CFO India - Feb/Mar 2010 by Bhupinder Sharma

SMOOTH TRANSITION CFOs HAVE ADAPTED QUICKLY TO NEW REALITIES: GODREJ p.10

THE INDOMITABLE NEDUNGADI HE FACES TOUGH TIMES p.24

THE UNION BUDGET IN LINE WITH GLOBAL TRENDS p.34

CFO INDIA

VOLUME 01

ISSUE 04

Rs.50

A 9.9 MEDIA PUBLICATION FEBRUARY-MARCH 2010

CRACKING THE C-SUITE CODE VOLUME 01 | ISSUE 04

contents

24 Ravi Nedungadi

FEBRUARY-MARCH 2010 VOLUME 01, ISSUE 04

cover story

16 CRACKING THE C-SUITE CODE

Why does India have more female bank leaders than any other country? By Bennett Voyles

10 Adi Godrej

cfo profile

12 Giri Giridhar

INFORMATION TECHNOLOGY 24 INDOMITABLE NEDUNGADI 36 Virtualisation is the way to go UB Group’s CFO faces his toughest challenge yet By Ullekh N.P.

view from the top 10 SMOOTH TRANSITION CFOs have adapted very well to new realities, but firms need to step up training By Adi Godrej

i think 12 GATHERING MOMENTUM Organised retail is steadily gaining in popularity By Giri Giridhar

in practice 30 BREAKING THE GLASS CEILING

COVER DESIGN BY PRASANTH T R

Longevity in a firm is critical for women to stay the course By Neeta Revankar

By CFO India Bureau

38 CYCLE UPS AND DOWNS How can you foresee the next recession coming? By Greg Autry and Peter Navarro

insight 43 M&A IN 2010 Conditions are more favourable in the current year By Werner Rehm & Carsten Buch Sivertsen

cfo lounge 48 GIZMOS 50 TRAVEL 03

from the editor’s desk

letters to the editor topline leader’s world art review books

32 DOUBLE-EDGED SWORD

CFOs look at ways to tackle inflation and interest rate risks By Ullekh N.P.

34 UNION BUDGET 2010-11 As government spending goes up, ensuring quality is crucial By Mohit Satyanand AD INDEX

54 56

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from the editor’s desk ANURADHA DAS MATHUR editor@cfo-india.in

CFO INDIA cfo-india.in

MANAGING DIRECTOR: Dr. Pramath Raj Sinha

Fairytale rise

OUR COVER STORY is on “women in finance” in India—an unusual narrative of success. It is remarkable because banking and finance are maledominated businesses across the world. And timely, too, given Women’s Day on 8 March and the fact that in India we saw the Women’s Reservation Bill go through the Rajya Sabha, following years of hibernation. My gut tells me that we are close to the “tipping point” on this one. The attitude of women has been among the most dramatic changes of the past decade. How they think—about work, family, motherhood, success, work-life balance, division of roles and much more—has undergone a shift so fundamental that almost nothing else has kept pace. Neither men nor the social fabric; neither infrastructure nor corporate structures; neither families nor other support systems. Everyone is struggling to make sense of the change. The simple fact is this. Women make up half the world’s population. And despite huge strides, they are still way behind in terms of contributing to wealth creation in the traditional economic sense of the word. Simplistically, more often than not, this is on account of choices they have to make between motherhood and work, family and career, etc. Several of the successful women interviewed for our story say that they have never looked for “special” treatment as women. They do what everyone else does and get their due ... my question is around “what everyone else does”— the current norm of work ethos. It is designed to respond to men and their situations. If we are committed to promoting the deserved participation of women at work, acceptable terms of work ethos need to alter or expand. Working from home, flexi-hours, crèches—they need to be viewed as important tools for a balanced work environment, not as “favourable” to women. Men, to my mind, deserve the same flexibility. My favourite example to explain what I mean is around western/European menu cards. As an Asian vegetarian, till 10 years ago, I had to find some way to carve out a meal for myself from a menu that was decidedly non-vegetarian and suited to the European palate. As Asia and its needs have been recognised, and its importance appreciated, menu cards the world over have vegetarian and Asian options. Not equal, but certainly a start. Women don’t need to try and fit the age-old work norm. We need to define an extended ethos that works as well for women as it does for men. Only then will corporations and the world be able to benefit from the latent and hidden potential of women. Would you make a start today by examining how your organisation scores on diversity... women colleagues, women in top management, women on your Board? I leave you with food for thought....

EDITORIAL CONSULTING EDITOR: Ullekh NP CONTRIBUTING EDITOR: Bennett Voyles DESIGN SENIOR CREATIVE DIRECTOR: Jayan K Narayanan ART DIRECTOR: Binesh Sreedharan ASSOCIATE ART DIRECTOR: Anil VK MANAGER DESIGN: Chander Shekhar SENIOR VISUALISERS: PC Anoop, Santosh Kushwaha SENIOR DESIGNERS: TR Prasanth & Anil T CHIEF PHOTOGRAPHER: Subhojit Paul THE CFO INSTITUTE EXECUTIVE DIRECTOR: Deepak Garg NATIONAL HEAD: Bindu Krishna MANAGER: Poonam Bhargava ASSOCIATE: Priyam Mahajan SALES & MARKETING V-P SALES & MARKETING: Naveen Chand Singh NATIONAL MANAGER (SALES): Pranav Saran (+91-9312685289) NATIONAL MANAGER (EVENTS & SPECIAL PROJECTS): Mahantesh Godi (+91-9680436623) NATIONAL MANAGER (ONLINE): Nitin Walia (+91-9811772466) ASSISTANT BRAND MANAGER: Arpita Ganguli CO-ORDINATOR (AD SALES, MIS, SCHEDULING): Aatish Mohite SOUTH: Vinodh Kaliappan (+91-9740714817) NORTH: Vipul Goel (+91-9654447689) WEST: Sachin N Mhashilkar (+91-9920348755) PRODUCTION & LOGISTICS SENIOR GENERAL MANAGER (OPERATIONS): Shivshankar M Hiremath PRODUCTION EXECUTIVE: Vilas Mhatre LOGISTICS: MP Singh, Mohamed Ansari, Shashi Shekhar Singh OFFICE ADDRESS Nine Dot Nine Interactive Pvt Ltd C/o K.P.T House, Plot 41/13, Sector-30, Vashi, Navi Mumbai-400703, India PRINTED AND PUBLISHED by Kanak Ghosh for Nine Dot Nine Interactive Pvt Ltd C/o K.P.T House, Plot 41/13, Sector-30, Vashi, Navi Mumbai-400703, India EDITOR: Anuradha Das Mathur C/o K.P.T House, Plot 41/13, Sector-30, Vashi, Navi Mumbai-400703, India PRINTED AT Silverpoint Press Pvt. Ltd. D 107,TTC Industrial Area, Nerul, Navi Mumbai-400706

SUBSCRIBER SERVICES: Call +91-11-45069999 Visit CFO India’s Website

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letters to the editor CFO

GREEN SPECIAL

CFO PROFILE SURESH SENAPATY, CFO, WIPRO LTD

THE ROAD AHEAD AZIM PREMJI CALLS FOR COHESIVE ACTION p.10

GREEN EVANGELIST WIPRO’S CFO SAYS THERE’S NO SUBSTITUTE FOR HARD WORK p.20

CFO

Green EVANGELIST THE

NAKED TRUTH FIRMS MUST SEE THE WRITING ON THE WALL p.46 VOLUME 01

ISSUE 03

Rs.50

A 9.9 MEDIA PUBLICATION JANUARY 2010

INDIA cfo-india.in

The down-to-earth CFO of Wipro talks about childhood, work and green business ULLEKH NP

CFO

VOLUME 01 ISSUE 03 JANUARY 2010

OPPORTUNITY

STRIKES

IT’S EASY BEING GREEN AS THE CLIMATE BOMB TICKS AWAY p.30

GREEN BUILDINGS WILL BOOST PRODUCTIVITY AT WORK

CLIMATE CHANGE 101

p.36

GLOBAL WARMING: WHAT CFOs MUST KNOW

NEW TRIPLE BOTTOM LINE

p.32

CFOs SHOULD TAKE ON MORE RESPONSIBILITIES

GREEN MONEY

p.53

EFFORTS ARE ON TO CHECK WATER SHORTAGE IN THE SALT LAKE

EXCELLENT; PUT FOCUS ON SPORTS The headlines in CFO India are striking, especially the ones on the cover of the magazine. It looks good and since I get bored easily, I go for magazines that I fall in love with at first sight ... this one is excellent. It would be nice to read some reports on sports as well—on the business of sports, especially cricket, hockey and soccer. —Ravi Ramu, director at Puravankara Projects

CFO India looks very impressive. I think there should be more focus on markets in the topline section of your magazine. —Vivek Kaul, Mumbai

JANUARY 2010

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FORM IV Statement about ownership and other particulars about newspaper CFO INDIA to be published in the first issue every year after the last day of February 1

Place of Publication

: Mumbai

Periodicity of its Publication

: MONTHLY

Printer’s Name Nationality 1[(a) Whether a citizen of India? (b) If foreigner, the country of origin] Address

: KANAK GHOSH : INDIAN : YES : NOT APPLICABLE : KPT House, 41/13, Sector 30. Vashi, Navi Mumbai 400 703

Publisher’s Name Nationality 1[(a) Whether a citizen of India? (b) If foreigner, the country of origin] Address

: KANAK GHOSH : INDIAN : YES : NOT APPLICABLE : KPT House, 41/13, Sector 30. Vashi, Navi Mumbai 400 703

Editor’s Name Nationality 1[(a) Whether a citizen of India? (b) If foreigner, the country of origin] Address

: ANURADHA DAS MATHUR : INDIAN : YES : NOT APPLICABLE : KPT House, 41/13, Sector 30. Vashi, Navi Mumbai 400 703

ALL THE BEST I am extremely impressed with the magazine. It looks ecclectic and I am sure it offers a lot of insights into the world of CFOs not only for the insiders but also for the outsiders. —Prem Udayabhanu, Mumbai

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I loved reading the profile of Suresh Senapaty, CFO, Wipro Ltd. (The Green Evangelist). Such write-ups will definitely help junior finance professionals learn a lot from the experience of their seniors. Keep it up! —SK Joshi, finance director, BPCL

p.50

LEAD THE BIG SHIFT TO SUSTAINABILITY

IN THE DEAD SEA

ZODIAC SIGN: Scorpio WIFE: Neeraja, a homemaker LOVES: Beaches, hill stations FAVOURITE CUISINE: Japanese, Chinese FAVOURITE MOVIES: Indian FAVOURITE AUTHORS: Jack Welch, Alan Greenspan MUSIC: Old Hindi songs ACTIVITIES HE LIKES: Badminton, swimming FAVOURITE ACTORS: Madhuri Dikshit, Akshay Kumar

Really informative

p.14

OFFICE SPACE

Facts & Trivia

MANY YEARS AGO, AFTER HE COMPLETED CLASS I, SURESH SENAPATY DROPPED OUT OF Stuart School in Orissa’s capital Bhubaneswar. Was he homesick?

Maybe yes. Maybe no, he isn’t sure. Senapaty has some vague memories. That’s all. “Ours was a business family and our idea of education early on meant just learning to calculate. That was considered enough education,” remembers Senapaty’s older brother Lalmohan. Senapaty was then put under a home tutor for a few years until Lalmohan goaded him into getting back to formal schooling in Class VI. Had his brother not been persuasive enough, Senapaty says he would have joined rural India’s thousands of other school dropouts. The technical school he attended afterwards had a great reputation for producing future engineers. Like many of his classmates at that school in the bustling little town of Aska, Senapaty, too, would have become an engineer without com-

RADHAKRISHNA

GREEN SPECIAL

Names and Addresses of individuals who own the newspaper and partners or shareholders holding more than one per cent of the total capital:

A DIFFERENT KIND I am sure CFO India will make a very good impact on the financial community in India. —Deepika Sahu, Ahmedabad

NINE DOT NINE INTERACTIVE PVT LTD., KPT House, 41/13, Sector 30. Vashi, Navi Mumbai 400 703 NINE DOT NINE MEDIAWORX PRIVATE LIMITED, K-40, Connaught Circus, New Delhi 110 001 I Kanak Ghosh, hereby declare that the particulars given above are true to the best of my knowledge and belief. Date: March 2010

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Sd/Signature of Publisher

03.10

topli ECONOMY

If history was all there was to the game, the richest people would be librarians.

PHOTOS.COM

WARREN BUFFETT

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Inflation spectre stalks India INDIA’S HEADLINE INFLATION HAS EXCEEDED EXPECTATIONS IN FEBRUARY, ALMOST touching double digits, prompting the country’s central bank to immediately hike interest rates much before its April 20 monetary policy review meeting. It raised both the repo and reverse repo rates by 0.25% each to 5% and 3.5%, respectively. More hikes are on the anvil, say experts. The last time India saw double-digit inflation was in October 2008, when it was 11.8%. Food inflation, which still remains the major driver of wholesale price inflation at 17.8% in February, has started spilling over to manufactured products as well; inflation of manufactured items accelerated to 7.4% in the month from 1.6% in October last year. Annual wholesale price inflation accelerated to 9.89% in February, the highest since October 2008 and well above the Reserve Bank of India’s March-end projection of 8.5%. The inflation data comes on the heels of a 16.7% annual jump in industrial output in January, with the unexpectedly strong economic pickup also back-

ing the case for the central bank to raise policy rates by at least 25 basis points. After a difficult start in the last fiscal, India’s industrial growth picked up after June and posted strong growth of around 9.6% in the April-January period compared with a year ago. Sequentially, the index jumped around 0.2% from December levels. As soon as the inflation figures were out, Ramya Suryanarayanan, an economist with DBS in Singapore told Reuters: “This seals the case for rate hikes so we should expect both reserve ratio and interest rate hikes on or before the April policy meeting.” The RBI had cut the repo rate by 4.25 percentage points in six steps between October 2008 and April 2009. The reverse repo rate was cut by 2.75 percentage points in four steps since December 2008. Several experts are of the view that at this rate of inflation, Indian consumers are required to spend about 20% more on food compared with the previous year to maintain their consumption level. Among food items, the prices of sugar, pulses and potatoes increased by 55%, 36% and 30%, respectively, in the 12 months ended February, according to a Reuters report that quoted official data. The fuel price index shot up by over 10%, mainly on account of higher prices of petrol and diesel. While petrol became dearer by 11.73%, diesel prices increased 8.85%. Sugar prices rose by 55.47% from a year earlier. Meanwhile, finance minister Pranab Mukherjee expressed hope that the economy would soon return to a high-growth trajectory, but cautioned that high inflation and heavy borrowings posed significant challenges. “We shall have to move towards the betterment, towards the development and 9% to 10% growth is achievable. It is not a pipe dream,” he said during the discussion on the Union Budget in the Rajya Sabha, the Upper House of Parliament. The overall inflation is set to accelerate in the current month due to the increase in excise duty, which will push up the index in March. The final inflation figures in January and February could be even higher, going by the prevailing trend. Now, all eyes are still on the RBI.

