HAVELLS-SYLVENIA ACQUISITION
A Term Project
Submitted in partial fulfilment of the
requirements for the award of the degree
of
MASTER OF BUSINESS ADMINISTRATION
In
Strategic Management
By
Priya Aggarwal
Puneet Murarka
Achal Jain
Bhanu Rana
Tapmi School Of Business
MANIPAL UNIVERSITY JAIPUR
JAIPUR-303007 RAJASTHAN, INDIA
May/2014
Table of content
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
N.
O.
Economic environmental setting of the industry
Business reasons for the strategy
The strategy
Internal analysis of the firm
Industry analysis
Initial reaction to the strategy
Value creation
strategy history
Comparison with earlier strategies of the firm
Comparison to other strategic moves made by major competitors
Impact of strategy on the firms financial performance
Impact of the strategy on industry structure
Subsequent performance and appraisal of the strategy
Looking ahead
Drawing some conclusions
A.
ECONOMIC
ENVIRONMENTAL
SETTING
OF
THE
INDUSTRY
1.
Important characteristics of the industry.
2.
Challenges faced by the industry over the 5 years prior to the strategy.
1. Shrinking Operating Margins
Global competition and new innovations are driving prices down. Companies must continually
become more cost-efficient to remain profitable.
2. Complex Global Supply-Chain
More and more, companies are having to juggle internal and external resources while staying
within international standards. Issues such as traceability and compliance are increasing
operational burdens. It is not unusual for components and sub-components to embark on a
journey that touches three or more continents before reaching the end-consumer.
3. Service and Warranty Management
Leveraging the global supply-chain is putting more focus on supplier quality management.
Having a strong quality and traceability system directly affects warranty reserve and postproduction service hours.
4. Short Product Lifecycles
With quickly changing consumer tastes and preferences, EMS companies and contract
manufacturers need to have effective New Product Introduction (NPI) processes in place.
Closed-loop communication between sales, manufacturing, and engineering is vital to ensure
product launches hit time, volume, and quality targets.
5. Uncertain Demand
Aggregately, economic volatility and cyclical demand cause fluctuations in production. On a
more granular level, consumer preference can cause spikes in demand for an individual product
or company. Efficient lean capabilities must be in place to keep inventory aligned with demand.
6. Sustainability
Emerging regulations and standards are forcing companies to account more and more for
Corporate Social Responsibility (CSR) in decisions. E-Waste, a popular topic today, is driving
conversations about the disposal of products and their impact on the environment. Companies
must now consider of the complete product lifecycle in decisions.
3.
Industry trends, prior to the strategy.
With a greater environmental awareness about green future, the Electronics and Electrical
goods industry is witnessing increasing demand for energy-saving appliances and energyefficient electrical goods from the Consumer and Industrial sectors. In addition, the rising energy
costs have led to the demand for energy-efficient products, thus making the Electronics and
Electrical goods industry a multi-billion dollar market. The players in this market are likely to
seize a good market share by providing various energy-efficient electronic products. Government
regulations and initiatives toward environmental consideration will further drive the demand for
energy-efficient electrical products.
This industry is also witnessing consolidation such as foreign collaborations and mergers and
acquisitions. Thus, a new wave of industrialization is offering several business opportunities for
the Electronics and Electrical goods market players. Other trends such as globalization,
technological advancements, and product proliferation will lead to increase in the growth of this
industry.
4.
Outlook for the industry over next 5-10 years at of time of
strategy.
Developing diverse product lines for one stop shopping for customers
Developing effective and cost-efficient supply chain processes with trading partners
Working closely with partners to conceive and develop products that will allow expansion into
new market segments
Coordinating all departments for speedy NPI and ensured customer service design,
procurement, production, distribution, and customer-facing sales and service
Recognizing and notifying all departments and partners of changes in market demand to ensure
speed of response
Creating smooth new product ramp-ups and obsolete product phase-outs
End-to-end inventory management to minimize both obsolescence and stock-outs
Book and ship within 24 hours based on high-yield, flexible production, or efficient distribution
Demand-driven replenishment based on vendor managed inventory (VMI)
Collaborative demand planning and sourcing among departments and trading partners
Accurate, responsive worldwide distribution networks
Contract-based procurement, order and billing management to ensure each supplier and
customer and is treated appropriately and shares risk as agreed
Analysis of sourcing and BOMs for compliance, with recertification of suppliers
Managing supplier certificates and proper lot handling and tracking
Redesigning products to eliminate hazardous materials and make them easy to disassemble and
sort into component materials for recycling
Tracking potentially hazardous components across the supply chain
Sorting and labeling inbound materials into compliant and non-compliant stock and ensuring
each group is used only for shipments to appropriate regions
Ensuring manufacturing operations are in compliance with all regulations at all times
Companies that supply the consumer electronics and appliance industry face a need for extreme
speed. The critical success factors for this industry are changing rapidly, and companies must
move at least as fast as their product lines change. While many companies in the segment still
use disconnected and piecemeal systems or spreadsheets, the complexity of regulations, supply
chains,and short product lifecycles makes this an obsolete practice. To gain customers and
cement a place in the consumer market, companies must have integrated enterprise-wide systems
that allow them and their global supply and distribution networks to react quickly and be in a
position to set trends.
5.
Economic and legal
conditions of
firm and industry in their or
respective countries Socio-Eco context of the strategy
What are the objectives (long term and short term) of the firm?
MAINTAIN STRONG OPERATING EXCELLENCE
Our commitment to operating excellence guides everything we do it always will. Continuous
improvement in safety, environmental stewardship and cost efficiency is a fundamental
requirement for our company and employees. We employ rigorous training and audit programs
to drive ongoing improvement in both personal and process safety as we strive for zero incidents.
We are committed to protecting the environment and continually seek to reduce our
environmental footprint throughout our operations.
