Potential to become India’s largest M&A

India’s largest mobile phone company Bharti Airtel is in talks to acquire a 49% stake in Africa’s largest telco MTN to create an entity with revenues of about $20 billion and over 200 million subscribers. The combined entity will be amongst the top five operators globally. MTN will get a 36% economic interest in Bharti in return for offloading the minority stake. The deal size is estimated to be worth over $23 billion.

The Indian telco said the deal would be achieved through a scheme of arrangement. As per the talks, MTN would acquire about a 25% post-transaction economic interest in Bharti for an effective consideration of approximately $2.9 billion in cash and newly issued shares of MTN equal to approximately 25% of the currently issued share capital of MTN.

• MTN would acquire approximately a 25% post-transaction economic interest in Bharti for an effective consideration of approximately USD 2.9 billion in cash and newly issued shares of MTN equal to approximately 25% of the currently issued share capital of MTN.
  
• Bharti would acquire approximately 36% of the currently issued share capital of MTN from MTN shareholders for a consideration of ZAR 86.00 in cash and 0.5 newly issued Bharti shares in the form of Global Depository Receipts ("GDRs") for every MTN share acquired which, in combination with MTN shares issued in part settlement of MTN’s acquisition of approximately a 25% post-transaction economic interest in Bharti, would take Bharti’s stake to 49% of the enlarged capital of MTN. Each GDR would be equivalent to one share in Bharti and would be listed on the securities exchange operated by JSE Limited.

The broader strategic objective would be to achieve a full merger of MTN and Bharti as soon as it’s practicable to create a leading emerging telecom operator which today would have combined revenues of over $20 billion and a combined customer base of over 200 million customers.

Contributed By:
Prof. J. N. Mukhopadhyay
(Globsyn Business School)

Source: The Economic Times

$ 1 trillion Toxic Assets – Will the recovery plan work ?

The term "toxic asset" is a nontechnical term used to describe certain financial assets when their value has fallen significantly and when there is no longer a functioning market for these assets, so that they cannot reasonably be sold. This term became common during the financial crisis that began in August 2007. Toxic assets played a major role in that crisis. When the market for such assets ceases to function, it is described as "frozen".

Markets for some toxic assets froze in 2007, and the problem grew significantly worse in the second half of 2008. Several factors contributed to the freezing of toxic-asset markets. The values of the assets were very sensitive to economic conditions, and increased uncertainty in these conditions made it difficult to estimate the value of the assets. Banks and other, major financial-institutions were unwilling to sell the assets at significantly reduced prices, since lower prices would force them to significantly reduce their stated assets, making them appear insolvent.

US Treasury Secretary Timothy Geithner has unveiled a plan aimed at persuading private investors to help rid banks up to $1 trillion in toxic assets that that are seen as a roadblock to economic recovery.

The US treasury has invited private entities and individuals to buy some of the toxic assets in the bank books at rock-bottom prices. The banks have partially marked these assets to the market and booked huge losses in recent quarters. There are additional incentives for investors to buy these assets at heavily marked-down prices.

The private investor is being asked to bring in less than 10% of the acquisition cost and the treasury is willing to fund the remaining 90% or more. Also, the government is ensuring private investors could walk away if the value of these assets falls further. So there is no further downside for the private investor.

There are many problems with such a scheme. It has been debunked by a Nobel prize winning economist as “cash for trash”. The main flaw in the scheme is that there is no knowing whether banks such as AIG, City and Goldman have fully marked these assets down to their real value. Over 60% of the housing derivatives were traded and acquired outside the exchange in over-the-counter deals. Since there is no liquidity, one cannot ascribe any value to them.

The treasury plan seeks to discover a price with private partnership. But nobody is sure whether any reasonable price will be discovered for these toxic assets. The biggest irony is that the treasury is trying to discover a price by allowing the private investor a nine-fold leverage! Is this sustainable for US citizens, already over-leveraged.

The Fed's Term Asset-Backed Securities Loan Facility, or TALF, received lukewarm response heightening fears private capital will also shun the government's toxic-asset plan amid public outrage over outsized executive bonuses.

A closer examination of the US treasury plan would suggest that the scheme might need a lot more fine-tuning before it is able to provide some succour to the ailing American banking system.

