Management Consulting: First Impressions

So it’s been a little more than a month (my internship, not counted) since I started with my first project – perfect time to build first impressions!

On the one hand, it’s a jungle out here. With so much happening every minute you can’t help but feel that you’re running just to stay in the same place. Of course with the pressure of expectations, extreme ambition and the resulting aggression you almost expect someone to kick you down a well and shout “this is Spartaa” every other minute.

So life in a consulting firm is tough (big surprise) – the travel itself is enough to sap all energy out of you (for my first stint, I catch a flight, then a cab, followed by an overnight train, and then another cab – just to reach my client place). Not to mention the impossible deadlines, out of the world expectations (from clients, the team and most importantly, yourself) and the constant pressure to deliver. And not just deliver, do better than most of the rest – because only a select few manage to reach the next level – at every level. Late nights over countless cups of coffee are a given – and for someone who takes stress easily, health will be a major concern very soon.

So this is probably the first thing anyone will realize here – consulting is not worth all the late nights, stress, lost opportunities (work, sleep, social life – choose 2/3 at max) if you don’t enjoy the process. Here’s another thing I realized – the way to enjoy the process is not to look at a snapshot of what I am doing every second (that’ll look like mundane work 80% of the time) – but look at it within a reasonable timeframe (where the full impact of what you did is visible). Because most of the satisfaction at work comes when I can see what we have achieved for the client and for myself.

This past month has been a crazy one – with me struggling to get accustomed to this new way of living, thinking and functioning (of course this new way keeps changing every two weeks and definitely with every project!) – but within just a month, I see a difference in how I work – I can be a lot more focused; I have started internalizing the discipline of prioritizing the most important (and not the easiest) tasks first; excel spreadsheets don’t slow me down (that much) anymore (even though my laptop does, quite often); I am more cognizant of the client’s perspective now; and (I think) I am getting better at setting more realistic short-terms goals. And all this, while I felt like I was just going through the motions, without even deliberating on the learning aspect.

The steep learning curve, which consulting firms promise to provide, is pretty real!

A partner joked about it once, saying “it is true that you will learn in 2 years, what most of your batchmates from business school will in 5 years – but that will be mostly, because you’ll end up doing 5 years worth of work in 2 years!”

I may have made it sound, so far, like the learnings have all been tactical* – that is fortunately not true!

Whoever said business school is the last time you will find real intellectual challenge, would have been pleasantly surprised at what (s)he experienced at a consulting firm – I am learning about concepts and aspects of business, which I missed out heavily on while at school. I never understood, for example, the real essence of corporate governance – till I sat in one some meetings with CXOs of a company (people who are still at business school, do take a couple of courses on corporate governance). I’ve also started thinking a lot more in terms of systems and processes – I can actually see them in front of me – and I understand how bad processes can make even high-performing organizations crumble in no time. I can see why some spectacular start-up founders ultimately lead their companies to a spectacular demise when it’s time to scale. And now I see IT in a completely different light – with utmost respect even.

I can clearly see why consulting firms are titled “Finishing Schools” by many – in a very short time this experience is going to change the way I think –and hopefully all for the better. At IIMA, I learnt discipline, core business concepts and a way of looking at things from multiple dimensions; now this experience is going to make me a lot more (for want of a better word)“professional” in my approach.

At the very least, I expect the next couple of years to make me a stronger problem solver, a more rigorous thinker, an effective communicator and a better manager overall.

 *I would also like to mention, in passing, some other useful life skills that I have acquired – like tying a tie windsor while on a conference call in a cab; the ability to pack a suitcase in 7 minutes flat or optimizing my travel time to be ‘Just in Time’ for every flight

** The views expressed above are personal views of author and should not be associated with any firm.

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Sahil Patwa is consult club alumni from PGP’14 batch. He holds a B.Tech in Mechanical Engineering from IIT Bombay

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GE’s Alstom Acquisition: How Smart is the Move ?

On June 22nd 2014, one of Europe’s fiercest acquisition battles ended. French Government officially supported Alstom’s purchase from General Electric. During the previous two months, Siemens and Mitsubishi also played important roles in the bid. Both strategic and political reasons lie behind the structure of the deal.

On April 30th, Alstom (€21 billion revenues) presented the details of the proposed acquisition from GE (€120 billion revenues): all assets and liabilities related to the Energy activities transferred to GE for an Enterprise Value of 11.4 billion Euros to be paid in cash.

Figure 1

Source: GE Website

Is the deal value fair ? 