INDIA’S MOON MISSION

PHOTOS.COM

FORMER ISRO CHIEF MADHAVAN NAIR HAS CALLED THE NEW FINDING “PATHBREAKING”.

Not just water, there is also ice Scientists have detected more than 40 ice-filled craters on the moon’s North Pole using data from a NASA radar that flew aboard India’s Chandrayaan-I. NASA’s Mini-SAR instrument, the lightweight, synthetic aperture radar, found more than 40 small craters with ice. The craters range in size from 2 km to 15 km in diameter, according to a Press Trust of India report. The finding would give future missions a new target to further explore and exploit, a NASA statement said, adding it is estimated that there could be at least 600 million metric tonnes of water ice in these craters. “The emerging picture from the multiple measurements and resulting data of the instruments on lunar missions indicates that water creation, migration, deposition and retention are occurring on the moon,” Paul Spudis, principal investigator of the Mini-SAR experiment at the Lunar and Planetary Institute, was quoted as saying in the report. Space scientist and former chairman of the Indian Space Research Organisation (ISRO) G Madhavan Nair, who had headed the Chandrayaan mission, told the Times of India that the new finding “is path breaking. It is the finding of the millennium.” J.N. Goswami, principal scientist, Chandrayaan-I, described the latest discovery as “an interesting and new result,” a report said. “It is quite interesting ... We thought it would be there, and it is there. I am confident that whatever signals we are getting are correct,” he was quoted as saying in the report.

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topline

REVENUE OUTLOOK

The price of tax sops THE CENTRAL GOVERNMENT IS ESTIMATED TO FORGO REVENUES OF OVER RS 5 LAKH CRORE during 2009-10 which amounts to 50% of its annual expenditure due to various tax concessions given to prop up the industry hit by the global financial turmoil, said a report. “The amount of revenues forgone continues to increase year after year ... to reverse this trend, an expansion in the tax base is called for,” the finance ministry said while providing details of revenue forgone so far. According to a PTI report citing government documents, the revenue forgone is estimated to rise from Rs 4.14 lakh crore in 2008-09 to Rs 5.02 lakh crore in the current fiscal. As a percentage of aggregate tax collection, the tax forgone will move up from 68.59% to 79.54% during the same period. “As a percentage of aggregate tax collection, the revenue forgone remains high and shows an increasing trend as far as corporate income tax (is concerned) ... for the financial year 2008-09. In the case of indirect taxes, the trend shows a significant increase for 2009-10 due to reduction in customs and excise duties,” the report added quoting government documents. Revenue forgone on account of customs duty concessions was to the tune of Rs 2.49 lakh crore in the last fiscal; revenue forgone due to concessions on excise duty stood at Rs 1.71 lakh crore, corporate tax at Rs 79,554 crore and personal income tax at Rs 40,929 crore, it added.

DEAL TALK

Jolt to RIL’s ambitious plan The board of bankrupt Dutch chemical firm LyondellBasell Industries AF has rejected a $14.5 billion bid from Reliance Industries Ltd. According to a Bloomberg report, the offer pitted Mukesh Ambani’s Reliance against creditors including Apollo Management Lp, a New York-based private-equity firm.

POSITIVE GROWTH

Exports rising, again INDIA’S EXPORTS ROSE 11.5% IN JANUARY, SIGNALLING THAT demand for the country’s merchandise is renewing in markets worldwide. According to a Press Trust of India report, exports increased to $14.34 billion in January against $12.86 billion in the same month a year ago. In November and December also, exports grew 18.2% and 9.3%, respectively. Prior to that, they had fallen continuously for 13 months since October 2008. Imports, too, turned positive on the back of growing economic activities, almost doubling the trade deficit to $10.36 billion from $5.3 billion in January 2009, according to official data. In exports, fruit and vegetables, marine products and tobacco did exceedingly well in January, while sectors such as tea, coffee, gems and jewellery and drugs also improved. However, engineering goods, textiles, jute, carpets and leather continued to fare badly, data said. 8

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INDIA’S EXPORTS CONTINUED ITS UPWARD RISE FOR THE THIRD CONSECUTIVE MONTH IN JANUARY

Exploring newer ways TWO PANEL DISCUSSIONS HELD RECENTLY IN THE COUNTRY SAW PARTICIPANTS— academics and industry insiders alike—dwelling at length on identification, assessment and prioritisation of risks. Making the keynote address at one of them, held in Gurgaon, near Delhi, Dr Ramabhadran S Thirumalai, assistant professor, Indian School of Business, Hyderabad, said risk management “is a continuous process and the ultimate goal is not to eliminate all risks but to decide which risks to ICICI’S SHILPA KUMAR (LEFT) WITH OTHER PARTICIPANTS AT A SESSION TO DISCUSS RISK MANAGEMENT take and which risks to minimise”. According to him, risks should primarily be managed in a way that it enhances the value of the company. Depending on the strategies employed by a company, risk management could be profitable at one time and loss making at another, he said. He felt that the key was to convince people that risk management was really necessary and ultimately beneficial for the company. LEGAL BATTLE “Therefore it was imperative to first identify the risks that needed to be managed and then decide how much risk one should manage. Since the risk scenarios kept changing, one would have to monitor the risk exposures of the company at all times,” he added. At the session held in Bengaluru, Shilpa Kumar, senior general manager and head, Global Markets Group, ICICI Bank, said most of the risks she had encountered were not operational but related to financial markets and there were several “options” available to manage them. She also felt that the costs of managing such risks were extremely high and hence the hesitation on the part of the banks to incur such costs. Indrajit Banerjee, chief financial officer, Cairn India Ltd, said globalisation has changed the nature and management of corporate THE LEGAL BATTLE, POTENTIALLY INVOLVING MILLIONS OF DOLLARS, IS risks in the modern world. For him, risk manageUNLIKELY TO END ANYTIME SOON. ment should be from the perspective of the shareholders of a company and it would be up to the IN WHAT IS EXPECTED TO BE A LENGTHY LEGAL BATTLE, APPLE board of directors to understand how shareholders Inc has sued Taiwan’s HTC Corp, which makes touchscreen viewed the company and what risks they are willing smartphones using Google software, accusing it of infringing 20 or not willing to take. hardware and software patents related to the iPhone, according to a He suggested a proper system for measurement Reuters report. of risks, laying down the rules for measurement, Even though the suit did not name Google Inc as a defendant, identifying what the matrix would be, reporting that Apple’s move was viewed by many analysts as proxy for an attack on to the board and for the board to understand what the Internet company, whose Nexus One smartphone is manufacthe shareholders want. tured by HTC, it added. There were differences of opinion on various facApple’s suit was filed with both the U.S. International Trade ets of risk management, but there was consensus Commission and the U.S. District Court in Delaware on Tuesday, after all—on the need to ensure transparency in and seeks to prohibit HTC from selling, marketing or distributing managing risks. infringing products in the United States, it added.

Touch me not, Apple tells HTC

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MANAGING RISKS

view from the top

Facts & Trivia ZODIAC SIGN: Aries

LAST BOOK READ: What the Dog Saw by Michael Gladwell FAVOURITE HOLIDAY DESTINATION: Italy FAVOURITE RESTAURANTS: Peter Lugerâ&#x20AC;&#x2122;s, New York; Zodiac Grill, Mumbai

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ADI GODREJ THE CHAIRMAN OF GODREJ INDUSTRIES says CFOs have

adapted very well to handle new responsibilities. Companies must, however, step up efforts to offer them more training, he adds.

orporate job descriptions are changing rapidly in the current, fast-paced global economy. The role of a chief financial officer (CFO), too, has evolved considerably over the past one decade or so as strong winds of change continue to buffet economies across the globe, including India. Sometime ago, the CFO was mostly responsible for the financial prudence and financial statements of a company. Not any more. Of late, the additional responsibilities the CFO has taken on are closely linked to strategies to drive growth such as managing risks, including managing foreign exchange risks—these have become very crucial in a CFO’s ever-expanding scope of responsibilities. Besides, he or she also has to manage the financial and regulatory implications of mergers and acquisitions (M&As) as more and more domestic companies embark on the path of aggressive inorganic growth even on foreign shores. The M&A scene has, over the past few years, witnessed quite a revolution with our companies increasingly angling for buys abroad. What is commendable in this regard is that in most cases, CFOs have adapted themselves easily to the new parameters, the challenges that growing responsibilities have thrown up before them. This is largely thanks to adequate training measures initiated by their companies. But companies need to step on the gas and continue to provide more opportunities to CFOs for training and learning, which includes offering chances to pursue relevant international courses. Overall, it is heartening to see our CFOs adapting very well to these new realities. Indeed, changes galore. And so are opportunities. All this means CFOs will definitely find it easier to assume or take up the position of chief executive officers at a later stage in their careers. In India, for that matter, it is not unusual for CFOs to

view from the top

move up the corporate ladder to the top executive position. Interestingly, unlike in the past, in most companies, CFOs need to take up responsibilities outside of the finance function as well. This “job rotation” helps boost efficiencies in a company and I am sure it will soon become a common practice among senior members of the boards of Indian companies, something that is common in the West. CFOs who are part of overseas multinational companies or Indian companies that are going global in a big way will get more opportunities and exposure though it may be a while before they start playing a major role in the international scheme of things. Following the recent global economic meltdown, the Indian economy is now in very good shape which means CFOs will have more challenges to

I expect India’s GDP growth rate to be 7.5% in the current fiscal and 8-9% in the next. In fact, growth is accelerating across segments and most companies are doing very well. tackle. I expect the country’s GDP growth rate to be 7.5% in the current fiscal and 8-9% in the next. In fact, growth is accelerating across segments and most companies are doing very well. Generally, these are good times as far as political risks are concerned; such risks are on a slide ever since the United Progressive Alliance government came to power in the last general election without support from the Left. Perhaps the only blip on the horizon is the threat posed by Maoist outfits in some parts of the country. But I am sure with effective measures, the government, led by the home ministry, will soon contain them and usher in a better investment climate for everyone, and everywhere in the country.

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i think

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LAST BOOK READ: Nine Lives by William Dalrymple FAVOURITE RESTAURANT: Sea Lounge (Taj Mahal, Mumbai),

HILTL (Zurich)

i think

Facts & Trivia

ZODIAC SIGN: Sagittarius PAST EMPLOYERS: Diageo Plc, ITC Ltd, , Shoppers’ Stop

GIRI GIRIDHAR ADITYA BIRLA RETAIL’S CFO

says although mom-and-pop stores still rule the sector, modern retail is gaining in popularity

THE INDIAN RETAIL INDUSTRY IS BIG. WHILE ESTIMATES vary, it is worth at least $300 billion and is growing at 6-7% per annum. Of this, the country’s organised retail sector is just $20 billion; however, it is growing faster at 15%. The overall economic growth, burgeoning middle classes and enabling commercial infrastructure are all contributing to this growth. The size of the prize is so significant that we are witnessing the entry of several new domestic and international players in retail. However, the financial health of many retailers has been under stress in recent times and the path to recovery is long. The challenge is clear: how do you access the prize profitably? At the heart is the core question: how do you provide a compelling value proposition? In the food and grocery space, the local kirana stores still rule. They understand the consumer intimately and offer home delivery, credit, etc. Homemakers tend to buy most of their monthly provisions from such stores. Modern retail stores are still a top-up store. This means the challenge

of modern retail is to deliver a value proposition and give a great shopping experience—ambience, pricing, etc. The good news is that in many markets, especially in South India, where the modern retail penetration is sizeable, this has been well-established. The industry is, in fact, learning fast, but ensuring high profitability is still a challenge. Retail is a business of scale. However, there is a need for tight control on costs; you also have to maintain high capital efficiencies. Revenue expansion, especially the samestore sales growth, is the key. Retailers are learning to improve consumer stickiness, walk-ins and ticket values through loyalty programmes, superior pricing and promotions. Retailers are learning to control rental, manpower and supply chain costs. Rentals: The recent worldwide economic downturn and more sensible negotiations are enabling retailers to control rentals—we are now beginning to see rentals negotiated as a percentage of sales, instead of fixed rentals. Manpower: It is a big cost. At the store end, benchmarking and ensuring

the right number per store is crucial. Employee turnover at the front-end is very significant. While the retail industry is a big employer, the challenge has been to offer a credible career path to the front-end staff to ensure retention. At the back-end, where retail experience is still scarce with high costs, lean multi-tasking teams are required. Supply chain inefficiencies: Retailers really need to think through the participation strategy along the value chain. In the fruit and vegetables segment, for instance, retailers who have adopted the “farm to fork” model have quickly realised that the price and quality advantages of farm sourcing are outweighed by the costs to serve. Distribution centres need to be efficiently operated in terms of their size; transportation costs also need to be optimised. The greatest challenge, however, lies in tackling poor vendor servicing. Big FMCG companies barely manage to deliver 60-70% of the orders placed by retailers. Consequently, the need for retailers to operate on higher stocks becomes a necessity. Retailers are trying direct-to-store delivery mod-

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els to slash supply-chain costs. Pilferage: Tackling employee-related pilferage is critical. Regular stocktaking is a must. Working capital management: The retail industry is all about stocks, requiring focus on stock turns and ageing. A high margin product like a Gillette shaving cream is purchased by a consumer once in two months. The low-margin vegetable is purchased every day. Defining the stock levels for each sub-category of merchandise is therefore vital; it is driven by the rate of sale, display stock requirements, vendor service reliability, etc. Further, adoption of practices such as â&#x20AC;&#x153;First Expiry First Outâ&#x20AC;? will ensure that all stocks are well within the sell-by date. Vendor partnerships: With modern retail growing in importance, vendor relationships are getting reshaped. The Wal-Marts and Tescos of the world have a strong negotiating position with their vendors. In India, the share of modern retail compared with traditional trade is still small. Consequently, the ability

of modern retailers to get into strong partnerships is still evolving. However, the quality of dialogue is changing in many casesâ&#x20AC;&#x201D;these retailers are sharing consumer insights based on buying patterns and are influencing promo-

folio investment from private-equity players. A sensible FDI policy will enable the inflow of the much-needed equity and develop the industry. An early implementation of GST will be a welcome move as it envisages doing

An early implementation of GST is welcome as it envisages doing away with artificial interstate barriers. tions, new product launches, etc. Policy challenges: Politically, the government is still wary of the impact of modern retail on mom-and-pop stores, which is seen as an employment safety net. In reality, the retail industry offers the largest potential for employment generation, especially in the young, school-dropout type people, who operate at the front end. All this has resulted in very restrictive FDI policies, which are cutting off not only the strategic equity from retail majors but also financial equity/port-

away with the artificial interstate barriers for goods movement. This will also enhance revenue collections. The government needs to establish a more transparent single window clearance and good administrative mechanisms to keep the transportation of goods simple for retailers. In fact, acceptance of modern retail among consumers is rising. Wellgoverned companies that succeed in delivering value proposition in a financially disciplined way will succeed in the long run.

