Proposed Cooper-Apollo merger deal goes kaput

A deal that was being touted as one of the biggest acquisitions of a US based organization by an Indian firm has finally been terminated after courtroom battles, attempts at forcing the deal at a previously agreed price, labour union demands and last but not the least, investor in a subsidiary crying foul.

Contours of the deal

• India based Apollo Tyres agreed to buy Cooper Tire and Rubber Company in June for $2.5 billion. This valuation meant a $35 per share offer for Cooper, well above its prevailing market price of nearly $26 per share.
• The deal was to be jointly debt-funded by Standard Chartered, Goldman Sachs, Morgan Stanley and Deutsche Bank on the basis of financial information that was to be provided by Cooper.
• The post-merger behemoth would have been the seventh largest tyre manufacturer in the world with an international presence. More than 60 percent of Apollo's revenues come from the Indian market. Sales in the domestic market are seeing a decline owing to the sluggish overall economic growth which has hit the auto sector hard.

The roadblocks

• Executives and workers at Cooper Chengshan Tire, Cooper's Chinese subsidiary which accounted for nearly a quarter of its revenues, were not in favour of an Indian company taking over the firm. CCT was earlier a 51:49 JV but the Chinese investor reduced his stake to 35% in a $18 million deal. For the Apollo-Cooper merger to materialize Che Honghzi demanded $400 million for his 35% holding in CCT.
• Labour Union United Steelworkers too objected to the completion of the deal without negotiation of a new contract. Nearly 3000 workers in Cooper's Texas and Ohio facilities are associated with this union. A US court too affirmed that Apollo and Cooper could not go ahead with the deal without renegotiation of the labour contract even though Cooper did try to push Apollo Tyres into deal completion.

End result

• Courtesy the disputes with the labour union and the Chinese JV partner, Apollo Tyres contended that the deal be valued lower than the earlier $2.5 billion offer at $35 per share. Cooper wanted to stick to the original contract signed in June.
• Cooper Tire and Rubber Company lost access to financial data at its Chinese subsidiary as executives refused to share information with the US based firm. This information was vital for the completion of deal as it was to be funded via debt. Cooper has been unable to meet its legal obligation of financial reporting owing to this dispute.
• Management at the Chinese subsidiary also reduced production at the plant while Cooper brand tyres were not manufactured at all. This lead to substantial reduction in revenues collected.
• Cooper terminated the deal on December 30, 2013; a day before it was to officially expire on December 31, 2013.

What next? 

• Both the parties are now aiming for compensation in the form of breakup fee and damages. If granted, Cooper is liable to pay $50 million in breakup fee while Apollo will have to shell out $112.5 million.
• As Delaware Supreme Court had earlier refused to order Apollo Tyres to complete the deal without the completion of negotiations with United Steelworkers and it is Cooper Tire and Rubber Company that has terminated the deal, the chances of compensation appear bleak. 

FIPB approval for Tesco-Tata multi-brand retail JV

FIPB (Foreign Investment Promotion Board) has cleared Tesco's proposal for investment of nearly $110 million in Trent. This would effectively make Tesco the first foreign multi-brand retailer to invest in India after India's policy initiatives to allow for FDI in multi-brand retail.

The Walmart-Bharti joint venture was expected to expand further in multi-brand but the two have since parted ways with Walmart opting to focus on the cash and carry wholesale business, keeping the 'Best Price' brand while Bharti Retail will take forward its front-end retail business with 'Easy Day' stores across India. The problems in the Walmart-Bharti JV crept up post allegations that officials from the firm or the consultants hired by the firm had indulged in unethical practices. Investigation was also being carried out in US under FCPA (Foreign Corrupt Practices Act) on allegations that Walmart had bribed officials for licences in Mexico.

People's Bank of China: Between a rock and a hard place

China's spiralling credit to GDP ratio is a talking point much beyond its shores. This is an economy that lures investors from around the world with the promise of high returns but credit to GDP ratio beyond 200 percent for a middle-income country does not augur well for its future, atleast that's what economists from around the world will have you believe. People's Bank of China agrees with that assessment. In keeping with this, it has been trying to discipline its banking system against credit expansion that overlooks due-diligence before lending.

