Do unto mothers, as mothers...
...do unto you; the Alcatel-Lucent merger is perfect and would hit the original Ma Bell AT&T the hardest

This one could not have made headlines the way Mittal's Arcelor bid did; as both companies are 'Western' here! But the fact is that the Alcatel and Lucent merger talks have been no less controversial ever since the two failed to combine in 2001; owing to disagreements over board representation.

Finally though, on April 2, 2006, the two companies confirmed that they had in fact combined to "create the first truly global communications solutions provider with the broadest wireless, wireline and services portfolio in the industry," with combined sales of over $25 billion and a manpower of 88,000 employees. Patricia Russo, Chairman & CEO of Lucent (left ), and CEO of the new entity, elaborated that "the communications industry is at the beginning of a signify cant transformation... one that is projected to enable converged services..." But analysts have questioned Alcatel's off - take from the merger.

Bill Lesieur, Chief Consultant at Technology Business Research states, "Alcatel is a strong global company that doesn't need Lucent to sustain its position." But perhaps analysts forget that Lucent's global leadership in wireless technology - which Alcatel thoroughly lacks - would combine redoubtably with Alcatel's superior geographical reach and expertise in Digital Subscribers Line equipments - which Lucent had disregarded till date.

Recent consolidations in US telecom, like the proposed acquisition of Bellsouth by AT&T (pending regulatory approval) have put huge pressures on manufacturers to consolidate. Also, the equipment market is shrinking globally, and firms have to merge to save costs. But perhaps the most important issue in this merger - and that is not even the plan for 8,800 job cuts - relates to security concerns within the government, as Lucent serves the US military and possesses national security information. This could force regulators to turn down the merger, despite whatever financial pluses it might have. But if this merger gets through, it would surely create a domino effect for smaller players like Tellas, Ciena, Sycamore Networks and ECI Telecom to consolidate. On another front, the original mother bell (or Ma Bell) AT&T, created from a merger between SBC and AT&T, had gone the M&A way believing its larger size would provide it much bigger negotiating power against equipment & service providing behemoths like Alcatel & Lucent.

Amusingly, now the same AT&T is expected to oppose the merger tooth & nail, as it would suffer a huge loss in negotiating power, while undertaking business contracts with the much stronger entity. But then the industrial world has always run on the saying, "Do unto mothers, as mothers do unto you!"... Well, hasn't it son?

The new suicide drug: Schering!
Bayer's offer for Schering is more ridiculous than that made by Merck

(column by R. Prasad)

One man's loss is certainly another man's gain. This sums up the story of companies bidding for pharma major, Schering AG. March 13, 2006 saw Merck making a hostile bid for acquiring Schering AG for $18.27 billion (a bid that had been thoroughly criticised by B&E, refer Stratagem section, issue dated March 24, 2006). On March 23, the story was different, as Bayer AG's $19.9 billion bid at $104.25 per share compelled Merck to withdraw, making Bayer the sole bidder.

Schering supreme Hubertus Erlen commented, "It is not possible for Schering to maintain its independence, given the Bayer offer." The new entity would have combined net sales worth approximately $18.4 billion and would create a health care unit ranked amongst the world's top 12 companies. It would also add Schering's Yasmin - one of the world's highest selling oral birth control drugs with sales of $718.45 million in 2005 - to Bayer's portfolio.

Bayer Chairman Werner Wenning declared, "The proposed takeover of Schering is in line with our strategic objective of further growing our health care business." But the fact is that this merger makes extremely less financial sense for Bayer, lesser than it did for Merck. With a ridiculously high P/E multiple of 27 (compared to Bayer's P/E multiple of 15.4, and Schering's 20.6 - based on prices before the Merck offer), the offered price is irrationally high.

Further, the combined and relatively pitiable free cash reserve of $4.9 billion will get wiped out 4 times over, if Bayer were to go through this deal. Rightly so, S&P's rating has already put Bayer on 'Credit watch with negative implications' saying that the acquisition could "deteriorate credit quality of the resulting group." For Merck, the death knell was sounded in its killer drug Vioxx. And for Bayer? Of course, in the killer company, Schering!

(End of R. Prasad column)

Ma'lazy'ian Airlines - Truly Asia?
MAS must drive operational excellence rather than merely cut costs

(column by Steven Philip Warner)

An ailing sector, groaning companies & petrified employees are routine in the aviation business today. Malaysian Airlines (MAS) seems no different. After a third consecutive loss-making quarter ending December 31, 2005 (loss of $342 million), a resurgence plan for MAS was heralded on March 27, 2006, which aims at cutting costs with 6,500 job cuts & withdrawal from 96 domestic routes.

