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Rama Krishna Vadlamudi
[email protected]
MUMBAI September 21st, 2009
This article reviews a recent book written book by Jim Collins, namely, “How The Mighty Fall And Why Some Companies Never Give In.” The review is with reference to the possibility of Great Indian Companies falling like the way the mighty American companies have bitten the dust.
Rama Krishna Vadlamudi, Mumbai. September 21, 2009. [email protected]
Page 1 of 5
Hi, everybody! A recent thought that struck me very powerfully is: “Are great Indian companies fallible?” What are the chances of great Indian companies failing in their efforts to scale up or sustain their past record? Are there any chinks in their armour? Jim Collins, the author of a seminal book Good to Great on 11 American companies, has come out with a new book: “How the Mighty Fall and Why Some Companies Never Give In.” In his well-researched book, he answers some questions on why great companies fail, can anyone detect early signs of weakness or can they reverse the course. The new book, of course, is written in the context of American companies. He argues that there are five stages of decline for great companies: o o o o o
Hubris born of success Undisciplined pursuit of more Denial of risk and peril Grasping for salvation Capitulation to irrelevance or death
After going through the book, I was just wondering whether great Indian companies, like, Infosys, Reliance Industries, SBI, ITC or Bharti Airtel for that matter, have got any cracks in their big reputation or business processes/models. No one can deny the fact that many Indian companies have acquitted themselves well to the changed economic environment in India in the last 15 years or so. As an observer of Indian economy for several years, there are many instances when I feel uncomfortable or queasy about what these companies venture out into. Let me recount a few such instances: Larse & Toubro: The company, in March 2008, reported a possible loss of Rs 200 crore due to commodity hedging by one of its foreign subsidiary (LTIFZE). It was obvious that this was due to pure ‘speculation’ by the managers in their foreign exchange operations. Many a time, hedging is a euphemism for speculation. It was no wonder that a great stock like L & T had fallen by 14 per cent on the day the news was posted by the company on stock exchanges. By the way, I’m not aware of any measures taken by the company to avoid such mistakes in future. A cursory glance at their Annual Report 2007-08 did not reveal any info about what kind of new risk management framework was set up Rama Krishna Vadlamudi, Mumbai. September 21, 2009. [email protected]
Page 2 of 5
by the company with a view to avoiding the kind of commodity hedging losses the company suffered in December 2007 through its foreign subsidiaries; except making some routine and general statements. Surely, the measures were revealed to institutional investors. The circumstances or ‘Black Swan’ events (huge volatility in commodity prices, etc) under which the company made these losses was understandable. However, the company could have been more transparent about its operations and risk management policies. Again some eight months back, the company as part of its treasury operations bought equity shares of erstwhile Satyam Computers with an intention to make a quick buck. When the latter’s share price tanked after the massive Satyam fraud, L & T again bought more of the same shares justifying its gamble as a ‘strategic’ decision – whatever they mean by that. One could argue that now the price of Mahindra Satyam has gone up to three-digit figures, L & T’s decision is visionary. But the post-facto rise in stock price of Satyam Computers does not validate the bad decision made by greedy and speculative financial managers of L & T. It’s not my intention to discount the great business model pursued avidly by Larsen & Toubro. My point is investors, especially big institutions, need to constantly question the management about their Risk Management policies. ITC: The company has been burning cash, for a few years, in its non-cigarette FMCG business. However, it’s yet to reap any benefits from this segment. The company pleases the investors by saying: “It’s brand building.” A few months back, its chairman, in a leading business channel, boasts that their brands will serve the investors “for two hundred, three hundred years.” Investors need to be wary of such absolute statements by top people. Its paper division is capitalintensive, hotels division is not doing any great things (of course, due to the harsh business environment) and most of its profits are from its cigarette division – its cash cow. As a conglomerate, the company has been using its cash flows from cigarette division to build other businesses and diversify out of cigarettes. There’s nothing wrong with that. All good or great companies do that. But, investors would like to know the payoff periods from its other loss-making or pedestrian profit-making divisions. It’s good to know that its agri-commodities business is doing well now. Bharti Airtel: The company wants to acquire MTN of South Africa in a complex process. May be, Peter Lynch would dub such diversification as ‘diworseification.’ It’s significant that the stock price of Bharti Airtel is not going anywhere for a long time. Companies, usually, are not good at utilizing their cash surpluses in a proper way. The company will be better off if it concentrates more on customer service, which is quite ordinary. Their emotional visual and print ads appeal to lot of potential customers. However, the experience of existing customers is less appealing. Is there any connection between the quality of the company’s customer service and the falling ARPUs?
