How Much Should You Bid for 3G Spectrum in India?

Short Answer: Rs. 37.2 Billion (for a pan-Indian presence).

TRAI has dictated that 3G spectrum is open to all and that it will be an auction and not a beauty contest. Mr. A. Raja is trying to reject TRAI recommendations and make 3G spectrum available only to incumbents. This would be disastrous –if you have six pan-Indian players fighting for six licenses, the auction would only meet the reserve price. Additional 2G spectrum won’t be available until subscriber numbers go through the roof and this makes the task of predicting the auction price for 3G spectrum a very complex task. Yours truly has made an humble attempt using complex game theoretic modeling!

For now, it looks like TRAI and TEC are not going to budge on the subscriber number thresholds for additional 2G spectrum - this is despite the slanging match that is happening between the GSM guys and Mr. Anil Ambani (ADA as he is referred to in the top echelons of Reliance). Given this situation, the focus is back on 3G spectrum bidding and all the 12 operators and atleast 100 others are keen on being part of this auction.
In order to simplify the task of modelling the auction, I have made some not so overarching assumptions. Here they are:

1. The auction will be conducted as a typical Vickrey auction - second price sealed bid auction. This is to avoid the winner's curse and the subsequent bid shading.
2. Although it would have made my task infinitely easier, I have not made the over-arching assumption of making it a common value auction. Clearly, the incumbent players have much more to gain than a new entrant. Even aong the new entrants, the foreign players have much more to gain given their lower cost of funds than the new domestic players.
3. The auction can be transformed from an incomplete information one to an imperfect information situation with nature as one of the players.
4. There will be absolutely no collusion between the players (not sure about this one considering the polarization of the players into the GSM group and the CDMA group).
5. None of the players will adopt a "heroic failure" strategy - someone might attempt to do it for branding purposes, but it looks unlikely given that TRAI may not be keen on publicizing all the bids.
6. Based on current posturing, I have assumed that only 6 players will be awarded 3G spectrum. This translates to roughly 30Mhz of bandwidth in the 2.1Ghz band as 5Mhz should suffice for the next 4-5 years assuming the WCDMA access mechanism.

I wont be able to give you the entire mechanics of the calculation, but what I did was start from the reserve price that TRAI has set in each of the circles and then tried to arrive at a Nash Equilibrium given all the payoffs for each of the respective players. Ofcourse, I cant give you the entire list of players that I have considered, but I can tell you factors that affected my payoff calculation from 3G for each of the players and consequently the Nash Equilibrium price for each circle:

1. Percentage of SEC A and SEC B customers for each player in each circle – the higher it is, the larger is the potential revenue opportunity from 3G
2. The HHI index in each circle – the presence of a dominant player means higher synergies
3. The percentage of population in the 25-44 age group and the percentage of males in the mobile user population
4. The percentage of English speaking mobile users in the population
5. The amount of unused spectrum in the particular circle
6. ARPU levels in each circle and the
7. The CDMA footprint in the particular circle – GSM guys are still tinkering around with the WiMAX technology option

So what exactly are my predictions? I guess by now, I have given such a detailed introduction that you would be justified in thinking that I am going to adopt the classic consultant’s strategy: sit on the fence and not get into any kind of number prediction game. But I will do exactly the opposite: here are my calculated numbers for the final auction price in each circle: (Do remember that you read it here first and if the final outcome of the auction matches my numbers then I should be given the status of honorary astrologer)

Circles and the corresponding predicted Auction Price in Rs. Million
Mumbai 5600
Delhi 8100
Chennai 2100
Kolkata 2300
Andhra Pradesh 3200
Gujarat 2400
Karnataka 2100
Maharashtra 2200
Tamil Nadu 1950
Haryana 512
Kerala 826
Madhya Pradesh 837
Punjab 922
Rajasthan 910
Uttar Pradesh (E) 1152
Uttar Pradesh (W) 910
West Bengal 610
Bihar 350
Assam 120
Himachal Pradesh 85
Jammu & Kashmir 70
North East 55
Orissa 140

Thus, to have a pan-Indian 3G presence, an operator should cough up a total of Rs. 37.2 Billion. There are six slots of 5Mhz available in each circle and though there is some room for dynamic auction strategizing, I am fairly certain that as is the case in most multi-winner Vickrey auctions, the six slots will go at the same price – which is the 2nd highest bid that is made.

I guess I am betraying my tribe by being prescriptive right down to the decimal points. However, I am out to dispel the general feeling in the industry which is aptly captured by this joke: “One day the fence will rip through the a********s of consultants as they keep sitting on it all the time”.

