Ouch, it 'Hertz'

Henry Ford once said, "a business that makes noting but money is a poor business". Ford Motors CEO Bill Ford, notwithstanding his legendary lineage, must be pleased with himself after the sale of 'profit making' Hertz Corporation for $15 billion. On September 29, 2005, Ford also announced plans to cut down its component suppliers to half from the current number and award them long term contracts to arrest spiraling costs. All these strategic moves indicate that Ford is striving hard to change its status quo significantly, as it is making 'anything but money' right now!

But the question is: Does the sale of Hertz to an investor group composed of Clayton Dubilier & Rice, the Carlyle Group and Merrill Lynch Global Private Equity qualify as a sensible business strategy? Hertz posted a $33 million first quarter profit (pre-tax) this year, an unprecedented jump as compared to last year's $7 million loss (pre-tax) for the same period. Truly, Hertz had been contributing steadily to Ford's bottomline.

The major impediment was that the synergy, that Ford tried to leverage with Hertz, no more seemed to pay off . Apart from fl eet partnership agreements to dispose off relatively unpopular models like the Taurus sedan, there was very little value that Hertz was adding to the company. To make matters worse, the resale value of these cars in the used car market dropped considerably, prompting Ford to go the General Motors (GM) way and divesting Hertz.

As far as Ford is concerned, a 38% fall in first quarter profits, followed by a not so good second quarter, with a 19% southward plunge has affected its balance sheet, prompting it to undertake such restructuring. According to Dr. Tom Kirchmaier, Management lecturer, London School of Economics, "Hertz is a healthy and profi table company, and as such, it is not a bad decision to sell the company at this point to repair Ford's balance sheet"; an objective re-affirmed by Executive Vice President and Chief Financial Officer Don Leclair after the Hertz sale was executed.

In order to boost its core automotive business, Ford must concentrate on its money lending arm, Ford Retail Creditthe only business apart from Hertz, which after a good first quarter, has shown a decline in profits by $157 million in the second quarter. The lending business can help Ford accelerate automobile retail sales to consumers.

Ford should also focus on innovations like fuel cell research and hybrid vehicles, where it has made major investments for over a decade. With increasing competition from Asians, Ford should gain technological edge in these new areas; else it is going to hurt itself much more.

Taking a 'U' turn

There seems lot of action at 1585 Broadway, New York- the worldwide head quarters of Morgan Stanley. Well, it might be too early to predict the possible outcome of the action, but yes, things are starting to change as past employees and allies of former CEO, Philip J Purcell continue to quit Morgan Stanley.

Morgan Stanley on course

Recently Michel Miles, a long serving director at Morgan Stanley, quitted the board and that was followed by the resignation of two other directors, Charles Knight and John Jacob, on 9th September 2005. Apart from their resignation, there was another thing common to all the three directors - they all were Purcell's allies.

Well, it seems to be a nice end to Purcell's era as Morgan Stanley starts to restructure and braces itself for a positive future under its new CEO, John J. Mack. Even investors are getting optimistic about Morgan Stanley's future as the share prices at the New York Stock Exchange showed some revival. And it seems, the future outlook remains positive at least as of now.

The stock prices of Morgan Stanley went up by a staggering 10.28% since June 2005 and all this has happened aft er Purcell's exit. Since then, there has been a complete overhaul in the board.

The action is not limited to the board and the top management alone. Morgan Stanley is trying to restructure its businesses as well. It has recently announced that it will sell off its non-strategic Aircraft Leasing Business and focus more on core businesses to give higher returns to its shareholders.

After Delta and Northwest airlines went bankrupt, this seems to be a very timely decision. Th is would definitely work in favour of Morgan Stanley as the airlines business shows no promise. Backing up his decision, CEO Mack said, "Aircraft leasing is not a business that fi ts with our strategy. We have for long made it clear that we should divest this business and focus on our core financial services". So much so that Mack has even retained its credit card business which has been suffering from declining profits, proving his seriousness for core focus. And it certainly seems that Morgan Stanley, with a new CEO, top management and a renewed core focus, is poised for a major turnaround.

