected in the recent ultra-mega power bids, where prices were as low as Rs 1.20 per unit. Furthermore, the urgency to commission new capacities is not driven by industrial demand-industry is largely powered by captive capacity.

The bottom line is one of simple economics: supply without a price does not make for a commercial deal. If Reliance's gas supply is secured, it must be competitive vis-à-vis coal. After all, for the Eleventh Plan period, of the 68,000 mw planned capacity addition, only 2,000 mw is expected to operate on gas. Since the principal gas buyers-fertiliser and power sectors-are in government domain and not in the pink of health, the government has even less reason to intervene.

Nurturing the Entrepreneurial Spirit

A TiE meet: Everyone wants to be an entrepreneur

But some caveats are in order. The first question that arises is: who will be in charge of running this fund? Bureaucrats and regular bankers are trained to be prudent and risk-averse. This makes them particularly unsuited to be in charge. One must quickly add here that there are many honourable exceptions to this rule. But it's also a fact that top-level appointments in public sector financial institutions depend crucially on political patronage. This is what gives rise to a queasy feeling.

Venture capital, by its very nature, cannot be disbursed along prudential lines. The venture capitalist has to make an often subjective call on which ideas will work and which won't. Also, only one or two out of every 10 ventures financed really take off, and many of the others have to be written off as duds. Most venture capitalists depend on a combination of scientific projections and their gut feel while backing projects. Giving bureaucrats and their political masters discretionary powers over vast sums of money carries with it the inherent risk that the entire exercise may degenerate into a game of patronage.

Is it, then, a good idea whose time hasn't yet come? No. Business Today feels that the idea, laudable as it is, will also become feasible if the government follows the public-private partnership model while implementing it. The government will do well to involve established venture capitalists in this programme. This way, it will retain a say over the broad direction of the venture, but not an overriding influence in the actual disbursal of funds. It can even follow the template created by The Indus Entrepreneurs and the Band of Angels where venture capitalists and other like-minded investors come together to finance and mentor enterpreneurs.

Also, it makes immense sense to route a part of the corpus through institutes like the IITs, the IIMs and other centres of higher learning, which should also be encouraged to set up their own venture capital funds. It bears reminding that Harvard University is also one of the world's largest venture capitalists. A few Indian institutions are now considered worthy peers of that august institution. This is another facet that they should try to emulate.