Deliver Profitable Growth
Manufacturing and logistics capacity expansions in Chemicals and Midstream have the potential
to deliver significant growth in earnings and free cash flow. Over the next few years, our
Chemicals joint venture, CPChem, plans to reinvest the majority of its net income to build
additional processing capacity that benefits from lower-cost NGL feedstocks. The need for
additional new gathering and processing, pipeline, storage and distribution infrastructure
driven by growing domestic unconventional crude oil, NGL and natural gas production is
creating capital investment opportunities in our Midstream business.
ENHANCE RETURNS ON CAPITAL
We intend to increase ROCE and capital efficiency through greater use of advantaged
feedstocks, a disciplined capital allocation process and portfolio optimization. By processing
lower-cost crude oil and NGL feedstocks, we have improved our gross margins and returns on
capital in Refining and Chemicals. We also expect to drive higher returns by selling finished
products to higher-margin export markets. A disciplined and rigorous capital allocation process
ensures that we focus investments into projects that generate competitive ROCE throughout the
business cycle. We anticipate our portfolio to shift to higher growth and returns businesses as we
redirect capital to our Chemicals, Midstream, and Marketing and Specialties segments and
reduce Refining exposure in regions that generate below-average returns.
GROW SHAREHOLDER DISTRIBUTIONS
We believe shareholder value is created through consistent and ongoing growth of regular
dividends, supplemented by share repurchases. Regular dividends demonstrate the confidence
our management has in the companys capital structure and its capability to generate free cash
flow throughout the business cycle. At the discretion of our board of directors, we plan to
increase dividends annually and fund a share repurchase program while continuing to invest in
the growth of our business.
BUILD A HIGH-PERFORMING ORGANIZATION
Our success is primarily attributed to the contributions of our talented global workforce. We
provide a great place to work where employees can reach their fullest potential, thrive on
delivering results and create shareholder value through individual, team and organization
success. We foster an achievement-based culture that drives accountability and meritocracy
while investing in learning and development.
Havells Objectives
Reduce CO2 emissions
Develop and manufacture energy efficient products
Improve environmental protection
Reduce hazardous substances and improve waste management
Improve quality of life
Create sense of well-being with a superior quality of light
Offer profitable solutions to market Better efficiency, sustainability and longer product life
B.
BUSINESS REASONS FOR THE STRATEGY
1.
Reasons provided by the company stated in SEBI /REGISTRAR OF COMPANIES
or other statutory institutions and Companys documents, filings, annual reports,
and announcements of the transaction.
Ans: The proposed acquisition makes sense for the following reasons: The acquisition of
Sylvania will give Havells access to the wide marketing networks of SLI. It will serve as a good
channel for marketing Havells products in Europe Access to the R&D and engineering
capabilities of SLI Ownership of various brands of Sylvania: Sylvania, Zenith, Linolite,
Claude, Concord and Marlin Exposure to lighting and lighting fixtures segment, as Sylvania
was primarily engaged in this segment whereas Havells had a small presence in the lighting
market.
Fixing Sylvania was their best bet, he reckoned, and the only opportunity to become an
international player
2 reasons in financial press
When electrical goods company Havells acquired Sylvania in 2007, all that it was looking for
was growth and a strong global presence.
SLI was then the world's fourth-largest lighting company and 1.5 times bigger than Havells. It
took Gupta minutes to make up his mind about buying it,
Qimat Rai was betting on Sylvania's strong 100-year-old brand in about 50 countries, and its
worldwide network of 10,000 distributors and dealers. "My father said we would not be able to
replicate these two things," says Anil.
Their was Havells first overseas acquisition.
By 2007, the business reached a turning point. Its technology partner for lighting, global
lightings major Sylvania, was struggling, and about to be sold to finance its parent companys
expansion into mobile telephony.
At that time, the worlds lighting market was dominated by four players - Sylvania, GE, Philips
and Osram, each of whom had roughly a quarter of the market. With an outright takeover by any
one of the other three likely to run afoul of competition laws in different markets, the company
was split into two. Havells decided to acquire the Europe, Asia and South America rights to the
company for 227 million, while the North American operations were bought by German
lighting major Osram.
Havells in 2007 created history by acquiring worlds renowned lighting company Sylvania thus
registering itself amongst top 4 lighting companies in the world
3) What is the vision and mission of the firm? Give your comments in terms of its
appropriateness
Vision
"To be a globally recognized corporation that provides best electrical & lighting solutions,
delivered by best-in-class people."
Mission
To achieve our vision through fairness, business ethics, global reach, technological expertise,
building long term relationships with all our associates, customers, partners, and employees
C.
THE STRATEGY
1.
How did this particular strategy fit into the broad objectives of the firm?
The main objective of the particular Sylvenia acquisition was to make the Havells brand global
leveraging the Sylvenia brand in 50 countries across 20000 dealers.By acquiring Sylvenias
technology,Havells reached operational excellence and diversified their product line further into
lighting and hope appliances.They wished to become one of the top leading consumable
electrical goods company in the world.
2.
Was the strategy related or unrelated to the existing operations of the firm?
Discuss the exact type of strategy of the firm. Has the firm ever invested in this
industry?
The strategy was unrelated. The exact type of the strategy was
Inorganic-International-Unrelated-Diversification
The mid 1990s was one of the most difficult times for the electronics industy.The liberalization
policy of the Indian Government triggered a wave of entrants from both well reputed
multinational corporations as well as generic imports from China.Havells any many other
companies were being challenged on the low end by Chinese exports and on th high due to
European imports.So Havells knew to grow they had to diversify into new businesses and as
Sylvenia was the leading consumer electrical company with a global presence,it made sense to
Havells to acquire the company even though it was 1.5 times the size of Havells.
D.