Finding nirvana Philips looks to improve margins

Revival for survival appears to be the mantra followed by Royal Philips Electronics NV (PHG) to alleviate its semi-conductor division showing ailing trends in terms of reduced sequential growth, competitive position and profitability. Under its cost cutting drive, it plans to save $307 million in its chip unit by the end of the year 2006, which could lead to laying off workers and shutting down one of its factories in Europe.

Frans van Houten, CEO, Philips Semiconductor has recently stated that shutting down one of the units is unavoidable, as Philips needs to become more competitive in third and fourth quarters. Th e Dutch conglomerate intends to be less dependent on the cyclical nature of the industry and projects its chip sales to rise up to 5% in the third quarter.

In the past, Philips had stopped its CMOS operations due to its drawbacks, divested its unprofitable projection television activities and outsourced the production of computer monitors. Th is time, the agenda for the cyclical consumer electronics business appears to be more of 'treatment'.

Philips CEO, Kleisterlee said that the semiconductor division must make a margin of 5% in an industry downturn and 15% at the peak. But the reality is that they could attain margins of just 9% at the last peak in 2004 and 2.5% in the second quarter of 2005. In May this year, Philips regrouped the semiconductor unit into four major areas to craft a more market oriented environment.

Further, to prune costs, Philips has opened its $60 million innovation campus in Bangalore, India to develop new chip technologies including healthcare, digital television and mobile handsets on September 30. Considering the setbacks in the now commoditised semiconductor market, Philips will have to make a signifi cant shift in operations to destinations like India, even if it means having to move out of its European base.

Too heavy to fly

God finds a lower branch for birds that cannot fly.but for birds with broken wings, in this case US aircraft carriers, there is always Chapter 11! The US aviation industry these days seems to be flying high on wings of Chapter 11 bankruptcy. The latest in the fray to seek refuge under this are Delta Air Lines and Northwest Airlines. They have, like their predecessors, filed for bankruptcy on September 14, 2005, as they succumbed under rising jet fuel prices that continue to defy gravity and an ever increasing burden of pensions and health care costs.

Consolidation: only saviour for the US Aviation Industry

Now, with the nation's third and fourth largest carriers seeking protection from creditors, four of the seven largest US airlines are under bankruptcy. Except for US Airways, which as a last resort to emerge out of bankruptcy has recently merged with America West Holdings Corp., all other past Chapter 11 filings have hardly borne any fruit.

United Airlines, the number two carrier has been operating under bankruptcy protection for nearly three years now! The recent bankruptcy filings could trigger an 'I am safe.I am bankrupt' reaction, where other carriers find themselves at a competitive disadvantage, as the bankrupt players do away with pensions and other healthcare costs. However, the 'not-so-lucky' carriers (read not bankrupt) could also gain mileage from the situation, if bankrupt Delta and Northwest cut back on domestic routes. Delta had earlier scaled back its operations in the Dallas hub. This will, to some extent, help US aviation battle the problem of over-capacity on most domestic routes.

But for how long can airline carriers survive on such 'ifs and buts' and price wars? The problems are galore. Firstly, the skyrocketing jet fuel prices due to refinery outages, thanks to Hurricane Katrina, have further aggravated the airlines' flights which were already struggling after the slowdown in operations, due to 9/11 and the SARS epidemic. Secondly, the industry continues to be fragmented with a large number of players trying to buy market share with price. For instance, Phoenix-based Mesa Air Group Inc. plans to start a new inter- island airline in Hawaii, in the first quarter of next year.

Analysts question the feasibility of a fourth airline in this market, where the other three players are Aloha Airlines, Hawaiian Airlines and Island Air. It's noteworthy that out of the three, Hawaiian Airlines has, earlier this year, finally managed to emerge out of bankruptcy. Aloha Airlines has recently tied up with two private-equity firms to commit $100 billion to help it emerge out of bankruptcy. This sums up the state of the inter-island airline market in the US.

