Havells India: The Sylvania Acquistion Decision

CASE STUDY

HAVELLS INDIA: THE SYLVANIA ACQUISTION DECISION

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PROBLEM STATEMENT

• How profitable is Havells on basis of industry sales, ROS, ROA, ROE, and EPS?
• What is driving the company to consider the acquisition?
• How different are electrical and lighting industry?
• Will this diversification will work? (Porter’s diversification model)

ISSUE ANALYSIS

FACTS:

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• In the first week of Nov. 2006, sales of Havells expected to exceed Rs. 10 Billion.
• In 2006, the global electrical market was highly fragmented and estimated at more than $1 trillion with an average profitability of 4-8%.
• US were the largest electrical market with a 29% market share in the world. Western Europe comprised of 22% market share in the global market.
• Global lighting market in 2004 was estimated between $40 billion to $100 billion. About a third of which was lamps.
• In 2006, international tariffs ranged from 5 to 10%. Also in the late 1990s, manufacturing had shifted to Asia due to the availability of automation technology and low cost skilled labor.
• National Electrical manufacturer’s association (NEMA) in the US incorporates electrical and lighting business in 10 segments: building systems, electronics, emerging technologies, industrial automation, insulating materials, lighting systems, medical imaging, and technology, power equipment, security imaging, and communications, and cable and wire.
• Schneider Electric was one of the largest manufacturers of equipments for electrical power distribution and for industrial control and automation. Schneider was having 120,000 employees in 102 countries with global sales of 16billion Euros. 32% sales of the Schneider were coming from emerging markets like India and China.
• In 2000s, Europe and North America were promoting energy – efficient technologies such as CFL lighting but residents were not rushing for it due to expensiveness. LED with greater energy efficiency and new capabilities was seen as having the potential to revolutionize the industry.
• Surjeet Kumar Gupta; the trading operations commenced in the year 1958. Despite the difficulty of economic environment in India, the business continued to grow. In 1961, QRG bought the rights to a well-reputed brand name, “Havells,” which was owned by Haveli Ram Ghandi, another local electrical company.
• Chint Electrics Co. Ltd (CHINT), founded in July 1984 in Wenzhou, China, was a leading manufacturer of electrical products with 16000 employees and $2 billion sales in 2006 with branches and regional offices in US, the Middle East, Germany, Russia, Brazil, Ukraine, Hong-Kong and Great Britain.
• By the early 200s, Havells had established itself as a dominant player in the switchgear market, with a strong brand presence and an overall market share of 35% in India. It was the largest manufacturer of MCBs in India and among the top 10 global manufacturers of the switchgears. Shares of the Havells were listed in BSE, DSE and NSE.
• Havells board comprised its founder, Qimat Rai Gupta (QRG), companies CMD, his son Anil Gupta, Joint MD and a small group of relatives and personal managers.
• In mid 1970s, the govt of India introduced several new regulations favorable to the manufacturing industry. QRG decided to set up manufacturing in 1976 and started with a small plant for Rewireable Switches and Changeover Switches at Kirti Nagar, New Delhi. They started manufacturing HRC fuses in 1979 at Baddi, Delhi, and High-quality ebergy meters in 1980 at Tilak Nagar, Delhi.
• The company was incorporated as Havells India Private Limited on August 8, 1983 and name changed to Havells India Limited in 1992.
• The distribution system in electrical and lighting products worked through 3 major channels: Institutional buyers (Govt. and construction companies), wholesalers and retail stores. Wholesaler’s margins were around 15% and retailer’s margins were around 20-25%.

Opinions:

• Rothschild (a New York based banker) messaged Havells India Private Limited that regarding a potential acquisition target that “if you can get back to us with a bid by next Wednesday, we could potentially get this working for you”.

• When QRG bought the Havells, he thought that a brand name can help him growing his business, opposite to the thinking of the most of the other traders of that time.

• Mr Anil noted that when his company started selling it’s products in Europe, they realized that their products had a huge acceptance and were recognized for its quality. But that time they did not have their brand equity outside the India and thought to build their own brand in international markets.

• QRG’s family was not happy with his risk taking and aggressive behavior but he did not lose focus and kept moving.

• Mr. Anil told that they are a company which goes a lot on instinct. They believe in empowering people rather than controlling them. Their paramount question is – can we handle people? And if answer is yes for new people, they become confident about the new acquisition work. And they thought the same in the case of Sylvania. So they did not want to think much about culture and other issues.

• Mr. Anil Gupta quickly realized that he needed much more than MBA learning to work in his family business. He was required to understand the nuances and culture of the business, the way of handling people by taking them along and getting the work done by them.

• Mr. Anil realized that they were growing big. They saw the growth potential and knew that they needed resources and reputation of a listed company to realize this potential.

Strategies:

• When Havells was building capability for international markets, it entered into a series of international collaborations, starting in 1996 with a 50:50 joint venture between Indian promoters and Electrium of the UK and Crabtree India Ltd. In 1998, it entered into a technical collaboration with Geyer to manufacture MCBs. The same year, it also initiated a joint venture with DZG of Germany; under the name TTL Ltd. to get into the energy meters business. Havells took a controlling stake in Standard Electricals Ltd., a MCB, fuse switches, and re-wirable switches manufacturer, with a market focus in South India.

• After the year 2000, Havells realized that it could suffer a loss of market share in India due to stiff completion from MNCs and Chinese importers, so they started venturing into markets like Africa and Middle East. Then they set up an International Business Division (IBD) catering to more than 45 countries in Europe, the Middle East, the Far East and Africa. It also opened branch offices in London, Dubai and Bangladesh.

• In 1993, Havells went for an IPO listing its stock in BSE. The capital from the IPO was invested in setting up new manufacturing plants at Sahibabad.

• Havells forey into international investments started in 2005 with a small acquisition in Greece for 10million Euro.

• The electrical and lighting industry is a loose agglomeration of business involved in some way with the generation, transmission and distribution of electricity. There are separate industries associations for power generation companies, power transmission companies, etc. large companies like Siemens and ABB tend to have business in all three segments. Companies such as GE and Phillips, have lighting as a core product, typically housed within a consumer products division.

Question 3

How different are the two industries: Electric and Lighting?