COVER STORY

PHOTOS.COM

BENNETT VOYLES WOMEN STILL HAVE a hard time in India, by and large. A recent survey by the Global Economic Forum ranked the country 127th out of 136 nations in terms of female economic opportunity. Even in the corporate world, where attitudes towards womenâ&#x20AC;&#x2122;s capabilities tend to be more progressive, the situation is not very good. A survey conducted a few years ago by the Confederation of Indian Industry (CII) found that only 4% of senior management posts in Indiaâ&#x20AC;&#x2122;s top companies are held by women. There is only one sector, in fact, where the situation is completely different: financial services. 16

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have had a great career, but left Today, two of India’s four largest early to have a baby and didn’t end private sector banks—ICICI Bank up coming back. Gupte, however, and Axis Bank—have women in grabbed that first rung and never let charge. Add the female leadership go except to take another rung furat the Reserve Bank of India (two ther up the ladder. out of four deputy governors are Why the leaders were so progreswomen), HSBC Bank, JP Morgan, sive, Gupte and other ICICI alumUBS, and it all adds up to an extraornae don’t recall. Even the current dinary amount of financial power in chief executive officer, Chanda Kochfemale hands—extraordinary not har, describes the company’s attijust for India, but also anywhere on tude towards diversity of all kind as the planet. something that has just always been Among the top 249 Indian com“part of the DNA” of the company. panies, only 11% are headed by “THERE WAS NEVER A QUESIn any case, the company’s prowomen, but over half of those, 54%, TION ABOUT GOING OR NOT gressive attitude towards women are in the financial sector. Right GOING. IF YOU WANTED TO DO wasn’t just a whim of HR. now, women run nearly half the WELL, YOU DID EVERYTHING ICICI put Gupte to work right companies in the sector, accordTHAT EVERYBODY ELSE DID.” in the heart of the business. At the ing to a recent survey by executive — LALITA GUPTE, CHAIRPERSON OF ICICI VENTURES time, ICICI was a lender involved search firm EMI Partners Interalmost exclusively in project finance. national. By contrast, only 7% of While many companies routinely barred women to opportufemale CEOs in the Fortune 500 are in financial services. How did so many women get ahead in a sector as notori- nities out of safety concerns, by requiring that they leave the ously macho as banking, which is still a mostly male bastion office by 5 p.m. or by restricting their travel, the leaders at everywhere else in the world, even in the United Kingdom ICICI expected her to work pretty much as the men did. The daughter of a well-connected family (her father D.S.Joshi and the United States? Even more remarkably, how did they manage to reach the was India’s cabinet secretary; her mother was a social activist), executive suite not because their family owned the company Gupte doesn’t recall being given any special treatment because or because a government quota pushed the door open for of her gender, either in terms of hours worked or obligations them, but through merit alone, even as traditional mores to travel, even when it meant week-long trips to plants in concontinue to restrain millions of other women’s horizons in servative towns in the interior. “There was never a question about going or not going. If you almost every conceivable way? wanted to do well, you did everything that everybody else did,” No single factor is responsible, observers say. However, even without one prime mover, it’s worth a look says Gupte, now 61. From the beginning, Gupte says, she was accepted as an at the elements that made this concentration of extraordinary careers possible—both for women looking for a game plan to equal by her colleagues. “There was no particular deference,” get ahead and for CFOs interested in finding a way to expand she recalls. “I was one of the gang, one of the team.” Gupte’s success encouraged the bank to take on other their pool of potential financial talent. women, who report having the same experience. A later hire, Kalpana Morparia, now CEO of JP Morgan in India, also insists that gender was never a factor in ICICI’s decisionGAMBLING ON GUPTE For this generation of leaders, one of the biggest breaks making. “Everything was on merit and gender played no role occurred in 1971, when one of the country’s larger private whatsoever,” she says. “What was clear was that if I perform I would get what financial institutions, the Industrial Credit and Investment Corporation of India (later renamed as ICICI Bank), decided I deserve and not be discriminated against because I am a woman,” agrees Kochhar, to give young Lalita Gupte 48. “At the same time, I was a chance. also very clear that I can’t The bright graduate of expect too many special Jamnalal Bajaj Institute of privileges being a woman— Management Studies in you know, I am a woman so Mumbai was not the first I’m going to walk out every female banker at ICICI. evening at a certain time or The first, she says, could

VERY FEW TOP CORPORATE MANAGEMENT POSITIONS ARE HELD BY WOMEN … THERE IS ONLY ONE SECTOR, IN FACT, WHERE THE SITUATION IS DIFFERENT: FINANCIAL SERVICES.

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NATURAL-BORN FINANCIERS?

Simple math suggests that doubling your applicant pool will double your chance of finding top financial talent. But the math involved in expanding efforts to bring in more women may be subtler than you would think.

MINUS

Many women aren’t interested in the punishing life of a high-powered financier. A certain percentage will decide they would rather spend more time with their children.

PLUS

Recent studies suggest that the talent balance may not be one for one: some recent studies have found that when it comes to handling money, men and women aren’t equal. Women are better. A variety of studies have found that women handle money more carefully and analytically than men, and now a new study is confirming that women in finance have some of the same characteristics.

PLUS

A 2009 survey by a Boston College assistant professor and a PhD candidate at the school tracked the performance of 73 female CFOs who served at least four years as CFO between 1996 and 2002. They compared the stock performance of the women’s companies with that of 500 male CFOs after they announced an acquisition or secondary offering, and found that on the whole, the market gave the women higher marks. Over all, the market gave the women a 2% price premium over the men after the announcement of an acquisition or a secondary offering. Professor Darren Kisgen’s conclusion: the market believed the deals were of higher quality.

PLUS

“Female CFOs seem to take a more strategic view,” says Prasad Kaipa, a management professor at the Indian School of Business, who is now beginning a study of women’s leadership in business. “They seem to be able to create a balanced view regarding profitability versus risk.”

PLUS

Women tend to be better at putting themselves in another’s shoes, says Chanda Kocchar of ICICI, giving them an advantage when it comes either to designing products or HR policies. Kaipa agrees. “Women tend to congregate in groups and talk about what is shared. Men tend to congregate in groups and talk about themselves,” he says. “Women work very well in teams,” says Gupte. “There are many women out there, eager to make good,” says UBS’s Manisha Girotra.

I am not going to travel or I am not going to keep long hours. Whatever it took to do the job, I must do it. Whatever a male colleague would have given to that job, one must do it.” In fact, the only special treatment ICICI alumnae recall was the company’s liberal policies when it came to maternity leave. Otherwise, the bank gave no special quarter on account of chromosomes. The company was broad-minded in other ways as well, says Morparia, 62. “There were no stereotypes. There was nothing to say just because you are a great quantitative person you can only be very good at model building, or you’re a lawyer, so the only role you can play is in-house counsel,” she says. “...If you had it in you, you got the job.” Brought in as a lawyer herself, for instance, Morparia was given opportunities beyond the law that led her eventually to a role as joint managing director. Always, she says, the only question was who is the best person for the job? But one feminist is skeptical that ICICI Bank could always be so even-handed. “I’m sure for every Chanda Kochhar there are 10 women who were stepped over and were not allowed to step up the ladder,” says Urvashi Butalia, a Delhi-based feminist writer and publisher.

JUST BE GREAT Gupte’s recipe for success in the man’s world of banking is simple: good work and a lot of it. “You have to be very dedicated and you have to work very hard, maybe twice as hard initially,” she explains. “...The point is to be so good at your work that nothing else matters.” The recipe worked, both for Gupte and for many of the women who followed her. Over time, many women rose at ICICI Bank and kept on rising, even as the bank grew. In time, Gupte became the bank’s joint managing director and chief operating officer, and although she retired in 2006, today she retains a post as chairperson of ICICI Ventures, the company’s venture capital arm, and serves as an audit committee member for Nokia and several other boards. In recent years, women have become so successful at ICICI Bank that some competitors took to deriding it as then-CEO K.V. Kamath’s “petticoat brigade”, but the women at ICICI have had the last laugh. Today, ICICI alumnae run not only ICICI and the majority of its divisions, but a number of other financial service companies as well, including Axis Bank and JP Morgan. Former ICICI Venture head Renuka Ramnath has even struck out on her own, and is now raising money for a new venture fund, Multiples. Several of the women, including Morparia and Gupte, regu-

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larly make it to the lists of top busieducation of all their children, and ness women, not only within India, expected them to succeed profesbut also around the world. One of sionally. the latest triumphs: the Forbes magaAll of Gupte’s siblings, a brother zine recently ranked Kochhar the and two sisters, for example, are also 20th most powerful woman in the professionally accomplished. Gupte’s world, a few steps behind India’s rulbrother was closely involved with the ing Congress party’s president Sonia ground-breaking super computer Gandhi but ahead of some heads of project; her sisters became a gynaestate, including Michelle Bachelet, cologist and a writer. Gupte and most the president of Chile. of the other women had supportive Beyond a progressive attitude husbands, too—men who not only towards female capacities which let them work, but also wanted them Kochhar says has always just been to succeed at their work. “I THINK IT’S (A QUOTA part of ICICI’s DNA, some qualities They say they benefited as well SYSTEM FOR WOMEN) COUNof the industry itself may have made from the availability of domestic serTERPRODUCTIVE BOTH FOR it easier for women to fit in, or at vants, and their families. Gupte, for THE FEMALE INDIVIDUALS AS least a more attractive industry for instance, says she relied on her sisWELL AS THE ORGANISATION.” them to join. For some, but certainly ters to help watch her two children — KALPANA MORPARIA, CEO, JP MORGAN INDIA not for women in project finance or when she travelled. venture capital, the hours may have Between servants and relatives, been helpful. Bankers’ hours can be long, says Prasad Kaipa, UBS’s Girotra says that it’s often simpler to combine a busia professor at the Indian School of Business, who has coached ness career with motherhood in India than in the West, where both Indians and American business people on leadership, nuclear families and expensive child care can make the decision but they are also often predictable: a help for a woman raising to pursue a career more difficult. All that support “really makes a family. the decision so much easier”, she says. The value of banking as a tool of social development may The Indian public itself has been surprisingly supportive also have attracted some women. Manisha Girotra, chairper- in its own way as well. Butalia says she has been surprised son of swiss bank UBS in India, for instance, went into bank- at how accepting the public has been of successful corporate ing partly because she had seen how her father’s work as a women. It’s the same as in politics, she says, where many banker of a state-owned bank could transform a life. women leaders who began under the quota system are now “I liked what he did,” says the 40-year-old banker. seen as individuals, and powers in their own right. The fact that clients need to win banks over to get their loans may have helped, too. When they met clients, none of the ICICI executives inter- WHERE NEXT? viewed ever recall running into any difficulties, not even when For Indian women in finance outside banks, the story isn’t touring factories in the country. “People were not used to see- nearly as bright. When it comes to corporate finance, sucing women walking the shop floors,” says Kochhar, recalling cesses are few and far between. It’s true that India-born Indra her first project finance trips 25 years ago. However, employ- Nooyi, who has spent most of her career in the United States, ees were still respectful—a reflection, perhaps, that people are rose to become the CFO at PepsiCo Inc and is now the CEO generally on their best behaviour around their creditors. “We of the food and beverage giant, but it’s hard to point to many were their bankers, after all,” explains Kochhar. other such stories. On the supply side, a lack of qualified candidates is one limiting factor. Only 15% of the members of the Indian Institute of Chartered Accountants are women. FAMILY TIES Soon, however, this is Support from their comgoing to change. Perhaps pany wasn’t the only reason encouraged by the examfor the success of today’s ple of today’s queens of female bank leaders: they finance, roughly a third of also say they benefited accounting students today from support outside the are women, according to company. Most came from the association. families that valued the

FOR INDIAN WOMEN IN FINANCE OUTSIDE BANKS, THE STORY ISN’T NEARLY AS BRIGHT. WHEN IT COMES TO CORPORATE FINANCE, SUCCESSES ARE FEW AND FAR BETWEEN.

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Demand is a second problem. female employees that they say is It can be doubly difficult to break essential is liberal maternity leave. into a historically male function in While not all these women took a historically male industry. Even in much time off—Gupte says that the US, where women are 30-40% she stayed home only for three of finance MBAs, surprisingly few months—a liberal policy made it have reached the top. Changing that much easier for them to get ahead. dynamic isn’t hard, however, Gupte Kochhar says that for her, diversity says. Her recipe: hire a few women. itself is what’s important—not how Once a department gets used to many men or women there are in a having women as colleagues, the team, or their social group. next hires take care of themselves, “Diversity makes the decisionsays she. However, most bankers making process that much more interviewed opposed rectifying the balcomprehensive,” she says. ance through quotas. Although Gupte “WHAT WAS CLEAR WAS THAT thinks quotas have shown some value RECOMMENDED READING IF I PERFORM I WOULD GET in politics, particularly at the village WHAT I DESERVE AND NOT BE 1. Female Power (The Economist; March level, she isn’t so sure of their value in 9-19 issue) DISCRIMINATED AGAINST the corporate world. BECAUSE I AM A WOMAN.” Morparia agrees. “I think it’s coun2. Womenomics (The Economist; March — CHANDA KOCHHAR, CEO, ICICI BANK 9-19 issue) terproductive both for the female individuals as well as the organisa3. Why Women Mean Business by Avivah tion,” she says. While she helps her current employer, JP Mor- Wittenberg-Cox and Alison Maitland (published by John Wiley & Sons) gan, in its more directed efforts to promote women, she says 4. Women Hold Up Half the Sky (Goldman Sachs report; March 4, 2008) her personal belief is that neutrality is the better path. About the only distinction in treatment between male and 5. www.20-first.com

COVER STORY | BLOG

WHY WORDS MATTER: DUMP DIVERSITY, PAINT A MOSAIC There are some words whose time has come … and gone.

his month I had the pleasure of spending a morning with a handpicked group of HEC MBA students, talking about careers, choices and life. Looking around the room, at a group made up of nine nationalities, 50% men and 50% women, it struck me. This isn’t “diversity” —this is the new normal. The underlying meaning of the current use of the word “diversity” in business labels certain groups as diverse, something different from the norm. The norm being homogeneity. But that norm is long gone in global business. And continuing to call the resulting, extraordinary, delightful mishmash of peoples “diversity” is misrepresenting a basic 21st century reality. Now, the diverse element is the old dominant majority: the home-country nationals who have never truly left their country, their culture and their languages. And who look askance at those who do not fit their codes, or play by their rules. For the moment, most progressive companies have created Diversity Departments. This starts from a wellmeaning urge to make a range of differences, and minorities feel comfortable within the walls of an organisation.

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BY AVIVAH WITTENBERG-COX

This approach has not proven its efficacy. Especially not as relates to gender, given the startling lack of balance in the senior ranks of most companies. Ironically, the diversity movement has proven to be quite good at alienating the “un-diverse”, the guys who are the backbone of past successes, and who often pack their bags once they think that their next promotion is likely to go to someone “more diverse”. Yet these are precisely the people you need, to be pushing the change.