ICICI Bank is Bending Regulatory Norms!! (Resulting in numerous cases of loan-driven suicides)

Mr. Prakash Sarvankar from Mumbai (father of 3 girls) committed suicide and left behind a suicide note blaming recovery agents on payroll of ICICI bank (albeit indirectly). The bank's press statement on the incident was chillingly curt: "as on date he (Mr. Prakash) is 145 days past due on his loan repayment. The agency (loan recoverers) and its executives are bound by a Code of Conduct which is in line with RBI guidelines."

You could view the above scenario as a case of the consumer aiming for a lifestyle that was not within his control. But wait a minute - such cases have been cropping all over the country and last week ICICI was slapped with an embarassing punitive fine of Rs. 55 lakhs on charges of physically torturing another borrower. The Indian banking regulator RBI has won worldwide respect for being one of the most astute and risk defiant banks in the world: surely there is something in their rules which preempts this kind of irresponsible lending and thereby keeps the occurrence of such gruesome incidents to a minimum.
The RBI has stipulated that 40% of total credit extended by the bank should be targeted at the priority sector which includes agri-lending (direct & indirect), small scale industries and a host of other segments. There are sub-targets under each of these headings as well. As per ICICI's latest annual report, their total credit was 196,000 Cr out of which only 55,000 Cr was to the priority sector. This amounts to a paltry 28% and on top of that ICICI doesnt meet the subtargets either. The penalty that RBI imposes for such non-compliance is that the bank should invest in 7 year instruments with NABARD and SIDBI at lower than prevailing market rates. However both these institutions are awash with deposits and cannot handle any more liabilities at their current scale. This forces them to reject a major portion of the stipulated fine amount. ICICI is fully aware of these shortcomings and exploits them to the hilt knowing that net-net they stand to gain - after all priority sector lending (PSL norms) yields lower returns and their NPLs are also higher. Since ICICI is left with a larger pie to lend to the retail segment (home, auto loans, personal loans etc.), they have to go overboard trying to source customers in this space. The "direct marketing agents" who are conveniently kept off its direct payroll is then forced to lend to all and sundry. No proper credit checks, no risk assessments and the incentive structure doesnt factor the NPL ratios that hit the accounts much later. This results in retail loans spiralling out of control and when they have gone bad (as in the case of Mr. Prakash's), the goons are called in to do the threatening.
Apart from posing a threat to society at large, let’s examine how ICICI's shenanigans are affecting the country at large. The shortfall in its PSL lending amounts to almost 33,000 Cr and if all it was directed towards the agri-sector, then that would amount to a 22% jump in overall agri-lending in India and over a 5 year period if we look at yields of 10-11%, then it translates to a doubling of our agri sector growth rate from ~2.5% to around ~5%. And if you are going to argue that the profits that ICICI is generating is being feedback into the economy somehow, think again – 74% of ICICI is under foreign ownership, Govt. of Singapore being prominent among them. This entire mess is a direct result of the high growth strategy that ICICI has pursued over the last 6-8 years. Their cost of funds is the highest in the industry and to match this high cost base they have had to lend aggressively to stay on top of the yield curve. Their credit deposit ratio is a good 15% higher than industry average and this puts them under additional pressure to realize all the cash-flow from their present loans.
So why is ICICI bank getting away with all these flagrant violations of norms? The answer lies in the attitude of the regulatory body – RBI. I have the utmost respect to Messrs. Reddy & Co., but I do feel then can be a bit more stringent with ICICI. In 2002, when the govt. introduced the SARFAESI act giving banks an extra lever to reduce the NPAs, the focus was primarily on rehabilitating the ailing PSU banks. There is no provision whatsoever in the act to resort to the extra-constitutional means that ICICI is adopting. Recovery of loans is always to be pursued through the civil courts or transferred to the asset reconstruction companies like ARCIL. The problem is ICICI owns 25% of ARCIL (the largest of the lot) and influences their decision making as well. Thus, ICICI capitalizes on the general philosophy prevailing within the RBI that NPAs have to be tackled as strictly as humanely possible. This is despite the fact that India has one of the lowest NPA rate in the world.
The general observation within banking circles is that RBI has been very lenient with ICICI. In a recent banking conference, I personally saw Mr. Vaidyanathan (Retail & SME head at ICICI) in a huddled discussion with Mr. Leeladhar (RBI Deputy Governor). Rumor has it that Mr. Kamath shares a very good rapport with Ms. Usha Thorat of the RBI. The noises emanating out of ICICI are also quite tell-tale: Ms. Chanda Kochhar being favored over the guru of Agri-lending Mr. Nachiket Mor for the big seat, Mr. Vaidyanathan himself being fast-tracked through the ranks etc. Even the long drawn out explanation of how PSL should be calculated based only on the residual credit after the reverse merger doesn’t hold water. The RBI better act soon as its hard earned credibility is at stake.

