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Dealing with a Demerger

"Discontinuity. How I hate using that word. But I have been constantly disturbed by it ever since my boss, Ingmar Lagerkvist, the CEO of Snowland Inc., woke me up last night to tell me that our company was being restructured. The global conglomerate has, finally, decided to focus on pharmaceuticals. Or the bigger, high-value business of healthcare, as he calls it. Speciality Chemicals, which I oversee, will now be a separate entity, shaping its future from scratch. I knew it was coming, but I had never dreamt that our ties with our parent would snap so fast. It will give us the freedom to manage our own destiny, but it will also cause uncertainty. As part of a 90-year-old transnational operating in 30 countries, we had an identity. And a reputation. Tomorrow, our bankers, vendors, and customers will start treating us with the circumspection reserved for start-ups. Internally, our managers will wonder whether the transition will add, or erase, value " It was that tomorrow that the president of Snowland India's Speciality Chemicals Division, Suresh Malhotra, had to prepare his managers for. Clariant India's P.R. Rastogi, Atthreya & Associates' N.H. Atthreya, and Cabot India's Alok Gupta try to tackle Malhotra's worries. A BT Case Study.

Divisional Meeting, Snowland India's Speciality
Chemicals Division
DATE: April 15, 1988
TIME: 10.00 a.m.
VENUE: Snowland Corporate Offices, Chennai
PRESENT: Suresh Malhotra, President; Anup Chatterjee,
Vice-President (Marketing); Mukul Dighe, Vice-President (Finance); Jayesh Shah, Vice-President (HRD); Rajiv Menon, Vice-President (Manufacturing); Charu Patel, Vice-President (Planning & Operations)
AGENDA: Demerger


Break-Up! How Companies Use Spinoffs To Gain Focus & Grow Strong; David Sadtler, Andrew Campbell, & Richard Koch

Creating Value Through Acquisitions, Demergers, Buyouts, And Alliances; Bruce Lloyd

80 Things You Must Do To Be A Great Boss: How To Focus On The Fundamentals Of Managing People Properly; David Freemantle

How To Manage Organisational Change; D.E. Hussey

The Discipline Of Market Leaders: Choose Your Customers, Narrow Your Foes, Dominate Your Market; Michael Treacy & Fred D. Wiersema

Strategic Management: A Focus On Process; S.C. Certo & J.P. Peter

The 20% Solution: Using Rapid Redesign To Create Tomorrow's Organisation Today; John J. Cotter

Change Master: Managing & Adapting To Organisational Change; Mitch McCrimmon

Suresh Malhotra: 'Morning, gentlemen. I'm sorry I had to pull you out of your hectic schedules at short notice, but I couldn't wait to give you the news. You are aware that Snowland Inc. (Snowland) commissioned Sigma Consulting (Sigma) last year to recommend ways by which to restructure its global businesses. The brief was to examine Snowland's three businesses--healthcare, agrochemicals, and speciality chemicals--and identify the focus areas for the future. Sigma finally submitted its report last month. One of its recommendations was that Snowland should exit from speciality chemicals, and concentrate on its core business of healthcare. Sigma had also suggested that the Speciality Chemicals Division be spun off--or demerged--as a separate company instead of being sold off. Sigma's logic is simple: the sale of a business invites a capital-gains tax whereas a demerger merely involves the transfer of capital.

I have just received the confirmation that our corporate headquarters in Zurich has accepted Sigma's recommendations. Consequently, the Speciality Chemicals Division will sever its links with the parent, Snowland, and by June 1, it will be spun off into a global entity called Crystal Inc. (Crystal), with its headquarters in Basle. Our business in India will be known as Crystal India, and will be a subsidiary of Crystal. I am quite excited about these developments. It is a wonderful opportunity for us to mould the Speciality Chemicals Division into a focused business, both locally as well as globally. But it would be naive to assume that the process will be smooth. The best strategy is to anticipate the problems that will surface during the transition, and prepare for them. That's why I thought we should meet immediately.