INDUSTRY ANALYSIS
1) Rivalry amongst competitors
low
a. No of competitors
large
b.
slow
Industry growth
12345
high
small
4
fast
c. Fixed cost
high
low
d. Differentiation
high
low
e. Switching cost
low
high
f. Openness of terms and
secret
open
sales
g. Excess capacity
low
Avg:
high
2.7
2) Barriers to exit
a. Asset specialization
high
low
b. Cost of exit
high
low
c. Govt restriction
high
Avg
low
2.3
3) Barriers to entry
a. Economies of scale
small
large
b. Product differentiation
low
high
c. Brand identity
low
high
d. Switching cost
low
high
e. Access to channel
easy
f. Capital requirement
small
g. Access to tech
easy
restricted
h. Access to RM
easy
hard
i. Govt protection
high
Avg:
limited
4
large
low
3.1
4) Threat from substitute product
a. Availability of substitute
high
low
b. Switching cost
low
high
c. Substitute price value
better
weak
low
d. Profitability of the products high
of the Substitute value
avg:
5) Bargaining power of buyers
a. No of buyers
small
b. Availability of substitute
many
less
c. Switching cost
low
high
d. Buyers threat to backward
high
integrate
large
low
e. Industry threat to backward low
high
integrate
f. Contribution to quality
low
g. Contri to cost
high
h. Buyers profitability
low
Avg:
high
low
high
3.6
6) Bargaining power of suppliers
a. No of suppliers
small
large
b. Availability of substitute
few 1
c. Switching cost
high
low
d. Suppliers threat to forward
high
low
many
integrate
e. Industry threat to forward
low
high
integrate
f. Contribution to quality
high
g. Contri to cost
low
high
h. Industry imp to supplier
low
high
Avg:
low
2.5
Overall industry attractiveness
low
12345
1) Rivalry amongst competitors
2.7
2) Carriers to exit
2.3
3) Barriers to entry
3.1
4) Threat from substitute product
5) Bargaining power of buyers
3.6
6) Bargaining power of suppliers
2.5
Avg
3.03
high
E) INTERNAL ANALYSIS OF THE FIRM
1.
Describe strengths of the firm.
Global Footprints Domestic Leadership
Expanded global reach through Sylvania acquisition in 2007
Presence across 5 continents, 50 countries with 94 branches and over 5000 professionals
Manufacturing facilities spread across India, Europe and Latin America
Consistent outperformer in domestic business, stabilizing international business
Consistent value creation
Organic growth led by gaining market share in existing products, launch of new branded,
consumer products
Significant brand emphasis to create a strong differentiator with FMCG like packaging,
promotions and advertisements
Consumer pull evenly matched with a well entrenched distribution network
High RoCE and RoE creating shareholder value
Buoyant end user segments
Infrastructure, power and construction key user segments
Significant investment planned with greater focus on infrastructure development
Large investment in real estate and power sectors
Structural changes in the underlying buying patterns
Distinctive shift from un-organised to organized segment
Increased brand awareness for hitherto commoditised products wires and cables
Growing protection awareness
Increasing affordability and willingness to pay for quality products Large opportunities for
quality, branded and well distributed product companies like Havells
Product Leadership Widest range Amongst Top 3- Gained
market share in the last 3 years
Domestic Switchgears
Market Size ~INR 12,000 mn
Competitors Position - Mkt Share
HAVELLS ~ 20%
Industrial Switchgears
Market Size ~INR 20,000 mn
HAVELLS ~8%
(7% IN 2006)
Electrical Wire Accessories
Market Size ~INR 10,000 mn
CRABTREE HAVELLS ~11%
(8% IN 2006)
Power Cables
Market Size ~INR 80,000 mn
HAVELLS ~ 8%
Wire
Market Size ~INR 40,000 mn
HAVELLS ~ 9%
(6% IN 2006)
Polycab
Energy Savings LampMarket Size ~ INR 10,000 mn
HAVELLS ~ 9%
Luminaries
Market size ~ INR 20,000 mn
HAVELLS ~ 10%
Fans
Market Size ~ INR 20,000 mn
HAVELLS ~ 14%
(6% IN 2006)
Well entrenched brand and distribution network
Brand focussed approach on FMCG lines adapted in packaging, media spends, one-stop
electrical shops
Consumer pull through branding ably matched with a strong dealer network
Significant focus on dealer relationship and management - a key trait instilled by Chairman
(himself being a dealer in the past)
The entire sales transacted through dealers ensuring their commitment and entrepreneurial push
The widest product range providing a larger share of dealer shelf space and a greater control
over him
Continue to focus on deeper distribution penetration and stronger brand awareness
West 16%
South 31%
North 33%
East - 20%
Expanding margins
Margin expansion in last 5 years driven by
Price disciplining- rationalisation of discount structure
Value engineering to reduce product costs
Economies of scale through large scale manufacturing at single sites
Brand investments creating consumer pull and de-commoditising products for price premium
Expect margins to sustain
Reducing lead time to pass on cost increase in
cables business
Rigorous working capital management
Continued brand investments to maintain price
premium with customers and discipline with
dealers
Launch product variants with value add features
Comfortable leverage and liquidity position
Debt free balance sheet with negative working capital
Capex to increase capacity in existing products FY 10 bunching effect, FY 11 regular
maintenance capex of Rs 500-700 mn
Capex being funded through internal cash generation
Investment in Sylvania acquisition largely funded through equity issue. Outstanding recourse
debt of Rs 1183 million
If non-recourse debt of Rs 8710 million included, leverage stands at 1:1
Focussed promoter group
Promoted by QRG, the current Chairman, himself an electrical dealer, in 1971
Promoter Group owns 60% shareholding
Single business focus since inception
Capital conservative : never issued capital since public issue in 1993 except to CLSA and for
Sylvania acquisition
Issued shares to Warburg Pincus for USD 110 mn in 2008 who now owns 14.5% in the
company
Havells is well positioned for growth in domestic markets through a stronger brand, distribution
network and vast product range
Sylvania would be cost competitive through current restructuring and presents a good platform
for
electrical products having a strong brand lineage and distribution network across Europe and
Americas
Havells has robust cash flows and comfortable leverage to meet its planned capital expenditure
for medium term
The economic environment including the thrust on infrastructure and upturn in real estate
markets augur well for Havells end user markets
Havells provides an attractive play on branded, electrical products industry in India with a
niche brand portfolio in international markets
2.
