Talk on M&A by Mr. S. Srinivasan,Emirates

The much awaited Corporate Wisdom session on Mergers & Acquisitions was conducted today(Nov. 21st) in the Department of Management Studies (DoMS). Mr. Suresh Srinivasan, Ex CFO of Emirates Airline was there to detail the students on the intricacies of Mergers & Acquisitions.

Mr. Srinivasan began by telling about the journey that Emirates had traversed from its inception to its present when it is the fastest growing airways and the 2nd most profitable airlines company in the world. Emirates actually started off as chain of travel agencies. After working as so for many years, it felt that it needed to enter into other travel-related businesses. So it gradually entered into several businesses over the years, starting from ground handling at its airports, holiday package selling, and catering services, to cargo logistics business in the UAE and overseas. During the course of this growth, it acquired a stake of 44% in SriLankan Airlines and a ground handling business in Singapore.
During each of these acquisitions Emirates asked itself whether the companies being acquired fit into its group and would they make sense over the long-term.
Starting off on the subject of acquisitions, Mr. Srinivasan said that acquisitions can take place in many ways. A public company would charter a different route than a private company. That was because public companies need to take into account the interest of its stakeholders. This is all the more important because as a company grows and goes public it starts diluting its stake and when its managers get ready to plan for an acquisition there is no single entity that guides them to ensure optimal returns for its stakeholders.
The diversification patterns in India are however are more succession-driven rather than expansion-driven as a large chunk of companies are family businesses. But goodcompanies that succeed at integrating acquired companies concentrate on the areasthat they need to expand into and then look for players in that industry. A company after acquisitions might still not acquire the critical mass it requires to be a reckoning force. Insuch circumstances it can go for a Joint Venture (JV).
Describing the process of a typical acquisition, Mr. Srinivasan said that a company interestedin acquiring another first gives an intention of target to one it’s interested in. Then a NonDisclosure Agreement (NDA) is signed between the two. After this, an Expression ofInterest is given to the target company after which financial advisors for this process areappointed. This part forms an important component as the financial advisors bring in great expertise thorough their experience, knowledge and networking and help in analysis of financial and technical details to ascertain the compatibility of the two companies. They help create an Information Memorandum specifying the details of the possible tie-up. After that the interestedcompany appoints legal advisors.
After these steps are over, the selected suitors are invited by the target company and given aseparate room that contains its confidential data, for the process of due diligence. After thecreation of the Draft Share Purchase agreement, the valuation of the target starts. This is a very important stage during which the person-in-charge at the target company keeps the entire management and the head of all business units posted about each detail of the process. Similarly, the target company’s accountants need to be in the loop as there are very stringent guidelines for writing off goodwill. After that the interested company meets with the clients of the target company.
Commenting on what could go wrong during M&As, Mr. Srinivasan gave the example of theTata-Corus deal as a successful deal and sad that an acquisition could only succeed if it is proactive and has a strategic focus. That might be the reason why only about 60% of the mergers succeed. To succeed, the acquiring company must work on synergies right from the word go and try to materialize them within 1 year. Many times this requires letting go of restructuring of the new entity, a strategy with Emirates has successfully followed.
Explaining that the process of valuation of a target company is more of an art rather than a science, Mr. Srinivasan said that it is never going to give a correct value. What actually matters is who makes the valuation. He told that the process of valuation of a privately-held company was different from that of a public company.
Mr. Srinivasan then talked about the three most popular routes of valuation: using Net Asset Value (NAV), the Earnings Multiple and Free Cash. He commented that while NAV was the most preferred, the Earnings Multiple path was good for a listed company. He showed graphically that Free Cash method gave the highest range of valuation, and then came in the Earnings Multiple method, and the lowest range was usually given by the NAV method. This was followed by a detailed explanation of the technicalities of each method, where Mr. Srinivasan pitched in withhis expertise and related examples on a spreadsheet, elucidating the areas where each method could be applied, the data required and the entire process of calculation.
Also touching upon mergers, Mr. Srinivasan emphasized that it was a way for better and efficient corporations to takeover not-so-well firms. With regards to merger, he spoke about the Event Study methodology and the Postmerger comparison studies. Mr. Srinivasan said that acquisition could be a regulatory nightmare with so many policies and regulations in place such as the Companies Act, Income Tax act and the MRTP act.
Holding forth on JVs, he said that no premium was attached to them, unlike acquisition. They actually started with mistrust of the partner with the problem being that of who will control the joint entity. As a result, in almost 90% of the JVs one firm buys out the other. He also said that in case of JVs accounting profitability was not an indicator of the success of the JV. For this purpose, Mr. Srinivasan gave the example of Emirates wherein when it found that ground handling charges in a new location were exorbitant it quickly opted for a JV with a local company and benefited from it as both worked towards supporting each other and realising synergies. JVs follow the route of aMemorandum of Understanding between the interested companies, a business plan, a JVagreement, a shareholders’ agreement and then finally the incorporation of the jointly operated firm. JVs are actually a very easy route to synergize as partners can dissolve them immediately and walk out.
After such a dedicated effort towards explaining M&As and JVs, Mr. Srinivasan fielded questions from students. On being asked the reasons for Emirates venture into airline as well as the hotel businesses, both of which are very capital-intensive, Mr. Srinivasan replied that the strategy succeeded because Emirates had no worthy competitor. Moreover, the hotel business had beenoutsourced to a highly respected firm in that business, which ensured that it was managedprofessionally in the best possible manner. He agreed that it might have been difficult in the face of competition.
On being quizzed about his thoughts on the Kingfisher-Air Deccan merger, Mr. Srinivasan asserted that it was a very good idea at least for the present as they could consolidate and work well. They already hold around 39% of the market and the deal seems to be working fine for both. However, no one could say for sure whether the combine will be able to weather the terrain of aviation well in the future.
When questioned how different a hostile takeover was from a friendly one, he said that the only difference was the initial doubts and negativity about a forced takeover by the targeted firm. Giving the example of Arcelor-Mittal, Mr. Srinivasan told that once the stakeholders get convinced it becomes a easier path to tread on.
A question raised about the preference of cash for stocks in order to pay for an acquisition was answered by saying that a seller will obviously force a cash payment as its stake will dilute in the future and it may not be able to dictate terms later. As a result, targeted companies during acquisitions preferred cash to stock payments.
On being asked about the future of the Air India-Indian Airlines merger, Mr. Srinivasan said that individually the companies would have gone down. It was a good decision on the part of the government to merge them. This would help them majorly in the number of aircrafts that the joint entity would have. However, he wondered how their inefficiencies would be reduced without any job cuts. An answer to that could be to recruit lesser and lesser over the coming years.
Answering the last question of the day, Mr.Srinivasan said that apart from the PE multiples, EBIDTA was also a good parameter of valuation. At the close of the session, Mr. Srinivasan gave away the award of the best question toR. Balaraman, and the 1st and 2nd prizes for the previously-held quiz on M&A to Neha Barnawal and Vivek Jain, a new practise put into operation by the Corporate Wisdom team. At the end, the Corporate Wisdom team signed off by thanking Mr. Srinivasan for sparing time and giving profound insights and knowledge about M&As.