Rama Krishna Vadlamudi, Mumbai. September 21, 2009. [email protected]
Page 3 of 5
Statistics reveal that more than seventy-five percent of all acquisitions/mergers end up badly the world over. One such great failure was merger of Time Warner and AOL in 2001, which was dubbed as one of the biggest mergers in those days. Only time will tell whether the merger of MTN and Bharti Airtel will be beneficial to all the stakeholders. I’m giving only a few examples. Many readers will be aware of several such companies going for reckless speculation or other practices inimical to the interests of the stakeholders. We have seen how the mighty Hindustan Unilever has fallen from its pedestal with smaller and nimbler companies nibbling away its market share continuously in the past decade. However, HUL is trying to make a good comeback and I feel it’s a company to watch in the next two to three years. How the fallen giant Xerox has risen from its ashes and the mighty Fannie Mae has fallen from its grace: As Jim Collins pointed out in its new book, fallen companies have got the capability of rising from their ashes like a phoenix. The author cited the examples of turnaround stories of Xerox, IBM and HP in his book. He has beautifully described how a great company like Fannie Mae (the company had shown extraordinary performance between 1969 and 1999) has fallen from its grace extremely badly. But for the US government’s bailout, the company would have gone the way of Lehman Brothers. The author argues: Perhaps, Fannie Mae got hammered down by an industry catastrophe Fannie Mae had acquired a reputation for arrogance by the early 2000s enabled by its past success The company was blinded by its pursuit of growth, without bothering about its increased risk profile Fannie Mae got embroiled in wrong accounting practices It had developed a missionary righteousness thinking it had got a special role in advancing the American Dream of home ownership (what a joke!) It problems were compounded by political pressures to help more lowincome families become homeowners #
# It’s very reassuring to know that Indian politicians are not the only ones who play to the gallery! More politicians are doing the same thing means that these politicians are ‘right’ in following populist policies while ignoring the fiscal pressures! Wow!
Rama Krishna Vadlamudi, Mumbai. September 21, 2009. [email protected]
Page 4 of 5
“Bad decisions made with good intentions are still bad decisions.” - Jim Collins
Well-founded Hope: I would close my thoughts with another captivating example quoted by the author in the book. His succinct description of how the fallen Xerox Corporation has bounced back under the leadership of Anne Mulcahy and made a profit of USD 1 billion by 2006 is as follows: Anne Mulcahy, the CEO, didn’t take a weekend off for two years She shut down a number of businesses She cut company’s cost structure worth USD 2.5 billion She turned down advice from outsiders to cut R&D to save the company; and actually increased the R&D expenditure as a percentage of sales It’s no wonder that she was selected as chief executive of the year 2008 by a magazine. May be, readers can update me on whether the company continues to do well even now. The contents of Jim Collins’ new book, “How the Mighty Fall and Why Some Companies Never Give In,” are fascinating stuff. I think Indian companies can learn some good lessons from the experience of American companies – both that have fallen and risen. But history suggests that we don’t learn from history! I reckon financial professionals in India will be very much benefited by the contents of this new book (with less than 200 small-size pages, the book can be finished between breakfast and lunch on one’s lazy Saturday/Sunday. Copies are available at Strand –my favourite book shop in Bombay – at deep discount). I wonder whether there are any such books on Indian companies. Happy reading and investing, Rama Krishna Vadlamudi MUMBAI P.S: Please share your thoughts with me.
