Havells India
The Sylvania Acquisition Decision
By Group 2
Ashish Garg, Ashish Behl
Devender S Pal, Dinesh Kumar
Honi Jain, VS Arun Kumar
Vikram Razdan
Agenda
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Introduction - Havells India
Case Synopsis
Introduction to Porter’s Five Forces
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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
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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
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Case Synopsis
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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
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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 Entry
High Entry Barriers for the industry due to following
factors:
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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
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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
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Rivalry between Competitors
Who are competitors (Indian market)?
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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
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 Established Brands ( - )
 International Certifications ( - )
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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
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Various M&A Strategies
Where 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?
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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
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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?
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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
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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?
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Financing the Deal
 Estimated Merger Cost - USD 200 million
 Very Short Time Frame
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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?
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Target company is twice as big as Havells
 Different sales and growth objectives
 Resistance to new processes
 Risk of high attrition among key talent
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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?
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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
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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?
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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?
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Access to global markets
Access to lighting products portfolio of SLI
Ownership of world renowned brands in lighting
industry
Action Plan for Havells
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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
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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
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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
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http://havells.com/UserControls/Havells_Feb23_IER.pdf
accessed on Aug. 12, 2010
http://www.fullertonsecurities.co.in/equity/markets/rsch_re
ports/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/69D1B1F5-8EAE48D7-A865-F96FCCCD60CE/0/9065_IndiaMADynamics_f
inal22.pdf accessed on Aug.10, 2010
References
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Developing Country Acquirers: The Case of India
http://leeds-faculty.colorado.edu/Bhagat/IndianAcquirorsAugust2008.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/247subramaniam _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