In the year 2013, this is the second time that China's banking system is experiencing a cash crunch, the earlier episode having played out in June.

The problem

The short-term inter-bank lending rate in China has seen a sudden spurt and has now moved beyond 8 percent. Similar highs were scaled in June as well. This essentially means that the central bank is not that active in the open market and banks are unwilling to lend to each other given that the credit uptake is high in December and withdrawals by organizations are substantially higher. Also, as avenues for investment grow in the form of varied financial instruments, banks find it increasingly difficult to attract depositors with their products. The interest rates for lending beyond the three month period still remain stable.

PBoC is caught between its efforts to ensure that the banking system remains stable - which essentially implies that high credit uptake should not lead to unmanageable bad debt levels which can significantly harm the banking system as it grows - and the need to keep the short term rates in check lest it squeeze the liquidity out of the system.

Action taken

PBoC announced that it had intervened via short term liquidity operations (SLOs) to lend nearly $50 billion to banks for the short-term. In a first, an announcement was made on Weibo about the impending move.

Long term impact

 There is a unanimous agreement on the fact that China needs to regulate its banks in order to effectively manage growth in credit uptake that is continuously seeing an annual growth of more than 20 percent for the last few years. The high reserve ratio requirement of 20 percent which requires banks to deposit nearly $3 trillion with PBoC does not hide the fact that China has an active shadow banking system. This cash crunch is not being seen as a major threat for now as long term interest rates are stable and the situation is expected to improve at the beginning of February next year which marks the beginning of a Chinese lunar new year.

China is unique in many ways. The more you try to learn about China, the more it intrigues you with its peculiarities.

bitcoin traders in India face the heat

After the RBI warning that bitcoin trading could be in violation of provisions of foreign exchange laws in the country, Enforcement Directorate officials raided offices of rbitco.in and buysellbitco.in. Apparently, buysellbitco.in was the biggest bitcoin trading exchange in India. Trading on bitcoin exchanges in India has been halted post the RBI directive as traders await a clear policy on bitcoins.

Till then, trading on these may well be illegal! What goes against trading in bitcoins is the lack of regulation which makes it an easy avenue for money laundering. Those trading in bitcoins may also find themselves on the wrong side of anti-terror financing laws.

A lowdown on Quantitative Easing

The term “Quantitative Easing” was first used in Japan in March, 2001 to fight deflation - reduction in price levels of services and goods - which has been a persistent feature of the Japanese economy for more than a decade now. QE has also been used by central banks in US, UK and the Euro zone, with multiple rounds of quantitative easing in USA being termed as QE1, QE2 and QE3.

Quantitative Easing comes into play in a scenario underscored by low interest rates, almost nearing zero, and lack of demand or a poor state of the economy in general. Deflation is also considered an important factor in such a situation. In an economy characterised by a general slowdown and low interest rates, further lowering of interest rates as a monetary policy tool to spur growth is not a possibility. Banks are unwilling to lend at low rates to the corporate sector and individuals when the GDP growth is sluggish or the economy is in a recessionary phase. Short-term bond buying by the government fails to
serve the purpose of bringing the economy back on track. The central bank then buys bonds and incurs long term debt. The Central bank thus injects liquidity into the system. The greater money supply is expected to boost demand because people and businesses get access to cheap credit and this eventually leads to growth in the economy.

In the post subprime crisis era, even though UK and EU have also used QE as a monetary policy tool, the maximum impact has been felt by Quantitative Easing undertaken by USA in multiple stages. This has increased its debt from $700-$800 billion to nearly $2 trillion. In the latest round of QE, termed QE3 or QE Infinity, undertaken from September 2012, the initial mandate was to purchase $40 billion of mortgage backed securities per month. This was hiked to $85 billion in December, 2012. In June 2013, the Federal Reserve Chairman, Ben Bernanke, hinted that USA was well on its path of achieving the set targets through QE and thus the monthly bond buying activity would see some tapering in the near term.