Rama Krishna Vadlamudi, Mumbai. September 21, 2009. [email protected]
Page 5 of 5
[email protected]
MUMBAI September 21st, 2009
This article reviews a recent book written book by Jim Collins, namely, “How The Mighty Fall And Why Some Companies Never Give In.” The review is with reference to the possibility of Great Indian Companies falling like the way the mighty American companies have bitten the dust.
Rama Krishna Vadlamudi, Mumbai. September 21, 2009. [email protected]
Page 1 of 5
Hi, everybody! A recent thought that struck me very powerfully is: “Are great Indian companies fallible?” What are the chances of great Indian companies failing in their efforts to scale up or sustain their past record? Are there any chinks in their armour? Jim Collins, the author of a seminal book Good to Great on 11 American companies, has come out with a new book: “How the Mighty Fall and Why Some Companies Never Give In.” In his well-researched book, he answers some questions on why great companies fail, can anyone detect early signs of weakness or can they reverse the course. The new book, of course, is written in the context of American companies. He argues that there are five stages of decline for great companies: o o o o o
Hubris born of success Undisciplined pursuit of more Denial of risk and peril Grasping for salvation Capitulation to irrelevance or death
After going through the book, I was just wondering whether great Indian companies, like, Infosys, Reliance Industries, SBI, ITC or Bharti Airtel for that matter, have got any cracks in their big reputation or business processes/models. No one can deny the fact that many Indian companies have acquitted themselves well to the changed economic environment in India in the last 15 years or so. As an observer of Indian economy for several years, there are many instances when I feel uncomfortable or queasy about what these companies venture out into. Let me recount a few such instances: Larse & Toubro: The company, in March 2008, reported a possible loss of Rs 200 crore due to commodity hedging by one of its foreign subsidiary (LTIFZE). It was obvious that this was due to pure ‘speculation’ by the managers in their foreign exchange operations. Many a time, hedging is a euphemism for speculation. It was no wonder that a great stock like L & T had fallen by 14 per cent on the day the news was posted by the company on stock exchanges. By the way, I’m not aware of any measures taken by the company to avoid such mistakes in future. A cursory glance at their Annual Report 2007-08 did not reveal any info about what kind of new risk management framework was set up Rama Krishna Vadlamudi, Mumbai. September 21, 2009. [email protected]
Page 2 of 5
by the company with a view to avoiding the kind of commodity hedging losses the company suffered in December 2007 through its foreign subsidiaries; except making some routine and general statements. Surely, the measures were revealed to institutional investors. The circumstances or ‘Black Swan’ events (huge volatility in commodity prices, etc) under which the company made these losses was understandable. However, the company could have been more transparent about its operations and risk management policies. Again some eight months back, the company as part of its treasury operations bought equity shares of erstwhile Satyam Computers with an intention to make a quick buck. When the latter’s share price tanked after the massive Satyam fraud, L & T again bought more of the same shares justifying its gamble as a ‘strategic’ decision – whatever they mean by that. One could argue that now the price of Mahindra Satyam has gone up to three-digit figures, L & T’s decision is visionary. But the post-facto rise in stock price of Satyam Computers does not validate the bad decision made by greedy and speculative financial managers of L & T. It’s not my intention to discount the great business model pursued avidly by Larsen & Toubro. My point is investors, especially big institutions, need to constantly question the management about their Risk Management policies. ITC: The company has been burning cash, for a few years, in its non-cigarette FMCG business. However, it’s yet to reap any benefits from this segment. The company pleases the investors by saying: “It’s brand building.” A few months back, its chairman, in a leading business channel, boasts that their brands will serve the investors “for two hundred, three hundred years.” Investors need to be wary of such absolute statements by top people. Its paper division is capitalintensive, hotels division is not doing any great things (of course, due to the harsh business environment) and most of its profits are from its cigarette division – its cash cow. As a conglomerate, the company has been using its cash flows from cigarette division to build other businesses and diversify out of cigarettes. There’s nothing wrong with that. All good or great companies do that. But, investors would like to know the payoff periods from its other loss-making or pedestrian profit-making divisions. It’s good to know that its agri-commodities business is doing well now. Bharti Airtel: The company wants to acquire MTN of South Africa in a complex process. May be, Peter Lynch would dub such diversification as ‘diworseification.’ It’s significant that the stock price of Bharti Airtel is not going anywhere for a long time. Companies, usually, are not good at utilizing their cash surpluses in a proper way. The company will be better off if it concentrates more on customer service, which is quite ordinary. Their emotional visual and print ads appeal to lot of potential customers. However, the experience of existing customers is less appealing. Is there any connection between the quality of the company’s customer service and the falling ARPUs?