Talk by Dr. Bharat Balasubramanian, Daimler-Benz

It was a new quarter at the Department of Management Studies, IIT Madras and it was a new corporate honcho who took out time to address its students and impart wisdom from his enterprising career. So it was Dr. Bharat Balasubramanian, Vice President, Group Research and Advanced Engineering, E/E, IT and Processes of Daimler AG whom the student came in droves to listen, under the auspices of the Corporate Wisdom forum.

Dr. Bharat Balasubramanian started by introducing himself. He is an IIT Bombay alumnus who went to Germany in 1974 after graduation. He joined his present employer in 1977. He said that joining Daimler AG was a conscious decision on his part as he wanted to work in a hard core engineering field rather than go to the US or to the IIMs for further studies, as his batch mates did.

Dr. Bharat Balasubramanian gave a description of various units of Daimler AG as well as Daimler-Benz and various cars, trucks and vehicles that these premium brands make. He spoke of the challenges the company is facing, in the face of other premium brands and worthy competitors such as BMW, Audi and Volkswagen. Daimler AG and Daimler-Benz today are working on delivering better cars that give more value to the customer who chooses to go with their brand. This posed great engineering challenges in areas such as fuel injection systems as well as fuel quality, he emphasized. To counter them, he showed how his company was actively engaged in research and development projects. The Mercedes-Benz brand is a first-rate brand that stands for class, comfort and safety. So today the company was working hard to come up with technologies that gave top notch comfort as well as safety. For this purpose, the company has zealously invested in quality improvement processes.

