Havells India

The Sylvania Acquisition DecisionBy Group 2

Ashish Garg, Ashish BehlDevender S Pal, Dinesh KumarHoni Jain, VS Arun KumarVikram Razdan

Agenda Introduction - Havells India Case Synopsis Introduction to Porter’s Five Forces

Barriers to Entry Bargaining Power of Buyers Bargaining Power of Consumers Rivalry between Competitors Threat of Substitute Products

Various M&A Strategies – Where does Havells’ acquisition of Sylvania fit in? Competitive Forces Question 1: Does the proposed acquisition make strategic sense for Havells? Why or why

not? Question 2: What are the major risks associated with this acquisition? Can these be

managed? Question 3: If you learned that the CEO wanted to go ahead with this acquisition, what

actions would you recommend for the likelihood of success? Update on Havells References

Introduction – Havells Leading manufacturer in India in electrical

industry Headquartered in Delhi, originating as a trading

company Sales in the excess of Rs 10 Billion (2006) Overall market share of 35% in India for MCB Largest manufacturer of MCBs in India and

amongst the top 10 globally Only company to offer an entire range of

electronic and electro-magnetic switchgear products catering to domestic, commercial and industrial users

Introduction – Havells

People & channel management key strengths for the company

Foray into Exports market to mitigate challenges in the Indian market

Exporting to 45 countries in Europe, Middle East, Far East and Africa

Exports not as profitable as domestic market Average profitability 4-8% in electrical

industry compared to much higher returns for wholesalers and retailers

Case Synopsis Havells, an electrical company, seeking to diversify

into new products and geographies through the acquisition route

Leveraging the synergy in electricals and lighting products businesses of common distribution channels

Growth in emerging markets and improvement in standards of living was expected to give a boost to lighting industry

Manufacturing shifting to Asia due to availability of automation and low-skilled labor

R&D intensive industry with many firms focused on new technologies viz. LED lamps

Case Synopsis Havells was unsuccessful in acquiring Electrium in 2005

pipped to the post by Siemens by less than £10M However, Havells learnt valuable lessons in M&A Evaluating near bankrupt Sylvania for diversifying in

lighting industry Sylvania had the third largest market share in the US Annual sales of €473 M in 2006 The deal was expected to cost more than $200MM (±

$15-20M on account of possible due diligence errors) SLI’s turnover more than twice that of Havells Challenge of integrating two diverse teams

Analysis of Industry Structure on the basis of Porter’s Five Forces Model

Barriers to EntryHigh Entry Barriers for the industry due to following

factors: Technology Capital Required Profit margins very low especially when viewed in contrast to high

margins enjoyed by channel partners downstream Oligopolistic market structure - few players controlling the majority

of the market. Distribution channels: Existing market players have their channel

network in place making it an effective entry barrier for new entrants

Quality Standards: Almost all countries have their technology standards which are primarily derived from international standards. These standards pose barriers not only to new entrants but also to foreign firms for getting approvals

Bargaining Power of Buyers

Who are Buyers ? Institutional buyers such as government and

construction companies Wholesalers Retail Chains such as Wal-Mart, Home Depot

etc in developed countries Small Retail shops in developing countries End-users and Contractors

Bargaining Power of Buyers In general, highly fragmented customer base and hence

low bargaining power of buyers for electrical industry, though in lighting, big chains have some bargaining power

Institutional buyers and Wholesalers are relatively few in number ( - )

Big retail chains like Wal-Mart are large consumers of lighting products ( - )

The end use of Electrical products is usually as a component of another product like appliances and switchboards ( + )

‘-’ indicates non favourable and ‘+’ indicates favourable to industry players

Bargaining Power of Suppliers Large number of suppliers in the market

hence low bargaining power of the suppliers Highly standardized product – ease of

availability of raw materials Industry-wide trend of backward integration

– further reducing the bargaining power of suppliers

Rivalry between CompetitorsWho are competitors (Indian market)? Industrial switchgear (Oligopolistic structure in India) –

companies like L&T, Siemens, ABB, Legrand, Indo Asian etc (mix of MNCs and Indian companies)