BLOG | COVER STORY

Recently, these departments, usually a sub-set of HR, have been re-baptised Diversity and Inclusion. This is meant to be a whole new opening on a more progressive approach to diversity. I think it makes the whole thing even worse. The words underline the presumption that the “diverse” folk need to be included … in what? The dominant norm? It seems to me that the corporate read on diversity reflects the tension between the two definitions of the word diversity: the first meaning being difference, the second meaning variety. One of my favourite quotes is from Tom Becker, president of the Chautauqua Institution, who says that “tolerance is a tepid response to diversity.” He points to the unacceptable hierarchy between those being tolerant and those being tolerated. I think the same comment can be made of those who are considered “not diverse” calling certain others “diverse”… or those being “inclusive” and those being “included”. Tom goes on: “Life is diverse in all its expressions.… We know this from the biology of life. We know that all of life seems to relate to core expressions of DNA and yet all of life is different. This lesson that we are one within our differences finds its expression in the discoveries of science and in the basic tenets of religion. And yet we continue to define family by the small and familiar rather than the large and enfolding. We talk about the necessity of having our walls and windows for safety and comfort, and the large-heartedness of

our willingness to open those doors and windows, on occasion, and with care and within limits. We live in an interracial, inter-religious, intergenerational, inter-partisan and interdependent world.” “Diversity and Inclusion” smacks of walls and windows. We need to re-brand the concept, and use new language. I grew up in a country, Canada, that aspired to be a cultural mosaic, in contrast with our formidable neighbour to

the most basic part of their own job. Instead, we need to make the understanding and appreciation of the magnificent variations of human existence an integral part of 21st century management—for every manager. It’s not about magnanimously including others in your picture. It’s about humbly understanding that you are only a fragment in a much larger tapestry. Finally, as the gender expert that I am, I am regularly offended by the term

The corporate read on diversity reflects the tension between the two definitions of the word diversity: the first meaning being difference, the second meaning variety. the south that imagined itself as a melting pot. As the world yearns to balance local or national identities, roots and cultures with global openness, interconnectedness and cooperation, the mosaic seems ever more relevant. Actually, I think we have come farther than we think. When I look at the multinational companies that operate all over the globe, with managers familiar and fluent with airports and videoconferencing with other cultures, accents and business practices, I question the need for Diversity Departments. Creating a Diversity Department, with a Head of Diversity, is a great way to get managers to think that diversity is someone else’s business, and not

“Creating a diversity department is a great way to get managers to think that diversity is someone else’s business, and not the basic part of their own job. ”

“gender diversity”. What in the world does that mean? Men and women make up almost exactly equal parts of humanity. Women now outnumber men among university graduates and among consumers. Can companies consider the majority of the talent and the majority of their customers a “diversity”? That isn’t the best approach to harnessing the opportunities this new world offers us. I propose renaming Diversity and Inclusion. How about referring to Mosaic Management? That puts the responsibility on all managers to have a global, inter-cultural mindset, and 21st century leadership competencies. This would of course include “gender bilingualism,” fluency in the differences, styles and preferences of men and women. Then you are uniting behind a common aspiration for connection, not unwittingly separating the ins from the outs. Sometimes, in breaking new ground and new centuries, you need to update the vocabulary to fit the times. “Diversity” is one of the words whose time has come … and gone. THE AUTHOR IS CHIEF EXECUTIVE OFFICER, 20-FIRST.COM

—Avivah Wittenberg-Cox

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CFO PROFILE RAVI NEDUNGADI, CFO, UB GROUP

THE

Indomitable NEDUNGADI He never shies away from a fight, not even with his boss Vijay Mallya. But now, he faces his toughest challenge yet. He must put his group’s ailing airline business back on track while sustaining growth in a company weighed down by debt from his last few mega deals. And toughest of all—he will have to do it without the help of his beloved Cohibas! ULLEKH NP

AYANI KURUSSI RAVI NEDUNGADI SITS IN HIS BENGALURU OFFICE, ACROSS A LONG TABLE,

relaxed, determined and exuding power. His slick hair combed backwards, he looks more like a don out of a Hollywood movie than the CFO of the UB Group, the liquor and airline conglomerate. The only thing missing from the picture are the rings of smoke rising from his trademark Cohiba cigar. He doesn’t smoke cigars any longer, as his doctors have advised him against smoking. “I have stopped smoking for the time being.” 24

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Facts & Trivia ZODIAC SIGN: Libra PAST EMPLOYERS: Computer Point, Bangalore; Pentagon Fasteners, New Delhi; Macneill & Magor, Kolkata & Delhi LAST BOOK READ: Stephen Roach’s The Next Asia; now reading The Lost Symbol by Dan Brown FAVOURITE HOLIDAY DESTINATION: London FAVOURITE SPORTSPERSON: Rahul Dravid FAVOURITE BUSINESS LEADERS: The late B M Ghia (Indian Organic Chemicals) Ratan Tata and Vijay Mallya

GIREESH G V

NEWSPAPERS HE READS REGULARLY: Deccan Chronicle, Business Standard, The Economist FAVOURITE CUISINE: Oriental, Bengali FAVOURITE MUSIC: Ghazals, semi-classical

DECEMBER 2009

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While it’s undoubtedly good for his health, it’s disturbing to see Nedungadi without his Cohiba. The smoke of that cigar, which serial entrepreneur Captain GR Gopinath calls Nedungadi’s logo, wafted over a number of important deals over the past decade, game-changing deals that grew the market capitalisation of the UB Group from $145 million just four years ago to $5.8 billion today—just the kind of fast-moving game you would expect from the corporate vehicle of the fast car-loving, cricket-crazy, globe-trotting billionaire Vijay Mallya. But today, as he struggles to bring the troubled Kingfisher airline division back to health, the cigar and the aggressive deal-making are both a thing of the past. For the time being.

media. “I met them all,” he says. “Both the chairman and I, we went out and made a number of commitments to investors in terms of reorganising ourselves and in terms of transparency, which at that time seemed far-fetched.” He worked beyond the company too, to encourage best practices and transparency within the industry, enabling the entry of institutional investors and re-rating the entire sector. Eventually, investors started showing huge interest in liquor stocks—and looking at United Breweries Ltd not as an investor in a dodgy industry, but a fast-moving consumer goods producer. Now Nedungadi sees United Breweries as a “branded FMCG company”.

THE LIQUOR GAME

GRASSHOPPER AND ANT, LTD.

But Nedungadi has pulled off plenty of surprises before. In At least two liquor industry experts say privately that it was just a few years, he built United Spirits Ltd, the Rs 1.25 bil- Nedungadi who gave a new spin to Mallya’s flamboyance, lion flagship company of the UB Group, into India’s biggest offering his businesses a much-required boost to make them and the world’s third largest alcoholic beverages company. attractive for investors and bankers. Without doubt, it is a burnished showpiece of Mallya’s entreNedungadi has a slightly different take on Mallya, who preneurial excellence; in the third quarter of this year, its earn- inherited the group from his father in 1984. ings surpassed analysts’ expectations. “I don’t think spin is the right word.” It wasn’t always this way. “The thing is that Vijay Mallya is a larger-than-life individWhen he took over as CFO in 1998, he recalls that there ual … but that is also an imagery he has carefully cultivated was a great deal of confusion in the minds of investors and because it is in keeping with the lifestyle brands which are at the media because of the enormous political meddling in the the heart of UB’s business … that spirit, the whole character liquor business. of Mallya is very much in consonance with that brand imagAt the time, the liquor busiery. Unfortunately, it must have ness was despised by powerful been misunderstood in many investors, especially from the quarters,” he says. Gujarati community. Industry “My sober personality is a foil insiders say Nedungadi played to that … in fact, that is why I the most crucial role in the UB keep telling you that we compleGroup in persuading its stakement each other,” he sums up holders that liquor could be just with an I-understand-it-all, cynianother business. cal smile. “If you go back 20 years, Then there is a pause and in north India, you had this he sits for a while in the way Thekedari system … I think the Gopinath has described him—a imagery of the thekedar, the Buddha, a figure of utmost comwheeler-dealer kind, was in posure—before he resumes talkeverybody’s mind … the fact ing about Mallya. that the UB Group, created Nedungadi and Mallya go as a corporate entity, is unlike back 20 years now. He says very those street-smart types was not shortly after he joined the group widely appreciated back then,” in 1990, when he was assigned Nedungadi recalls. to do mergers and acquisitions, He, along with Mallya, tried to his work brought him in conbreak that stereotype, and sold tact with Mallya in a big way. the story of how United BrewerHe found the two worked well ies could run a “sensible, ethical together—Mallya providing the business in liquor” to the counvision and Nedungadi handling try’s investors, bankers and the the details. RAVI NEDUNGADI

“Mallya has often accused me of lacking the vision that he has … if I had it, I have often joked with him, then he would be working for me.”

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wrote a 2-3 page offer letter”. And that set the ball rolling. “I think with that step … they certainly started talking.” “That succeeded in improving the trust … though we were yet to conclude the deal, they had actually started talking,” remembers Nedungadi. “Then it was a Mallya brain wave that I executed by approving a public offer for minority shareholders which finally won the day,” he notes. Those two insights—the simple, handwritten letter, and the public offer for minority shareholders—finally catapulted United Spirits into the big league, as one of the largest alcoholic beverages company in the world. “That deal changed the rules of the game in the liquor business and for the group,” Nedungadi says. It has also led to other liquor deals, most notably the £595 million acquisition of Whyte & Mackay Scotch brand which gave the company access to scotch inventory. Nedungadi played a complementary role alongside Mallya in this buy “It was a strategic asset. It was an important milestone for us,” says he.

Nedungadi keeps things simple and straight ... in the process of sealing the Shaw Wallace deal, he replaced a complex document with a hand-written offer letter, and that helped build trust.

THE BIG DEALS After the death of Mallya’s fiercest rival, Manu Chhabria of Shaw Wallace & Co in 2002, Chhabria’s wife and daughters wanted to exit the cut-throat world of liquor business, but they didn’t want to sell Shaw Wallace, which produced Royal Challenge and Directors’ Special whiskies among others, to the UB Group. But Nedungadi and Mallya had other plans. They were keen to keep trying because they believed that enormous synergies were possible through such a buy. In spite of the complexities involved in landing the Rs1300 crore deal, which closed only in mid-2005, in the end, Nedungadi remembers the whole deal came down to one small detail. When the final offer letter had to be given to the sellers, the lawyers had in usual form drafted a complex document with caveats, riders, etc. He realised that this could lead to “some degrees of suspicion”. “We were dealing with Mr Chhabria’s wife and daughters and they were represented by McKinsey and Co. We actually didn’t use any high-powered merchant banking expertise in negotiating the deal ourselves,” he says. To allay any such suspicion, Nedungadi immediately “hand-

UP IN THE AIR When Kingfisher Airlines, which gets its name from the UB Group’s flagship beer brand Kingfisher, was launched in March 2005, it had two things going for it. First, it was a trusted consumer brand. Second, leave it to a company owned by the game-loving Mallya to see to it that Kingfisher became the first domestic airline to offer entertainment systems in every seat. It also had a lot of ambition. Mallya wanted Kingfisher to be the country’s largest domestic airline by 2010. But getting there was not going to be easy —even reaching somewhere near that target would be really tough, because Kingfisher was competing with airlines that had massive wingspan in the segment. And then the opportunity struck. Four years after its launch, Air Deccan, India’s first no-frills, low-cost airline, was looking for partners. Its founder Gopinath was looking to sell some equity. There were companies with deep pockets interested in entering aviation by buying a stake in Deccan Aviation which ran Air Deccan, but Kingfisher was, like in the case of the Shaw Wallace deal, ready to make an offer the “captain” couldn’t refuse. In his book, Simply Fly: A Deccan Odyssey, Gopinath describes the

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Mallya, he admits, has often accused him of lacking the entrepreneurial spirit and the vision that he has. “If I had them, I have often joked with him, then he would be working for me.” “Mine is a very much feet-on-the-ground approach, understanding the way the financial system works,” says he. “I take pride in the fact that I am generally upfront with people across the board, even with Mallya…. I don’t waste time … whether it is internally or externally, I am accepted for plain speak.” In fact, Nedungadi is so blunt that he almost quit the UB Group a couple of times in the past 20 years, but always decided to stay in the end. “It is no secret,” he says, adding that his relationship with the group was never a “one-way thing”. “It has been a satisfying time for me as well … to create value for the group and promoter etc, it has been a two-way affair for me.” Nedungadi insists that his feet-on-the-ground approach is what the company is really about deep down. On the product side—on the consumer delivery side—the UB Group has an extremely flamboyant lifestyle-oriented approach. But at the heart of the conglomerate’s business, the backend, it tries to keep everything conservative and simple, he says. Nedungadi doesn’t explain further, but says that “we have uncomplicated our business”.

CFO Profile

meeting he had with Nedungadi on a day in 2007 when the preliminary deal for the merger of Air Deccan with Kingfisher was made. Early that morning, at 4 am, Gopinath had got a call from Mallya in Monaco, explaining the deal. “… We decided to meet at the Oberoi at 2 p.m. Ravi was there, a glowering cigar in his mouth … I checked the key details and signed a preliminary agreement with Ravi Nedungadi representing Mallya….” “It brought us scale that we couldn’t have managed otherwise … it has come at a cost but the way I look at it in any industry in India if we are to acquire with a 20%-plus market share, $2-3 billion would not be an unreasonable price to pay,” Nedungadi says justifying the deal. Not that the decision needs defending: in fact, Nedungadi is widely respected in the industry for helping close the Air Deccan acquisition in record time. Kingfisher first picked up a 26% stake in Deccan Aviation, and later acquired its ownership—then integrated it into the Kingfisher fleet, rebranding it as Kingfisher Red. But today, it still hasn’t paid off. The UB Group’s airline division, saddled with at least Rs 6,000 crore in debt, is hurting the whole entity. As the airline industry is going through difficulties, Kingfisher Airlines posted a net loss of Rs 419.96 crore in the third quarter of this financial year. However, Nedungadi claims that “the trajectory is upward”. “I am not saying Kingfisher is out of the woods yet. The growth is happening and rationalisation is taking place in the industry,” he says adding that “we have not cut back on the consumer experience.” Even last year, when most chief financial officers were hunkered down and were waiting for better times, Nedungadi kept making deals. At the height of the global economic slowdown, he helped United Spirits raise Rs 1,100 crore by selling treasury stock in two blocks—following the failure to strike a deal with Diageo plc, which wanted to buy a 15% stake in United Spirits. In the first block deal, 52.6 lakh shares or 5.2% of the company’s equity changed hands on the BSE at Rs 900 per share. In the second block deal, 72 lakh shares changed hands on the NSE at Rs 886.30 per share.

St Xavier’s College—where Mallya also studied—and finished his BCom and CA simultaneously. He finished his CA before he was 21 and wasn’t allowed to become the member of the CA Institute for several months. After graduation, he worked with a couple of companies such as at Macneill & Magor Ltd, a diversified conglomerate, and Pentagon Fasteners Ltd in Delhi. “A lot of my outlook to business started out there,” remembers Nedungadi. Then, he moved back to Bengalaru, joining the UB Group in 1990 as corporate treasurer. Within two years, he was transferred to London as group finance director of UB International, which included the paint giant Berger Jenson and Nicholson, which he succeeded in getting listed on the London and Singapore bourses.