Aloha has managed to lower its costs by $70 million, on an annualised basis. David Banmillier, chairman, president and chief executive of Aloha, has gone on record to say that, "The reason we had to reduce our costs ... is that you never know when someone is going to come into the market". This is the problem with US airline carriers. Even in markets where there is hardly any scope for operation, with most routes already over-crowded, airlines continue to weigh their options of operating with lower costs.

The resurrection mantra for US aviation lies in consolidation, even as lowcost airlines like JetBlue make profitability a distant dream for most carriers. According to the Air Transport Association, between 2001 and 2004, the US aviation industry as a whole, posted net losses of around $32.3 billion, including profits by low-cost carriers like Southwest Airlines and JetBlue. It makes strong business sense for US airline carriers to go the US Airways way. Though it might be a little expensive to align different fleets and maintenance programs, but it's better than the 'veiled threat' that the carriers still don't see.it's time the inevitable is not delayed anymore.

Come out of the deep freeze
Sticking with the frozen foods will be a bad idea for Unilever

It's the fiftieth birthday of Unilever's Birds Eye frozen food brand. But instead of celebrations Unilever is engaged in serious deliberations over the relevance of continuing with its frozen foods business. On September 16, 2005, the company announced that it would "undertake a study into strategic options for the future of its frozen foods business in Western Europe".

Besides Birds Eye, Unilever's Findus and Iglo frozen food brands are presently marketed in 11 European countries. Food accounts for 49% of Unilever's sales and Ice creams and Frozen Foods alone make up for 30% of sales. Though 43% of the Anglo-Dutch conglomerate's sales come from the European market, of late the figures have been quite dismal. Sales fell by 2% and 0.6% in the first and second quarters respectively this year.

The decision for reviewing the frozen food operations could prove to be timely and vital for the company which is trying to reverse the slowdown in growth over the last couple of years. While Unilever's appointed reviewer, Goldman Sachs has the option of recommending more investment or creating a subsidiary, the most appropriate move at this time would be a sell-off which could fetch $2.5 billion.

With Europe getting increasingly more health conscious, frozen meals are falling out of favour with consumers. Chilled fresh foods, organic foods and chilled ready-meal-kits have been eating into frozen foods market ever since healthy eating campaigns have caught hold of the European palate. A few years down the road, Unilver shareholders might thank the board if it dumps frozen foods from its prestigious menu.

The new German blitzkrieg
Deutsche Post's global ambitions hinge strongly on the US market

The Germans are coming!, is what Americans will say to this. The Germans never could attack the US mainland, in either of the world wars, but they are intent on US 'mail' land for sure! Mail and logistics giant Deutsche Post AG is taking over UK's largest warehousing and distribution company Exel Plc, in a deal worth $6.7 billion. The deal would catapult the German firm as the worlds largest postal and logistics company ahead of FedEx, TNT, and UPS. And also signifi- cantly improve Deutsche Post's presence in the immensely critical US mail and logistics market.

Deutsche Post perceives problems back home in Germany where it stands to lose its monopoly in the postal services in 2007, with a competitive joint venture being set up. In particular, the US is one of its most important, yet toughest markets. The takeover of Exel is the second big ticket acquisition for Deutsche Post after buying express shipper DHL in 2002, which was done to gain a stronger foothold in the US express air-freight business.

DHL suffered losses of over $600 million in US in 2004, under tough competition from the duopoly of United Parcel Service (UPS) and Federation Express (FedEx). Moreover, Deutsche Post faces the severe challenge of rising air freights, due to which it needs to aggressively expand its land network. The company chairman Dr. Klaus Zumwinkel, in a statement to shareholders reiterates, while referring to US that "it is undoubtedly the right strategy for a global logistics group to be active on the world's most important express and logistics market."