Observers of the Indian banking industry say that if ever there was a banking crisis in India like the Asian financial crisis, then the first bank to go under would be ICICI. I totally agree

In India, GDP stands for "Generally Doubted Parameter"

Predicting India's GDP growth rate has never been an activity known for the unanimity of its outcomes. But of late, the numbers have gone from ballpark estimation to desperate shots in the dark. Goldman Sachs predicts 8.4% to continue till 2020!!! Lehman Bros. is taking it to 10% by 2008 and everybody from the CII to the RBI have come out with their own predictions. But the trillion dollar question - "Is this growth sustainable?" doesnt have an easy and straightforward answer.

India's GDP at the end of year 2006 was close to $900 Billion. 2007 promises to be a watershed year in the history of India's economic growth not because of the posssibility of hitting the trillion dollar mark, but because ofthe fact that after 5 consecutive years of over 8% growth, we are finally seeing the first signs of an overheating economy. The recent RBI report on monetary policies focussed almost entirely on inflation and how it can be controlled without affecting the GDP growth. In an ideal situation, a country's fiscal policy should be totally independant of its monetary policy and the very fact that the RBI is worried makes the prediction of the GDP growth all the more dicey. The point I am trying to underline is that the path the GDP charts is dependant on too many policy related decisions to actually be deterministic.
The recent Forbes report says that India's 36 Billionaires have a total networth of around $191 Billion. This means that roughly 20% of the GDP is controlled by the whims and fancies of these guys, albiet regulated by the respective shareholders. This means that these guys could actually push up the rate by atleast 2-3%. The next set of destiny controllers are the quasi government institutions like RBI, FIPB, TRAI etc. - however, my hypotheses is that the vagaries of their decisions can be controlled by assuming that they are totally rational. Next up are our ministries and the political environment that influences their decisions - attributing "unbounded" rationality to them will be fallacious especially in these days of coalition politics.
How then do we simplify the question of predicting the GDP growth rate? Before that, I will dwell on why this is a crucial question for India inc. and the populace at large. Capacity utlization has reached alarming levels across all sectors in India (ideal is ~75%) and traditionally Indian firms have been very miserly in allocating capital for capital expenditure. This has been the reason for the extremely high ROEs of Indian firms - Eg: Indian public sector banks, despite their very low efficiency have the highest ROE across the whole of Asia. But firms have now reached a point of no return - they have to bring more capacity online to cater to the huge demand. It has been a painful decision for the corporate strategists and a lot of heated debates have been played out in boardrooms. The final word however has been taken based on the due diligence exercises and the huge spreadsheet NPV models prepared by the overpaid consultants jetting all over the country. The demand projections in these models almost invariably have some component of the GDP growth rate factored into it. So we end up with some really big ticket investments and expansion plans (due to the backlog over the years) being drawn up based on these GDP projections. The ironic fact is that none of these GDP predictions are actually coming from the big stakeholders in the Indian economy. Why then is India inc. placing their faith in them?
I now address the question of the GDP growth rate itself. To control for the various possibilities I am resorting to the classic 2*2 matrix with the following quadrants:

Quadrant I - Short term + Status Quo
Quadrant II - Long term + Status Quo
Quadrant III - Short term + with reforms
Quadrant IV - Long term + with reforms

Quad I will have the typical growth rate projections that the Goldmans and the Lehmans are predicting - roughly 8.5% over the next 3 years. This is based on consumption and savings growth. Quad II is a bit trickier - the supply shortfall, particularly the shortfall in money supply which is commonly manifested as inflation will eventually slow down the growth rate. Based on datapoints from other countries including China, Mexico and the south east asian countries, my guess is a 6-7% from 2010 to 2015 (which is my timeframe for the long term horizon).
Quads III and IV have a subtle caveat embedded within them. The reforms I am talking about are fundamentally different here - in the short term it refers to FDI regulations, privatization and disinvestment, CRR, SLR and repo rate changes. In quad III, I expect the RBI to exploit all its levers to the maximum and clampdown on inflation severely, primarily due to the political ramifications of that inflation has. This will bring down the GDP growth to a more realistic 7-7.5% over the next 3 years.
Quad IV will probably be the most important as this is where India's destiny will play out. The reforms to be considered here are the really far-reaching ones - infrastructure, education, labour reforms, poverty eradication, environment etc. If all these areas are taken care of, long term GDP growth rate can be upped to the level of China at 9-9.5%.