FAMILY MAN, BUT MOSTLY ON THE ROAD Despite all those years working with Mallya, Nedungadi says that he is still not a flamboyant person. “It is difficult for me to be that. I am not very comfortable at big parties and all. I am happy being in small gatherings with friends.” Nedungadi, who listens to ghazals and semi-classical music to unwind, says he is a family man, but he is on the road for at

Industry insiders say Nedungadi played a crucial role, along with Mallya, in successfully campaigning with investors and bankers to remove the stigma associated with the liquor business.

HONORARY BENGALI, KANNADIGA Born on 20 October 1957 in Kerala, Nedungadi was brought up in Kolkata. He went to St Xavier’s School, Kolkata. “But thanks to all disruptions caused by the actions of the now ‘sainted’ Jyoti Basu (the late chief minister of West Bengal who imposed compulsory Bengali medium of education in schools), I ended up finishing my schooling in Bangalore.” But then after schooling, Nedungadi returned to Kolkata to 28

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least 20 days in a month, he adds. “I hardly get time to watch movies or read much.” His wife Suma is a psychotherapist, mainly dealing with children’s problems and those of their parents. Their older son is an engineering student in the US and his daughter in 12th standard at the Christ University, Bengaluru. While there is talk in circles close to him that he is highly religious, Nedungadi calls himself a deist. “Going to temples per se is not high on my agenda. I spend some time every day in the morning and evening to pray … of course, I believe in God,” he says. Nedungadi is no foodie, but he loves both Bengali and south Indian cuisine. “I am not fussy about food at all,” he says. When it comes to drinks, the scotch has not gone the way of the cigars yet. “Still, I take one or two scotches every day,” Nedungadi says. But it’s not quite the same any more, without tobacco as a companion. “Earlier, I used to love my cigars more.” But in his habits as in his deal-making, that’s just how things are ... for the moment.

inpractice

gender question BREAKING THE GLASS CEILING IN FINANCE

Mentoring and longevity in a firm are critical for women to stay the course and reach leadership levels BY NEETA REVANKAR

PHOTOS.COM

ow is a leadership role in finance different from other leadership roles? Why are there large numbers of women in the finance functions of major corporations but disproportionately few women chief financial officers (CFOs)? The role of the CFO has been evolving over time. The CFO is expected to keep the CEO honest, be the truth teller to the board of directors and investors; he or she has to be the trustee of the shareholders by protecting company assets and ensuring compliance with financial reporting and control requirements. CFOs are often required to manage the risk function to set the tone of governance in many organisations. CEOs and boards also expect CFOs to partner the CEO and the other leaders in setting the future direction of the company in a way that enhances business performance and shareholder value; to be strategic thinkers, CFOs have to exercise strategic judgment and make tough, timely decisions with available, often uncertain and incomplete information. CFOs are often also required to be the catalyst for changeâ&#x20AC;&#x201D;promoting financial literacy and financial thinking throughout the company and building a framework for disciplined execution, understanding what it takes to get things done within the company and applying that knowledge consistently to drive execution. It is, therefore, obvious that strong

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ethics, integrity, sincerity, trust, courage, self confidence and willpower are key requirements of a person holding such a position. In addition, the CFO is today required to be adept at influencing people instead of just directing change in the organisation. People and influencing skills are vital to ensure buy-in on tough decisions. The use of dialogue, along with listening to other points of view, while making decisions is viewed as critical. Education in accounting

“It is important for women to recognise that they need advocacy and support, and if it does not come automatically, it is alright to seek it.” —Neeta Revankar

evant for women, since we have competing demands on our time. Longevity has certainly helped me get to the coveted position faster than most. Women in leadership positions usually have their physical support systems well in place. In my view, women must also ensure that they set up a strong emotional infrastructure in terms of informal work groups—mentors and coaches, family and friends—on whom they can lean on when needed. These are essentially relationships where you feel secure enough to openly discuss challenges at the workplace and get other perspectives that can help significantly.

I would say, get your ‘software’ and ‘infrastructure’ in place. By ‘software’, I refer to the soft skills of communication ... by ‘infrastructure’, I refer to support systems, both physical and emotional. is another critical factor which ensures that women are able to stay the course and reach the leadership levels. The investment of time and energy required in establishing new relationships and networks, and understanding new organisational methods can be better spent on being more effective in the existing organisation. This is more rel-

It can be really helpful to have someone perceptive and reliable to talk to, to bounce your thoughts off, and clear your mind. And, if you have as a part of this infrastructure someone who has been through similar situations and can share her experiences with you, show you the mirror in a non-threatening way, then it works even better. Women often

do not make the investment of time that is required in creating and maintaining this infrastructure, and this has been a key learning for me personally. From an organisation’s perspective, it would be worthwhile to examine how diversity at the leadership-level links to their business results. Once this is established, they need to create the infrastructure to support the women’s need for flexibility, to counter the exclusion of women from the typically male-dominated informal networks and to focus on the advocacy and mentoring required for women to succeed in leadership positions in finance. For women who have the requisite values, competence and courage, and who aspire to get to this position, I would say, get your “software” and “infrastructure” in place. By “software”, I refer to the soft skills of communication, influencing and negotiation, people and relationship skills and, of course, the learning skills. By “infrastructure”, I refer to the physical infrastructure (the support systems to help take care of your other responsibilities at home) and emotional infrastructure (your informal network that keeps you positive and strong). Strengthen and nurture these and you will soon find yourselves joining the ranks of leading CFOs. THE AUTHOR IS CFO AND GLOBAL HEAD, HR, IT AND ADMINISTRATION, AT SASKEN COMMUNICATION TECHNOLOGIES LTD

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and finance does not necessarily prepare finance professionals to be good at negotiation and driving a fair bargain. Conflict resolution skills, a subset of negotiation skills are vital to balancing competing interests in a company. Seems like a great deal to ask of one. So clearly the appropriate interplay of key personal traits and values and specific skills are vital for CFOs. When we bring in the gender issue, of course, the challenges only increase for the women and sometimes they really look insurmountable. Early in my career, I did not even think of the impact of gender on my career. I was, somehow, never exposed to any such discussion or thought. The idea was that I would compete fair and square and needed no handicap. The aspect that has helped me as I have grown in the various finance roles in various organisations has been that someone at a senior level recognised my potential and advocated for my development and growth, even though I did not ask for it. I was lucky. However, I think it is important for women to recognise that they need advocacy and support, and if it does not come automatically, it is alright to seek it. Longevity with an organisation

inpractice

risk management BATTLING A DOUBLE-EDGED SWORD

Financial executives look at ways to combat inflation and interest rate risks

BY PHOTOS.COM

his is no question for which you can give or expect an answer in one breath. For, it is not a choice between good and evil. Nor is it a choice between tough and easy. Which one do CFOs fear most? The accelerating inflation that forces people to trim their spending or a rise in interest rates which makes borrowing tougher? Top CFOs in the country are a tad divided on which one is a bigger spoiler in these times when the focus should be on boosting economic growth, after all the slowdown across the globe, but all of them emphasise the fact that what’s crucial in riding out the bad times—either in the case of a high inflation scenario or in the event of interest rate hikes—is how good companies take everything in their stride and manage such major, external risks. R Nandakumar, the CFO of Honeywell International Inc, is of the view that a hike in interest rates, one way to tackle high inflation, would be clearly alarming because it would directly hurt the fiscal and monetary stimulus measures initiated in the country so far, to prop up the economy buffeted by strong winds of frozen or sluggish growth worldwide.

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BY ULLEKH NP

The Congress party-led ruling government has introduced a host of stimulus measures, including excise duty cuts by 6%, service tax reduction by 2% and raised expenditure in social and infrastructure sectors, besides an agriculture loan waiver to the tune of Rs 65,000 crore and implementation of the Sixth Pay Commission recommendations. The fiscal and monetary sops introduced by both the RBI and the government have resulted in the economy bouncing back with growth in the second quarter of 2009-10 standing at 7.9% against 6.1% in the first quarter and 5.8% each in the preceding two quarters. Between September 2008 and January 2009, India’s central bank, the RBI, had cut the repo rate by 425 basis points, the reverse repo by 275 basis points, and the cash reserve ratio (CRR) by 400 basis points to prop up the economy.

rates are major concerns for businesses. “The real point to be seen is whether the upward movement of interest rates in the current scenario can curtail the high inflationary pressures on the Indian economy,” he says. The Wholesale Price Index-based inflation in India jumped to 9.89% in February compared with a year ago and food inflation stood at 17.8%, marking a 16-month high. “The government should control inflation by supporting logistics, sup-

tional efficiencies. Adds Nandakumar, who maintains that managing such risks are really tough: “Re-look all your long-term investment plans and make sure such investments are not exposed significantly to interest fluctuations due to huge borrowings.” “Also, have a re-look at your long cycle sales pipeline and make sure that the production line is optimally loaded and working capital movements are closely monitored and kept under control.”

CFOs say what’s most crucial in riding out the bad times is how fast companies take everything in their stride and manage such major, external risks. porting timely and balanced movement of food stocks, reducing the high level of custom duties wherever applicable,” adds Gupta.

WHERE THE REAL ACTION LIES Joshi, who is in the pharmaceutical business, says that such inflationary risks can be managed by keeping the costs low through innovative purchasing, thereby protecting margins. Magow suggests long-term contracts. He also favours looking at alternative sources of capital and boosting opera-

Stimulus for growth THE CONGRESS party-led ruling UPA government had introduced a slew of stimulus measures, including excise duty cuts by 6%, service tax reduction by 2% and raised expenditure in social and infrastructure sectors, besides an agriculture loan waiver to the tune of Rs 65,000 crore and implementation of the Sixth Pay Commission recommendations. THE FISCAL and monetary packages introduced by both the Reserve Bank of India and the Central government in the past two years have resulted in the economy bouncing back with growth in the second quarter of 2009-10 standing at 7.9% against 6.1% in the first quarter and 5.8% each in the preceding two quarters. BETWEEN SEPTEMBER 2008 and January 2009, India’s central bank, the RBI, had cut the repo rate by 425 basis points, the reverse repo by 275 basis points, and the cash reserve ratio (CRR) by 400 basis points to prop up the economy.

Gupta says that in a rising interest rate scenario “we try to lock in borrowings at fixed interest rates based on the early signals we pick from inflation rates, U.S. treasury yields movement, monetary policy expectations and GDP growth”. “We maintain a healthy mix between fixed and floating rate products to manage our interest rate risks.”

POLICY RISKS SLIDING, YET UNCERTAINTIES GALORE Meanwhile, most CFOs surveyed by 9.9 Media say that policy-related risks to businesses are on the decline in the country though political uncertainties are rising. “Reform measures such as GST and the Direct Tax Code have to be put on the fast track. There should be enough clarity on all of these,” says Joshi. Gupta says political uncertainties are still a problem despite a stable government at the Centre. “A case in point would be the decline in cement demand and prices in Andhra Pradesh due to the Telangana issue, which has hurt infrastructure and consumer spending in the region,” he says.

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risk management

“Today the world over, an economic recovery is happening thanks to measures to boost liquidity … and if this gets sucked out due to a rise in interest rates or related actions, it is going to hurt industry sentiment and growth. Companies may not like to borrow as it is challenging to service borrowings and this will slow down long-term investments,” notes Nandakumar. Satish Joshi, director, finance, at UCB India Private Ltd, on the other hand, puts the spotlight on the steep rise in prices. He says inflation is a bigger worry in a savings-oriented society such as ours. “People will try to retain savings by reducing consumption. This will affect the industry. Moreover, employers will not be able to offer substantial salary hikes every year which will result in a decline in the disposable incomes of employees,” he adds. Rajesh Magow, the CFO of travel portal Makemytrip.com, finds that rising interest rates “directly impact the cost of capital which can impact the decision making to raise more capital for the growth of businesses”. “So it’s a double whammy where on one side there’s an additional hit on profit and loss and on the other it can possibly impact the additional growth capital infusion to support the recovery process,” he adds. On his part, Adesh Gupta, CFO, Grasim Industries, says both accelerated rates of inflation and rise in interest

inpractice

budget IN LINE WITH INTERNATIONAL TRENDS As government spending goes up, ensuring quality becomes crucial

PHOTOS.COM

he Union Budget for 2010-11 dispelled any doubt that India is part of the global financial system. The country’s finance minister’s focus on fiscal deficit in his Budget speech was in direct response to the shift in international attention, following the Lehman Crisis, from the health of company balance sheets to government financing. It was, therefore, imperative that Pranab Mukherjee focused on trimming India’s fiscal deficit; it is now targeted at 5.5% of GDP for the coming year. He also promised a more transparent accounting mechanism; specifically, he would compensate fertiliser and oil marketing companies (OMCs) for the losses they incur by selling products at governmentmandated prices in cash, rather than through oil bonds. This promise, while welcome, immediately casts doubt on the fiscal deficit target. The Budget has lowered the subsidy for OMCs by roughly Rs 15,000 crore. But unless the prices of crude and petroleum products fall drastically, this move is unlikely to make a significant impact on the country’s fiscal deficit. My second area of concern lies with the deficits of the state governments. Their accounts aren’t quite transpar-

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BY MOHIT SATYANAND

ent, but estimates converge at a total fiscal deficit of 3% of GDP. The finance minister’s projections depend on buoyant tax collections and a firm control on revenue expenditure. With inflation nearing 10%, it seems unlikely that he will be able to hold the revenue expenditure growth at a target of 6%. My own ball-park estimate for India’s total fiscal deficit is 10% of GDP. This number is not very far from the 12% figure for Greece. I believe that GDP is the wrong denominator to measure growth: luckily for us, the government is not able to get its hands on the entire GDP of the nation; it has to fund the deficit out of tax revenues (and further borrowings). Using tax as the denominator, India’s deficit is roughly equivalent to its tax revenues, which are estimat-

The finance minister’s focus on fiscal deficit was in response to the global shift in attention from the health of company balance sheets to government financing. and infrastructure—all of them are sectors with a high need for capital. India is, despite its savings rate of over 30%, a net importer of capital, as a growing economy should be. Unprecedented international liquidity prior to the Lehman Crisis helped lower our interest rates, and fuel our hunger for capital. Though capital flows have resumed, if interest rates in the US tighten (they can’t stay at 0% forever), our economy will have to conserve capital, especially within the government. Besides the quantum of our government’s fiscal deficit, let’s also put the