Describe the weaknesses of the firm and how the firm has dealt with it?
High Debt ratio Large Debt Deal was expected to cost more than $200million Came up to
300million bid price Globally small market share Slowdown of real estate Slowdown in global
markets will effect moreadversely after a series of acquisitions
Integration difficulties differences in managerial practices and culture Too Large Sylvania was
almost
1.5
times
Firstoverseasacquisition
that
Lacked
of
Havells
formal
in
M&A
size
personnel
Inadequate evaluation of target fast bidding process where Havells had little time to think ahead.
Inability to achieve synergy
How to manage?
Integration difficulties Conduct training programs for employees so that collective strength are
leveraged
Study
towards
shared
cultures
vision
and
seriously
developing
deep
and
symbiotic
relationship.
comprehensively.
Project Prakram (enhanced management participation by Havells) Too Large Restructuring to
gain profitability by pushing market positions and to leverage the Sylvania brand
Project Phoenix and Project Prakram
The CEO and three other key executives were removed even as Anil took charge of Europe and
Ameet of Asia and the Americas. They shifted five senior executives from India for threefour
months, and appointed their own CFO
Sylvanias problem was that sales had shrunk and plants operated at half the capacity even as
costs remained high. Layoffs in Europe and the Americas were central to restructuring plans.
the economic recession was claiming victims everywhere.Since the retrenchment was spread
over eight-ten countries with different rules and regulation, Havells engaged a European law firm
to help navigate in each country. The strategy was to convince the local management of the need
to restructure and then let them take chargeThe operations heads were largely left untouched. In
technical areas like supply chain etc.,
3.
How the strategy was financed?
Deal Details:The merger of Sylvania into Havells was a complete merger so that South
American, European and Asian divisions of Sylvania LLC were incorporated into Havells.
Havells Sylvenia is the entity after merger headquatered in India (Noida) and London. The actual
acquisition was undertaken by Havells Netherlands B.V. which was the step subsidiary of
Havells but was not incorporated as such in Europe. Havells Netherlands had been disclosed as a
step-subsidiary of Havells in EU FTC filings. This was most probably a shell company
incorporated for tax purposes. (The actual ownership has not been declared by Havells or
Sylvania).Havells Netherlands B.V. then acquired Sylvania LLC in all three geographies. The
debt recourse of 120mm of the term debt was aimed at this Havells Netherlands B.V with
80mm in recourse to Havells India Pvt. Ltd. This was renamed as Havells-Sylvania. After the
restructuring program, Havells Sylvania was merged into Havells India Pvt. Limited with no
separate existence. Havells- Sylvania now remains as the only entity with two separate brand
names Havells and Sylvania. Indirect subsidiary (step owned) Havells India Havells
Netherlands B.V. Acquired Sylavnias three divisions Sylvania LLC (Europe, South America
and Carribean) Merger of equals Merged After restructuring, Havells India and Havells Sylvania
were merged into one entity Havells - Sylvania (subsidiary of Havells India Ltd.)
Deal Structure:
Sylvanias lighting business was acquired by Havells in April, 2007 for a total consideration of
227mn (8.4x FY08 EV/EBIDTA) financed entirely with debt of 200mn. Additionally, there
were pension liabilities worth 27mn in the books of Sylvania.Out of the total debt 80mn was
with recourse to Havells, which was funded by bridge loan of 50mn and term loan of 30mn.
Bridge loan of 50mn was repayable in 18 months. The company repaid this bridgeloan through
the proceeds of private placement to Warburg PincusGroup Company (Seacrest Investment Ltd).
Term loan of 30mn was repayable in 9 semi annual payments of 3.3mn each from April08April12. Remaining 120mn of the total debt of 200mn was in the form of 80mn in term loan
while 40mn as revolver facility. The company repaid 4m of the term loan facility in 2008.
However, debt covenants for the remaining payments of term loan had to be restructured as
severe global financial crisis hit the performance of the companysharply. Under the new
agreement, payments were differed till 2013 and the company will pay 12mn/12mn/52mn in
CY11/CY12/CY13. The revolver loan of 40m has to be repaid in bullet payment in April12. 13
Warburg Private Placement:
Havells issued 4.1m equity shares to Warbug Pincus at Rs625/share, aggregating to Rs2.6b,
which it used to repay a bridge loan of EUR50m that it had taken for the acquisition. This allows
it to issue USD110m new equity which diluted existing shareholders by 11.2%. Seacrest
Investment Ltd, a Warburg Pincus group company, has agreed to invest the above amount. Issue
details: 4.16m equity shares of INR5 each at a price of INR625 per share aggregating to
INR2.6bn 2.6m warrants at INR690 per warrant aggregating to INR1.8bn on a preferential
allotment basis Key pointers of Warbug investment: High valuation: The company has
received higher valuation than prevailing trading comps,which is positive. Debt repayment:
The company paid a bridge loan of USD65m which was raised for Sylvania acquisition
Finance capex: Around US$45m has been raised to fund the capacity expansion in India, which
was used to cater to increasing demand, and eventually shift the manufacturing base of Sylvania
to India.
4.
Using VRIO Model, identify the sustainable competitive advantage of the firm
Quality in Services
We believe that providing good-quality products is incomplete without offering an equally
premiumquality
of after-sales service. Superior after sales service allows to forge long-term relationships with
customers and serves as a continuous feedback mechanism. With this objective, we were the first
Company in the Indian electrical industry to offer comprehensive doorstep services to customers
through our initiative Havells Connect. Dedicated
toll-free helplines enable service-seekers to connect with Havells call-centre, which is currently
run in 9 Indian languages.