After decades of disillusionment with the hindu rate of growth, the Indian worker will have to make some serious sacrifices to attain the level of productivity that will give him better living standards. A reality check on labour skill sets and infrastructure should go hand in hand with rising aspirations.

Air Deccan’s Operating Model: Deceit and Daylight Thievery!

When you opt to fly Air Deccan, there are some things that you have to live with – low service quality, no food, inordinate delays and an abysmal flight experience. But to be totally conned into losing your ticket and valuable time (not to mention the hassle and costs of buying a last minute ticket) for no fault of yours is not part of the bargain.
I am struggling to maintain my calm as I write this piece of investigative journalism that I am compiling. The devilish manner in which some flaws in the Indian aviation system are being exploited by a private airline operator – Air Deccan is appalling to say the least. Kindly read the “My Investigations” section of this report if you feel the gory details are unnecessary.

My Contention
I hereby accuse Air Deccan of consistently overbooking flight seats on their inter-metro flights. I know that for a low cost carrier this is illegal as per IATA rules and hence I have painstakingly collected my proofs and evidences, which I have elaborated below. I intend to take the matter up with the highest levels possible in the Indian aviation industry – the DGCA (Directorate General of Civil Aviation) which is answerable to the Ministry of Aviation.

First-hand Report
I am now going to give a blow by blow account of what happened at the Bangalore Airport on the 29th of January starting at 5:15 am when the check-in counter queues start opening up at India’s most congested airport.

5:00 am – Check in for DN 763 flight from BLR to MUM for 6am departure opens
5:15 am – I join one of 4 queues and am 5th in my particular queue
5:26 am – One of the roving Deccan agents checks my photo ID and writes “ID Checked” on my printed ticket
5:27 am – The person behind me in the queue (Mr. V.K.Dalal from Delhi) is worried he will miss the 25 minute prior deadline (slated for 5:35 am) for check in and asks the Air Deccan employees to speed up. He is calmed down by another Deccan employee (Ms. Thara) and assured that he will surely be checked in.
5:30 am – The Deccan counter operator for my queue (Mr. Taha) is particularly slow and has checked in only four passengers so far. He asks for my ticket and starts my check-in. I move my baggage onto the weighing machine.
5:31 am – The Air Deccan duty manager – Mr. Arindam Das comes out from inside his glass office and shouts out, “Mumbai (flight)180 ho gaya – ab bas karo” to all the counter operators. Mr. Taha who is midway into my check-in immediately writes “5:36 am” on my ticket even though the time is only 5:31 am as per airport clock. My pleadings and protests fall on deaf ears.
5:35 am – 15 passengers spread across the 4 queues for the Mumbai flight are deemed to be “late arrivals” and are told that their tickets will have to be cancelled. There will be no reimbursement or new ticket issued. All the protests and display of anger go in vain as the Airport security move in on the order of Mr. Arindam Das (Duty Manager – Air Deccan)

Further Observations
All the stranded passengers were convinced that this was a deliberate case of over-booking by the unscrupulous operator. There were three clear deviations from the standard operating procedures for check-in counters in this incident above:
When there are passengers who have already joined the queue and the time for takeoff is approaching, it is mandatory for airline employee to shout out aloud and pull out the passengers on the immediately departing flight from the rest of the queue so as to expedite their process. This was definitely not done by Air Deccan.
When a particular queue was moving really slow, there was no attempt to redress the inefficiency of the counter operator (Mr. Taha) immediately despite the large number of people who were waiting in the queue.
There was no attempt by Air Deccan to open another check-in counter for the Mumbai flight.
When Mr. V.K.Dalal specifically asked to be shifted to a faster moving queue, he was given the false assurance that his check-in will definitely be taken care of.

The above observations suggest that Air Deccan has deliberately tried to con the passengers by lulling them into a false sense of security regarding their check in process. Over and above that, there was gross misrepresentation of the time of arrival of passengers to enable the airline to invalidate their tickets.