The speculation continues as US' jobs data improves.

bitcoins: Some facts

1. A bitcoin is an international crytocurrency that came into circulation in January, 2009. A complex programme is used for its creation.

2. A maximum of 21 million bitcoins can be created. As of now 12-12.5 million bitcoins exist.

3. The credit for bitcoin creation goes to a pseudonymous developer Satoshi Nakamoto.

4. World's first bitcoin ATM opened recently in Vancouver, Canada.

5. Several websites accept bitcoins as donation. Information about physical outlets that accept bitcoins is available on coinmap.org

6. In order to buy bitcoins, one needs to register with an international digital wallet to get an alphanumeric string termed as the bitcoin address. coinbase.com is an instance of this. An open source software armory also serves as a bitcoin management platform.

7. The value of bitcoin has gone up significantly in the year 2013, the value being below $10 at the beginning of the year. It has touched $1000 in the recent months and the current 'buy' price is $ 740.52.

8. Tokyo, Japan based Mt.Gox holds the distinction of being the world's largest bitcoin exchange.

9.  This currency has been legalized in Germany.

10. The scepticism emanating from central banks and regulators stems from the risk of its use for money laundering and other illegal activities as the transactions involving bitcoins cannot be traced or tracked. Recently, FBI arrested entrepreneur Ross Ulbricht for his online venture, Silkroad, a web based platform accepting bitcoins, which was selling drugs and arms. It was accessible only through the Tor web network.

bitcoin: A potential fiat currency?

Quantitative Easing has been a much talked about subject throughout the year 2013, with "Will happen/ Won't happen" analysis coming in from all quarters as and when the US jobs data or the inflation numbers suggested that the Fed is indeed achieving its set targets and the situation is ripe for tapering. The central banks around the world are assessing the likely impact of QE tapering on their own currencies but one currency that is making waves around the world and is likely to remain untouched by what Ben Bernanke does now or Janet Yellen does in the future is the bitcoin.


News about the future prospects of the currency has been a bit of a mixed bag with the US online retailer Overstock.com giving it an emphatic nod of approval with an announcement that it would start accepting the currency by as early as the end of 2014 and People's Bank of China (PBoC) forbidding financial and payment institutions from carrying out bitcoin related business. This happened even as the bitcoin was scaling new heights in terms of its value, touching $1200 but the news did act as a dampener and the virtual currency was soon trading at $800 for a bitcoin. General citizens in China are still free to exchange the virtual currency among themselves, not against the local currency though.

Reserve Bank of India has followed suit albeit with a warning in place of a downright ban. The warning pertains to potential risks that dealing with the currency hold in terms of money laundering and cyber security. Players in the bitcoin domain in India now await directives from the RBI in terms of a clear policy in order to carry out the buy sell activities while avoiding being on the wrong side of the law. Entities such as INRBTC.com and buysellbitco.in have thus suspended their operations for now.

Discounting the fact that bitcoin finds itself entangled in the web of regulation, it faces no serious threat to its existence. The general consensus among analysts is that these moves by central banks may delay the use of bitcoin as a full-fledged currency but this currency is here to stay.

Supply and Demand basics

Profitability of any organization boils down to the basics of supply and demand. If you start with the concepts of microeconomics, which deals with the behaviour of an individual unit, be it a consumer or a firm, it is the supply and demand curves that come into play. Simply put, these form the foundation of the subject.

The Supply curve represents the quantity that a producer is willing to supply at a given price. The Demand Curve represents the quantity that a consumer is willing to buy at a particular price. Intersection of these two curves gives us the equilibrium or the market clearing price.

In the above diagram, S represents the supply curve, D1 and D2 represent the demand curves; P1 and P2 represent the market clearing prices for the demand curves D1 and D2. Movement along a Demand curve represents the change in quantity demanded with change in price, with all other factors remaining the same (ceteris paribus). When a new factor comes into play and the demand increases considerably or we can say, that the quantity demanded at each price increases, there is an outward shift in the demand curve and we move from Demand curve D1 to D2. The market clearing price thus changes from P1 to P2.