When 2 and 2 adds up to 5…
The other day, I was advising somebody to invest in entities that are diversified in nature and predominantly the ones that are spinning off their Strategic Business Units (SBUs) as separate incorporated entities. While I could easily drive home the point of investing in diversified entities by giving the analogy of not putting all your eggs in the same basket, the later one was a little too difficult to explain.
A layman that the other person was, or rather quite logical that he was, I was unable to explain him as to why 2 plus 2 could actually be 5. And when they are together they just add up to 4. His reasoning was quite simple: The business pre and post de-merger are the same. The management, more or less, is unchanged. As a matter of fact the economies of scale that are available when those SBUs are together as a single unified entity are no more exploitable in the new scenario.
I was scratching my head.
I tried to give him the Reliance example and tried to reason out. But even I knew that with two brothers splitting their empire, Reliance is a too complex story to use it as a case study for spinning off a diversified company’s SBUs.
As I was grappling for answer, my door bell rang. It was my cable operator, who had come to pick up payment of monthly bill and also that of my broadband connection. As I was settling those bills, the postman came with a bunch of mail. Inter alia, he handed over to me three Hutch & two MTNL bills.
Postman & cable guy gone, I continued my discussion with that gentleman about state of financial markets and the direction in which Sensex is likely to move. As I was unwrapping the mail, the discussion moved to the growth of communication companies. “It’s so obvious that these companies are doing so well. Look at my bills.” I said and showed him the 3 Hutch bills, pertaining to myself, my wife & dad, totaling to some 3000 bucks. “Add to that this landline bill of 1800 and my sister’s MTNL cell bill of some 700 odd. Plus broadband & cable TV. My family spends 6-7 K only on communication! Not more than 10 years ago, we didn’t have broadband – but we had a landline, that was more than sufficient – and we were still connected to the world through dial-up.”
In those days, I used to call up home may be once a day, in all probabilities just before leaving office. Today, in the form of mobile I carry a GPS instrument. And make numerous not-so-necessary-what-am-I-doing-update calls. 3 youngsters in the family spend 70% of their waking hours in office where we have access to internet and the broadband at home is used only over the weekends, for which I pay hundreds of rupees.
So, how do I justify my family spending 6-7 K on communication today vis-à-vis a thousand or two per month then?
Hey, haven’t I been actually a victim of de-merging of industries and unlocking of value? Same needs, similar means, separate service providers and I pay each of them an X amount towards fixed monthly rentals and actual usage charge over & above that. In earlier times, all of it was offered by one single service provider as a combined solution and the cost used to be much lower. What’s happened in last decade or so is that my wants have been converted into needs and different service providers fulfill only a fraction of those wants, thereby creating market for each of them.
A layman that the other person was, or rather quite logical that he was, I was unable to explain him as to why 2 plus 2 could actually be 5. And when they are together they just add up to 4. His reasoning was quite simple: The business pre and post de-merger are the same. The management, more or less, is unchanged. As a matter of fact the economies of scale that are available when those SBUs are together as a single unified entity are no more exploitable in the new scenario.
I was scratching my head.
I tried to give him the Reliance example and tried to reason out. But even I knew that with two brothers splitting their empire, Reliance is a too complex story to use it as a case study for spinning off a diversified company’s SBUs.
As I was grappling for answer, my door bell rang. It was my cable operator, who had come to pick up payment of monthly bill and also that of my broadband connection. As I was settling those bills, the postman came with a bunch of mail. Inter alia, he handed over to me three Hutch & two MTNL bills.
Postman & cable guy gone, I continued my discussion with that gentleman about state of financial markets and the direction in which Sensex is likely to move. As I was unwrapping the mail, the discussion moved to the growth of communication companies. “It’s so obvious that these companies are doing so well. Look at my bills.” I said and showed him the 3 Hutch bills, pertaining to myself, my wife & dad, totaling to some 3000 bucks. “Add to that this landline bill of 1800 and my sister’s MTNL cell bill of some 700 odd. Plus broadband & cable TV. My family spends 6-7 K only on communication! Not more than 10 years ago, we didn’t have broadband – but we had a landline, that was more than sufficient – and we were still connected to the world through dial-up.”
In those days, I used to call up home may be once a day, in all probabilities just before leaving office. Today, in the form of mobile I carry a GPS instrument. And make numerous not-so-necessary-what-am-I-doing-update calls. 3 youngsters in the family spend 70% of their waking hours in office where we have access to internet and the broadband at home is used only over the weekends, for which I pay hundreds of rupees.
So, how do I justify my family spending 6-7 K on communication today vis-à-vis a thousand or two per month then?
Hey, haven’t I been actually a victim of de-merging of industries and unlocking of value? Same needs, similar means, separate service providers and I pay each of them an X amount towards fixed monthly rentals and actual usage charge over & above that. In earlier times, all of it was offered by one single service provider as a combined solution and the cost used to be much lower. What’s happened in last decade or so is that my wants have been converted into needs and different service providers fulfill only a fraction of those wants, thereby creating market for each of them.
That gentleman was now convinced that demerging actually creates revenue making opportunities for each & every spun off entity and thereby makes shareholders of the erstwhile combined entity richer. Even I was happy to have got a good analogy to explain the phenomenon but at the same time was feeling low for being at the receiving end of it.
posted by Narendra Ganpule @ 11:26 AM
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