My Hypothesis
Yield Management is a concept practiced by all leading airline operators in order to even out the demand side fluctuations in the aviation industry. One of the levers used is Overbooking, which is allowed only to regular service operators as they compensate late arrivals with seats on subsequent flights or give the money back. In Air Deccan’s case, the strategy of overbooking seems to take precedence. The assumption is that for all flights there will be an average of x% of no-shows.
Suppose the capacity of a flight is 100, then Air Deccan books 120 tickets on that flight through their central reservation mechanism. In some cases, less than 100 passengers turn-up in which case the airline is safe. But in other cases (say on a Monday morning) when more than 100 turn up, then this is what Air Deccan does:
They first delay the flight by another half hour to 1 hour, by when some of the high-urgency passengers would board some other flight to reach their destination on time.
If the above step does not bear results, then Air Deccan simply stops checking in passengers once the capacity limit is reached and then accuse the remaining passengers of late arrival.
Air Deccan thus earns a 20% extra revenue on all such flights at no extra costs and this means a direct 20% increase in bottom line profit.


My Investigations

Out of a desperate need to vent my frustrations, I went to the Bangalore Airport Manager’s office to lodge an official complaint. Mr. Jayavardhan, the Manager on duty was sympathetic to my complaint and did try to help me out. I wrote a long complaint detailing the series of events. As I turned the pages of the complaint book, I saw that Air Deccan has been doing this on a regular basis. The previous day, 25 passengers had been overbooked on the BLR to Kolkata flight. On the same day, the subsequent Kolkata flight was overbooked by 10. There were atleast 5-6 other incidents that I read pertaining to overbooking on Deccan flights. All this was only for flights out of Bangalore. Imagine the scale of the deceitful operations if it is repeated for all the 12-13 odd major cities that Air Deccan operates out of.
My suspicions were immediately aroused and I realized that these weren’t one-off incidents. The order to overbook flights is coming from somewhere higher up in Deccan’s hierarchy. It is common knowledge that Deccan is bleeding money and combined with an IPO that went drastically wrong, I guess the top management has literally decided to play it dirty.

With the help of the Bangalore Airport managers – Mr. Jayavardhan and Mr. Shiva Murthy (both of whom have agreed to testify), I enquired at the ATC (Air Traffic Control) in Bangalore as to what the POB on flight DB 763 was. For any flight, the captain has to relay the POB number (Persons On Board which includes passengers and crew) to the ATC in his briefing. This is used in case of search and rescue operations and in case of hijack situations. The captain’s voice is then recorded on a VHF spool at the ATC. This spool was replayed and the number quoted was 161 POB for DN 763 flight. The total capacity of the Boeing aircraft at that capacity and configuration was 192. Deccan keeps a crew of six and that leaves a maximum passenger limit of 186. Quite obviously, the POB number reported to ATC was incorrect so as to evade suspicions of overbooking. This could have been easily proved if say the plane was running at 186 POB and there were additional 15 stranded passengers on the ground, putting the total booked seats at 201. So the cover-up operation had started at Deccan’s end.

I called up the DGCA office at Delhi and after some convincing managed to get through to the terminal manager at terminal 1B of Mumbai airport where the flight was scheduled to land. By then it was 7:25am and the flight was about to land in Mumbai. I managed to convince the Airport managers in Mumbai (Mr. Kumar Swami and Ms. Jayanthi Sivaraj) about the gross violation that was happening and requested them to personally carry out a manual headcount as the passengers were de-boarding. I was pleasantly surprised by their sincerity and Mr. Kumar Swami himself go onto a car and went to the landing tarmac to take a headcount. He counted 186 passengers and 6 crew members – adding to the exact capacity limit of 192 passengers. Considering the 15 passengers who were stranded in BLR, it was tantamount to a clear case of overbooking by Air Deccan. More importantly, Air Deccan was deliberately reporting wrong POB numbers to the ATC. This would result in grave blunders in case a search and rescue operation is required. Additionally, in case of plane crashes, the reinsurance agencies will not compensate the passengers beyond the POB limit. These are very serious aviation malpractices that Air Deccan continues to employ on a daily basis. Other unscrupulous tactics include not reporting the total weight of aircraft to ATC (required in the case of hard landings), taking excess baggage beyond permissible limits, converting flight delays causes from technical flaws (which mandate a reimbursement of 20,000 Rs. to passengers) to natural causes by giving frivolous reasons like “Tyre burst due to animal roaming on runway” and “inclement weather in the hangar” etc.

Further Course of Action
I intend to follow up the complaints that I have already filed at the Bombay and Bangalore airports by sending this report to the DGCA, The Ministry of Civil Aviation and Capt. Gopinath – the CEO of Air Deccan. My supporting evidences will be:
1. The testimonies of the Airport managers in BLR and MUM
2. The VHF spool recordings of ATC briefings at BLR
3. The passenger manifest of flight DN 763
4. The witnesses to the manual head count done by Mr. Kumar Swami at MUM

Conclusion
As India’s aviation industry is growing by more than 35% year on year, it is imperative that the regulatory authorities maintain a vice like grip on the players so as to keep the best interests of the customers as the top priority. TRAI is doing a tremendous job in the telecom sector and the aviation sector can get some valuable tips from them. Most importantly, it is important to have a framework for verification of important flight related statistics like POB, load factor etc.

