There is much hand-wringing among Reliance shareholders over the Ambani civil war --if civil is the word we are looking for. Will all this public washing of dirty linen destroy shareholder value?
Can investors trust Mukesh and Anil Ambani the way they did Dhirubhai? Unsaid in all this is the hope that the two warring brothers will somehow kiss and make up in the interests of safeguarding their patrimony.
The Reliance 'ownership issue'
I'm not so sure kissing and making up is what is needed here. No matter how well the cracks are papered over, with family and friends providing the motive force, once trust is breached it is always difficult to rebuild.
Just as Dhirubhai would never have settled for second place in anything he did, it is difficult to see either Anil playing second fiddle to Mukesh, or the other way round. Two alpha males cannot coexist in the same place without hurting each other.
In fact, the best way forward is to split and make up, not stay together in an uneasy alliance. And there are sound reasons why a split will work better than staying together. The anecdotal evidence is that spinoffs deliver greater shareholder value than mergers and conglomerates.
Examples: L&T, Indo-Gulf, which are doing better after divesting non-related businesses. HLL, which merged with Brooke Bond Lipton, is still groping for a magic formula post-merger.
Reasons? First, vertical splits bring focus to a business; M&As do the opposite. The focus happens at two levels. When you run one business instead of two (or three or four), top management is able to automatically give it undivided attention.
There is no need for balancing the interests of one business with another; when you have two businesses, for example, it is normal human tendency to spend more time with the weaker one and give it more time and money. The prodigal son always gets more attention than the one who didn't stray.
At another level, top management commitment often increases when businesses are split. When you are part of a large conglomerate, the top managers in each division are always comparing themselves with counterparts in other parts of the business, wondering if they are getting fair treatment or not -- irrespective of how the business is actually faring.
When a business is split, everybody knows he will sink or swim with it. Everybody has to deliver.
Second, the prime actors in the split have higher levels of motivation to succeed. Having caused the split, or having been thrown out by a rival, both have something to prove. Lee Iacocca did immensely better at Chrysler after he left Ford.
At Reliance, once a split is finalised, both Mukesh and Anil will have something to prove to each other. If the split is not prolonged or unduly messy, their companies and shareholders will benefit from this rivalry and extra motivation to succeed.
Third, the age of conglomerates is really over. While vertical integration is still the norm in the oil industry, Reliance Industries is excessively integrated -- starting with oil exploration, and going on to refineries, retailing, petrochemicals, and even further into textiles. Plus, there is the horizontal expansion into two other capital-intensive industries -- power and telecommunications.
I doubt if any one Ambani can provide adequate entrepreneurship in such diverse industries, given the scenario of global competition.
In his time, Dhirubhai was essentially battling domestic bureaucracy's anti-growth mindset behind high tariff walls. He chose to fight mostly on domestic turf -- and he knew how to prepare the turf to his advantage.
His sons will be battling global competitors who will have to be fought on their own terms. Whether they are fighting as one business or two, both Mukesh and Anil will have their hands full -- and ultimate success is not a certainty.
In pre-reform India, where tax rates were high and levied at multiple points in states, vertical integration made sense for almost all businesses. By producing all inputs in-house, companies could avoid paying taxes at various stages of the production process.
But over the next year or two, India is moving towards value-added tax. Henceforth, there will be no great advantage in aggregating the whole production process under one roof. With low import tariffs and domestic VAT, companies have to unbundle the supply chain and source raw materials and intermediates from the most economical source.
If the Ambanis were to look closely at their own integrated set-up, they may find inefficiencies building up at many points. A vertical and/or horizontal split between the brothers may, in fact, be one way of unlocking the value lost through such inefficiencies.
Dhirubhai Ambani used to say that India needed a thousand Dhirubhais rather than just one. I see no reason why allowing two Dhirubhais to flower within the Ambani family is all that bad for shareholders.If Anil and Mukesh can rediscover the spark of entrepreneurship separately rather than together, there could be nothing better. Two Dhirubhais with something to prove to the world is something to celebrate.