In financial parlance, the word ?leverage? often connotes risk. Leveraging denotes taking on more debt in the balance sheet. Of course, risk is inherent in all businesses. And leveraging higher amounts of debt may not be bad all the time. Indeed, there are periods in the life of nations when their economies get into a secular high growth phase for decades on end. In this phase, big businesses tend to pile up relatively high debt to achieve big leaps in growth. Indian big businesses are also in the process of leveraging more debt internationally to establish their global footprint. The relatively high debt financing by Bharti Airtel in its bid to acquire the African assets of Zain telecom must be seen in this context. Reliance Industries Ltd (RIL) is also in the process of acquiring a global footprint in petrochemicals and refinery. So RIL will also, in due course, take on more debt into its balance sheet. Earlier, the Tatas had to leverage their balance sheets a lot in their successful attempt to acquire a global presence in steel and automobiles. They will have to take on even more debt going forward as they expand their auto business globally, through organic as well as inorganic means.
The larger point to note here is that all these leading business groups are acquiring companies worldwide so that they can, at once, grow two to three times larger in size. Such non-linear growth simply cannot happen without leveraging higher debt in the balance sheets. So, there is certainly some risk. But isn?t that par for the course in the world of business?
What really needs to be highlighted is that most of these business groups have achieved a rare cost efficiency level, which enables them to transplant their business models on a global scale. The Tatas have brought down costs in their global steel and auto ventures considerably. Bharti will do the same if its acquisition of Zain fructifies. To get an idea of how much more cost efficient Bharti can become in foreign markets, one only has to take a look at what it charges per minute for talktime. Till some time ago, Bharti was charging Rs 1 per minute whereas in Africa telcos charge roughly Rs 10 per minute. So if Bharti Airtel manages to take its low-cost model to Africa, the upside will be huge.
Mind you, it is not just the Tatas, RIL or Bharti who are in a position to do this. I would see this as an inflexion point in business history where thousands of Indian companies will emerge to impose their low-cost model globally. This opportunity arises because of inherent economic imbalances in the world. For various reasons, mainly labour protectionism in the developed world, businesses there are running unusually high-cost operations. This provides a rare opportunity for Indian businesses to do more leveraged buyouts. The debt component automatically gets reduced over a few years as cost efficiencies throw up much higher profits, which help in paying back the loans.
In fact, this rare opportunity for Indian businesses must be recognised by the government. The Centre could also create new funding mechanisms for such buyouts by Indian companies. Earlier, there was a suggestion that the central bank could use some of its rising forex reserves to facilitate such leveraged buyouts. The idea got shot down because our reserves are more in the nature of capital liability and have not been accumulated through current earnings from abroad, as is the case with China or Singapore.
Nevertheless, the idea of creating a large fund corpus to facilitate leveraged buyouts remains an attractive one. Such a fund could raise money globally and can do so relatively cheaply with implicit government guarantees. This is not unusual because developed nations did extend their global business footprint in the mid- to late-nineteenth century through high debt leveraging helped by governments.
The UK is a classic example in this regard. Economic historian Niall Ferguson says: ?If you add up all the British capital raised through public issues of bonds between 1865 and 1913, you will see that the majority went overseas; less than a third was actually invested in the UK itself.? At one time, the UK?s gross foreign assets were 150% of its GDP, which was substantially funded by bonds. Can you get more leveraged than that?
In that phase of massive financial globalisation, leveraged British capital naturally went into creating productive assets in the highly underdeveloped parts of the world. Of course, much of it was colonised with military might. However, the same strategy is now being adopted within a peaceful framework by China and
India, whose businesses have begun to acquire assets in other emerging economies through various funding options, including debt. For instance, the Chinese government plays a very proactive role in acquiring assets in Africa. Our government has been far less proactive in this respect.
Of the early 20th-century UK, Keynes wrote: ?A Londoner of moderate means scarcely required any effort to adventure his wealth in the natural resources and new enterprises of any quarter of the world.? Some of the fast-growing emerging economies are perhaps in this Keynsian mode today. Leverage in no longer a dirty word.
mk.venu@expressindia.com