Contract logistics, a highly fragmented and growing market, is one of the key strengths of Exel. Exel has a very prominent foothold in the US in this market. To capitalise on this, Deutsche has to ensure positive synergy between DHL and Exel in its US operations, as t h e challenge is indeed daunting.

The escort without heart
Without a few cash cows, it needs to look at underperforming businesses

If this was a filmy script, the late Raj Kapoor and superstar Amitabh Bachhan could have mounted a Bobby motorcycle and saved Escorts from hurtling into oblivion in a thrilling climax. Unfortunately for chairman Rajan Nanda, son-in-law of Raj Kapoor and father-in-law of Amitabh Bachhan's daughter, it is not filmy antics but hard nosed decisions and a generous dose of luck that can save Escorts. Once a premier business group of India, Escorts seems to be in the Intensive Care Unit - literally fighting for life. Perhaps that was what prompted Rajan Nanda to sell the family jewel Escorts Heart Institute to Fortis Healthcare in a Rs.6.5 billion deal.

But given this business family's Bollywood connections, there had to be a filmy twist even to this. Younger brother Anil Nanda has obtained a stay from the Delhi High Court on the sale of Escorts Heart Institute to Fortis. However, analysts and insiders are confident that the sale will go through eventually and Escorts will manage to get Rs 6.5 billion. Without this money, Escorts is sunk for sure. The company is sadd l e d with debts in excess of Rs.15 billion, most of it bearing unusua l ly high interest rates.

Financial Institutions and banks have already lent money more than once to Escorts to put its house in order and the company has exceeded all credit limits. No bank would lend any more money to Escorts simply because the company is bleeding and there are not enough cash flows to repay even the existing debt. The Rs.6.5 billion will be used by Escorts to retire high cost debt and launch a restructuring exercise that might save the company.

Rajan Nanda has been trying for years to save the company. He has already hived off Escorts stakes in businesses ranging from mobile phones, auto components, tractors, motorcycles (Yamaha) and retail (Nanz). Apart from a stake in a V-SAT venture with Hughes Communications, Escorts Hospital appears to be the last throw of dice for Nanda and Escorts. It is not difficult to figure out what went wrong.

Like the Modis, Podars, parts of Birlas, the Singhanias, the Dalmias, the Bangurs, Shrirams, Sarabhais and the Mafatlals, the Escorts group was once a premier business family of India with multidimensional business interest. But those were the days of sheltered and protected business environment for India Inc since foreign investment was virtually restricted in sectors in which the traditional business families operated. Since 1991, the protective walls have disappeared and many business families have found it extremely difficult - if not impossible - to come to terms with fierce global competition More than 20 years ago, when Britain based industrialist Swaraj Paul had launched a hostile takeover bid for the Escorts, it had led to nationwide controversy over the propriety of allowing 'foreigners' to snatch away India's business jewels. Sadly, there is not even a whimper now as the jewel has lost its shine, and Escorts is fading into the sunset.

Shining like a bright star
Future looks bright; but for how long?

Bharat Forge Limited (BFL), flagship company of the $1.25 billion Kalyani Group, has acquired Sweden based Imatra Forging Group (which consists of Imatra Kilsta AB, Sweden and Scottish Stampings, Scotland), in an all cash deal. The forging giant, thus, has extended its acquisition spree to four global companies in a span of twenty-one months.

The exact figure of the acquisition is not known. But it is believed that BFL has bought the Imatra Forging Group for Euro 45.5 million ($54.7 million). Imatra Forging Group is the largest manufacturer of front axle beams and second largest crankshafts producer, both in Europe. The Sweden based group has a combined capacity of 100,000 tonnes per annum with a 2004 turnover of about $132 million. It is a major supplier to leading passenger car and commercial vehicle manufacturers like Volvo, Scania, Perkins and Iveco.

Announcing the deal, BN Kalyani, chairman and managing director, BFL, said, "This has been our core strategy to enhance our competitive advantage by providing a complete service and better value to our global customers and improve our share of business with them."

