Tatas outwit Reliance once more

Last year when the Boca Raton headquartered industrial conglomerate Tyco International announced plans to shed its ailing submarine cable business, its investment bank Goldman Sachs invited competitive bids.

It was only natural that many of the enthusiastic contenders were companies that Tyco had partnered. High on the list was domestic telecom major, the Rs 3,163 crore (Rs 31.63 billion) Videsh Sanchar Nigam Ltd. At that time, Tyco's cable construction arm was building VSNL's Chennai-Singapore cable link.

So in March, when Goldman's Indian affiliate, Kotak Mahindra Capital Co, touched base with VSNL's 46 per cent owner -- the Tata Group's top brass -- for a possible acquisition of Tyco Global Network, it didn't come as a big surprise. And in May, according to sources close to the deal, when the Tata Group assigned the mandate to its investment bank DSP Merrill Lynch, both the parties worked to pull off perhaps the most value-for-money acquisition they had ever partnered.

Today, the Tata bosses lay the credit squarely on Arun Agarwal, 32, head of telecom investment banking at DSP. Agarwal, who moved in after an eight-year stint with global consulting firm McKinsey, and helped set up the telecom business for a large CDMA player, had vigorously hammered down TGN's $2.5 billion billing.

"The high billing was done during the euphoria days. But with technology changing dramatically, supply exceeded demand, leaving enough room to negotiate," says Agarwal. Adds a Tata manager close to the deal, "Finally, for us, it was like buying my boss' Rs 80-lakh S-class Mercedes for Rs 400,000."

That's because if the Tatas were to set up that kind of network, with 12 gateway city connectivity and 30 global points of presence, it would have to shell out nothing short of the original bid price of $2.5 billion.

Fortunately for the Tatas, TGN's business was one of the casualties of the dotcom bubble, which very nearly sounded the death knell for Tyco, under its erstwhile chief executive, Dennis Kozolowski.

Anointed one of the top five mergers & acquisition deals in India, it ranks behind Reliance Infocomm's January acquisition of UK-based Flag Telecom for $211 million. Now, with more than 60,000 km of an under-sea fibre optic cable network, spanning three continents, it will rule the waves across the trans-Atlantic, trans-Pacific, trans-America, western Europe and the Far East including Japan.

Says Kishor Chaukar, managing director of Tata Industries, "The Tata Group now has telecom and information technology capabilities. With this deal, no one can beat us."

An empty boast? Not really. With Sunday's $130 million acquisition of TGN, the Tata Group had once again edged out Reliance Infocomm. The other contender was Phoenix-based Pivotal Private Equity, owner of Network Solutions. The Tatas had earlier breasted the tape against Reliance in January 2002, when it picked up the initial 26 per cent stake in the government-owned VSNL for Rs 1,439 crore (Rs 14.39 billion).

At that time, the Tatas bid for VSNL through Panatone Finvest, a special purpose vehicle, where the group's main companies had stakes. Both Tata Power and Tata Sons had a 40 per cent stake each with the balance shared equally between Tata Industries and Tata Steel.

This time though, the Rs 600 crore (Rs 6 billion) acquisition, to be wrapped up over the next six - nine months, will be funded through internal accruals via yet another SPV. At the moment, with cash reserves of Rs 1,600 crore (Rs 16 billion), it expects around Rs 1,000 crore (Rs 10 billion) income from the sale of investments in Intelsat and New Sky Satellites.

The new entity will be housed under VSNL America, overseen by the Singapore-based Vinod Kumar, VSNL (executive director) for international business. He was earlier senior vice president Asia Netcom and CEO of global telecom major, Worldcomm Japan.

Again, TGN, with a global footprint, has more than a 10-fold unlit fibre capacity, as what's operational is barely 5-10 per cent of that, say telecom analysts. According to a Tata manager, Tyco's unlit capacities across just the Pacific and Atlantic total around 11,000 gigabits, throwing up huge opportunities for VSNL. Says Chaukar, "We will be a big global wholesaler of bandwidth and big in communication solutions to select people."

Then, VSNL gets Tyco's large data carrier clients who are mostly Fortune 500 companies. It also absorbs TGN's 200 employees pushing up VSNL's current 1,800 headcount.

Clearly, the acquisition comes at a time when the Tata bosses have been making statements about wanting "VSNL to be a telecom supermarket". Only two months ago, Tata Group chairman, Ratan Tata, had said: "We want to offer end-to-end quality services to corporates in the spheres of voice and data apart from video."

It also comes close on the heels of the Tata Group's crown jewel -- Tata Consultancy Services -- which went public on July 29. Moreover, its arch rival Reliance acquired Flag telecom only early this year giving it a 50,000km long cable network.

In all this, just how important is TCS in VSNL's current game plan? "Very vital. VSNL has a great opportunity in telecom. If we have to give substantial high value-added service to clients, the synergistic advantages with TCS are very high," reveals Chaukar.

Like what? VSNL will leverage TCS' telecom solutions practice. Today, according to a TCS manager, after banking & financial services and manufacturing, the telecom practice is the third largest contributor to TCS' Rs 6,000 crore (Rs 60 billion) revenues: TCS sells data solutions to corporates all around the world. "With data originating and ending with IT, VSNL can latch on to the same clients to sell bandwidth," says a telecom expert.

Reveals a senior Tata manager: "Today, Microsoft is a TCS client and we provide bandwidth connectivity from the American giant's Seattle headquarters to its Bangalore office. For the rest of its requirements, Microsoft has to depend on other partners. Now we can go to our clients and say that apart from solutions, we can give you end-to-end connectivity with VSNL."

VSNL can piggyback on TCS in more ways than one. The latter already has a foot in the door at many global companies, liasing with their chief investment officers. Now, as a wholesaler of bandwidth, VSNL's point of contact too will have to be the CIO. "This way, we will be a one-stop shop for our customers," says Chaukar.

Adds N Srinath, VSNL's director operations: "The agreement is a major step forward in our ongoing drive to offer our enterprise and carrier customers seamless, end-to-end telecommunications solutions that encircle the globe." Three days ago, he was in Singapore to flag off the Tata Indicom cable network connecting Chennai to Singapore.

These efforts have no doubt enthused the markets. Since the announcement on Monday, the VSNL scrip has moved from Rs 172.60 to close on Thursday at Rs 185. Analysts says that while they are happy with the long term prospects for VSNL, the short term is not clear. "We still don't know how it will impact its revenues in the near future," says an analyst.

Already, VSNL's once flagship international telephony business is gradually taking a back seat. Revenues from this business are down from 90 per cent from its government monopoly days to 60 per cent now. Other businesses like national long distance, Internet services and television uplinking services are on the upswing.

Even so, VSNL's marketing expertise will be tested to the hilt. Already, overcapacity and price wars have pushed global outfits like Global Crossing and 360 Networks into oblivion. Tyco too was on the brink of collapse. Can the Tatas make a dent here? "In this activity, marketing is critical. Our efforts at this stage are mostly 'direct' in nature," says Kumar.

It is addressing a focussed group of around 1,500 companies and around 50 carriers where the communication is personalised and customised. "We are establishing ourselves as a thought leader and 'subject matter expert' on the topic of telecommunication in India. We want to help customers recognise that VSNL is a progressive organisation that has evolved and continues to grow in many areas," he adds.