Product Quality
We define quality of products in terms of durability,reliability, aesthetics and finishing. We have,
since our inception, focused on providing supreme quality across our product categories. Our
products undergo several stages of stress and durability tests before reaching the market. A
unique Vendor Management System enables us to work closely with our suppliers and ensures
material-quality. We are also constantly looking for better alternatives to continually improve
productquality. This has helped us in sustaining our USP of providing high-quality products to
our customers.
Today, our products set quality benchmarks in the industry.
Energy-efficiency
Our third major priority area is energy-efficiency. We realise that we operate in an environment
where energy-conservation is critical to ensure energysecurity of the nation. Drawing more
electricity from the grid will mean burning more fossil-fuels for power-generation and, in turn,
an increase in GHG (green-house gas) emissions. Over the
years, we have taken a conscious decision to steer clear of manufacturing and marketing
inefficient technologies. In this regard, we did not enter into the manufacturing of the
incandescent bulbs and inefficient fluorescent lights, instead setting up a CFL manufacturing
plant at Neemrana in India. Since then we have also ventured into the
manufacturing of LED lights and energy-efficient range of motors.
Entering new markets
In 2012, we ventured into the home appliances market in India. The sector is expected to grow
and we expect to get benefit from the Havells brand which has huge acceptance in the market.
We have decided to invest further in marketing, research and development in this segment over
the next two t three years.
Reo the revolutionary
game-changer
In 2012, we also launched our breakthrough product, Reo switches. The switches have been
introduced to capture the growing demand for piano switches in tier II and III cities in India.
Priced for the entry-level category of non-modular switches, Reo will provide the same quality,
durability, safety, and service as promised by all Havells products. Through our dedicated efforts
in product innovation and after-sales services, we have emerged as
market leaders in various product categories, enjoying high-level of customer-satisfaction with a
strong support from our channel partners.
Havells introduced Indias first energy-efficient ceiling fans, indigenously designed by the R&D
team. The innovation won the National Energy-Conservation Award three times in a row from
2009 to 2011. Consuming only 50 watts of electricity, the ES-50 model is among the largestselling energy-saving fans in India.
Our workforce
As on 31 March, 2013, 2041 employees were on our company payroll at the Head Office and at
our manufacturing locations. During the year, 569710 contractual labourers were employed
across our manufacturing plants.
10 Consolidated data based on 12-month average across seven plant sites.
F. INITIAL REACTION TO THE STRATEGY
1.
Stock market reaction (describe reasons, if any, behind sharp rises or declines in the
equity
prices upon announcement of the strategy).
After the acquisition and onset of Global Financial Crisis in 2008, this management proved to be
a hindrance in restructuring of Sylvania. Declining sales of Sylvania post merger and Corporate
restructuring programe: As the meltdown rocked European markets, Sylvania's sales fell, leading
to net losses of Euro 16.3 million in 2008/09 and Euro 26.1 million in 2009/10. From Euro 515
million in 2007/08, revenues dropped to Euro 438.4 million in two years. 15The global financial
crisis led to the slowdown in the consumption and construction activities in the key geographies
of Sylvania. Decline in demand coupled with high fixed cost structure resulted in sharp declineof
EBIDTA by 58.8% in FY09 and loss in FY10 at operating level. Falling operating efficiency of
Sylvania though Havells on a standalone basis remained performing: Sylvania recorded a
revenue decline of 8% (in EUR terms), with EBITDA margin of 4.4% (+440bp YoY). HAVL
spent Rs2bn on restructuring to lower operational costs at Sylvania. It closed the lossmaking
plants and reduced workforce. The benefits of these steps reflected in FY11 EBITDA which
increased to Rs2.1bn (margin of 7.8%) in FY11 from Rs192m in FY10 (margin of 0.6%).
2.
Security analysts reactions.
Covenant breach in Sept. 2008 and demand for an asset sale by lenders to recover outstanding
loans In September 2008, Sylvania's bankers, led by Barclays Capital, hit the panic button as the
company breached its covenants . Havells has raised EUR200m for the acquisition of Sylvania of
which EUR120m is recourse to its balance sheet. Sylvanias balance sheet had EUR110m-115m
in receivables. Management indicated that it would sell Sylvanias receivables (factoring) and
pay back part of the outstanding debt. This will lower debt to equity ratio and improve balance
sheet. The net debt-equity stood at 1.1x, for the consolidated entity The banks agreed only to a
twomonth deferral of repayment of loans, helping Havells with a Euro 24-million cushion for
that period.
3.
Financial press ( Business Week, Forbes, Economic Times, Financial Express,
Business News channel reporting etc.) reactions.
Will the Guptas be able to pull this off? The Havells Sylvania merger is complex. It involves
too many transitions at the same time, says Smith. A first-generation 73-year-old entrepreneur
passing on the baton to his son; a company gobbling another that is far bigger than itself; and all
this even as it tries to globalize. Typically a company does one-two of those things at a time. So
many things at the same timeat least I havent seen it, he says.
Besides, Sylvania and Havells are like chalk and cheese. The former is steeped in a slow, stable,
structured world of processes and hierarchies. The latter is an entrepreneurial powerhouse that is
flexible, ambitious and aggressive, leaning heavily on gut feel. But Havells lacks the managerial
bandwidth to handle Sylvania.
Yet, early signs are encouraging. On a recent Tuesday, a business unit wanted to make a euro
75,000 marketing investment. Three years ago it would have taken Sylvania a month to approve
that. We made the decision in 10 minutes. They talked to me. I set up a call with the COO and
all the country managers and the decision was taken. Thats Havells culture. Leaders are highly
interactive. There is always a sense of urgency hard to miss, says Smith.
Things are changing but it will not be easy. There is tremendous discomfort [about the new way
of working]. But there is a critical mass that has become comfortable, he adds. But there is no
denying that this transition will take several years.
Havells has become an MNC overnight with a presence in 50 plus countries. While absence of
structures and processes bring agility, it will also bring chaos as the company scales up.
