Big is profitable

By K. T. Jagannathan

Small is beautiful, says an old adage. `Big' is, however, the new mantra. To be precise, the latest slogan reads thus: Be big and stay profitable. India Incorporated has, no doubt, begun to realise the importance of size not only as a tool to garner market share but also as a means to survive. We have seen a spate of acquisitions on the Indian cement front. Still in its infancy, the private Internet service provider - Satyam Infoway - stunned the corporate world when it announced some time ago that it had taken over a little-known Mumbai-based dotcom company in a mind- numbing cash-all deal. Post-Budget 2000, capital-intensive cellphone companies, too, have begun to appreciate the virtues of size in a marketplace which is turning fiercely competitive by the day.

Among the best known industrial houses in the country, the Tatas and the Birlas have just announced their decision to merge their cellphone entities. Reports suggest that the Nandas and Modis have also commenced parleys on possible amalgamation of their cellphone businesses. Unlike elsewhere, what is happening in the telecom sector is the coming together of reputed industrial houses, signalling a welcome churning in their business outlook.

Surely, traditional business houses in India have traversed a long way - from a protected environment into a liberal atmosphere. Much of the industrial wealth that exists in India today is the result of efforts of these big business empires. The famed Adam Smith theory of ``wealth, more wealth and still more wealth'' might have been the driving force behind their business- building exercises. The fact, nevertheless, is that these industrial houses did share a concern for society at large even while creating their enterprises.

The possible inter-connection of business houses - especially in the telecom field - is undoubtedly the consequence of an assortment of factors ranging from liberalisation of the economy to competition in the marketplace and the technological revolution. The expected consolidation has definitely taken unusual turns. The Tata-Birla MoU and the talks between the Nandas and the Modis have revealed a realisation among established industrial houses of the need to close ranks and jointly take on competition not just to survive in their chosen fields but to ensure that they continue to find a prominent place in the industrial map of the country.

The wiring of industrial houses through telecom marriages - what does it portent? In a capital-intensive sector like this, these alliances - nay marriages - should see customer benefit in the end. More than anything else, these are clearly pointers to the coming of age by conservative Indian industrial houses.

The imminent consolidation of private sector players in the wake of budget-induced fillip to the telecom sector and stepped-up aggression on the part of Mahanagar Telephone Nigam Ltd. (MTNL) are all promising to provide exciting days ahead for phone users.

For those who follow closely the revolution happening on the information technology front, these are merely coming events casting their shadows before them.

In an era where one is slowly witnessing convergence of services - wireless telephony, data transmission through cellphones, Internet connectivity and what not - these merger moves are just the beginning. It will not be long before specific IT service providers converge to create bigger amalgams.

The merger moves may yet have implications for the telecom policy which is evolving by the day. The Indian telecom scene has seen many takeovers in the past. The Ruias came into the cellphone business only through takeover.

Nevertheless, the Mittals were the ones who had set the tone for consolidation in the telecom field. Originally, they had the licence for Delhi region alone. Now, they have expanded to Chennai by buying up Skycell. They have already pocketed non- metro licences in Andhra Pradesh and Karnataka.

Thus, even though licences are allotted on a territorial basis, one can expand and consolidate by takeovers. The legal entities operating the licences do not change in case of takeovers.

It is, however, yet unclear as to how the regulator will view the impending mergers. Will the two licences be transferred in the name of the merged entities? The regulator may have to do some fine-tuning of the policy to factor in the merger possibilities.

Far from creating complications to merger deals, the regulator should let these go through. Mergers and acquisitions (M&As)are definitely here to stay, especially in a liberalised environment.

In a capital-intensive nascent industry like this, where private telephone operators are soaked in red, it is prudent to let them do what they feel is best for them.

Send this article to Friends by E-Mail

Section  : Business
Previous : SBI gold deposit scheme - need for a relook