Highlights of Union Budget 2010-11 Petrol, diesel prices go up as basic duty of 5% on crude oil restored Income up to Rs 1.6 lakh per year exempt from income tax; up to Rs 5 lakh to be taxed at 10%; income of Rs 5-8 lakh to be taxed at 20% and income above Rs 8 lakh to be taxed at 30% IT returns forms for individual tax payers to be further simplified Taxes on large cars and SUVs increased 2% to 22% Tax on cigarettes, cigars and chewing tobacco increased Service sector tax retained at 10% to aid the introduction of GST; more services to be taxed Partial roll-back of reduction in central excise duty Fiscal deficit to come down to 5.5% of GDP in 2010-11 Government actively engaged in finalising structure of the general sales tax regime; hopes to implement it from April 1, 2011 Implementation of direct tax code from April 1, 2011 Rs 35,000 crore raised from divestment in 2009-10; the figure will be will be much higher in 2010-11 Minimum Alternate Tax (MAT) increased from 15% to 18% Rs 48,000 crore set aside for Bharat Nirman NREGA scheme allocation raised to Rs 41,000 crore Allocation to health at Rs 22,300 crore Allocation for school education up from Rs 26,800 crore to Rs 31,036 crore Allocation to power sector at Rs 5,130 crore Rs 10,000 crore allocated for Indira Awaas Yojna Social Security Fund to have corpus of over Rs 1,000 crore Rs 5,400 crore allocated for urban development

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ed at 10.8% of GDP, one of the highest in the world. In a similar vein, Pierre Cailleteau, chief economist of rating agency Moody’s, was quoted by the Economist as saying that “the key ratio is not debt-to-GDP, but interest payments as a proportion of government revenues. Once that gets beyond 10%, a government may face difficulties”. The figure for India is over 25%. No wonder the 10-year yield for Indian government bonds, at 8%, is significantly above that of Europe’s “basket case”, Greece, at roughly 6%. Bond yields affect the entire matrix of interest rates in India. Interestingly, during the peak years of growth in the country, between 2003 and 2007, the 10-year bond yield never crossed 8%. This single fact was, in my view, the biggest contributor to the boom in the Indian economy and more particularly to the growth in construction, engineering, real estate

spotlight on the quality of the government’s spending, what I like to call the “real deficit”. All those who have worked in business have their favorite stories of Indian mis-governance. Rather than adding to these anecdotes, let me share some objective facts on two key governance fronts: the World Bank’s “Ease of Doing Business” report ranks India 133rd out of 183 nations rated, behind Nigeria, Bangladesh and Papua New Guinea. In its ability to enforce contracts, the country is ranked 182nd, just behind Afghanistan. In education, a nation-wide survey shows that 44% of Class V kids in India cannot read a Class II text. And, our much-vaunted higher education? Depending on which of the many international surveys you look at, one IIT, plus the Indian Institute of Science figure on the World’s top 500 Universities’ list. China, meanwhile, has 7, Hong Kong 5, and Taiwan 3. There is a belated recognition that the two bad words, “foreign” and “private”, could have a positive role to play in education. Unfortunately, the formulation of the Right to Education Bill leans more towards choking the private sector than to improving government schools, whereas the regulatory framework for foreign universities still needs to be examined in detail. If this year’s Budget fosters public awareness of fiscal deficit, it is to the good. What we need, more critically, is a keen awareness of the “real deficit”. THE AUTHOR IS A PORTFOLIO INVESTOR AND AN ENTREPRENEUR WITH INTERESTS IN EDUCATION AND THE PERFORMING ARTS.

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inpractice

information technology VIRTUALISATION IS THE WAY TO GO

How to cut IT spend on maintenance and boost efficiency

BY CFO INDIA BUREAU

undits who advise us on how to spend money wisely are a dime a dozen in this world. Through speeches, books, TV shows, seminars and other channels, they keep telling us how to cut costs and focus on increasing efficiency. Mark Peek, chief financial officer, VMware, doesnâ&#x20AC;&#x2122;t exactly fall into the category of those who preach on how to trim expenses and boost efficiency. He just tells you to spend on enhancing efficiency. But in the process, you end up cutting costs! So the spotlight is on virtualisation which, in all practical ways, means you utilise your IT systems to the fullest and thereby cut maintenance costs. It is a software technology that lets you run multiple virtual machines on a single physical machine, sharing the resources of that single computer across multiple environments. Different virtual machines can run different operating systems and multiple applications on the same physical computer. At a time when information technology has become increasingly complicated and a huge chunk of IT-related expenses are on maintenance, virtualisation clearly provides an alternative, said Peek, at a session held recently in Bangalore. According to him, virtualisation enhances efficiency and, therefore, offers three major opportunities for cost saving: a) Infrastructure cost per application goes down as multiple virtual machines are run on one server. b) Operating expense is greatly reduced as active appli-

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cations can be easily moved from one server to another. c) Minimisation of lost revenue due to downturnâ&#x20AC;&#x201D; disaster recovery software is included in most products and so, related issues can easily be resolved. On the India experience, Peek said several reference studies have shown that small- and medium-sized companies in the country have implemented virtualisation 36

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inpractice

(ABOVE) MARK PEEK, T SRINIVASAN, MANAGING DIRECTOR, VMWARE INDIA & SAARC, AND OTHER DELEGATES AT A CONFERENCE HELD RECENTLY IN BANGALORE

more effectively than others. As for the stigma associated with displacing or repurposing people in the Indian IT environment, he said if companies have a plan for growth and are able to move IT spending away from maintenance, this will not be a major issue. At the same time, when companies are able to run more applications on less power, efficiency and savings will follow. Unlike in the earlier days, companies could be up and running within hours instead of the weeks it takes to instal physical servers and this gives them a big edge, Peek noted. According to him, most companies are still struggling to manage their PC infrastructure as the desktop

has brought in a score of problems. Virtualising the desktop will ensure that employees offer the same level of service irrespective of their location of work. Server virtualisation not only helps save hardware costs, but it also cuts the cost of space and power required to run data centres besides the number of servers used. What worries Peek is that though the Web looks promising, it is plagued by limited efficiency even as security remains a concern. Therefore, cloud computing is the future where “our organisations could take their own data centre and turn it into a private cloud”, he added. This system promises flexibility, automation and agility. Cloud com-

“Medium-sized firms in India have implemented virtualisation more effectively than others ... the real challenge lies in creating awareness.” —Mark Peek, CFO, VMware

puting is a general term for anything that involves delivering hosted services over the Internet. These services are broadly divided into three categories: Infrastructureas-a-Service (IaaS), Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS). The name cloud computing was inspired by the cloud symbol that’s often used to represent the Internet in flow charts and diagrams. The CFO of VMware said though large cloud providers such as Microsoft Inc and Amazon will want everyone to come into their cloud, he has ultimate faith in the fundamental freedom of “choice of users to move around and decide for themselves”. He summed up by saying that in this growing environment, especially in fastgrowing economies such as India, the opportunities that virtualisation offers are immense. Given the renewed focus on growth, companies in the country will now have to act fast and do more— very often with less budget and fewer resources. But the real challenge, he insisted, lies in educating businesses about virtualisation.

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leveraging business CYCLE UPS AND DOWNS

Did the recession take a big and painful bite out of your bottom line? Are you now asking, â&#x20AC;&#x153;Is this current recovery real?â&#x20AC;? If so, how can your company take advantage of it? And, importantly, how can you foresee the next recession coming? BY GREG AUTRY AND PETER NAVARRO

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o financial executive should have been surprised by the 2007-2009 economic collapse. Indeed, by following just a few simple economic indicators, a crash could have been foreseen and appropriate defensive measures could have been taken. All executives can learn to forecast the business cycle; and competitive advantage can be gained by combining forecasting ability and appropriate business-cycle strategies. Many financial executives reacted to the severe recession like captains of a sailing ship caught in an unexpected storm at sea: batten down the hatches, pull in the sails, ride it out. In contrast, a few executives seemed to possess an uncanny ability to not only see the tempest coming, but also to actually harness the recessionary winds to speed past their floundering competitors. Such captains of industry maintain robust profitability and enjoy higher share prices right through recessions. An extensive study of this phenomenon was conducted by the authors at the Paul Merage School of Business at the University of California, Irvine. The goal was to identify winning companies and isolate the strategies their executives employed. Empirical results of market performance for firms using the forecasting framework were clear: they tend to enter downturns with more cash, lower overhead and a leaner

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payroll. In the depths of a recession, these companies eagerly buy up materials, suppliers, competitors and facilities on the cheap. They use the pain of high unemployment to grab the best talent at the best price and actually expand their advertising in the relatively uncongested ad market. They increase their capacity and seize market share in preparation for the inevitable upswing and take the opportunity to reinvest when expectations are low and the pressure for short-term performance is lowest.

The research-based framework involves three steps for achieving superior performance over the course of the business cycle: 1. Develop internal forecasting capabilities and communicate the results to executives; 2. Correctly apply counter-cyclical business cycle management strategies; and 3. Build a culture that integrates business cycle management thinking.

FORECASTING AND OTHER CRITICAL INDICATORS Though financial executives often take full-length courses on how to forecast the business cycle, some of the key points can be covered here. For starters, one of the most important incentives for every executive is that successful forecasting requires a continual reassessment of all the economic indicators under consideration. If the forecasting unit comes up with a projection for the quarter—or if it comes from an economic forecaster at a conference— don’t bet the company on it. While such forecasts are often very good, economic winds do change and three or six months later, that same forecaster would very possibly advise a new direction in order to accommodate the change. This point also underscores the importance of quickly communicating new economic information to all decision-makers within the company. The central tool to becoming a successful economic forecaster is the famous “GDP equation,” first set forth by the Depression-era economist John Maynard Keynes. The inflation-adjusted gross domestic product is used in every nation to measure the health and growth of the national economy. It is driven by four easy-tofollow components: consumption (C), business investment(I), government spending (G) and “net exports,” which is the difference between exports (X) and imports (M).Thus, the Keynesian equation maybe written: GDP = C + I +

(X-M) + G. Exhibit 1 provides an overview of the forecasting model and the 11 leading economic indicators and economic reports that maybe used by you and your executive team to track movements of the GDP. It must be stressed that following these components will take no more than five-to-10 minutes a day. In today’s dynamic economic environment, forecasting must become an important part of the job of every financial executive.

THE ECRI INDEX As for the predictive power of this model, consider, the ECRI Weekly Leading Index, which is released each Friday by the Economic Cycle Research Institute. This is a well-tested indicator that has accurately signalled each of the last three recessions going back to 1990— without any false signals. Exhibit 2 indicates that the ECRI index would have given a full six months warning of the 2007-2009 crash. The purple line clearly began to head south in June 2007. By December, it was at a record low and the commentary read: “Also, the breadth of deterio-

10-year Treasury bond, has accurately signalled the last three recessions. The logic of the yield curve as a leading indicator is worth understanding. Investors expect higher rates of return when they commit their money for longer terms. Hence, the yield on the 10-year note almost always exceeds that of a threemonth bill and the curve graphing those yields slopes gently up from shortest to longest term. However, if bond traders begin to believe that rates will be dropping significantly in the future because they see a recession ahead, they are likely to want to “lock in” today’s relatively higher yields for long periods. When this occurs, the yield curve “inverts” and demand for the long bond drives yield on the long-end down below shortterm yields. In this way, the yield curve reflects the consensus of the real money bets of the world’s brightest speculators on a recession. Note that the green line in Exhibit 2 charts the “spread” in yield (difference in percentage points) between the 30-day Treasury bill and the 10-year bond over the recent past. Normally, it is well above zero. But each time the line drops below zero (on the right axis) the spread is negative and,

In today’s dynamic economic environment, forecasting must become an important part of the job of every financial executive. ration evident in the latest data on the components of ECRI’s many leading indices has rarely been seen except near the cusp of a recession.” Yet, despite the ECRI index’s warning sign, government economists and the consensus opinion were still unwilling to admit a recession.

THE YIELD CURVE The yield curve spread is an equally powerful recessionary signal. This indicator, which measures the yield spread between the 30-day Treasury bill and the

at least for the last three occurrences of this inverted yield curve, a recession has followed. For example, Exhibit 2 shows that the spread drops into negative territory in August 1989 and recession follows the next July. In July 2000, it signals the March 2001recession. In August 2006, it signals 2007’s downturn. In fact, the yield curve spread has called the last six out of seven recessions without a false positive. It follows that the odds of your own forecasting using the yield curve should be pretty good because you are learning

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leveraging business

THE FRAMEWORK

leveraging business

from some of the smartest money managers on planet earth —professional bond traders.

COMPONENT INDICES At this point, one might be thinking: If GDP forecasting tools like the ECRI Weekly Leading Index and the yield curve spread are so accurate, why bother with the right-hand side of the GDP equation and with tracking consumption, business investment, net exports and government spending? That’s a good question. A really good answer is that any recession can be triggered by any one of these four GDP components. This is a critical observation for financial executives because they far too often focus too narrowly on their own industry indicators for guidance. That’s fine if a recession is going to be triggered by a sharp drop in business investment, as in the case of the 2001 recession. However, it can cause real trouble if a recession is consumption-led, like the 2007-2009 crash. The broader point is that following the four components on the right-hand side of the equation provides a better early warning system than following direct GDP indicators alone.

When it comes to the strategic part of business cycle management, conventional executive wisdom is often toxic. Here is more detail on some of the indicators used in the forecasting model: consumption. The Consumer Confidence Index indicates where shortterm consumer thinking is while retail sales directly measure what consumers are actually spending. In addition, new home sales represent an excellent gauge of how consumers feel about the longterm prospects for growth.

BUSINESS INVESTMENT There are a lot of business investment measures, including factory orders, capacity utilisation and durable goods. For the time-pressed financial executive, it’s more than sufficient just to follow one indicator: The Institute for Supply Management, or ISM manufacturing index.

Exhibit 1: The ‘Always A Winner’ Model and 11 Indicators z z

ECRI Leading Index GDP Report

z z

Consumer Price Index Producer Price Index

Inflation

Exports

Consumer Confidence z Retail Sales z New Home Sales

ISM Index

Source: Peter Navarrow, Always a Winner, 2009 John Wiley & Sons

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The bad news here is that there is no single indicator to follow. Instead, it is critical to review the monthly Trade Report issued by the Department of Commerce. To economise on time for this, consider using Moody’s “Dismal Scientist” website for its regular analysis. This site also offers a “one-stop shop” for monitoring all of the indicators in the forecasting model. (See http://economy.com/dismal/navarro to find all these indicators in one spot.) In reviewing the Trade Report, it is critical to understand basic economic concepts such as why the balance of export/imports changes. Some movements are due only to short-term interest rate changes and collateral exchange rate movements. Others may be triggered by a price spike in a specific commodity (usually oil).These factors can produce abrupt, but often fleeting, changes in the net export numbers. Only in context can their significance be judged. For example, low interest rates in the US during the last boom depressed the dollar and sustained U.S. exports to Europe, at a cost to the European economy. The consumption in Europe slowed and this export advantage evaporated. Oil price shocks drive imports up and have been associated with almost every recession in modern history.