Havells is aware of that. The CFO, Rajesh Gupta, says they initiated a program on risk
management where every Havells employee was asked to list the risk they see the organization
faces. They compiled 600 such risks, which vary from operational procurement issues, HR and
accounts. The list is being tackled and is now down to 13. Procurement policies have been
overhauled, inspired by Sylvania systems. Checklists have been prepared for every step in the
procurement process. If there is a slip up at any point the system throws it up automatically.
Kuldeep Kumar Aggarwal, a Havells dealer, who does Rs. 60 crore worth of business annually
with Havells, says earlier he had to book orders manually. Now everything is automated.
Inventory can be checked, orders placed and tracked in real time on the Havells portal. Inspired
by Sylvania, they have created a central warehouse in Sahibabad in Ghazaiabad district, UP, to
facilitate this.
Nowhere is the challenge more acute then building a leadership pipeline. If we have to buy
Sylvania again we must have enough management bandwidth to manage it, says Anil. From
succession planning to grooming talent by exposing them to difficult assignmentsHavells is
tapping into both India and Sylvania staff for this. The good thing is they listen. And once they
realize it [the problems] they move very quickly, says Smith. Will they be able to maintain the
magic as they scale up and put in place structures and processes?
The answer will hold the key to Havells future.
This article appears in the August 27 issue of Forbes India, a Forbes Media licensee.
G) VALUECREATION
How did the company expect to create value?
Consistent value creation
Consistent profitable growth over the last 10 years 40%CAGR
Sales - 27x and PAT - 58x
30 quarters of consecutive growth*
10-year EBDITA and PAT CAGR in excess of 40%
Organic growth led by gaining market share in existing products, launch of new branded,
consumer products
Significant brand emphasis to create a strong differentiator with FMCG like packaging,
promotions and advertisements
Consumer pull evenly matched with a well entrenched distribution network
High RoCE and RoE creating shareholder value
Describe sources of value creation.
BrandPillars
Brand Focus Aggressive brand building initiative by patronizing cricket, high brand
visibility on mass media
. Indias Biggest Advertiser in Electrical Industry. over Rs.400cr Ad. Spends in the last
4 years.
Strong Brand Association with Cricket
New TV Commercials across Product Categories every year
First electrical co. to enter social media space
BrandInnovative
First in the Industry to create a Galaxy conceptretail initiative Galaxy - One Stop Shop
for Havells & Crabtree Products - 130 Galaxies opened in different cities - Target to
reach 200 by year end
First in the Industry to create a Havells World concept Retail initiative Havells World Unique Concept of Displaying Entire Havells Range in Wholesale Markets -Havells
World in Delhi & Mumbai
BrandMediaRecognition Gen Next The Hidden Leaders Business Today Among
Indias Most Valuable Companies Business Today Among Indias Most Investor
Friendly Company Business Today Among Top 20 Stocks for 2010 Dalal Street
Fastest Growing Electric Company Construction World Havells on 43rd position
among Top 1000 companies in India Business Standard Havells on 55th position
among Top 500 companies in India Industry 2.0
Manufacturing , R&D
Baddi Alwar Manufacturing (3 Units)Manufacturing Domestic Switchgear(2) Power
CablePlants -India Switches Wire 15 Plants
Neemrana Haridwar 8 Locations (4 Units) (2 Units) Motors Lighting -CFL -CMI
Lamps Fans - Fixtures
Sahibabad Sahibabad Industrial Capacitors Switchgear
Noida FaridabadManufacturing LightingPlants -India - Ballasts Industrial Switchgear
Haridwar 15 Plants (Standard) 8 Locations Domestic & Industrial Switchgear
Germany Belgium Manufacturing LampsManufacturing LampsPlants-Abroad U.K.
France 6 Plants Concord IC Fixtures 6 Locations Fixtures Costa Rica Columbia
Fluorescent tubes Fixtures Fixtures France. Paris Warehouse
R&D
QRG Tower NoidaWorld class
Plant R&D at Alwar, Faridabad, Baddi, Haridwar,NeemranaInfrastructure
Global R&D centre at Noida - Switchgear, Fans. Lighting, Cables
100+ Engineers
3 Quality
Delivering on our promises
Understand customers expectations
Understand perceived quality
Capitalise on quality No compromises on quality!
4 Service
All functions Critical Differentiator must be customer oriented
Product availability
Supply Chain Customer
Speed of delivery R&D Service
e-business Finance
After sales service Marketing
Was the desired value created? Describe.
HIL has gained market share across all the segments because of the value they bring to their
customers.The surge in market share is mainly attributed to a strong dealer network which helps
the company adopt a dealer push strategy. HIL has also been aggressively promoting its products
thereby increasing the brand recall. These two factors, we believe, would help the company
further increase its market share over the next few years
H) STRATEGY HISTORY
a. What was the earlier strategy of the firm?
Havells had a track record of five successful acquisitions, and high growth in its
Indian operations. o o o In 1983, it bought the loss-making Delhi-based Towers
and Transformers Ltd and turned it around in a year Between 1997 and 2001,
Havells also bought ECS, Duke Arnics Electronics and Standard Electricals
Established a 50:50 joint venture with UK-based Crabtree. Havells later acquired
Crabtree's stake in the JV in 2007 for a consideration of INR 2,100 crores.
b. Describe why the firm has to change its strategy?
The mid 1990s was one of the most difficult times for the electronics
industy.The liberalization policy of the Indian Government triggered a wave
of entrants from both well reputed multinational corporations as well as
generic imports from China.Havells any many other companies were being
challenged on the low end by Chinese exports and on th high due to European
imports.
c. Trace out the historical strategic moves of the firm for last two decades
I)
COMPARISON WITH EARLIER STRATEGIES OF THE FIRM
1.
How did this strategy compare to others, if any, made by the firm in last 10 years
with respect to size and results?
Current valuation 7248 crores
2.