Contributed By:
Prof. J. N. Mukhopadhyay
(Globsyn Business School)

New Package of Government of India to Revive the Indian Economy from Recession

On 16.12.2008, the Indian Bankers Association held a meeting in which it was decided that the rate of interest on loan taken would be slashed. At the same time, rates of interest were also lowered for small & medium term business loans. However private banks like HDFC, ICICI did not specify anything with regard to lowering of interest rates. Experts are of the opinion that they too will soon adopt the policy of nationalized banks.

The Government of India, to revive the economy, has taken a number of decisions to increase the flow of money in the economy. The price of petroleum has been reduced, a stimulus package of Rs 30,000 Crore of Rupees has also been declared by the Government of India. Even after all these, the Export Sector & Housing Sector got due attention from the RBI, which declared Rs 9,000 Crore package for these sectors. Amidst these, the Repo Rate was lowered by the RBI.That was done when RBI started bargaining with the banks with regard to lowering of interest rate. The final shape was obtained in the meeting of the Indian Bankers Association on 16.12.2008.

At the end of the meeting, the Chairman of SBI, Mr. O.P.Bhatta said, the nationalized banks will charge interest on Housing Loan @ 8.5% p.a. up to a loan of Rs 5,00,000 & would charge 9.25 % interest p.a. on loans between Rs 5,00,000 to Rs 20,00,000.Presently on an average the current rate of interest on loan is more than 10%. The new rate of interest will come into effect from 16.12.2008. Thus from 16.12. 2008 to 30.06.2009,whoever take housing loan, will have to pay interest at the above-mentioned rate. Bhatta further added that the revised rate will apply only to the new home loan takers & that the rate will remain fixed for the coming 5 years. After the fifth year, judging the market scenario, the loan takers can convert their loans into fixed or floating terms. Loan processing fee & prepayment penalty are also waived. Along with it the loan takers will also get free life insurance policy. Even the initial percentage of the amount required to be arranged by the loaners for Project Finance, has been reduced. It has now been decided that upto a project loan of Rs 5,00,000,the loaners are required to arrange 10 % of the project loan & between Rs 5,00,000 to Rs 20,00,000 project loan, they are required to arrange 15%. Till 16.12.2008, the margin fixed by the banks was 25%.

To revive the small & medium industries, Bhatta has talked about the decision to reduce the rate of interest by 100 basis point i.e. by 1%. To provide employment opportunities, the banks have decided to expand their business activities & appoint new employees (staffs). LIC & Nationalized banks, jointly have decided to create new employment opportunities to the tune of 45,000, the bank sources said.

The Finance Ministry stated that on account of the new package the burden of Rs 15,000 to Rs 20,000 Crores would ultimately fall on the shoulders of the nationalized banks. Naturally the banks will not be interested in further slashing of the interest rates. The Real Estate, it seems is not interested in the new package. They feel that in Metros it is not possible to get a home within Rs 20,00,000. Hence the loan takers of these Metros will fall outside this package. As a result, the demand for Real Estate during recession and the decision to increase the inflow of cash will remain unfulfilled. But the Finance Ministry is not accepting this theory. They feel that even during recession, the Real Estate price is bound to fall.

The Labour Minister Mr. Oscar Fernandez stated that during August 2008 to October 2008, 65,000 employees have lost their jobs on account of recession. So to create employment opportunities the Government now relies heavily on public sector undertakings.

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)

Federal Reserve Of USA Slashes Interest Rate To Zero - Will It Help India?

To tide over the effects of Recession, the Federal Reserve, the Central Bank of the USA, has slashed the rate of interest on loans, taken from the Federal Reserve, to zero. This seems like following the ten-year-old Japanese Model, in which rates of interest were also slashed to zero. The Federal Reserve has stated that the rates of interest taken from them would range between 0% to 0.25%. In other words, the US banks & other Financial Institutions will now practically get Interest Free Loan from the Federal Reserve. As a result of this step, the Investment Cost in the American Economy will be reduced & at the same time people will be encouraged to spent rather than save. The US Economists are of the opinion that they now expect the common people to invest in Share Markets, Mutual Funds etc rather than keeping money in the Banks. The experts are of the opinion that this process will slowly revive the US Economy. Economists are also of the opinion that the slashing of the interest rate will help India boost up her Export Trade since the slashing process will reduce the price of the dollar in relation to the rupee as well as other major currencies of the World. This will definitely help India to boost up her Exports.

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)

Should Redeemable Preference Shares be treated as Debt or Equity?

Corporate houses that have issued redeemable preference shares are treating them as equity capital.