Now, MAS' top competitor, Air Asia, will enjoy a monopoly on these routes & will also purchase 19 MAS aircraft s for $1.08 billion. The plan hopes to achieve annual profits of $135.5 million by 2008. Analyst Praveen Vetrivel from International Bureau of Aviation does state, "I am surprised they did not do this earlier." Unfortunately, in reality, the MAS problems lie elsewhere.

MAS operates on revenue to per passenger ratio of just 4¢ (cents), whereas Cathay Pacific and SIA operate at 9¢ and 7¢, respectively. MAS operates on passenger capacity of 2.8 million per personnel, while SIA and Cathay Pacific are way ahead at 5 million & 4 million respectively. Consequently, around 97% of MAS' domestic routes are loss making.

On the current course, MAS is forecasted to hit the critical cash balance threshold of 5% of revenue (around $140 million) by April 2006 and touch a negative of $610 million by July 2007! Perhaps MAS should learn the art of mastering operational and financial excellence from Southwest Airlines in the US, which rewrote benchmarks of how to operate economy flights. Unless MAS undertakes radical process and structure re-engineering, flying to heavens could become true literally.

(End of Steven Philip Warner column)

Incarcerated without a trial!
Rick Wagoner's professional career is dead whether or not he's guilty

(column by Smita Polite)

The name is Wagoner, Rick Wagoner and he is the star of "Triple trouble." Donning the triple role of Chairman of the board, CEO and "Mr- Fix-it" for the North American operations of General Motors, the world's largest auto maker - Wagoner's character definitely deserves an Oscar for carrying it through so far.

GM recorded a loss of over $10.6 billion for 2005. On April 3, 2006, Wagoner announced that GM is selling 51% stake in its highly profitable financing arm GMAC to a consortium of investors led by Cerberus Capital Management, which is expected to generate $14 billion for the troubled auto maker. "This agreement is another important milestone in the turnaround of GM," said Wagoner following the announcement.

But will it really steer the story towards a happy ending? Let's go into flashback to get a feel. Way back in early 1970s, Wagoner was majoring in economics at Duke University, but secretly wished to become a professional basketball player. Standing at six feet four, he was part of the freshman basketball team, but soon enough realized that he would not excel at it.

He met his wife Kathleen Kaylor at Duke and in 1975 joined Harvard University for an MBA. In 1977, he joined GM's Treasurer's office as a Financial Analyst and has remained with it ever since. At the age of 47, in June 2000, Wagoner became the youngest CEO in the 98-year-old history of GM. Then followed a number of "never befores."

Wagoner defied the tradition of promoting within the organization and hired Steve Harris & John Devine for top positions from DaimlerChrysler & Ford respectively. The most radical appointment was of Robert Lutz - who had no formal training in engineering - as product development head.

But it worked! GM started reporting encouraging profits, and then in May 2003, Wagoner was elected Chairman of the board. The story was following the typical "So far so good" pattern, but in April 2005, Wagoner invited trouble with open arms when he personally took responsibility of revamping the North American car business.

In the past six years GM's market share has dropped from 28.7% to 24.4%, its credit rating has fallen from "investment grade" to "junk", its debt has accumulated to a historical $30 billion, and the share price has hit rock bottom. The primary problem remains the legacy of health costs and pension benefits of workers with around $2,000 per car spent on pension liabilities.

Wagoner has launched a restructuring plan that entails over 30,000 job cuts by 2008. However, the controversial role of a job slayer has made Rick hugely unpopular with the US media, as well as with citizens. But what perhaps is surely the final nail in Wagoner's professional coffin is the fact that last month, GM revealed it had misreported last year's losses by $2 billion and is currently being investigated by the US Securities and Exchange Commission.

Considering Wagoner's finance background, the accounting scandal puts a big question mark on Wagoner's knowledge of billion dollar financial frauds; but more importantly, on his integrity, which has been already incarcerated many times over much before any formal judgement has been passed by the SEC. The fraud provides the belligerent GM board an exquisite opportunity to ease Wagoner out from the leadership position; an opportunity they would be loathe to resist.

Always accused of being stoical and "robotic", the only way Wagoner can now hope to survive, is to perhaps give up one of his three roles, or be kicked out. Till then - as Rick pleaded on April 3, 2006, "I appreciate support from the board, my wife, anybody I can get it from these days" - all that he can hope for, is hope itself. But isn't that stuff exactly what runs Bond movies globally?

(End of Smita Polite column)