Does this strategy break the strategic pattern of usual approach of the firm? Discuss
Yes earlier Havells used to only acquire companies dealing with motors,meters and cables.After
observing the industry trends they shifted to the international market acquiring firms of the same
nature.But in 2007,they broke their strategy pattern by acquiring sylvenia which was a lighting
manufacturer to diversify their business in lighting and to make a global presence by leveraging
sylvenias
network
of
50
countries
and
over
20000
dealers.
J)
.COMPARISON
TO
OTHER
STRATEGIC
MOVES
MADE
BY
MAJOR
COMPETITORS
1.
Select two or three key competitors of the firm and compare the recent strategic
moves (During last 2-10 years) of these companies to that of the selected firm.
1.Philips
Philips acquired companies like Amprex,Magnavox,Signetics,Mullard,VLSI,Agilent
Healthcare Solutions Group etc.Philips also believed in the external growth strategies just
like Havells and acquired diverse companies to expand their product line.
2.Osram
It has consistently expanded its global presence through acquisitions and joint ventures.It
was established by the merger of 3 organizations AEG,Siemens &HAlske AG.It took
over LCS from Siemens and did a series of acquisitions to have a presence worldwide.
2.
Is the purpose of strategy (size, type, and objectives) similar for each of the 2 or 3 major
firms studied? Do the competitors rely more on internal or external growth? If, yes why?
If not, discuss any differences.
Osram and Philips are similar to Havells in terms of size,type and objectives as all deal in
electrical and electronic equipment and consumer electrical goods.The competitiors rely
on external growth for expansion and global presence.Since liberalization laws have been
eased in most countries and globalization is key to success these companies rely on
acquisitions and mergers and joint ventures for their growth.
K) IMPACT OF STRATEGY ON THE FIRM FINANCIAL PERFORMANCE
CREDIT RATING
CARE
Credit Analysis & Research Limited (CARE) is a full service rating company that offers a wide
range of rating and grading services across sectors. CARE's Credit rating is an opinion on the
relative ability and willingness of an issuer to make timely payments on specific debt or related
obligations over the life of the instrument. CARE rates rupee denominated debt of Indian
companies and Indian subsidiaries of multinational companies.
During the year, CARE has reaffirmed the CARE A1+ [A One Plus] rating assigned to the shortterm facilities of your Company. This rating is applicable to facilities having a tenure upto one
year. Instruments with this rating are considered to have very strong degree of safety regarding
timely payment of financial obligations.
Further, CARE has also reaffirmed the rating of CARE AA [Double A] assigned to the long-term
facilities of your Company. This rating is applicable to facilities having tenure of more than one
year. Instruments with this rating are considered to have high degree of safety regarding timely
servicing of financial obligations.
L)
IMPACT OF THE STRATEGY ON INDUSTRY STRUCTURE
1. Was the firms announcement followed by other large strategic moves
in the same
industry? List these strategic moves and whether you
believe they were motivated or a result of the firms strategy under
study.
Beacon Electric Supply,* San Diego
Gexpro (IESCO), Dallas
Robson Electric Supply,* Johnson City, N.Y. Friedman Electric/Sonepar USA
ESSCO Wholesale Electric,* Chandler, Ariz. Sonepar USA, Philadelphia
Hagemeyer North American operations,*
Charleston, S.C.
Sonepar USA, Philadelphia
Total Supply Solutions
Anixter Inc., Glenview, Ill.
Eurofast SAS, Collegien, France
Anixter Inc., Glenview, Ill.
Minnesota Electric Supply Co., Willmar,
Minn.
US Electrical Services Inc. LLC, Exton, Pa.
McNaughton-McKay Electric Co., Madison
Heights, Mich.
Border States, Fargo, N.D.
Consolidated Electrical Distributors Inc., Westlake
Village, Calif.
ESOP
Hagemeyer, Naarden, Netherlands
Breva, Zonhoven, Belgium
These firms decided to acquire companies for forward intergartion and diversification as these
firms realized to keep pace with the changing trends in the electrical industry it was
imperitive to diversive or move forward.Some of these companies came in joint ventures
to cut costs and to increase productivity and share production.Some of these companies
leveraged the other brand to expand their customer base.
Do you believe the strategy under study will/had cause/caused more strategic moves in the
industry? Why or why not?
3.
What impact do you believe the strategy under study will have on the firms market
share, on firms competitive advantage, growth and profitability.
The acquisition would help them leverage new production bases for these products in India and
Brazil while premium products where Havells had no presence would be available for them in
Europe Vertical consolidation up the value chain: The acquisition of Sylvania would give
Havells a foothold in the fixtures and Energy efficient markets in Europe where they had no
earlier expertise and depended on imports from Europe itself even for the smaller market in
India. There will be a thrust on emerging technologies such as CFL and LED that address energy
and environmental issues . The European market for energy efficient lighting in Europe was
$930 million in 2007, of which CFLs alone were $883 million. This market is expected to touch
$1.6 billion by 2014, estimated Frost & Sullivan. Expansion strategy in new markets: With a
combined 2007-08 turnover of Rs 5,000crore (of which Rs 3,000crore is contributed by SLI
Sylvania) HavellsSylvania would become a serious contender in the $29 billion global lighting
market. This includes expansion and new business in Eastern Europe, Middle East, South
America and Asia. It also wanted to address the professional lighting business in a big way,
where Chinese products weren't a serious threat. Cheap valuation of a premium brand: The fact
that Sylvania was being offered at a modest premium of 5%-10% which virtually negated any
control premium for the proposed deal meant that Havells can aspire to undertake a debt funded
deal for a purchase consideration of US$ 300million at an initial target for US$60-70million. The
fact that Havells had a low gearing ratio of 14% (March 2006) meant that there was sufficient
financial headroom for the acquisition
M) SUBSEQUENT PERFORMANCE AND APPRAISAL OF THE STRATEGY
1.
Initial changes made after the strategy (e.g., layoffs, divestitures, changes
in management, leadership, structure, market, technology, customer orientation
etc.).