Mukul Dighe: We share your excitement. But, let me warn you, the transition is going to be painful. After all, the Speciality Chemicals Division has been part of Snowland for decades. It has been the company's second most profitable business, contributing a quarter of Snowland's global turnover. Locally, of Snowland India's turnover of Rs 330 crore last year, our division contributed Rs 130 crore. Of the 1,800 employees in Snowland India, our division has a manpower of 400.

The way I see it, we could face two problems. First, the global issues--like asset-sharing, transfer of capital, debt-allocation, tax matters, and shareholder value--are hard issues, which will be decided in Zurich and applied uniformly to all subsidiaries worldwide. We will have little choice but to comply with the directives. Second, local issues--which will vary from one subsidiary to another--are soft issues, involving employees, suppliers, customers, service-providers, and bankers. Indeed, they are more complex to handle since they involve people

Jayesh Shah: There is bound to be emotional resistance to the change as well. When two sets of businesses, united for several decades, are separated, it is natural for people to experience a sense of discontinuity; even loss. Many people eschew transition since it changes organisational roles. The best way to deal with it is to convey the message that we, the Speciality Chemicals Division, are more valuable as an independent business than as part of a conglomerate. We must market the demerger as a renewal programme, and we should do so with conviction.

Malhotra: That's a good start. Let us now discuss the specific problems that may arise. Charu, where do we start?

Charu Patel: We must examine two issues carefully. First, Crystal India will be, essentially, in the business of intermediates; our contact with the end-user is remote. For example, we make pigments and additives used in the manufacture of paints which, in turn, are used by the automobile industry. Our manufacturing is characterised by long production chains; at times, there are as many as 15 intermediates between the base- chemical and the end-product. Our division is not vertically integrated; it produces only those intermediates where the value addition is high. As an independent business, we must address one question: should we continue with the strategy of concentrating on specific components of the value-chain? Or should we aim for higher volumes through integration? That brings me to the question

Anup Chatterjee: Sorry for the interruption, but I think this raises a more fundamental issue. Price-realisations are, generally, low in the kind of business we operate in. The value of our products, as perceived by the end-user, is often small. The problem is compounded by the fact that there are quite a few competitors in the unorganised sector. And all of them enjoy large price-advantages

Patel: Absolutely. And that brings me to the second issue: the environment. Stringent environmental laws in Europe are forcing speciality chemicals companies to relocate to Asia. Snowland had to shut down its 2-billion tonnes per annum dyestuffs-facility in Europe two years ago. Back home, the stringent norms being enforced by the government will force most chemicals companies to either relocate or shut down. That will open up competitive space for companies like ours. We have won several safety awards but, unless we regularly upgrade our effluent treatment technology, our survival will always be at stake

Malhotra: These are, undoubtedly, important issues. But they impact on our business portfolio, and we cannot decide on changes in that in isolation of our global priorities. So, let us confine ourselves to our local problems.

Rajiv Menon: Well, there are three issues in manufacturing that we should manage in the short run. Of course, I see great opportunities in the long run. For example, Charu mentioned the emergence of Asia as a manufacturing base. I think we have the potential to become a global sourcing-centre for Crystal. That will put us in the big league. But let me come back to what I was saying. First, business-orientation among our line managers is critical. Earlier, manufacturing could afford to be inward-looking because Snowland consciously advocated specialisation in its various divisions worldwide. It encouraged the pursuit of functional excellence through regular improvements in various processes. Functional excellence is good, but that alone is not enough; it must be linked to business results. Second, it is important to prune costs. As an independent entity, our operational costs are bound to increase. The third, and most important, area is customer satisfaction. The concept of customer focus--both external and internal--will become crucial once we become an independent enterprise. Especially since we will have to build brands from scratch. I have another point to make. Out of the 190 people on the shopfloor at our works in Chennai, there are about a dozen who have been closely involved in global projects on quality and technology. Their jobs are routine and low-profile, but they could have interesting suggestions to offer