As per the International Financial Reporting Standards (IFRS), redeemable preference shares should be shown under the head long-term financial liability on the liability side.

The company law, in contrast, requires them to be classified as equity capital on the liability side.

The Institute of Chartered Accountants of India (ICAI) had suggested in its standards on financial instruments that companies treat them as long-term liability.

The changes would have impact on the bottom lines of companies negatively. Classifying redeemable preference shares under long-term financial liability will have an impact on the net profit of the company because it will change the way dividend paid on such shares is accounted for. If a redeemable preference share were treated as equity, the returns to those holding the instrument would be in the nature of dividends. On the other hand, if it were treated as long-term liability, the same would be interest, which would be an expense that would lower profits, at the same time it will reduce the tax burden of the company to some extent.

Hence should Redeemable Preference Shares be treated as Debt or Equity?

Contributed By:
Krishnendu Ghosh
(Globsyn Business School)

I Bank Crisis. Why?

B School Grads dream of joining I Banks. Suddenly with the meltdown, we find that many respected I banks have evaporated and some are on the brink.

This paper attempts to analyze some of the probable reasons.

Financial Over-Leveraging - when loan and investment books are significantly larger than its capital. With $ 25 billion, some I banks were doing business of more than $500 billion. Leveraging is good. Over- Leveraging is bad, very bad.

Disclosure Issues – Many I Banks even in its last conference call with investors, gave no clue that it was actually on the brink.

High-Risk Nature of the Loans and Investments - I Banks play advisory role but slowly over the years, their proprietary books have multiplied. They also organize big loans for their clients for funding acquisitions. At times, they take positions, only to hive off the securities to other clients. In a crisis, they may not get the opportunity to down-sell such positions.

I Banks started buying mortgage loans from other banks, and then packaged them to sell bonds against the loan pool. Often they added cash to make the loan pool more attractive, so that the bonds can be sold at a higher price. By selling these structured bonds, it raised money and freed capital. But when homebuyers started defaulting, these bonds lost their value. It all began like this, and then the virus spreads across markets.

Sub-Prime to Prime - When an I Bank faces a redemption pressure, and if it sells the mortgage-backed bonds, whose prices have fallen, it will not raise as much as was earlier expected. So, it sells some of the other good assets or bonds which may have nothing to do with mortgages. But since the bank starts dumping these assets, prices of these assets also dip. This is when the crisis spreads from subprime to prime.

Strange Accounting of Complex Derivatives - All banks are required to mark-to-market (MTM) their investments. So, a drop in price leads to the MTM loss. Many of the instruments are over-the-counter derivatives, which are struck on a one-to-one basis between two parties. For a complex derivative a bank does construct a model, and feeds the available market price of these variables in the computer, to arrive at what the market price of the derivatives could or should be. This is an artificial model-generated price. This is called the mark-to-model against mark-to-market.

Illiquid Instruments - An MTM loss can be provided only if there’s a ‘market’. When there is no market, the bigger problem is how does one provide for the losses. The trouble is when the bank actually goes out to sell the derivatives, it discovers that there are no takers. And, even if there are buyers, they are willing to pay just a fraction. In other words, there is a sea of difference between the price that is being offered in the market and the high artificially-generated price thrown up by the computer model. Once there is a financial crisis of this magnitude, banks may refrain from lending to each other, fearing that the money would get stuck, compounding the crisis. So, when the bank ends up selling the instrument or unwinding these complex derivatives, the loss suffered is far in excess of the mark-to-model loss. Such extra losses on multiple of securities and multiple portfolios can wipe out the capital of the bank.

Contributed By:

Prof. J. N. Mukhopadhyay

(Globsyn Business School)

Reference: The Economic Times

Barclays Mops Up Lehman Brother’s Business In North America

Barclays, the major Global Financial Services Provider Company, took over bankrupt Lehman’s business in North America. More than 10,000 employees of Lehman Brothers, engaged in different capacity will now be employed in the amalgamated company of Barclays & Lehman. The Court of Bankruptcy, having given green signal to the takeover, Lehman’s North American business comprising of Fixed Income, Equity Sales, Selling & Distribution, Research, Investment Banking etc, will now run in full swing. In a statement, Barclays stated that though the amalgamated business will now run in the name of “ Barclays Capital”, but since Barclays has already purchased the goodwill name of Lehman, it can use that name as & when it deems fit.

Contributed By:

Prof. Jayanta Mitra

(Globsyn Business School)