He said that Daimler-Benz also had a R&D centre in India. He described about the initial challenges of setting up a new division outside of Germany as the company’s employees were wary of the unit taking away jobs from them and how initially the results were not up to the mark. That’s when he decided that the unit needed to fix the problem of kill the unit. Dr. Bharat Balasubramanian then worked hard at convincing the powers that be that if the company let go of this opportunity then someone else might pounce on it. He went for a Board of Directors revamp. Also as it was the Mercedes-Benz brand that was better known and respected in India, the unit was renamed as the Mercedes-Benz Research Center to make its presence felt as well as attract the best talent.

After listening to such an interesting career progression and its accompanying challenges, curious students poured in with their questions. On being asked how he managed the progression from a total R&D professional to a managerial role handling so many units, Dr. Bharat Subramanian said that the transition was an easy one. However, he had his share of challenges. As a part of the senior management he had put forward a thesis that the company change its focus. Initially 90% of the efforts were concentrated on the engineering side and only 10% on management. He suggested that Daimler AG give 40% efforts towards engineering, 30% towards processes and the rest towards management. This was unacceptable to a number of engineers at the company as they were adamant that the present setup was good enough and they were managing very well. After a lot of convincing on the management’s part, the employees were trained over a period of 3 years in management aspects such as sharing one’s vision with one’s team and working with an inter-disciplinary team as well as process aspects such as TQM. This process lasted 3 years at the end of which the management as well as the trained employees appreciated that the training helped them perform their job better.

On being quizzed why Mercedes- Benz didn’t have a great presence in India, Dr. Bharat Balasubramanian accepted that India was a small market for his company. He said that there was a big market for different segments of cars in India and their quality and price aspects were very different from premium brands as that of Mercedes-Benz. So the company would need to differentiate on this respect and come with a different car. In contrast, Europeans expected the same technologies in each car segment and were also very conscious of differentiating between the segments. That’s why Mercedes-Benz had a greater market in Europe than in India, he explained.

Answering question on the split between Daimler and Chrysler, Dr. Bharat Balasubramanian said that the relationship was set up because the company wanted a foothold in the US. However, Daimler AG was a premium brand player while Chrysler was a volumes player. The synergies that the two wanted was not really found as despite the tie-up, both operated as different units and reported profits individually. The combination also had massive cultural issues. Moreover, Chrysler, along with other American automotive giants such as GM and Ford, didn’t really attract the best talent. In contrast, the best engineers in Germany vied to work with each other to work for a company that produced a car such as Mercedes-Benz. So there was also a talent dissonance. To top all these, the brands didn’t match. Mercedes-Benz didn’t want to dilute its brand with the Chrysler association while Chrysler wanted to a brand of the masses; this resulted in a totally ineffective brand strategy. This taught the company a very important lesson – if you want synergies to come from an association you must share the same platform of operation. Even when 2 years ago when it became clear that a split was needed, there was no retrenchment possible in Chrysler as was the norm in the US automotive industry. Finally a majority stake of the holdings was bought by Cerberus Capital Management.

Commenting on the Tata Group’s famed attempts to make the 1 lakh car, Dr. Bharat Balasubramanian said that European car makers wouldn’t make such a car for their customers. He said that in this case Tata’s strategy was to attack the 2 wheeler segment users and give them a safer option than an open vehicle to travel with their entire family. However, such a car wouldn’t pass the crash tests that are a very important regulation to be met by European carmakers. In fact, two wheelers such as motorcycle have their own market in Europe as they command a distinct respect as a stylish way of travelling. Due to such intricacies involved, he surmised that the European customer wouldn’t fall for such a car.

In the end, Dr. Bharat Balasubramanian said that he felt that engineers from institutions such as the IITs were moving more towards sectors such as IT and Software Services rather than hard core engineering. To have a Mercedes-Benz come from India it was important that the best brains flocked to the automotive sector.

Global Management- Srini Nageshwar, Dyansys Inc.

DoMS, IIT Madras first corporate interaction for the academic year of 2007-08 kick started with Corporate Wisdoms hosting Mr. Srini Nageshwar, Director and CEO of DyAnsys Inc, a US based medical instrumentation firm that has been founded with the aim of applying Mathematics to Medicine.He started his career with Hewlett-Packard, where he worked for 25 years and was instrumental in standardizing the 3.5 inch floppy. As the CEO of Iomega for 8 years, he played a vital role in developing the Ditto, Zap and Jaz business.Discussing the topic of “Global Management”, Mr. Srini Nageshwar harped on the fundamental importance of adapting to global markets and cultures.