The Murky Waters of Telecom Acquisitions

The new year is likely to usher in the biggest acquisition that Indian industry has ever seen - Hutchison Essar is on the blocks and the Ruias are at their dirtiest best in playing the valuations game. With atleast 7-8 serious contenders in the fray and money flowing aplenty, how will the grain be seperated from the chaff? Surprisingly, the answer lies in the very same concept pioneered by the enigmatic John Forbes Nash and later made palatable to ordinary folks like us by the authors of "Co-opetition" - Brandenburger and Nalebuff.

Valuation of a telecom operator is just about as complex as they come, Especially if the concerned player is not yet listed on the bourses and has an ownership pattern that has been complicated to circumvent the stringent FDI regulations governing this sector. Having been involved in one such exercise for a foreign investor, I know that the complexities multiply as we get into the data points required for a compltete proforma income statement and cash flow analysis. How do you amortize the fixed costs of licenses, spectrum charges and network equipment? How would you arrive at a fairly accurate measure for the operating expenses without making more than a reasonable number of assumptions? What is the approporaite amount of market risk that has to be factored into the Beta calculation? It is amazing how even the basic principles of corporate finance can be overlooked when it comes to adjusting the valuation. To top it all, most of these valuation exercises are done by investment bankers who have no clue about what are the actual components in a telecom network, how much it costs to maintain them, what are the marketing and distribution costs etc. They just chose the easy way out by looking at the book value of the assets and then making qualitative adjustments for the intangible assets. This figure is then "crunched around" to arrive at a facetious discounted cash flow analysis that would sound convincing enough to the investors.

The shit hits the fan when the returns fail to match up to the cost of capital and by then the investment bankers are totally out of the picture. If at all there is a variable component to the compensation of the investment bankers in a deal, it is only related to the initial share price of acquiring party. Thus all they have to do is get the buzz going in the market about the whole deal, which any self respecting IBank can pull off in these 'exaggerated times' (I am not totally sure about what that phrase means, but you can ask Rahul Dravid. He described Steve Waugh as being "a truly GREAT batsman without belittling the superlativeness of the adjective which is most often the case in these exaggerated times" in the forward he wrote to Steve's autobiography). Coming back to present happenings, Vodafone has valued Hutch at between $16-17 billion and Reliance at between $13-14 Billion. All these are from hearsay only, so dont quote me on this. Various other players are throwing numbers around. UBS and Goldman Sachs are getting into the spoils and god knows how many. The other parties interested in the deal are Maxis from Malaysia, Qtel from Qatar, Isthithma - a PE group from the middle east, the Ruis themselves and a coupla other no-hopers. Reliance is using the "raising the bar incrementally" strategy in its bid, while Vodafone could go for the jugular in its first bid itself. It thus boils down to a Reliance Vs. Vodafone game and thats when it gets interesting.

Both parties realize that the valuations are very inaccurate and hence are relying on the bidding process and the underlying strategic games being played to get more information. Why they cant engage a telecom consultant like me for 1 month and arrive at an accurate figure using a grounds-up approach is beyond me!! Anyways, IMHO there are three things which will decide the winner in this bidding game:
1. The advantage in cost of capital - Vodafone has a cheaper cost here as their funds come from a war chest contributed by recent divestments in Swisscom, Vodafone Japan and may be Bharti as well. Reliance is hoping to minimize this by mobilizing the US markets and PE funds. The bloated interest rates in India will ensure that none of the Indian banks will put money into this deal.
2. The regulatory advantage - both parties measure up equally here, though I just might be tempted to put Reliance lower on this one as well. Vodafone is restricted by the 74% FDI in telecom, which means that they will have to go to bed with the modern day Shylocks - the Ruias. Reliance is restricted by the TRAI rule that the same entity cant own more than 10% of equity in more than one player in a particular circle.
3. The synergies that can be exploited - this is where Reliance comes a cropper. Vodafone has a huge opportunity in entering the world's fastest growing telecom market and positioning itself at the absolute high end - the fact that Hutch has the highest ARPU among all players buttresses this strategy. Reliance has to sort out the whole GSM vs. CDMA war to even think about realizing the synergies better.