By using the comparable method, it emerges that GE has undervalued Alstom. Indeed, GE’s offer implied a EV/EBITDA multiple equal to 7,87, while Damodaran suggesting that a fair multiple for the sector should be equal to 9,78 and Valuemetrics to 10,44.  The main reasons of this undervaluation may be the industry trend and Alstom’s recent performance.  According to an Ernst & Young research of 2012, the M&A trend in the power and utilities industry has been decreasing in terms of value and number of deals. Considering similar transaction multiples of the recent past in the European market, they confirm the trend and are similar to the ones of Alstom’s acquisition. For example, in 2012 Electricite de France acquired Edison International with a EV/EBITDA multiple of 9.7 and Snam was acquired by Cassa Depositi e Prestiti with a multiple equal to 8.7. Moreover, the whole European energy sector has been facing threats due to the raise of energy resource prices.  Alstom has also negatively performed in the last years. In 2013, Net Income fell 28% to €556 million due to higher restructuring costs. Operating Profit fell 3% to €1.4 billion, with Operating Margin dropping from 7.2% to 7% and orders to 10% (€21.5 billion) because of a weak performance in the thermal power division.

The underlying strategy

The strategic rationale behind the deal is to integrate the Alstom energy activities (€14.8 billion revenues and 65.000 employees) within GE to strengthen its development’s prospects. The main sources of synergies are the complementary capabilities among the two firms: GE’s excellence in Gas Turbines and Wind Onshore and Alstom’s superiority in Hydro, Grid, and Steam turbines. Moreover, Alstom could use the cash received to refocus on the transportation sector.

The deal is likely to be very successful due to various elements. It strengthens GE’s position as the most competitive infrastructure Company in the world. Moreover, the type of technology that is going to be acquired is complementary to the existing capabilities of the company, thus increasing the likelihood of benefiting from the potential synergies in the short-term. Indeed, the synergies that GE is going to leverage are concrete and clear because Alstom mostly conducts business in areas where GE is already present, so the learning curve necessary to generate value is not very difficult to be achieved.

The benefits that GE is more likely to achieve are in the power business, especially regarding the production of clean energy. Indeed, the demand of pollution-free energy is likely to increase in the near future, especially from Asian countries like China or India. Thus the acquisition has taken place in an opportune moment in terms of industry cycle and given the huge scale that the company is going to put in place, it will be able to largely satisfy the future demand.

According to estimates provided by GE, the cost synergies opportunities that the company is expected to generate is about $1.2 billion within 2020 (see graph below for a more articulated analysis), a $4 billion increase in operating profits by 2018 and an EPS increase of $.04-.06 within 1 year.

 Another relevant factor is the past success in dealing with acquisitions of France and European companies. Among them we remember Jenbacher, an Austrian company that has been the cornerstone of GE’ global distributed power business and that under GE’s control has increased revenues 3x times. This success ranges also from various industries, not only in the power sector, ensuring that the post-merger integration phase will be conducted appropriately by GE given the previously developed skills.

 What are the Challenges ?

 Although the deal has a huge potential to be very successful, it is not immune to risk. The first important point that GE should be aware of is the strength of the France unions in the context of the France labor market. Any time it will take decisions regarding the firing or the reconversion of the France labor force may be very difficult to be implemented (or may be implemented at higher costs than in other countries of the world).

Another risk factor is the large amount of transactions costs that will be present as soon as the deal will be completed. They mainly derive from the terms of the deal, which require the constitution of three Joint Ventures that were not present in the first bid by GE. Thus, GE will face much more pressure in generating profits given the larger cost structure.

 Figure 2Source: Author’s elaboration on company’s data

Conclusion

 The deal has high chances to turn to be very successful and may be considered as a game changer in the industry. Although the initial terms had to be modified by GE due to the competition that arose from Siemens-Mitsubishi, the benefits are both large and concrete, and very likely to be monetized in the short-term. This is also related to the nature of the estimated synergies. Indeed, they are of the cost-saving type, which have a higher probability to be achieved compared to the growth ones. However, challenges arise from the institutional environment that surrounds GE’s activities in France, where the power of unions is very high as well as the high amount of transactions costs that arose in order to positively conclude the deal.

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Gianmarco Bonaita is a Double Degree student of PGP coming from Bocconi University. He completed his undergraduate degree in Business Administration and Management at Bocconi University. He has been elected city councilman and has worked as a collaborator of journal for 3 months. He has had an internship in an Italian SME. He is passionate about travelling, skiing and photography.

Twin upstarts from Fortazela – A sign of the times to come?

“International governance structures designed within a different power configuration show increasingly evident signs of losing legitimacy and effectiveness”

– Official statement signed by the BRICS leaders

On July 15, 2014, the BRIC countries announced the formation of twin financial institutions at the Fortaleza summit – the New Development Bank (NDB) and the Contingent Reserve Arrangement (CRA). The announcement has been variously received with gushing optimism about the changing world order to cautious questioning of the feasibility of the bank. Considering the wide disparity in reactions, it is instructive to understand the structure, the motivation for setting up and the implications of this newly minted multilateral institution which is being hailed by many as the sign of the times to come.