Malhotra: I am sure there are similar opinion leaders at different levels in the organisation. In our transitory phase, we should identify them, and turn them into internal allies. Rajiv made another valid point about the need for customer focus in manufacturing. I foresee concern in the minds of our key customers and vendors about doing business with a company that has, suddenly, shrunk in size. They would have apprehensions about delivery-schedules, credit-terms I think we should invite them to visit our manufacturing premises just as we should encourage our own workmen to visit the premises of our customers and vendors. That will reinforce confidence levels at both ends. It is important to make our customers, both internal and external, feel that they are an integral part of our new business strategy

Chatterjee: Crystal India has the potential to become a global sourcing-point. While that will, certainly, trigger off growth, we should pay adequate attention to product development. Thanks to our multi-divisional structure, which limits the availability of resources, our suggestions have always received a lukewarm response from headquarters. While, on the one hand, we have, often, been forced to follow marketing leads emanating from Europe, on the other, our attempts at launching our own products locally have been opposed. We rank second and third in the textile chemicals and leather chemicals markets, respectively. But 15 new dyes have been in the pipeline for more than two years. We have even completed the pilot-tests and market research. So, our first priority should be to launch them. That will not only provide us market leadership, but also add gloss to the new identity

Malhotra: I agree. But, simultaneously, we should strengthen our relationships with customers. Patel certainly had a point about the risks associated with the intermediates business. We should now identify 50 top customers from the existing 1,500, and work with each of them closely to find out how we can enhance value at their end. In fact, I would personally like to monitor the top 10 accounts

Dighe: A major problem I foresee is in the distribution of financial resources between Snowland and Crystal. The debt burden that we will eventually be saddled with is an issue in our relationship with our bankers. We will be deprived of the strength of a large balance-sheet. That, in turn, will limit our ability to bargain for finer rates of interest. I must, however, mention that our performance will be watched more keenly than ever before by the financial markets. Analysts and foreign institutional investors will turn the spotlight on us because they love to track a company focusing on a single business; a pure play, they call it. This is where we need to upgrade our skills in external relations. Managing the external environment will become a key area of management responsibility

Shah: So far, everyone has talked about what should be done post-demerger, but there has been little mention of the internal problems that are likely to crop up. This is, perhaps, understandable because most problems relate to people, and that is the responsibility of the Human Resources Department. I am sure you will all agree that our transnational character has given us a sense of identity. A break-up will create uncertainty about the future, and result in a loss of morale. Success depends on how well you manage the transition.

It will be necessary to set up a transition team. We should also develop a contingency plan to tackle resignations, which are bound to occur. We could even identify star performers, and hike their salaries substantially to convey the message that we value merit. But, as I said, we must convince people that demergers lead to value-creation--not value-erosion. That can only come through a series of strategic responses like, say, a vision statement. That is what we should do first since it will bridge the gap created by this discontinuity.

Menon: You know, we have a large manufacturing facility at Chennai, where Snowland has been manufacturing products for all its three divisions. But what do we do with the surplus capacity in the pharmaceuticals and agrochemicals divisions once the demerger comes through? I think it is necessary to retain Crystal India's links with Snowland after that. The facilities could be let out to Snowland till it decides to set up its own works. That will take the sting out of what Jayesh labelled as discontinuity.

Malhotra: Thank you, gentlemen. Let us all meet tomorrow to discuss these issues once again.

How should Crystal India manage the change from being part of a conglomerate to a focused entity? What are the unique problems that the company's top management team is likely to encounter in the transition period? How should Malhotra, and his top managers, prepare themselves for change? Can they use the opportunity to push through an agenda for organisational transformation? Is Crystal India merely moving from being part of one global company to another, or is there a more fundamental change in the offing? Does Malhotra really have the freedom to manage the destiny of Crystal India?

Solution A   /  Solution B  /  Solution C


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