Imports

GDP = C + I + (X – M) + G z

NET EXPORTS

Trade Report

Treasury Report

WHAT TO DO, AND WHAT NOT TO DO Once you become adept at economic forecasting, you will be able to nimbly execute a set of battle-tested and typically counter-cyclical strategies over the course of the business cycle. When it comes to the strategic part of business

Exhibit 2: The Yield Curve and ECRI Weekly Index Signal Recessions 4.000

150.000

140.000

130.000

120.000

ECRI Slides

Another favourite tool of a reactive-type executive is the “hiring freeze,” which is also one of the most pernicious habits of the stereotypical “bean counter” mentality. Consider the position that a freeze puts managers in. It sends the message that they cannot be trusted to manage when it really counts and if

December 2007 Recession

90.000

March 2001 Recession

100.000

0.000

Yield Inverts

July 1990 Recession

ECRI Weekly Index

110.000

-4.000 Dec-87 Jul-88 Feb-89 Sep-89 Apr-90 Nov-90 Jun-91 Jan-92 Aug-92 Mar-93 Oct-93 May-94 Dec-94 Jul-95 Feb-96 Sep-96 Apr-97 Nov-97 Jun-98 Jan-99 Aug-99 Mar-00 Oct-00 May-01 Dec-01 Jul-02 Feb-03 Sep-03 Apr-04 Nov-04 Jun-05 Jan-06 Aug-06 Mar-07 Oct-07 May-08 Dec-08

80.000

The spread on the yield of the 30-day T-Bill and 10-year bond, and the ECRI Weekly Index call each of the last three recessions in advance.

that is the case, there might be questions about why they are still receiving management wages. If this were the only problem with the freeze, it would be bad enough. However, such a move also unintentionally establishes a perverse set of incentives. Among the unintentional consequences of a freeze is that managers will virtually never fire anyone or let them leave. Fearing that even the worst employee is better than no employee, they will work to retain

Among the consequences of a freeze is that managers won’t fire anyone or let them leave. Fearing that even the worst employee is better than no employee, they will work to retain individuals who are sloppy. CHILL WITH THE FREEZE

leveraging business

cycle management, the conventional executive wisdom is often toxic. Here, simply avoiding the reactionary pitfalls that ensnare the normally cost-conscious chief financial officer is a great first step. Indeed, if you can learn to simply avoid these behaviours more than half the battle is won. Just what are these bad reactive behaviours? As was mentioned in the introduction, the winning executive sees recessions coming, gathers cash at the market top and pounces on the advantages of lower costs and reduced competition to acquire the best assets, hire the best people and conduct the most cost-effective marketing campaigns. Rather than slashing, this astute business-cycle manager is leasing, building, hiring and expanding advertising. This executive knows that recessions rarely last more than a year or so and they look at each recession as an opportunity to thoroughly pound their clueless, reactive competitors. It’s not just falling into such a reactive trap that must be avoided. Exhibit 3 illustrates the timing of several critical proactive strategies employed by the winning companies in the survey.

individuals who are clearly performing below corporate standards. As such, managers are driven to conceal the failings or infractions of these individuals to protect their headcount. With fudged performance reviews, the worst employees gain eligibility for promotions, raises and even bonuses. As this becomes obvious to their peers,

morale suffers. In the same vein, managers may actively impede promotions and lateral transfers, even if these moves are in the best interest of the firm. Corporate efficiency will suffer and morale will again suffer. In such a scenario, the attitude of managers will not be better. The public diminishment of their authority will grate against their egos, the requirements to compromise their principals for headcount will degrade their integrity and the ensuing alienation from an increasingly disgusted staff erodes their job satisfaction. The hiring freeze is never a winning strategy, and it’s also a notice for the brightest employees to start printing their resumes on company time—with the best managers right behind them. In contrast, hiring qualified managers, trimming through attrition before recessions and trusting managers to manage their business is the sound way to control human resources costs.

MANAGING CAPITAL Any financial executive knows that the cost of capital varies over the business cycle. For example, borrowing costs are typically lower during a recession. Thus, recessions can be a great time to invest

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in new capital equipment. Recessions can also be a great time to acquire rivals or suppliers, particularly since these acquisitions are often selling at bargain prices. With such a counter-cyclical acquisition strategy, cheaper financing is simply an icing on the cake. Meanwhile, the reactive managers are loaded with expensive debt from ill-timed investments made at the height of the previous expansion; their weakened companies may even be the acquisition targets of their stronger, more business cycle-savvy rivals. On the long-term debt front, those financial executives prepared for any cycle are likewise ready to lock in longterm debt during downturns, when it is cheapest. They are also astute enough to utilise shorter-term borrowing in expansionary periods when rates are higher. If it is necessary to raise cash or make acquisitions during an expansion, the best choice is often to use equity while company stock is most highly valued. Gaining the skills to forecast the economy makes timing these operations much more practical. Those who truly understand capital management that is sensitive to business cycles have moved on to an even higher level and realise that the spread between short-

term and long-term debt often varies in reaction to the business cycle and the Federal Reserve’s manipulation of the markets. The Fed’s target interest rates are achieved via its “open market opera-

Carefully timing equity offerings and borrowing options to coincide with the business cycle saves large companies millions a year and even very small firms stand to benefit. tions,” which consist primarily of trading overnight repurchase agreements, known as “repos”. These operations are very effective in quickly pulling short-term rates to the Fed funds target rate. The actual policy goal is to affect long-term interest rates on capital equipment and property financing, which are normally down during a recession. However, there is often a significant lag in the long-term market’s response, which increases the previously mentioned spread. This is exploited by those in the know. For instance, following the 2001 recession and the 9/11 terror attacks, General Electric Corp greatly increased its per-

Exhibit 3: Selected BCM Strategies Across The Business Cycle Acquire & Finance Using Equity

Reduce Cap Ex

Build Cash

Enter Downturn with Cash Trim Work Force

Hire Talent

Tighten Credit

centage of ultra-cheap short-term debt. CEO Jeff Immelt and his team correctly forecast that the rates were not likely to rise significantly for a while and reasoned they would be able to turn these

Boost Advertising

short loans over and over, rather than pay for the comfort of the long-term rate. Despite some very public criticism from traders who didn’t understand the underlying strategy, this $100-billion play saved GE hundreds of millions of dollars. While not for the weak of heart, watching this spread, anticipating where the business cycle is headed and carefully managing the ratio of short to long-term debt can certainly bear fruit. In fact, over time the heavy lifting will be in educating the CEO, board members and fellow executives on the need for each of them to become economic forecasters. The goal is to have this attitude permeate the organisation— and thereby cultivate a business-cycle management culture. If every executive and manager becomes a forecaster and information is pooled and communicated to the right parties, the correct business cycle management strategies can be executed in a timely manner. The goals? To turn the next recession into a winner for your firm. And to avoid getting caught if the latest “recovery” turns into a double-dip recession as well. ABOUT THE AUTHORS

Loosen Credit

Expand Cap Ex Counter-cyclical moves across the ups and downs of the business cycle

Lock in LongTerm Debt

PETER NAVARRO (www.peternavarro.com) is a professor at the Merage School of Business of the University of California, Irvine, and author of several books including his recent “Always a Winner: Finding Your Competitive Advantage in an Up or Down Economy”, published by John Wiley & Sons, 2009. GREG AUTRY (gautry@merage.uci.edu) is an entrepreneur, author and Ph.D. student at the Merage School. © 2010 Financial Executives International

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insight A STRONG FOUNDATION FOR M&A IN 2010

When adjusted for market capitalisation, M&A activity among corporations was stable in 2009â&#x20AC;&#x201D;and fundamentals point to continued strength in 2010.

BY WERNER REHM & CARSTEN BUCH SIVERTSEN

&A activity was more resilient in 2009 than commonly believed, and conditions are improving for 2010. Many reviews during the past year focused on the significant decline in volumes from 2007 and 2008. Indeed, with 5,800 deals totalling $2.3 trillion announced in 2009, M&A volumes were at their lowest level since 2004. Most of the reduction during the past two years, however, came about because of a 29% decline in market capitalisation1, leading to smaller absolute deal sizes, as well as a sharp decline in private-equity activity as a result of weak credit markets. When adjusted for market capitalisation, the level of deals by corporations in 2009 was on par with that of 2008, only slightly lower than that of 2007, and significantly higher than it was after the dotcom crisis at the beginning of the decade. The pattern of M&A changed in other ways during the past year. The long-term trend of an increasing number of cross-border deals ended, though in one respect the M&A marketplace turned increasingly global as Asian companies increased their share of international M&A. On a sector-by-sector basis, M&A activity was busier in strong sectors, such as energy, utilities, health care, and pharma than in more troubled ones, like financial services, real estate, construction, and basic materials. Overall, conditions improved in the fourth quarter, and companies increasingly found attractive deals and the

means to complete them. That increase in activity appears set to continue in 2010, if current trends continue. But companies should take note: with the S&P 500 up 65% since last March, the era of highly undervalued assets is probably over, so acquirers must redouble their attention to fundamental drivers of value2. We expect that large corporate buyers will be particularly well positioned to take advantage of any new wave of M&A, but we also see private-equity firms returning to the market.

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insight

STABLE ... Compared with the M&A downturn at the beginning of the decade, deal activity as a share of global market capitalisation appears to be holding at a much higher level two years after the peak (Exhibit 1). This year’s activity had several defining features.

STABLE ACTIVITY LEVELS AMONG CORPORATE ACQUIRERS The heights of M&A activity during 2006 and 2007 were driven largely by privateequity players and access to cheap financing, much to the frustration of competing corporate bidders at the time. In 2009, corporate acquirers remained busy, with an activity level in line with that of 2008 and only slightly below that of 2007, even as private-equity activity fell to levels not seen since 2000. Private-equity firms accounted for just below $100 billion, or 4%, of global M&A—down from more than $600 billion (or almost 20% of global activity) in both 2006 and 2007. The decline in M&A value from its peak was therefore not so much a “new normal” as a return to long-term trends, much as occurred in the late 1980s and early 1990s, when the disappearance of cheap credit led to a similar decline in leveraged buyouts. Observers may be heartened by a glimmer of light among the clouds: private-equity M&A activity hovered at around $15 billion a quarter since the end of 2008 but tripled in the fourth quarter of 2009, to $45 billion.

RETRENCHMENT IN CROSS-BORDER ACTIVITY Before the economic crisis reached its depths in 2008, companies around the world had increasingly sought to raise their foreign presence through crossborder M&A. That trend halted abruptly in 2009 as the number of cross-border deals dropped significantly and cross-border activity as a share of total M&A value fell by ten percentage points, from pre-cri44

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sis levels of above 40%. Notably, M&A activity was more evenly spread around the globe as Asian companies continued to increase their presence. Companies in the Asia-Pacific region accounted for 26% of global M&A in 2009, up significantly from 20% in 2007 and 2008, not to mention 10% in 2000 and 2001. More value created—but more given away to targets. The value created by M&A, measured as the capital market’s reaction to deal announcements, reversed a three-year declining trend, with the total deal value added (DVA)3 increasing to levels slightly below the long-term average. Still, that was only a bit more than half of the value created by the more disciplined deal making of 2005 to 2007 (Exhibit 2). The reduction in DVA since then has resulted from a continuing decline in the average value created for acquirers. This decline is reflected in the increasing number of deals in which the market reaction has been negative for the acquirers, suggesting that they may have overpaid4. Indeed, the proportion

… AND GROWING? If the trends that produced the significant increase in fourth-quarter 2009 deal activity—up more than 40% from the average for the first three quarters—continue to operate, conditions appear right for the market’s further acceleration in 2010. For one thing, uncertainty in both the economy and the stock market has fallen dramatically over the past year, with volatility5 hovering between 20% and 25% at the end of 2009, down from its peak of around 80% in late 2008. Also, both the credit and the equity markets are again financing M&A deals; credit spreads are back to reasonable (though not precrisis) levels; and the IPO market, virtually closed in the first half of the year, is now trending toward a 40% increase over 2008. Finally, even if stock markets have recovered very strongly, market valuations are still favorable compared with historical levels. Indeed, the market value of the S&P 500 as of December 2009 remained below its intrinsic value6, though it closed most of the gap seen in 2008 (Exhibit 4). If

When adjusted for market capitalisation, the level of deals by firm in 2009 was on par with that of 2008, only slightly lower than that of 2007. of overpaid (POP) stayed at 61% in 2009, the same as for 2008 (Exhibit 3). Although market skittishness in early 2009 may have skewed the index toward the high side, we believe it is still generally correct as an indicator. In some cases we observed, share prices fell following a merger’s announcement—even when the value of the cost synergies alone more than covered the premium paid and even when analysts deemed those estimates of synergies too conservative. Yet short-term market reactions, historically, have been a good indicator of long-term value creation through M&A.

a wave of M&A does materialise, as many expect, large public companies should be particularly well positioned to benefit. In addition, during the past two years the balance sheets of large public companies have accumulated record levels of cash, which can now be put to work. Their share prices have significantly outperformed those of their smaller counterparts over the past three years, creating a strong M&A currency. Moreover, they have historically outperformed their smaller industry counterparts operationally (measured by EBITA7 margin) across many sectors,

Exhibit 1: A shallow correction Adjusted for market capitalisation, corporate M&A has remained strong.

12 11 10 9

15-year average

8 7

7.6% 7.1%

6.6%

6 5

4.5%

4 3 2 1 0 1995

1996 1997

1998 1999 2000 2001

2002 2003 2004 2005 2006 2007 2008

2009

1 M&A volume includes deals (announced and not withdrawn) > $25 million; total deal value excluding debt; market capitalisation of World-DS Market Index as defined by Thomson Datastream. 2 Excludes private equity, sovereign wealth funds and other investment funds. Source: Bloomberg; Dealogic; Thomson Datastream; McKinsey analysis

Exhibit 2: Giving it away

Target Total Acquirer

M&A value creation was close to long-term averages. Average annual deal value added (DVA) 1 % 20

Average

9.8%

4.0%

4 0 -4

-5.8%

-8

1997 1998

1261

1999

2000

1338

2001

2002

2003

2004

2005

2006

2007

2008

242

2009

1067

1 For M&A involving publicly traded companies, defined as combined (acquirer and target) change in market capitalisation, adjusted for market movements, from 2 days prior to 2 days after announcement, as % of transaction value. Source: Dealogic; Thomson Datastream; McKinsey analysis

Exhibit 3: Number of deals For M&As involving publicly traded companies, POP is defined as proportion of transactions in which share price reaction, adjusted for market movements, was negative for the acquirer from 2 days prior to 2 days after announcement. 80 75

Werner Rehm is a consultant in McKinsey’s New York office and Carsten Buch Sivertsen is an associate principal in the Oslo office.

2 See Richard Dobbs and Timothy M. Koller, “The crisis: Timing strategic moves,” Mckinseyquarterly.com, April 2009.

-16

Number of deals

ABOUT THE AUTHORS

1 Source: S&P 500.

-12

-20

insight

Total M&A Corporate acquirers 2

Annualised global M&A volume as % of global market capitalisation 1

but especially in pharma, biotech, high tech, telecommunications, the media, and consumer and retailing. In several sectors, this performance gap is increasing, and large companies can create even more value by acquiring smaller, inefficient ones and improving their operations and margins. Private-equity players are also poised for a return to M&A, as hinted by the fourth-quarter volumes. They still have considerable access to capital—with “dry powder” estimated earlier this year at around $500 billion. True, they may be at a disadvantage, compared with their standing before the crisis, given their expected debt/EBITDA8 ratios of three to four, compared with boom-year levels of between five and seven. That said, all signs indicate that they will regain their presence in the global M&A market, accounting for as much as 10% or more of it over the short to medium term.

