"The demerger could be a strategic move to capitalise on the strengths of two distinct businesses." Vijay Vancheswar, Vice President (Corporate Affairs), Indo Rama Synthetics

First and foremost, a demerger for the case in question need not signify a complete alienation of the two businesses of yarn and polyester from the parent company, Osiris. Rather, it could be a strategic move to capitalise on the strengths of the two distinctly separate businesses, driven as they are by different business dynamics.

Osiris' ceo Lagoo had apparently started his textile foray with the yarn business, based on the traditional approach adopted by most in his industry. But over time, and in line with the shifting pattern of growth and saturation witnessed by the industry, Osiris started being driven by the polyester business. Now, Osiris must clearly be watching the global capacity build-up in polyester shifting from the West to Asia, and in particular to India and China.

On the one hand, the technology-driven polyester business presents an excellent arena for driving Osiris up the profitable volumes game. Equally important, Lagoo realises that the yarn business, fragmented as it is, has a potentially strong future. The CEO is perhaps well aware that the time is ripe for the yarn business to tap the opportunities that the Indian yarn business presents. For one, the labour-intensive yarn business does offer Lagoo significant cost advantages in the global market. More so, as growth in GDP and population significantly impact clothing consumption, Lagoo would do well and gain by identifying mutually rewarding alliances and marketing partnerships with potentially strong, smaller or similar-sized players in the yarn business.

While the point made by Rajiv Vedi, the marketing controller, through comparisons with the larger petrochem player Mobius, is interesting, he has to realise that it is a choice between a widely integrated focus and a focussed niche market play. Osiris, with its significant advantages in the intermediate polyester and yarn business, would do well to go for the 'horses for courses' option, by demerging and concentrating on the two separate but specific strengths.

Further, it is quite likely that the more dynamic and structured polyester business had thus far overshadowed the yarn business, focussed on the textile industry. Given the smaller players here and their fragmented structure, Osiris would do well to demerge its yarn business to attain compatibility for business partnerships with its brethren units in the industry. Osiris' yarn business could potentially play an important role as a leader in this arena, given the inherent strength of belonging to a larger and better-managed entity with a global view.

Concurrently, the polyester business of Osiris can ride on its strengths in the petrochem sector, and grow, backed by its definitive edge in terms of technology and capacity-to fulfil its market potential.

All in all, the demerger would provide the two companies the freedom, space and identity to operate under their distinct market dynamics, but nonetheless governed by the overriding corporate ethos of Osiris. This could potentially be a truly win-win proposition for both of Osiris' businesses.

"Without a clear strategy, holding the polyester and yarn SBUs under a single parent won't help.'' Sunil Nehru, Managing Director, Insight Business Consultancy

To demerge or not to demerge-that is the question. Lagoo faces a difficult decision. Structure should follow Strategy, as they say, and this is a question of structure. So where is the Strategy?

Osiris is no Mobius, and while Vedi, the Marketing Controller, seems fixated with emulating the giant competitor, there is clearly no future in trying to beat them at that game. Mankad of polyester wants to change the synthetics playing field by moving into new, specialised products, picking off attractive sub-segments that might click, by building R&D and leveraging his cost-conscious manufacturing base. Ahuja wants to exploit market opportunities other than apparel for his yarn, and is looking at growth through acquisitions. The two SBU Chiefs have their feet on the ground, have realistic ambitions and are eager to do battle with similar-sized competitors in the mid-market arena. But where is the brand-strategy for Osiris as a whole?

Neither Lagoo nor Vedi have articulated one, and there lies the rub. Their pleas for a unified brand seem to be sentimental and woolly, conferring, at best, weak second-order benefits to the businesses. Even Suresh, the Vice President (Finance), is clear that the brand is not likely to be a key factor in raising the finances needed. It was straightforward performance that would count with investors. Vedi's yearning to emulate Mobius, while a potential strategy of sorts, is clearly unrealistic and Lagoo brings him sharply down to earth when he mentions forward integration into apparel!

Without a clear over-arching strategy for the Osiris brand as a whole (which then would drive, not just the existing businesses, but the thrust into new businesses as well), holding the polyester and yarn SBUs under a single parent just does not make sense. The usual sources of synergy-shared vision, strategy, knowledge, technology, facilities, services, vendors, and customers-do not apply. The captive supply of polyester to the yarn SBU can take place just as well between separate companies. In fact, such an arms-length relationship would sharpen the commercial performance of both. Each would also be able to sell to the competitors of the other without hesitation, if they were quite distinct entities. Vedi cites his naphtha prices paper and the benefit to polyester's R&D efforts from intelligence provided by the yarn SBU as reasons for staying united. If such intelligence was important to a business, it would have to be sought systematically in any case.

For my money, therefore, Lagoo should proceed with the de-merger. The Osiris brand should vest with the original family business-the yarn business. Since it is older, smaller and less well established, it would benefit from existing brand equity. Lagoo, Vedi and Suresh would have to support each of the two businesses to complete their new business plans, financing programmes and internal manpower resourcing. Having re-launched them as focused companies, they should then bow out to seek pastures new.

"Demerging into two units does not imply they create two parallel sets of infrastructure." Kameswari Vissa, Partner, KPMG Consulting

Osiris should demerge and the two units (polyester and yarn) should be independent in order to achieve the articulated objectives of pursuing SBU specific strategies and enhancing shareholder value.

There are obvious synergies between the units. The polyester unit provides assured supplies at close proximities to the yarn unit. The rationale for backward integration, though highly relevant at one point in time, in the current liberalised scenario appears to be weak. The two main reasons for this are-price of material and availability. The domestic price of sourcing polyester, the feedstock for the yarn plant, is aligned to the import price and hence no major price differential advantage exists. Imports are freely accessible in India with same or better quality parameters-this eliminates the second objective of having assured supplies.

The other area of synergy is the similarity in developing applications. The demand drivers for the two units are common to some extent. The demand for yarn applications forms a subset of demand for the polyester unit. Therefore there is a degree of commonality of R&D for developing new applications and thereby new markets.

On the other hand, the industry lifecycle of the polyester unit need not impact the performance of the yarn unit. The capital requirements for the units can be better justified while linking requirements to the respective industry segments and relevant benchmarks.

During the trough cycles for the polyester unit, the overall profitability of Osiris will be affected and the yarn unit's performance will be diffused. In such situations, the stakeholders, including the shareholders will be able to relate to the business strategies and funding requirements if the units were independent.

There is an evident conflict in the product quality strategy-the polyester unit wanting to produce cheap/cost-effective products and the yarn unit wanting quality products. The independence will help resolve these conflicts and the yarn unit may source better quality of feedstock with no compulsions to source from the in-house unit.

The aspect of cost efficiencies is relevant in the context of running a profitable business. In today's business paradigm the cost efficiencies can be arrived at through shared services. The mere fact that Osiris is demerged into two units does not imply they create two parallel sets of infrastructure for the support services. The support services such as finance, account, information technology and human resource management can be shared between the two units. The synergies in R&D can also form part of the shared services. Shared services can either be part of one of the units in their new independent entities or can be a separate entity providing service to the two independent units.