Monday, June 01, 2009

Reliance: Staying sane during insane times (excess liquidity times)

The economic slowdown had hit everybody hard and RIL is no exception. Many of its projects like Reliance Retail, SEZ etc have been affected. But if one looks around RIL has managed to control itself really well during the Insane Years of 2005-2009. Not only it managed to focus and complete its major Greenfield projects – KG D6 oil & gas project, Jamnagar 2nd Refinery project, East west pipeline project in time, but it also managed to stay sane and avoid the lure of mega international acquisition unlike its peers. And staying sane in such insane times is no mean achievement. If you don't agree, ask Tata, Birla or Mittal.

Last few years had been really mad years. Factor of production (land, labor & capital) prices had hit the roof and most businesses were unviable at market value of factor of production (not to be confused with historic value). The only way people could make money was by selling out stake or the business to public through IPOs, to private equity firms, to strategic investors or to competitors. The best and the biggest company in India fell for the lure of international acquisition including Tata group, Birla group and also the Mittal group. Ratan Tata had been bold enough to admit in public that they ended up buying Corus, Jaguar & Land Rover at peak prices and it had been a big mistake.

Others like Birla, Suzlon and Mittal had been equally foolhardy and now realize that they made a mistake although they might never admit in public. On the other end of the spectrum had been players like Ranbaxy who managed to exit the business at a very good price. We may keep arguing that selling out completely made sense or not but we all will agree that timing was amazing.

So why did it happen? Do these companies don't have smart people who can advise the management properly? I don't think it's a skill set problem (Finance Problem). I believe it's an individual's interest Vs Company's interest problem (HR Problem). I see a systemic problem here. The system has a built-in bias towards occurrence of the deal. The system incentivizes people who vote for the deal and penalizes who vote against the deal.

Today corporate world is designed in a fashion where you are paid incentives and bonuses for making deals and not for voting against it. Investment bankers make money when deal is done; consultants make money when deal is done. Even the company's in-house managers reap benefits in form of bonus, recognition in the organization, additional responsibility when the deal is done and a sane advisor who advises the management against it is a looser both ways. If the management goes ahead with the deal the one who advised in favor of the deal get the recognition, responsibility of the new company and all associated benefit. In case management decides against it for any reason, nobody gets anything. Hence, advising against the deal is a lose – lose strategy.

From Investment bankers to Media, for everybody occurrence of the deal is beneficial and hence in most cases the deal happens. Again, higher the value of the deal, higher is the commission (for I-bankers, consultants and experts), higher is the interest of the public (for media), and higher is the recognition & responsibility (for in-house managers). And to top it all the excess liquidity in the system, thanks to Mr. Alan Greenspan & company made sure arranging funding for it was never a problem.

So what helped RIL stay sane when others could not resist the temptation? This is despite Mukesh Ambani declaring in two consecutive AGM, the company's ambition for international acquisition and change of strategy towards inorganic growth. It seems there were few in RIL who were ready to take lose-lose strategy for self in the interest of the company. I hope RIL if not rewarded, at least recognized these selfless employees.

1 comment:

Bhanu said...

Liquidity per se is not a problem any more in Indian economy as of today. During so called taugh times of 2005-09, i would say mid 08-09 were the worst. RIL, though surviving the same, has seen a large portion of its hard earned goodwill go down the drain, be it the Gas stations in India or KG basin feud between the brothers. Besides the goodwil, i dont see their refining business do any better with Oil porices almost quarter of what they were a year and a half back.
As for the Tata's, no body anticipated the economy suffer through the slump the way it did. Decision of expand or curtain have thie inherent flaw of being seriously injured with economic factors so Jag or Corus, decisions were correct ( as can be seen with Net wealth of Tata's ( Tata sons) growing at the rate of 12-15% YoY) however economic factors may be debated.