Is M & A heading for a demerger?

<div class="section1"><div class="Normal">It''s ironic, isn''t it? M & A normally signifies a merger, but the warring brothers of Reliance, M & A, seem to be heading towards a de-merger. This is rather sad, since an integrated company such as Reliance under a united management, was the closest a private sector Indian company has come to becoming a global leader.<br /><br />This is a manifestation of a transition from a family-managed business, which all firms start out being, to a concern whose growth beyond a stage necessitates bringing in professional managers to manage and institutional investors to own.Although the percentage share of the original promoters reduces as a result, its value increases because of the growth of the business. The Walton family, as revealed by an article in Fortune, (November 15, 2004), holding 39 per cent of professionally managed Walmart, are, collectively and co-operatively, the wealthiest family with a $90 billion fortune, more than Bill Gates and Warren Buffett combined.<br /><br /><span style="" font-weight:="" bold="">What are the options for the brothers? </span><br /><br />The option most talked about is that of Anil Ambani, the businesses of Reliance Energy and Reliance Capital, plus a lot of money, to compensate for his share of Reliance which could be taken over by Mukesh. Such purchases often end up becoming white elephants (ask the Mafatlals who bought over Shell''s stake in Nocil which went on to become, one way or another, a shell company). This is because the stock market values companies at a multiple of earnings; and controlling interest sale commands a higher price. <br /><br />However, the earnings from that investment would be under 3 per cent from dividend yield, and far less for a price paid for control. So to justify the investment, either the stock price must appreciate fast, to give an appropriate return on funds, to the acquirer, or he ends up selling the stake just as in the case of Nocil. <br /><br />The other alternative is to go the legal route, which only enriches the lawyers. Meanwhile, constant news flows such as the one about the 4.7 per cent stake in RIL funded by it but owned privately, raises questions which end up perhaps diluting the valuation of the shares and is to nobody''s interest. <br /><br />The dilemma thus is whether to brave out what could be a protracted war of words, which would sap corporate energies, or to quickly reach a solution that may be out of the box but which helps restore order. <br />The market made a long overdue correction last week. FIIs sale in cash market was only Rs 570 million; their sale in the derivatives was significant. This debunks the theory, that cash and derivative markets need to be segregated so that one doesn''t affect other. It does. </div> </div>