Cable & Wire (fragmented, large no. of domestic players) – Polycab, Finolex, CCI, Universal Cables etc

Electrical Consumer Durables (fragmented, large no. of domestic/MNC players) – GE, Crompton Greaves, Bajaj Electricals, Usha etc

Lighting industry – Lamps (oligopolistic, MNC/domestic players) and lighting fixtures (fragmented, domestic players)

Rivalry between Competitors Large numbers of big competitors in each

category of products putting price pressure ( - )

International Market competitors have Established Brands ( - ) International Certifications ( - )

CR (concentration ratio) published by US census for 2002 in electrical components manufacturing sector for 4 and 8 firms is 16.5% & 25.7% respectively indicating industry fragmentation and hence more intense competition

Threat of Substitute Products Very real in the electrical and lighting

industries Introduction of new technologies, more focus

on R&D, energy efficiency and climate pose real challenges to the industry players

In Lighting sector, LED bulbs may affect the CFL/GLS lamps business adversely

In industrial electrical sector state of art automation products (e.g Drivers, PLCs etc) are forcing out use of conventional electrical products like contactors/relays, switches etc

Various M&A StrategiesWhere Havells acquisition of Sylvania fits in

Overcapacity Geographic Roll Up

Product and/or Market Extension

R&D Industry Convergence

Eliminate excess capacity, gain mkt share, more efficient operations

Geographical expansion, operating units stay local

Extension of product line & international coverage

Acquisition in lieu of R&D to build market position

Building a position quickly in newly emerging industry

Competitive Strategy to Corporate Strategy Does Havells pass the Tests?

Test of attractiveness

Industry chosen must be structurally attractive or capable of being made attractive

The Cost of Entry Test

Cost of entry must not capitalize all future profits

The Better Off Test

Either the acquired company must gain competitive advantage from parent or vice versa

Does the proposed acquisition make strategic sense for Havells? Why or why not?

Build and Bolster International Brand Equity Havells is not a globally renowned brand Establish a strong operational presence in Europe and the

Americas Be ready to compete with big MNC brands

Expand Global Footprint Leverage common distribution channels Tap markets in North and Latin America, Australia,

Western Europe and Middle East SLI Sylvania’s products will benefit from Havells’

distribution channels in Asia

Does the proposed acquisition make strategic sense for Havells? Why or why not?

Key Factors Global Electricals Business

Havells India

Market Size (Sales) USD 1 trillion USD 250 million

Average Profitability (Return on Sales)

4% - 8% 4% - 6% (Domestic margins higher than export margins)

Key Geographies United States 29%Western Europe 22% Others 49%

Largely India Domestic Limited exports to 45 Asian and European countries

Tremendous potential for Havells India to expand its global footprint and build its international brand equity through the Sylvania acquisition

Does the proposed acquisition make strategic sense for Havells? Why or why not?

Synergy benefits Bundled Offerings to common customers Eliminate dual costs on sales and distribution Attractive and competitively priced products Bid for Big Projects together and leverage cost benefits

What’s in it for SLI Sylvania? (Very Important) Fresh infusion of capital Rationalize surplus capacity Manage competitive threats from bigger rivals Access to the fast growing Asian markets

What are the major risks associated with this acquisition? Can these be managed?

Financing the Deal Estimated Merger Cost - USD 200 million Very Short Time Frame

Low on M&A Experience Could give rise to M&A credibility concerns Is the deal priced right? Have all angles been looked into? Not easy to convince bankers and financiers

What are the major risks associated with this acquisition? Can these be managed?

