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CASE GAME: INTEGRATION The Case Of Post-Acquisition Strategy How will Sunrise integrate the formerly state-owned Alco into its umbrella? Ajit Kumar of Accenture, Prashant Srivastava of TSM, and Haresh Shah of mergersindia.com discuss. By R. Chandrasekhar
The government's divesture at Alco had attracted controversy in the corridors of power with which the low-profile Khanna was not too comfortable. The ideological overtones had overshadowed business considerations for months. But, hopefully, all that would soon be in the past. Even as the sense of relief among the members of the A-team seated around his desk was palpable, Khanna was quick to remind them that the real task was only beginning. ''It is time to get down to business,'' he said.
Acquisitions were not new at Sunrise. The company had consciously avoided organic growth in pursuit of its goal of becoming 'the lowest-cost producer of metals'. It had interests in copper and zinc, in addition to aluminium, and had extensive refining facilities in interior Maharashtra. As part of consolidating its position in the high-end aluminium market, it had taken over Surabhi Aluminium in Chennai three years ago. The purchase of a majority stake at Alco would now give Sunrise access to captive mines, refining, and smelting facilities, and also a power plant at a sprawling estate in Orissa. Sunrise would soon become the third-largest player in the upstream range of standard and specialty alumina products targeted at the growing markets of refractories, ceramics, electronics, and electricals. The company would also become the second-largest manufacturer of rolled products targeted primarily at burgeoning industry segments such as building, transportation, consumer durables, packaging, and telecommunications. ''We have moved one step forward in the value chain,'' said Naveen Chintan, Director (Business Development), excitedly. ''Of course,'' agreed Khanna. ''But,'' he added a note of caution, ''if costs go out of control, we will be moving two steps backward. So, we had better watch out.'' ''This is an opportunity to replicate our success with Surabhi,'' said Vidur Chalapathi, Director (Operations), who had not only overseen the merger of Surabhi with Sunrise, but also had managed a quick turnaround of Surabhi, which had been making losses prior to its takeover by Sunrise. ''Let us not forget, Vidur, that the context is different,'' said Ashwin Narayan, Director (Finance). ''The merger of Surbahi gave tax benefits to Sunrise. And the cost structure was manageable because Surabhi had still not exhausted the long-term statutory benefits associated with a greenfield project. Alco, on the other hand, is profitable although its costs are high. Surabhi was a small but integrated unit. In contrast, Alco is several times bigger.'' ''But Vidur is right about the learnings,'' said Vishnu Vardhan, Director (hr). ''We have tightened the operations at Surabhi. The unit costs are down by 30 per cent in two years. There is a renewed focus on efficiency, quality, and customer service. In fact, we have used those benchmarks to improve our operations at Aurangabad. I am sure we can replicate our success on a larger scale at Alco and make it more profitable.'' ''We have taken over Alco not just to run it profitably, but use it as a platform to take on the international market,'' said Rakesh Mathur, Director (Marketing). ''Cost control is a crucial plank for us. Costs in a commodity business like aluminium can be controlled only through economies of scale. We now have scale. But the disadvantage is that all our aluminium units are far flung. Can we eliminate duplication of resources and rationalise common costs in such a situation?'' ''It would be good to work towards a situation where all aluminium-related operations are brought under one single umbrella that gives it a focus,'' said Vardhan. ''It means merger,'' said Khanna. ''There are two reasons why I have some reservations. Once we merge Alco with Sunrise, we would invariably have government nominees on the parent board. I would rather have the government's role confined to the operations of Alco alone. Second, Alco is a high-cost unit. I would first concentrate on reducing costs and bringing its operational benchmarks on par with Sunrise before thinking of a merger. After all, Alco has a baggage. Integration becomes far easier when there are common business drivers.'' ''There are several costs that are out of control at Alco,'' said Narayan. ''The workforce, for one. It is 45 per cent higher than our norm. We can, of course, offer VRS, but there is a pre-emptive clause that runs for a year. And then, electricity, which is our major raw material. The cost of captive power at Alco is about Rs 3 per unit, which is 60 per cent higher than that of Sunrise. And the capacity utilisation of the plant-a critical cost element in a commodity business-must be ramped up. There are also large social overheads at Alco. Township management, for example, is a non-core activity. It must be outsourced. There is also the Cost Of Poor Quality (COPQ), which is higher by about 65 per cent. My point is that a merger with a large but poorly-run plant like Alco might impact negatively on the overall operations of Sunrise. That is a risk we should avoid.'' ''In fact, in my view, we should break up each activity in the value chain into an independent strategic business unit,'' said Mathur. ''The focus is different. Mining requires optimum utilisation of capacity. Smelting and refining require not only technological sophistication but also continuous monitoring of costs. High-end products require brand building and customer focus.'' ''An immediate fallout of the strategic business unit (SBU) structure is escalation of costs,'' said Khanna. ''An SBU, therefore, hardly fits in with our low-cost ambition. A merger, on the other hand, gives us the advantage of size, which is in tune with our global aspirations. We can leverage size to acquire new units-locally and overseas-and grow bigger with each passing year.''
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Surinder
Khanna, Chairman and Managing Director of Sunrise Metal Industries, signed
the cheque with a flourish. It was as though he was signalling the end of
a traumatic saga that had hogged media headlines for long. Once the cheque
was handed over at the special ceremony scheduled to be held at the office
of the disinvestment ministry in New Delhi that evening, Sunrise would
formally acquire 51 per cent stake in the state-owned Aluminium Co of
India Ltd (Alco). ''It's a battle well fought,'' Khanna thought to
himself.