After the acquisition and onset of Global Financial Crisis in 2008, this management proved to be
a hindrance in restructuring of Sylvania. Declining sales of Sylvania post merger and Corporate
restructuring programe: As the meltdown rocked European markets, Sylvania's sales fell, leading
to net losses of Euro 16.3 million in 2008/09 and Euro 26.1 million in 2009/10. From Euro 515
million in 2007/08, revenues dropped to Euro 438.4 million in two years. 15The global financial
crisis led to the slowdown in the consumption and construction activities in the key geographies
of Sylvania. Decline in demand coupled with high fixed cost structure resulted in sharp declineof
EBIDTA by 58.8% in FY09 and loss in FY10 at operating level. Falling operating efficiency of
Sylvania though Havells on a standalone basis remained performing: Sylvania recorded a
revenue decline of 8% (in EUR terms), with EBITDA margin of 4.4% (+440bp YoY). HAVL
spent Rs2bn on restructuring to lower operational costs at Sylvania. It closed the lossmaking
plants and reduced workforce. The benefits of these steps reflected in FY11 EBITA which
increased to Rs2.1bn (margin of 7.8%) in FY11 from Rs192m in FY10 (margin of 0.6%).
Security analysts reactions.Covenant breach in Sept. 2008 and demand for an asset sale by
lenders to recover outstanding loans In September2008, Sylvania's bankers, led by Barclays
Capital, hit the panic button as the company breached its covenants . Havells has raised
EUR200m for the acquisition of Sylvania of which EUR120m is recourse to its balance sheet.
Sylvanias balance sheet had EUR110m-115m in receivables. Management indicated that it
would sell Sylvanias receivables (factoring) and pay back part of the outstanding debt. This will
lower debt to equity ratio and improve balance sheet. The net debt-equity stood at 1.1x, for the
consolidated entity The banks agreed only to a twomonth deferral of repayment of loans, helping
Havells with a Euro 24-million cushion for that period
However Sylvania was adversely impacted during the economic crisis in Europe and reported a net loss
of EUR24 million and EUR73 million during CY08 and CY09 respectively which consequently had a
negative impact on HIL. There has been a medium term financial impact on HIL by a maiden covenant
breach with lenders group in October 2008. As a result, a restructuring agreement was signed with
lenders in August 2009 with new covenants. HIL took immediate steps to counter the crisis and
initiated two major restructuring plans:
This restructuring again required an extra amount of debt and HIL refinanced its outstanding debt of
EUR102 million, which was payable in two tranches by the end of April 2012 and April 2013. Under
the new proposal, EUR40 million has been guaranteed by Havells India repayable in one year i.e. up to
April 2013 while the balance EUR77.5 million is on the book of Sylvania and will be repaid over the
next four years (i.e. up to May 2016). Going forward we expect Latin American and other markets to
post strong growth on the back of these restructuring activities. We expect Latin American markets to
grow at 10% CAGR and other Asian markets to grow at 15% CAGR over FY13 over FY13-15E.
However European business is likely to remain under pressure as European markets are still reeling
under the slowdown fueled by the European Sovereign Debt Crisis. We have estimated a flat growth
for the European business for the next two years on the back of flat GDP projections for most of the
European markets.
N) LOOKING AHEAD
1.
Has the firm positioned itself wisely in relation to its industry for future value creation?
Discuss your reasoning.
Yes the firm has positioned itself wisely in the consumer electrical business.they have
diversified into home appliances and fans and opened retail stores by the name of Havells
Galaxy to be in contact with the customers directly.They have Brand Focus Aggressive brand
building initiative by patronizing cricket, high brand visibility on mass media
. Indias Biggest Advertiser in Electrical Industry. over Rs.400cr Ad. Spends in the last 4
years.
Strong Brand Association with Cricket
New TV Commercials across Product Categories every year
First electrical co. to enter social media space
Manufacturing , R&D
Baddi Alwar Manufacturing (3 Units)Manufacturing Domestic Switchgear(2) Power
CablePlants -India Switches Wire 15 Plants
Neemrana Haridwar 8 Locations (4 Units) (2 Units) Motors Lighting -CFL -CMI Lamps
Fans - Fixtures
Sahibabad Sahibabad Industrial Capacitors Switchgear
Noida FaridabadManufacturing LightingPlants -India - Ballasts Industrial Switchgear
Haridwar 15 Plants (Standard) 8 Locations Domestic & Industrial Switchgear
Germany Belgium Manufacturing LampsManufacturing LampsPlants-Abroad U.K. France 6
Plants Concord IC Fixtures 6 Locations Fixtures Costa Rica Columbia Fluorescent tubes
Fixtures Fixtures France. Paris Warehouse
R&D
QRG Tower NoidaWorld class
2.
Plant R&D at Alwar, Faridabad, Baddi, Haridwar,NeemranaInfrastructure
Global R&D centre at Noida - Switchgear, Fans. Lighting, Cables
100+ Engineers
What are some major changes in strategic direction the firm under study could make to
improve its current performance and prospects?
They should cut costs by shutting down plants which are not operational or through which there is not
enough yield generated.They should open plants in geographic locations where it is easier to produce
the desired products and where labour costs are low like China.they should collaborate with
international manufacturers to keep the quality high and demand met.
O) DRAWING SOME CONCLUSIONS
1.
Which of the companies studied (the firm and 2-3 key competitors) seemed to have
followed the best strategy and its execution?
The Havells and the Sylvenia strategy was the best in its execution as it was Havells instinctive
decision to acquire Havells as it wanted to become a global leader in the electrical industry.It incurred
debt too but this acquisition was required for it to achieve its objective of becoming a global leader.
They executed this strategy very calmly and structured everything properly and had an effective
management to handle the crisis.The experienced mgmt. of Havells made it easier for Sylvenia and
Havells to restructure the company easily.
2.
Does one company appear to be consistently better than the others?
No, most of these companies are on the same lines producing and delivering the same quality and
products.
3.
What is the source of its superiority?
Source of its superiority is its early establishment in the indian market and a continuously innovating
team to keep pace with the changing environment.
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