Outlining the characteristics of a Global Manager, he said a Global Manager is one who can function anywhere in the world, can start off immediately on any assignment, should be able to understand the company very well to achieve objectives and leave the organization better off than when he started with. Stating that a Global Manager should also be able to manage diverse backgrounds, he claimed Indians to be better suited to become Global Managers because of India’s inherent diversity.

Mr. Srini Nageshwar said the prerequisites to becoming a Global Manager are: a sound upbringing, extrovert behavior, openness, flexibility and adaptability and a strong intent of practicing day in and day out. He also held forth the difference between global professionals, in country professionals and employees who carried out the routine tasks of a company.

Speaking in context of practicing Global Management, he said that a company usually starts a subsidiary in a new location through a trustworthy lieutenant, emphasizing the need for someone who knows what the company wants exactly. He likened this to potting a plant in one place in a garden and repotting it in a new location. He told that a Global Manager was parachuted in when a company wants to accomplish change, add skills to the organization or manage outsourcing. He spoke of each of his stints where he had to work as a Global Manager to open a foreign business and manage change to refocus towards growth.

For achieving such goals, Mr. Srini Nageshwar harped on the need to develop a good business strategy, staff the team accordingly and execute the strategy solidly. For a robust top-line, he emphasized the importance of appropriate business and financial models for a firm, a good product strategy, people skills and people management.

He also spoke of differences between a Silicon Valley company and an Indian company. To become a balanced company, he said that one should squeeze all possible sales out of current products and define and execute new product development programs. This requires having a killer marketing and sales group while using current resources extremely effectively.

Regarding entering foreign markets, Mr. Srini Nageshwar recommended to start off at avenues where mistakes made wouldn’t hurt the company much and develop templates for functions such as products, logistics and support. These guidelines to Global Management were peppered with examples from his own professional life, making the discussions more relevant and useful to the audience.

Finally, Mr. Srini Nageshwar answered the audience’s queries, harping on the need to strengthen the Indian infrastructure with respect to support for entrepreneurship as well as the need for building better companies to build a better nation.

Talk by Mr. Josh Foulger, Nokia

Mr. Josh Foulger, Head of Manufacturing Operations, Nokia visited DoMS on 12 th Feb to give a talk on various topics ranging from various popular products of Nokia to the strategic reasons behind the setting up of Nokia plant in Chennai.Mr. Josh being Head of the Manufacturing Operations and with his 10+ years of experience with Nokia was with the CMO division which looked into sales & marketing, SCM, SC solutions and manufacturing technology. He started his talk describing Nokia’s market presence and its dominance of the mobile phone market. Nokia was way ahead of its competitors like LG, Siemens, Samsung etc with a whopping 32% market share.

He then gave a brief glimpse of the various products from Nokia which were popular and which featured the latest in handset technology. He described how Nokia was structured into various Business groups (verticals) and how each of these business groups functioned as individual entities with their own separate teams for marketing, R&D etc.

He described the strategic reasons behind the Nokia plant in Chennai. Lower labour costs, and availability of resources including skilled technologists played key roles in setting up the one-year old Chennai plant. Understanding customer requirements were key in formulation of Nokia’s manufacturing strategy. Nokia gave highest priority to Quality, cost and responsiveness in manufacturing.

The Question – Answer session which took almost the same time as the whole presentation saw a volley of questions being thrown at Mr. Josh by the students of DoMS. He himself confessed at the end that the questions were thought – provoking and it was a learning experience in itself for him.

A few of the questions asked were, regarding Nokia’s supply chain, the increasing replacement phone market, potential threats from competition etc. A few budding MBA’s probed on Nokia’s strategy of phasing out certain successful products as well as Nokia’s strategy of using numbers rather than names for each of its models, the lag in the introduction of latest models in India compared to their release in other countries and the possibility of tie-ups with mobile service providers. Queries were also put in on Nokia’s HR strategy of hiring Higher Secondary School pass outs for their manufacturing operations. Mr. Josh was able to substantiate his view on the importance of the market being the driver for making decisions related to market launch and withdrawal as well as Nokia’s attempts in seeing India as a low cost producer of high quality mobile phones.