KARACHI, Oct 9: The corporate architecture is changing fast and the September 11 US episode would quicken the pace of change.
In Pakistan, crony capitalism received a great setback with shrinking of the sources of patronage—external and domestic financing through DFIs and mounting fiscal deficits. Weak financial institutions cannot support an ambitious investment programme. Nor is the IMF-induced policy of stabilization helping investment and growth.
The private sector, with rare exceptions, is left to fend for itself. For example, the CresBank has been bailed out, as revealed by Finance Minister Shaukat Aziz at a luncheon meeting he hosted for businessmen in Karachi recently. Pakland Cement is yet another example.
The fundamental weaknesses of the economy, aggravated by the US and the European sanctions, dried up the flow of foreign private capital. Foreign investors were preferred to local investors. They got not only the normal industry-related incentives but also secured extra project-related incentives. Hubco got the best deal. Its profits were guaranteed.
The DFI concept is dead. The commercial banks are unwilling to take long term risks of project financing. And the investor is left with no option except to put his own money or raise funds through the Term Finance Certificate (TFCs) or corporate bonds. Money can be raised from the market through bonds, if the offer for subscription is backed by a track record and sound credit rating. Multinationals find it easier to secure funds through TFCs.
In the manufacturing sector, the multinationals have gone for acquisitions either dictated by local market conditions or mergers of their parent companies. Since the Monopoly Law is weak and now under review, monopolism has not been checked effectively.
The need for monopoly law was not felt when the commanding heights of the economy were brought under state control by Bhutto regime. Liberalization has demolished substantially the state control over banking, manufacturing and services sector. Since the private investment, both foreign and local, has been at a low ebb, the policy makers have been moving very slowly to update the monopoly law.
Though a development finance institution would be created by merger of RDFC and SBFC to finance small and medium sized enterprises, big corporates would have to get funds for investment from the capital market. Private pension funds would be created to help fund investment in corporate ventures. Laws governing venture capital are also being formulated for the IT sector.
Globally as well as locally, mergers have taken place primarily through acquisitions. No less than 97 per cent of the mergers worldwide have been forged through acquisitions. Whether it is weak or strong corporate culture, the key factor governing the mergers is majority stake and management control.
The mergers have not been an unqualified success. Clash of company cultures have been great hurdles in the success. Redundancies have quite often left the new identity with deadwood and made it more difficult to attract professionals with track record. Trimming of corporates in distress proves counter-productive unless the retrenchment is part of an overall strategic plan. And to quote a German bank: “Ideas are capital, the rest is money.”
Of late, the pace of mergers had slowed down. The US-led global recession has virtually halted the process. Corporate profits have plummeted despite mergers, alliances and outsourcing.
The corporate world has come up with a lot of innovative ideas to face global competition, to survive and prosper. These include: mergers, alliances, outsourcing and the concept of “cyber nomads.”
In the past decade, there has been upswing in corporate alliances. A study in late 1990s by Booz-Allen and Hamilton, a consultancy, estimated that alliances in the US had grown by 25 per cent per annum. The spectacular success were: France’s Renault and Japan’s Nissan.
Given the difficulties in acquisitions and mergers, alliances are considered as a safer partnership and involve minimum risks. Alliances are easier to work. Companies with global reach, also need local partners to enter foreign markets. Alliances also permit some of the benefits of mergers. Each company retains its identity. They also fit into the current trends towards outsourcing. But some alliances also turn sour when one partner is seen taking undue benefit at the cost of the other.
Alliances have been most popular with the airlines. But the Sept 11 exogenous shock brought about the collapse of world’s leading airlines. When the market shrinks, alliances can do very little to help.
In a turbulent world, afflicted by global recession, the corporates have one more option. Corporate citizen should turn into a role model shaped by “cyber nomads.” Whereas alliances may or may not take care of the market strategy, output could be managed and tailored to the market demand on piece and contract basis. An individual would be required to master more than one trade or skill.
To quote Newsweek, the average job tenure in the US dropped from 23 years in the 1980s to less than four years in 1990s. A study by Robert Lubacher and Thomas Malone of Massachusetts Institute of Technology reveals that 25 per cent of the American workers are part-time workers and independent contractors.
In California only one in three workers hold a permanent full time day shift job working on site.
And the study predicts that the free-agenting trend of the IT sector, far from being typical, may actually serve as model for the American economy as a whole in the twentyfirst century. If this trend were to catch up, specially in the current global recession, the corporate citizen may turn into the role model of a cyber nomad.