% of overpaid (POP)1

3 For M&A involving publicly traded companies; defined as combined (acquirer and target) change in market capitalization, adjusted for market movements, from two days prior to two days after announcement, as a percentage of transaction value. 4 The proportion of overpaid (POP) is the percentage of transactions in which the share price reaction, adjusted for market movements, from two days before to two days after the announcement, was negative for the acquirer. This definition assumes that the share price of the acquirer declines if the price it pays for the target is higher than the target’s stand-alone value plus synergies (hence, overpayment). 5 As measured by the Chicago Board Options Exchange (CBOE) Volatility Index, or VIX, which measures the implied volatility of S&P 500 index options. 6 This assessment is based on our model of intrinsic value, which uses a 40-year median return on equity (ROE), the median cost of capital, and the long-term growth trend of corporate earnings/GDP.

70 65 60 Average = 62%

55 50 45

7 Earnings before interest, taxes, and amortisation. 8 Earnings before interest, taxes, depreciation, and amortisation.

40 35 30 0 1997 1998 Number of deals

1261

1999

2000

2001

2002

1338

2003

2004

2005

2006

2007

2008

2009

242

1067

This article is first published in The McKinsey Quarterly 2010 and is also available on the McKinsey Quarterly website, www.mckinseyquarterly.com. Copyright © 2009 McKinsey & Company. All rights reserved. Reprinted by permission.

Source: Dealogic; Thomson Datastream; McKinsey analysis

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LEADER’S WORLD WINNING MINDSE T S

Strategies

Managers for

Hate

who

Negotiating

Never forget that humour will allow you to be more comfortable in dealing with potential partners

ABOUT THE AUTHOR David Lim, founder, Everest Motivation Team, is a leadership and negotiation coach, best-selling author and two-time Mt Everest expedition leader.

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A FEW MONTHS AGO, I WROTE ABOUT THE FOUR PRINCIPLES THAT affect negotiation outcomes in this publication, and they are: dealing with people as though the relationship will last a lifetime; following the other side’s negotiation style and interests; recognising feelings as facts and knowing your default or preferred negotiation style; and lastly, understanding what kind of negotiation power is owned by either side. I also covered some seven tactics in negotiations. However, a common refrain from people I meet is: “I couldn’t possibly say that!” or “I just hate bargaining!”

GENDER BENDER If you are a woman, be careful of how overt sexism is being replaced by implicit sexism. In a study by researchers from Carnegie Mellon and Harvard universities, women who were assertive in job benefit negotiations were penalised up to three times more than men. This is complemented by Bowles and Ruddick’s study that women are similarly penalised more than men for self-promotion. Understand how adjusting your style, if it is “assertive” to calibrate possible unconscious prejudices, may work in your favour. Dial down the table-thumping attitude if you are a woman. In societies such as China and India, there are already biases against women which count against them in business. However, a recognised peer who is a foreigner evokes fewer prejudices in these countries. So Indian and Chinese women may need to consider the “assertiveness” they use while negotiating.

“If you are woman and if you want to negotiate, be careful of how overt sexism is being replaced by implicit sexism.

done in a variety of ways. Associate professor Tommy Koh, a key player in the Law of the Sea and Malaysia-Singapore water talks, did this once: faced with possible tough negotiations, he and his team still brought the opposing team on a pleasant, historical tour of Singapore. This helped break the ice and establish mutual respect which ultimately helped in the talks. A Finnish study looked at a set of internal and external negotiations. The findings of the study suggest that the use of humour, especially “insider” jokes, tone of voice and strong rapport-building attitudes, helped in the negotiations. However, some people are reluctant to “use humour” while dealing with external companies owing to a perception that they have to remain “serious” while dealing with external parties. You must understand that humour will allow you to be more comfortable in the negotiation process.

CULTURE CRUNCH

Be aware of the other party’s culture of education. The more you know what to calibrate, the less anxiety you will have in negotiating with the other side. For —David Lim example, a Chinese national whose traditional culture suggests they will be more relationship focused, deferential MAKING THE FIRST to authority and be more open to lateness may be impacted OFFER This aspect of negotiation gives many people sweaty palms by where they are educated. Many Singaporeans who are and anxiety. Galinsky’s research from the Northwestern Uni- educated in the US or the UK may return with a very linear, versity has revealed something many of us in the field already sequential, empirical based attitude towards many things, and know. Introducing the first offer anchors the conversation may prefer punctuality versus “standard Asian time” and so and pricing for the remainder of the conversation. People who on. Deference may be overshadowed by more Western-biased start at a higher point often end up with a price closer to that assertiveness and impatience with results. People from India point. Conversely, if you start discussing a lower price point, and many other parts of Asia are “polychromic”—they do the final number will also be closer to that number. This posi- not discuss things in a linear fashion, they have flexible time tion is supported by a study by researchers from Houston and considerations and are more open to ambiguity. Americans Michigan universities where they measured the anxiety level and Europeans work in a “monochronic” fashion where time and business outcomes of MBA students engaged in a one- management, certainty of issues and so on are key. Constant item price negotiation. If the business outcome is the main revisiting points previously thought to be settled can drive an focus, then train yourself to make the first offer. If factors American nuts. So be aware when you are settling on issues such as business relationship are vitally important, consider with people of a different culture orientation. So do prepare the ground and know who you are dealing inviting the other party to make an offer. with so that you will feel more confident and poised to negotiate more effectively. HUMOUR ME A key component in making negotiation seem less intimidatFOR MORE INFORMATION AND FREE ARTICLES ON ing is establishing good ties with the other party. This can be LEADERSHIP,VISIT: www.everestmotivation.com

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leader’s world

So here are some tips on how you should approach your next negotiation if you always get anxious.

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ad Re Y st OG Mo OLZINE N ia’sCH GA d In TE MA

A photographer’s dream city Teresa Cline walks along with history, vows to return to Krakow, Poland’s cultural capital

THE MAIN MARKET SQUARE IN THE OLD CITY OF KRAKOW HOUSES THE REMARKABLE ST. MARY’S BASILICA, A 14TH CENTURY CHURCH.

WHEN I ARRIVED in Krakow, Poland, I could not wait to pull out my camera and go for a walk: this beautiful city, built in the 7th century, is a photographer’s dream. I started my adventure of sorts from Wawal Hill, atop which is the Wawel Castle, which once was the house of polish kings; it is now home to the Polish Crown Jewels and National Museum. The walled fortress also houses the Wawel Cathedral where Polish monarchs received their coronations. Many kings, saints and other famous people are buried here. The fortress looks like something out of a fairy tale with its perfectly manicured landscape and magnificent medieval architecture. From the castle I walked to the Main Market Square in the heart of the old city. Europe’s largest medieval town square houses the remarkable St. Mary’s Basilica, a 14th century gothic church famous for its wooden altarpiece carved by German sculptor Veit Stoss. Every hour a trumpet signal called “the Heynal” is played from the top of St. Mary’s highest tower and broadcast across Poland. The tune cuts off midway to commemorate a famous 13th century trumpeter who was shot in the throat while sounding the alarm before the Mongol attack on the city. I finished my day with a historical tour of Jewish Krakow. The next day, we visited the Old Jewish Quarter called

Kazimierz where the movie Schindler’s List was filmed. This was once a booming Jewish settlement until WWII when the Jews were forced into the ghetto across the river. With the success of the movie, important historical sites such as the Old Jewish Cemetery and Oscar Schindler’s factory have been restored and Jewish-themed restaurants have opened to capitalise on the tourist boom. The next day was Remembrance Day. To honour the soldiers who lost their lives in World War II to liberate Europe from the Nazis, I decided to take a tour of Auschwitz and Birkenau. Auschwitz was the largest Nazi concentration camp; it was built in an old Polish Army barracks and received its first group of 728 Polish prisoners on 14 June 1940. Soviet prisoners of war were soon to follow as well as German homosexuals and criminals. It is estimated that around 1.1 million people had died at the Auschwitz camps. To offset the sadness of the concentration camps, I decided to end my day with a tour of the Old Salt Mine. The Wieliczka Salt Mine, also known as the Old Salt Mine or the Underground Salt Cathedral of Poland, is one of the oldest operating salt mines in the world. Visitors to the mine are taken on a 3.5 km tour to see the magnificent rock salt sculptures and churches carved by miners and contemporary artists. Even the intricate chandeliers that hung from the ceiling of the salt cathedral were made of salt. I will never look at table salt the same way again. My three-day Krakow “adventure” ended with a longing to come back and spend at least a week visiting some 6000 historical sites in and around the city.

cfo lounge

TRAVEL

The Wieliczka Salt Mine and the Jewish quarter where Schindler’s List was filmed are a few of some 6000 historical sites in Krakow.

TERESA CLINE IS a Canadian travel photog-

rapher who has a travel channel on YouTube called TeresaTheTraveler. She has travelled extensively in the Middle East, Europe, North America and Central America.

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art review ARTIST OF THE MONTH

Strokes of Satire Mumbai-based artist Riyas Komu has made a big mark both at home and abroad By Ullekh NP

THE PORTRAIT OF SONIA SOTOMAYER BY KOMU WHICH WAS COMMISSIONED BY THE NEW YORKER MAGAZINE

RIYAS KOMU is an obsessive experimentalist and tries to invent, or rather bring into focus, certain visual metaphors that explore the irony of human existence, undeterred by occasional criticism from a section of art critics. And that explains why he made dark-skinned, teenaged labourers in real life look light-skinned in his collection of portraits titled Systematic Citizen in 2006. A year later, his show Mark Him had on display resplendent, larger-than-life portraits of members of what he called the beleagured Indian football team. Recently, when the New Yorker magazine commissioned him for a portrait of the feisty US Supreme Court judge Sonia So54

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ABOUT THE ARTIST Born in 1972 in Kerala, Riyas Komu did his Bachelors in Fine Arts and Masters in Fine Arts from Sir J.J. School of Art, Mumbai. He is the youngest Indian to exhibit works at the prestigious Venice Biennale art show in 2007. This year, his solo shows will be held at Azad Gallery in Tehran, Iran, in April, Aicon Gallery in London, in June and Sakshi Gallery in Mumbai in November. Some of his noted solo exhibitions include Related List (2008), Mark Him (2007), Systematic Citizen (2006) and Faith Accompli (2005). He lives in Borivli, Mumbai, with his artist wife Zoya and daughter Mariam.

tomayer, he didn’t highlight her usual beaming self. Instead, in Komu’s work, her face brimmed with sadness-tinged benevolence, her lips trying to hide a beatific half-smile. “I try to look at how the minds of these important people work. I make a hypothesis and then try to merge it with reality…,” says Komu, the Mumbai-based painter-sculptor; between 2003 and 2008, the value of his works had appreciated by an average of 10,000%—it didn’t decline afterwards despite the global economic meltdown. The artist who in 2007 became the youngest Indian artist to take part in the Venice Biennale is now getting ready for his next show in March at the prestigious Armoury Center for Arts in New York. He has a very tight schedule indeed: in April, his solo exhibition is coming up at Teheran’s Azad Art Gallery. Recently he tied up with US academic and sport writer Jennifer Doyle to campaign for promoting women’s soccer in India. Komu, who plays soccer every morning when he is in Mumbai, very often blends, in his works, soccer with his favourite subject: international politics. One such is the painting, titled Stadium, which shows Iraqi soccer captain Younus Mahmoud reaching out to raise his country’s flag—his hands are not shown, instead, the flag is shown erected with crutches, quite symbolic of the maimed morale of the team during Saddam Hussein’s rule. Well, soccer is just a part of Komu’s rich oeuvre which covers a range of subjects from forced migration to death to women’s issues to imperialism and personalities. He is highly political, and many of his works, including huge sculptures such as the Noah’s Ark-shaped My Father’s Balcony, are, according to his own admission, “sometimes grim”. Yet he is one of India’s most successful contemporary artists. “I take a stand and stand by it,” says he, smiling. That attitude, for sure, has found a lot of buyers both in India and elsewhere.

books

NEW RELEASE

The new grassroots music GREG KOT HAS been a music critic

PICK OF THE MONTH

Captain Courageous The father of India’s low-cost aviation tells the story of his life MOST INDIANS USED to treat airplanes as some sort of identified flying objects which they thought were almost alien to them. They never thought they could ever afford the luxury of flying, until one fine day when Captain Gopinath stepped in with the country’s first no-frills airline, Air Deccan, in 2003. Simply Fly: A Deccan Odyssey is a from-thehorse’s-mouth story of a village boy’s entrepreneurial overdrive which takes him through different avatars—Udupi Hotel owner, agricultural consultant, politician, a dealer in motor bikes, etc. Interestingly, when Gopinath, a former army captain, launched India’s first low-cost airline, a report called it an “Udupi Hotel in the sky”, referring to the low-cost business model of these self-service vegetarian eateries, originally from Udupi in Karnataka, that have become a generic name for cheap but good quality meals that offer quick returns. Alongside the story of the rise and later the reversal of fortunes of Air Deccan, the book, as expected, offers an insider look at India’s aviation sector, with all its lobbies, cut-throat competition and backstabbing. One reason why this book should be read is that it is the story of a quintessential entrepreneur in his most recent role as a writer. —Ullekh NP Publisher: HarperCollins Price: Rs 499

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at the Chicago Tribune, where he has comprehensively covered popular music since 1990. Ripped: How the Wired Generation Revolutionised Music looks at how digital technology, over the past decade, has revolutionsed the global music industry, freeing music from the clutches of a few corporations. There is one ultimate winner: the fan, he says. As a critic, Kot is skeptical of the corporate record industry due to several incidents he explains in the book; his philosophy is that anything good for the fans is good and anything serving corporates isn’t. Whether you are completely convinced by this argument or not, this book talks about how “the laptop generation created a new grassroots music industry.” It is stunningly written. Publisher: Scribner Price: $25

OTHER RELEASES

New habits for success WE ARE ALL familiar with the title of an earlier book, even those of us who haven’t read it, Rich Dad, Poor Dad. Its author, Robert Kiyosaki has now come out with a book full of advice on how to unlearn what we have learnt in classrooms, and reverse the damage caused by learning. And that, he says, helps you achieve business and emotional success. The book is inspiring in places where it talks of conventional wisdom. Publisher: Jaico Books Price: Rs 195

Packed with action IF YOU ARE looking for a break from economics and business—which is what former banker Krishan Partap Singh has done to write books—Delhi Durbar, his novel, offers a good read and fast-paced action. It is a political thriller set in the sleazy heart of Indian politics, New Delhi. Singh is also the author of The Raisina Series, a three-book series set in Lutyens’ Delhi, India’s set of power. Publisher: Hachette, 291 pages Price: Rs 195