Target company is twice as big as Havells Different sales and growth objectives Resistance to new processes Risk of high attrition among key talent

Cultural Challenges and People Issues

Different cultures Retention of key staff Introduce changes subtly and gradually Absorb Sylvania culture where relevant

What are the major risks associated with this acquisition? Can these be managed?

Regulatory Issues Adherence to new government and regulatory directives Multiple policies for multiple geographies Will challenge standardization of core business processes

across geographies Will increase process complexities, cost and time

Risk of Underestimating Key Variables Underestimating or Not factoring a key variable’s impact on the deal could potentially undermine the benefits driving the merger

If you learned that the CEO wanted to go ahead with this acquisition, what actions would you recommend for the likelihood of success?

Recommendations to Havells CEO Evaluating the facts and ground reality

Sylvania twice the size of Havells in sales Different product categories Different cultures Sylvania – cash strapped and running losses

What is in it for Havells (acquirer)? What to do for Sylvania?

If you learned that the CEO wanted to go ahead with this acquisition, what actions would you recommend for the likelihood of success?

What to do with/for Sylvania?Resources

Infuse capital in cash strapped Sylvania No major shake up in the team at the outset, however,

observers/assistants from Havells to be deputed to Sylvania set up

Processes Phased integration over a period of time Process analysis to monitor and control costs

Values Not rush into manpower restructuring straightaway Contrasting cultures – time needed to align the two

cultures

If you learned that the CEO wanted to go ahead with this acquisition, what actions would you recommend for the likelihood of success?

What is in it for Havells? Access to global markets Access to lighting products portfolio of SLI Ownership of world renowned brands in lighting

industry

Action Plan for Havells Homologation of its products with SLI product range Test runs in a few countries Exposure to SLI business practices by relocating key

employees to SLI

Update on Havells SLI integration progressing at snail speed, SLI CEO

relieved, direct control with CMD of Havells Several key Havells employees relocated to SLI offices in

Europe and Latin America – executive control still with SLI managers

SLI and Havells websites still running separately Going strong in Indian market with 22% revenue

growth in Q1 2010 YoY (Rs 2200 cr sales in 2009-10) Capitalizing on strong growth in real estate and power

sectors Havells products being introduced through SLI channels

in African/Latin American markets

Update on Havells…continued The biggest distribution network in electrical sector in

India - > 3,000 direct channel partners and >25,000 strong retail network

Still lagging in industrial sector in India inspite of launching new products like Capacitors, ACBs, Motors

Limited delegation of power and authority to middle and junior level employees

Despite being a fast growing company, employee attrition rate is very high – due to lack of focus on HR

References http://havells.com/UserControls/Havells_Feb23_IER.pdf

accessed on Aug. 12, 2010 http://www.fullertonsecurities.co.in/equity/markets/

rsch_reports/1_0_05062010Investment%20Idea%20-%20Havells%20India%20(HOLD).pdf accessed on Aug. 11, 2010

Hem securities limited’s report on Havells research@hemonline.com accessed on Aug. 11, 2010

High performance through mergers and acquisitions: India’s new dynamics http://www.accenture.com/NR/rdonlyres/69D1B1F5-8EAE-48D7-A865-F96FCCCD60CE/0/9065_IndiaMADynamics_f inal22.pdf accessed on Aug.10, 2010

References Developing Country Acquirers: The Case of India

http://leeds-faculty.colorado.edu/Bhagat/IndianAcquirors-August2008.pdf accessed on Aug. 09, 2010

Business Regulation Evaluation Group in Latin America http://www.idrc.ca/en/ev-120228-201-1-DO_TOPIC.html accessed on Aug. 09,2010

Technology and Marketing Alliances, 1996 – 2003 http://www.efmaefm.org/efma2005/papers/247-subramaniam _paper.pdf accessed on Aug. 10, 2010

http://havells.com/UserControls/Havells_Feb23_IER.pdf accessed on Aug. 12, 2010

http://www.census.gov/prod/ec02/ec0231sr1.pdf accessed on Aug. 14, 2010