The “What”

The New Development Bank adds on to the burgeoning list of development banks internationally – a 2009 study from the Association of Development Financing Institutions in Asia and the Pacific estimated that there were 550 development banks in the world.  The NDB (having a $50Bn paid-in capital) aims to fund infrastructure and sustainable development projects while the CRA is $100bn swap line that gives each country an access to emergency supply of paid-in capital. While the initial capital for NDB is being contributed equally by each of founder member countries ($10Bn each), the CRA will have a different set of contributions from each country.

Figure 1

Fig: Initial contributions, Source: Reuters, Government of Brazil

Though the NDB in a section of commentary has been hailed as a possible alternative to the Bretton Woods institutions (World Bank and IMF), its initial capital base is lower than many of the existing multilateral banks.

Figure 2

Source: Market Realist

The bank has been structured to be open to new membership with a caveat that the founding members will hold a minimum of 55% of the voting power all the time. After much last wrangling, the BRICS decided that the bank be based out of Shanghai and while India will preside over the operations for the first five years, followed by Brazil and then Russia.

Why was it set up?

The setting up of NDB has been read as a first step towards the assertion of greater power by the developing countries and towards the breaking of dollar dominance. The NDB is the result of dissatisfaction with the current west-dominated international financial system which has not reflected the rise of the developing countries. For instance, the voting rights in the IMF for the BRICS countries are completely incongruent to the economic heft and the population of these countries.

Figure 3

Source: Financial Times

There also has been particular frustration in the style of operation of the global multilateral institutions such as the World Bank and IMF which attach sometimes unsuited and unreasonable requirements to the loans and assistance they offer. More often than not, privatization of resources is insisted which results in lucrative contracts for private companies, which are mostly based out of the west. Additionally, the perceived hypocrisy of these institutions while imposing harsh austerity measures on Asian countries after the Asian currency crisis and the acceptance of the lax stance of the European countries after the global financial crisis, served to heighten the antagonism among the developing countries towards these institutions. A more immediate trigger came in the form of rapid exodus of capital from emerging markets triggered in 2013 due to scaling back of the expansionary monetary policy in the US which highlighted the perils of over-dependence on the dollar and monetary policy of the US Fed.

Why does it matter?

The coming together of the BRICS countries to negotiate as significant multilateral institution points to the growing maturity of the bloc. This can be heralded as the v2.0 of the BRICS grouping – a shift from the being a convenient grouping of countries for investors towards tangible institution development. The impact of such a bank can be analysed with respect to 2 dimensions:

  • Global power shifts – The development of a NDB and CRA signals the viability of cooperation among the BRICS countries to come up alternatives if their demands for greater share of authority are not met. As an example, the draft IMF reforms for increasing the vote share of the BRICS countries agreed upon in 2010 is stuck in the US congressional process with no signs of any breakthrough. Furthermore, the CRA mechanism is designed to help the BRICS countries to lessen their dependence on the US Fed and the dollar.
  • Funding for developing countries – According to the World Bank, there exists a $1 Trillion funding gap for infrastructure in developing countries. In this context the NDB will provide an attractive alternative for other developing countries to acquire funds from other than western dominated multilateral institutions. The fact that a BRICS bank aims to make electricity, transport, telecommunications, and water/sewage a priority is important; the demand for infrastructure is expected to grow sharply as more countries transition out of low-income status. In terms of scale, after a couple of decades, if the membership expands along with mobilization of government financing and private funds—the BRICS Bank loans could dwarf World Bank loans. This type of success has been seen with the CAF, which now funds more infrastructure in Latin America than the World Bank and the Inter-American Development Bank combined. Over the long run, this might result in a reduced loan portfolio and consequently lower policy influence of current dominant institutions such as the World Bank. However, for the foreseeable future, given the huge demand-supply gap for financing, NDB will play a complementary role rather than supplementary one. This realization is reflected even in the official responses of the World Bank and IMF, which have welcomed the creation of NDB and CRA.

There are however several potential pitfalls for the success of NDB and CRA. The fairly heterogeneous composition of the BRICS setup – varying from quasi-dictatorial style of functioning of raucous democracy – will impose challenges in reconciling the negotiations to a common set of outcomes acceptable to all. This was already exhibited in the way the first set of decisions on headquarter location and the presidency were taken – at the last moment. Furthermore the range of scale of economies – China’s economy is almost 24 times the size of South Africa’s economy will put strain on the “democratic” nature of the institutions with China naturally wanting to impose itself.  China needs to resist overwhelming the institutions for its own advantage, in order to secure support from players such as India and Brazil.

The institutions born at Fortazela, have the potential to be harbingers of the needed change in the western dominated world of international finance. However, it will take patience and extraordinary maturity on the part of the BRICS nations for these institutions to fulfil their potential.