Rama Krishna Vadlamudi, Mumbai. September 21, 2009. [email protected]
Page 3 of 5
Statistics reveal that more than seventy-five percent of all acquisitions/mergers end up badly the world over. One such great failure was merger of Time Warner and AOL in 2001, which was dubbed as one of the biggest mergers in those days. Only time will tell whether the merger of MTN and Bharti Airtel will be beneficial to all the stakeholders. I’m giving only a few examples. Many readers will be aware of several such companies going for reckless speculation or other practices inimical to the interests of the stakeholders. We have seen how the mighty Hindustan Unilever has fallen from its pedestal with smaller and nimbler companies nibbling away its market share continuously in the past decade. However, HUL is trying to make a good comeback and I feel it’s a company to watch in the next two to three years. How the fallen giant Xerox has risen from its ashes and the mighty Fannie Mae has fallen from its grace: As Jim Collins pointed out in its new book, fallen companies have got the capability of rising from their ashes like a phoenix. The author cited the examples of turnaround stories of Xerox, IBM and HP in his book. He has beautifully described how a great company like Fannie Mae (the company had shown extraordinary performance between 1969 and 1999) has fallen from its grace extremely badly. But for the US government’s bailout, the company would have gone the way of Lehman Brothers. The author argues: Perhaps, Fannie Mae got hammered down by an industry catastrophe Fannie Mae had acquired a reputation for arrogance by the early 2000s enabled by its past success The company was blinded by its pursuit of growth, without bothering about its increased risk profile Fannie Mae got embroiled in wrong accounting practices It had developed a missionary righteousness thinking it had got a special role in advancing the American Dream of home ownership (what a joke!) It problems were compounded by political pressures to help more lowincome families become homeowners #
# It’s very reassuring to know that Indian politicians are not the only ones who play to the gallery! More politicians are doing the same thing means that these politicians are ‘right’ in following populist policies while ignoring the fiscal pressures! Wow!
Rama Krishna Vadlamudi, Mumbai. September 21, 2009. [email protected]
Page 4 of 5
“Bad decisions made with good intentions are still bad decisions.” - Jim Collins
Well-founded Hope: I would close my thoughts with another captivating example quoted by the author in the book. His succinct description of how the fallen Xerox Corporation has bounced back under the leadership of Anne Mulcahy and made a profit of USD 1 billion by 2006 is as follows: Anne Mulcahy, the CEO, didn’t take a weekend off for two years She shut down a number of businesses She cut company’s cost structure worth USD 2.5 billion She turned down advice from outsiders to cut R&D to save the company; and actually increased the R&D expenditure as a percentage of sales It’s no wonder that she was selected as chief executive of the year 2008 by a magazine. May be, readers can update me on whether the company continues to do well even now. The contents of Jim Collins’ new book, “How the Mighty Fall and Why Some Companies Never Give In,” are fascinating stuff. I think Indian companies can learn some good lessons from the experience of American companies – both that have fallen and risen. But history suggests that we don’t learn from history! I reckon financial professionals in India will be very much benefited by the contents of this new book (with less than 200 small-size pages, the book can be finished between breakfast and lunch on one’s lazy Saturday/Sunday. Copies are available at Strand –my favourite book shop in Bombay – at deep discount). I wonder whether there are any such books on Indian companies. Happy reading and investing, Rama Krishna Vadlamudi MUMBAI P.S: Please share your thoughts with me.
Rama Krishna Vadlamudi, Mumbai. September 21, 2009. [email protected]
Page 5 of 5
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