BFL now has world class manufacturing facilities across eight locations - two in India, three in Germany, one in Sweden, one in Scotland and one in North America. BFL is now eyeing the large markets in North America and China. It is studying the pros and cons for strategic acquisitions in China. Sounds great no doubt. But it would be too early to say that Bharat Forge is emerging as a global leader in the auto-components industry.

With annual sales of $500 million, Bharat Forge is 70 times smaller than global leader Delphi which clocks annual sales of more than $28 billion. Even Visteon is almost 40 times bigger than Bharat Forge.

A similar story emerges even if you look at overall figures. At $1.4 billion in 2004-05, auto-components exports do look healthy. But not if you compare them with $ 6 billion for China and $ 20 billion for Mexico.

Clearly, Bharat Forge has many mountains left to climb. But then, no one can deny that it is on the right track.

Salaam Namaste for FM Radio
Private FM Radio Companies have got a new lease on life

The next time you tune in to your favourite FM Radio station, just don't be flabbergasted if you get bugged by constant ad breaks, as you can surpass this small trouble with assorted mix of quality infotainment now. Indian radio is on the verge of a boom with new rules abolishing huge license fees and allowing 20% FDI.

Advertising revenues on radio is expected to grow by 20% this year to Rs. 260 crore, up from last year's Rs. 220 crore. With more than 100 new FM stations in the pipeline, radio is set for exciting times. The estimated growth expected from the access of newer frequencies in the market is around 22% within the next five years.

The current FDI norm is likely to generate foreign investment inflows of over Rs. 2bn in the next 18 months. The moving to the revenue sharing regime is expected to bring in many positive changes in terms of increased variety in content; Rs. 10-15bn estimated capital investment as well as reduced operating cost (up to 50%).

Reforms in telecom sector in India in the past have led to the surfacing of mobile players who with their constant price war made the overall mobile market more feasible to the end consumer. One can certainly anticipate such positive streak in upcoming private FM radio market which has got a huge potential to grow. HT Media, the owner and publisher of The Hindustan Times, has signed a MoU with Richard Branson's Virgin Radio.

Millions of listeners across hundreds of towns will finally be able to enjoy the joys of radio--something stifling state controls have not allowed for the last five decades. Just in case you did not know, while India will boast of 100 radio stations soon, the US already has more than 14,000 of them!

'Steel'ing the show?
The rush to announce huge steel capacities for future could just be a ruse

The Indian steel industry seems to be in the grip of an MoU and announcement mania of unprecedented proportions. Every other day, newspapers feature feel good stories about a steel major signing a Memorandum of Understanding (MOU) for multi-million tonne and multi-billion dollar projects with the governments of Chattisgarh, Orissa and Jharkhand. Add up all these ambitious announcements and you reach an incredible figure. In the next five years, steel companies plan to add more than 60 million tonnes to the existing capacity. Days are back for the Indian steel industry. Not to count the billions of dollars of investments planned in countries ranging from West Indies to Singapore to Iran.

In this age of global capital, it is possible that companies like Tata Steel, Essar, Jindal, Bhushan, Ispat and others can raise the dollars required for these huge projects. Yet, talk to any analyst and the message coming across is that a lot of this new steel capacity will remain merely on paper. For one, demand for steel in India - currently hovering around 35 million tonnes - will not reach the magic figure of 100 million tonnes in a hurry. That leaves exports as an option for the Indian steel companies.

Till recently, a sustained boom in the global steel industry - fuelled primarily by explosive demand growth in China - had made steel a very profitable sector to be in. In fact, the boom has made Tata Steel a jewel in the Tata empire with net profits of Rs. 35 billion in 2004-05. The surge has also rescued corporate empires from decline and oblivion.

By the turn of this century, the Essar group's steel venture was making such huge losses that the entire group was in danger of becoming history. Losses in steel had compelled Essar to beg off its ambitious foray into mobile phones and Essar phone became Hutch phone. Yet, the steel boom triggered a near miraculous turnaround in the Essar group, with Essar Steel generating a net profit of Rs. 5.9 billion. In fact, the Essar group has used steel profits to spend Rs. 15 billion and buy back a major stake in Hutch.

