Monday, September 24, 2007

Infosys - The Toyota Way

In the linked article Jitendra V. Singh, dean of Singapore's Nanyang Business School argues that Indian firms should use the rupee's strength to their advantage by adapting their business models in innovative ways, much as Japan's automakers did during the 1980s.

The article provides a good starting point for Indian IT industry to think ways to reduce their currency risk. The risk is inherent by the nature of business where predominantly revenue is in USD while costs are in INR. Ideal situation as also suggested in the article is to follow Japanese automakers when they shifted production of low margin products to US thereby reducing impact of currency appreciation. But in the Indian scenario the fundamentals are different. While Japanese did enjoy the low cost advantage but they also had very high productivity which enabled them to be highly competitive even when shifted manufacturing to US. The Indian IT industry is still far from matching US productivity let alone surpass it. Indian advantage is genuinely labor arbitrage which more than compensates low productivity and enables firms like Infy to earn margins close to 30%. But as the article speculates on an exchange rate close to INR 20 / USD this would kill the Indian advantage if productivity does not rise large enough and also fast enough. The fact with any arbitrage is that it remains only for a short while before markets become efficient and wipe it out.

The exchange rates are beyond control of Indian IT firms so what can they do to still stay competitive? Answer lies in productivity improvement. Apart from organic ways of doing it through training, companies like Infy should use their accumulated funds and make logical overseas acquisitions in the space of high end IT services. The integration of these companies and their practices back in India would be very important as it is here where the productivity gains are required. High end services would also enable to expand the margins thereby providing thicker cushions against USD fall. These overseas acquisitions will also help IT companies in having a more geographically balanced revenue-cost structure thereby providing a partial hedge.

So overall its not just the Toyota Way for Indian IT companies but they need to find a innovative solution to the rupee appreciation. How about a (Shinning) India providing large part of revenues to Infy in our very own rupee?

Sunday, September 16, 2007

Arun Gandhi on Tata Corus Deal

Arun Gandhi - the Tata Corus deal maker in an interview to Moneycontrol talked about the deal. Some of the highlights:

Deal Timing:
The timing of the deal was crucial as during that time the Russian companies were undergoing IPO and if the deal had been delayed then they would have also jumped in with their IPO collections thereby increasing the competitive pressures of the bid.

UK Takeover code:
The UK take over code governs the deal making process to ensure fair deal to the shareholders. The law requires regulations on the break fee and stake building which acts as defense against the competition. The break fee has to be less than 1% of the transaction value and also the company directors need to certify that the break fee is in interest of shareholders. The stake building is allowed upto 30% prior to announcement. Post announcement stake building is risky as the access to confidential information during due diligence may expose the bidder to criminal insider trading prosecution and also it does not get a right to vote in the bidding. The UK law also has a provision to prevent financial assistance - target company (only public companies) to let the bidder use its assets or guaranties to secure financing.

608 pence:
In the last round of bidding CSN topped up at 603 pence and Tata wrapped up the deal at 608 pence. The price was chosen at 5 pence higher as there was 6 weeks time to go after the auction date and the Corus share price would have included the time value of money thereby keeping the share price lower than 603 pence. CSN at this point might had created trouble as it could have bought as many shares as it could at a price less than or equal to its bid of 603. Tata hence had to keep the share price above 603 and hence a bid of 608.