Case Game: The Case Of Strategic Acquisition

CASE GAME
The Case Of Strategic Acquisition
Contd.

Should Total Buy Zulfi?

THE DISCUSSION

U.R. BHAT
Director, Jardine Fleming India

Business considerations should be paramount in an acquisition move. Synergy is evidently a major business consideration. Kumar should examine carefully the kind of synergies that accrue to the batteries division of Total in specific areas like manufacturing, marketing, and distribution. A target company is only as good as its marketshare, its potential to improve the marketshare without compromising on the margins, its ability to make profits, and its image in the marketplace.

The crucial questions to be addressed here by Kumar and his team are: what does the acquisition of Zulfi mean for the existing batteries business? Does it increase the division's market reach? Does it help achieve better price realisation? Does it provide access to new markets, new customers, and new categories? Does it supplement the existing product range? Will it help Total service the market needs better? Pinning down such synergies into tangible indicators should be the first step.

The second set of considerations relates to integration. Broadly, Kumar should examine the imperatives of integration in three areas: systems, people, and corporate culture. It is likely that Total and Zulfi are complementing each other's strengths. It is also likely that they will merely reinforce each other's weaknesses. When two firms are involved in acquisition talks, the working environment in both the companies is likely to be charged. It is just the right time for competitors to move in and poach people. Retaining valuable employees-through special stock options, for example-is often a major component of the cost of integration. Systems integration is equally important. Culture compatibility is no less significant. After all, Total and Zulfi have been competitors so far. Can they shake hands at the ground level, notwithstanding the friendship that prevails between Kumar and Rao at the top? Can Total and Zulfi together create a common platform?

It is only after the above-mentioned issues are sorted out that the issue of pricing comes into the picture. In fact, once business and integration issues are dealt with, it is easier to determine the premium. Premium is justified only on the basis of potential cash flows discounted at a rate that reflects the cost of capital.

Total should also examine the option of putting up a new plant. It has several advantages. The excitement levels within the company are high because it opens up new opportunities for people. Culture fitment does not become a contentious issue. Motivation levels would be higher. Acquisition heightens stress levels because people have to build new relationships and adapt to new situations.

MUKUL GUPTA
Consultant, Andersen Consulting

A commonly-held view that drives M&As is that size matters. And that economies of scale help produce a larger organisation capable of creating value through increased revenues and reduced costs. This may not always be true. An acquisition, in particular, is usually driven by the predator's desire to achieve at least one of the following key advantages: entry into new markets; reduction in costs; acquisition of new vendors and customers; and access to new delivery channels. But often, managers tend to lose sight of the raison d' etre of an acquisition: value enhancement for the firm in the long run.

Therefore, Kumar must ensure that his team has a clear mandate: What precisely is the value that accrues through the acquisition of Zulfi? That sets the tone for determining the price of the acquisition.

The acquisition of Zulfi, per se, seems to make commercial sense for Total. It provides instant access to the latest technology, value-added products, new customer segments, and an opportunity to enhance the overall marketshare in the batteries industry. There is also a sense of urgency here. The interest shown by overseas battery manufacturers to enter the Indian market could, in the ultimate analysis, threaten the future of the smaller companies. In order to have a fighting chance, companies like Total should grow via acquisitions. After all, a larger firm is more difficult for a predator to swallow than a smaller firm.

Kumar's team does not seem to have identified the source of funds for the acquisition. In fact, for medium-sized companies, funds pose one of the biggest obstacles in the way of an acquisition. Most financial institutions in India are not yet geared to fund takeovers. The debt markets are still small and illiquid. Funds apart, the plan to acquire Zulfi must be supported by two more capabilities: integration, and the ability to manage uncertainties.

Integration is an important element of an M&A. Not just in terms of organisation cultures and processes, but also in terms of corporate visions. Ability to manage uncertainty is an important factor, and is best managed by developing contingency plans aimed at protecting not only the existing turf but also maximising future gains. The last thing Kumar would want is to destroy the value of his current business.

SHAILESH JAIN
Chairman, Electricmela.com

Kumar should go ahead and seize the opportunity. For three reasons. First, given the circumstances of the case, someone else will if Kumar doesn't. And that would dilute Total's current competitive position in the batteries industry. Second, the management team at Total is all steamed up. This is a healthy sign, indicative of a high level of action-orientation. If there are uncertainties at a later date, they could be dealt with as and when they arise. That is what management is all about anyway. And the ultimate clincher: Zulfi makes a good business fit with Total at least on the face of it. The alkaline market is nascent, the players are few, the market prospects are good, and sales realisations are likely to be high. The nitty-gritty must, however, be worked out and the numbers duly crunched before taking a formal decision.

A major issue to be resolved upfront, as part of taking a final decision, is to fix certain boundary limits. One such limit is the cap on the cost of acquisition. It is important to note that the acquisition is viable only at a particular price. It is not viable at all prices. The cap is a function of two factors: the monetary value of synergies that accrue to Total; and the ability to generate resources (both internal and external) to finance the acquisition. The reason why Kumar and his team should fix a cap-and remain inflexible about it-is that beyond a point, the acquisition price would be driven by factors outside of business, like market speculation, media build-up, and competitive bidding. There is danger in chasing the price beyond a pre-determined level. The existing business should not be placed at a risk in pursuit of a new business.

Most CEOs would be treading on what they believe is 'sensitive' ground here. That is why Kumar should take his divisional presidents-particularly Sahai-into confidence while the groundwork is being done. His apprehensions about the lack of synergy between strategic planning and financial planning appear to be misplaced. Clearly, strategy should lead finance, and not the other way round. If there is no strategic fit between an acquirer and a target firm, no numbers-however matching and good looking-would make sense to me. Strategy should be the defining parameter.

The personal value system of the CEO invariably comes into play not only in fixing the boundary limits, but also in the road map to be followed once you decide to go ahead. As for me, I would not make a hostile bid. Relationships are more important than business opportunities. Since Kumar and Rao have known each other at a personal level, and Rao has made the first move, a hostile takeover is not an issue here. A merger is a worthwhile option for Kumar to explore, without letting the ifs and buts of it paralyse his strategic initiative. It is important for Kumar to get Rao on his side. His role in managing the transition would be invaluable. There will be fewer surprises in store as the implementation gets under way.