But this bull run is on its last leg and will soon peter out. China is adding capacity at a furious pace and will be producing close to 200 million tonnes. In most other emerging markets, analysts are projecting a surplus of steel capacities in the future. So does that mean companies like Tata Steel and Essar bent upon committing hara-kiri?

The truth, as always, lies elsewhere. The mad rush for new steel projects was on after Orissa signed a formal MoU with South Korea's POSCO for a 15 million tonne steel plant to be set up at a cost of $ 12 billion - that includes capital needed to upgrade infrastructure in Orissa. POSCO came on board only after Orissa agreed to let the company have direct access to and control over huge iron ore reserves.

And therein lies the reality behind the steel rush. Scared of losing access to mines and ores, steel companies have gone on a MoU signing spree just to prevent rivals from getting access to mines. Did anyone say steel is a dull and banal industry where corporate warfare and intrigues do not happen?

Another Indo-Italian union
Tata motors MoU with Fiat can give a boost to the latter's operations

Tata Motors is all set to become the first Indian automotive major to join hands with Italian automobile major Fiat and is exploring the possibilities. A memorandum of understanding was signed between automobile major Tata Motors and Italy's Fiat. The MoU would help both the companies to analyse the co-operation across various markets in the passenger car segment. Other areas that would be covered are - development, manufacturing, sourcing and distribution of products. The signing of the MoU would be followed by a feasibility study, which would be both short term and long term and after that a definitive agreement would be arrived at. Fiat had been looking for partnerships in auto sector and this is one of the steps, followed by the company which has been going through one of its worst ever financial crisis. Fiat already has tie ups with Ford Motor to develop two small vehicles for the European market.

In India, Fiat has made its presence felt by investing about Rs.200 billion in operations and has also made an influx of Rs.20 billion. Fiat has not met with the success that it had anticipated, as Fiat Palio faces stiff competition from Hyundai Getz and the newly launched Maruti Swift. Models of Tata such as Indigo and the Marina have also fared moderately. Fiat's current models that include Palio, Adventure and Sienna are manufactured at the Bandra - Kurla complex and it is expected that a successful alliance would definitely make Fiat Palio a shot in the arm of Tata Motors.

This alliance would affect both companies immensely as Tata Motors would be a great ally with global ambitions and it will gain from the retail network of Fiat. One surely hopes that this alliance would give Tata Motors a global acclaim and help Fiat to finally put an end to the hunt for a suitable partner.

Apollo launches a new mission
Apollo closing in on India's dream of health-for-all

The man's vision has been unmistakable, starting with a name like that for a health care group. Much like the Apollo11 mission lodging man's first steps on the moon, Dr. P. C. Reddy's Apollo group is making a concerted move towards establishing a literal 'world-class' presence, not content with being the single largest private health group of Asia.

Spearheading a movement of healthfore all, is Apollo's tie-up with Reliance Infocomm leveraging their 240-strong WebWorld network promising to take telemedicine facilities through videoconferencing to folks far from the premises of a brick and mortar health centre. But the new buzz is about going global. Anil. K. Maini, President, Corporate Development at Indraprastha Hospital confirms, Apollo is widening its presence overseas with opening up of its information centres, clinics, medical centres and hospitals in countries like Afghanistan, Bangladesh, Sri Lanka, Middle East, Africa and soon in UK.

Apollo's international aspirations surfaced four months back as it signed an MoU with John Hopkins Medicine International and the Apollo Hospital at Indraprastha achieved the Joint Commission International (JCI) accreditation, and lately as it bid to provide services to the National Health Service (NHS) of UK. Having mobilised $70 million with the issue of GDRs, the Apollo mission looks set to get cracking again.

Perhaps the only grey cloud could be the frequent charges of negligence from relatives of patients against Apollo. Then again, that could be the price Apollo pays for being so high profile.