Anil Ambani definitely has an enviable task on his hands. His only option is to improve on the synergies and then use that as a bargaining point in keeping the valuations within his grasp and thereby indirectly pressurise Arun Sarin (CEO of Vodafone). The key lies in exploiting the spectral and bandwidth efficiency of CDMA in data services and combining it with the improved stability and maturity of the GSM ecosystem. It probably would require them to arm-twist Qualcomm into coming out with compliant handsets and maybe even playing around with the standards and regulations to better exploit the 35% market share that they will realize out of the combined entity. There is enough of an opportunity in the enterprise segment also and the trick there would be to design innovative vertical applications by certifying ISVs and thereby building a strong value proposition to end customers.

Out of purely patriotic sentiments, i want Reliance to win the bid and at the same time not pay more than $15 Billion for Hutch. From my understanding of the Indian telecom market, the Hutch deal is a huge bonanza and I dont want snooty shareholders sitting in UK to be reaping the benefits of this opportunity. ADAG may not be the best representative of Indian interests, but their shareholders are a fairly large sample.

How Can India Inc. Reduce Transaction Costs of Acquisitions? Ans: BIMBOs

The number of cross border M&A deals initiated by Indian firms have risen exponentially in the past couple of years. However, if the attempted Tata-Corus deal is a pointer to the future then India Inc. have some teething issues to sort out - exaggerated valuations, higher transaction costs, elongated due diligence phases and excessive use of corporate espionage and intelligence tactics. The answer lies in framing innovative deal structures that keep all the stakeholders honest and motivated.

Millions of children in our country who are painstakingly taught Indian History will always remember the treachery of a character named Mir Jafar. His betrayal of Siraj ud dowlah's army to Rober Clive's Britishers in the infamous Battle of Plassey fought on the fertile plains of Bengal was at that time an insignificant piece of trivia. Little did Jafar know that it would resign India to 400 years of colonial rule. Even after independance, the "short selling mentality" continues to plague the minds of young Indian managers. We continue to be good at making short term profits and in exploiting fleeting opportunities at the expense of a greater benefit to the country. The phenomenon is manifesting its ugly head again - this time in the acquisitions and buyouts that India Inc. has been making for the past 2-3 years.

The primary premise upon which most of these deals are based is the arbitrage opportunity based on a cheaper cost of funds in foreign countries. There is also gains in terms of technology, management expertise, access to order books (made famous by Bharat Forge) and better marketing & branding. Let me explain the concept of arbitrage - the cost of funds, whether it is equity or debt is indirectly related to the GDP growth rate. This growth rate is proxied by the risk free interest rate in each country. India and china naturally have a higher cost of funds and hence our firms have to provide higher returns to the shareholders through either capital gains or dividends. Their counterparts in the western world however cannot be as demanding. Thus, they settle for the high premiums that Indian firms pay. Lawyers and investment banks are also paid a very high fee for their services and thus transaction charges go through the roof. Since the interested parties do not have a sustained incentive structure, it is anyone's guess as to how long they remain committed to the deal.

Apart from the issue of unnecessarily higher premiums and transaction costs of Indian aquisitions, there is also the larger issue of who owns this arbitrage in risk free rates. I feel that a high GDP growth rate is a "public good" as it is the citizens of the country who pay for the heated economy either through inflation or through the social costs of development and lifestyle changes. It is this public good that is being exploited by firms to pursue their ambitions of becoming a global company. Companies are even getting innovative at exploiting this resource to its fullest - notable among them are Tata Tea's acquisition of Tetley - a company almost 3 times its size via the LBO route and the Betapharm deal using Foreign Currency Convertible Bonds (FCCB). India's improved sovereign rating by both Moody's and S&P also contributes to this business tactic. But there is an underlying flaw behind the entire logic - an arbitrage opportunity is always a short term one and is not enough to motivate the upper management to make a long term success of a deal. The solution to this puzzle lies in coming up with innovative deal structures - notably BIMBOs. No... not the blonde buxom ones, I mean Buy In Management Buy Outs - an increasingly popular mechanism to undertake big ticket aquisitions. It ensures the seperation of ownership and management and at the same time leaves enough incentive for all the stakeholders to ensure that synergies are exploited and no flight of talent ensues after the deal is done. And the evidence is there - two leading PE firms Actis and ICICI Ventures have already executed more than three BIMBOs respectively and both of them promise that more are in the pipeline. The biggest gain for these firms are what they save on due diligence costs paid to I-banking firms and lawyers. Something for the old economy behemoths like Tatas and Birlas to think about!

Empirical evidence shows that more than 70% of acquisitions fail to improve shareholder wealth over a horizon of greater than 5 years. Indians have been particularly bad and i think it has something to do with the fact that we are a more docile lot as evidenced by our historians who keep trumpeting the fact that we have never attacked a country in our 5000 year record (may not be entirely true as the Chola dynasty at its prime extended upto Java in Indonesia). Given this fact and the ever shrinking arbitrage in interest rates, my bet is you'll be seeing a lot more of BIMBOs - pun intended:)

Why India Should Go the Triple-play Way?

More than ten European telecom operators have launched IP Television services, but none of them have any subscribers as yet and the targets are modest at best. Forrester predicts that the net telco IPTV revenue per broadband user wont go above $15 even in the best of circumstances. Since IPTV is the key component in the value chain of triple-play services, does it make sense for India to go down that route? The answer is Yes:

Bandwidth ubiquity in the developed world has led to the emergence of triple-play services which bundles Video, Broadband and Voice over the same pipe. The primary access mechanism for this is the unassuming DSL cable which has almost unlimited bandwidth carrying potential. Voice is transmitted using VoIP and in most cases a flat fee is charged for the month. The convergence of these services has resulted in overlap of interests and not surprisingly other players have jumped into the fray. The telecom operators want a share of this pie too and are pushing for the launch of 3G so as to overcome their bandwidth constraints. TRAI is still holding up the discussions which may atleast in part be due to the fact that their office has been sealed off:) There is also the satellite based bandwagon led by Tata Sky and Worldspace etc. who want a share of the spoils and to top it all, we have the Intel led consortium trying to push for WiMax based connectivity.

All these players with their diametrically different technologies and access mechanisms readily acknowledge one chilling truth - the destiny of all them will be decided by a single killer application - delivering a much more improved television experience and the key to that is IPTV. Janus Friis (of skype fame) is working on "The Venice Project" which is trying to combine the best of TV and internet. His reasoning: "people love the amazing storytelling, the richness, the quality itself. But they hate the linearness, the lack of choice, the lack of basic things like being able to search." It certainly makes a lot of business sense and Tata Sky has big plans for the Indian viewers and that too without even getting into the rigmarole of generating additional content. The IP-based platform offers significant advantages, particularly the ability to integrate television with other services like internet access and VoIP. Since the content provider can actually decide what information to be sent to the viewer, there is considerable conservation of bandwidth. Conventional cable involves sending the signal for all the 100 odd channels to the viewer and he then makes his choice on a dumb terminal. With IPTV you choose what you want, you can search for programs, have interactive channels and even set alarms and store your favourite programs on a central repository. Better compression algorithms and innovative VAS's like on-screen caller ID and videophone can generate huge revenues. The spin-offs from locking-in the viewer to your platform will trigger a whole set of positive network externalities. The possibilities are numerous and bounded only by human innovativeness and government regulations.

However, the question that remains to be answered here is which is the best access mechanism for the unusually peculiar Indian market. The problem that could spell doom for Tata sky is that satellite based access involves huge switching costs. Convincing the Indian consumer to buy a set-top box and a dish antenna will require more than brand equity and marketing muscle. The limited coverage of satellites combined with resistance from the local cable guy who could get disappropriated out of the value chain adds to the woes. The jury is still out on satellite access, but I predict a gloomy future. The telecom operators on the other hand have better coverage (assuming 3G kicks in at the right time), but do they have the expertise to deliver television content? Verizon wireless launched triple play a year back, but revenues have been sluggish even in a well covered country like the US. Additionally, the content manufacturers are more wary of large telecom players controlling the last mile to the customer and are unlikely to submit to them easily. The WiMax mechanism makes for an interesting case study and could prove to be a ground breaking connectivity enabler for developing countries, but the vision is too utopian as of now. That leaves the good old cable operators as the best channel for IPTV. Coaxial cable enabled with DSL can give a large bandwidth pipe into the home and aggregating the usage over IP based TV, internet and voice can improve the overall efficiency of the pipe. The cable operators have to unite and form a nodal agency for digitizing the present content and installing all the infrastructure rquired for VoD and interactive channels. A long term perspective will tell you that this could make or break the fate of cable operators in content distribution as the spectre of tech. obsolescence looms large in the form of satellite, 3G and WiMax.

Imagine waking up in the morning and switching on your TV to read your daily newspaper in digital form, complete with zoom in, tagging, search, store and multimedia capabilities. If you are thinking that this means your entire family will be stuck to reading the same news peice, as opposed to the easy sharing of newspaper supplements, think again - you can split your screen into four!!