Havells India: the Sylvania Acquistion Decision

1. Havells’ proposed acquisition of Sylvania Limited Inc. (SLI) makes sense from a strategic point of view. Macroeconomic conditions and an increasing threat of competition give merit as to why this proposed acquisition makes strategic sense. The electrical and lighting industry is poised for a major growth spurt (page 3), and this could pan out to be a lucrative time for companies such as Havells to begin investing in both these segments.

Havells has become a dominant player in the switchgear market (page 4), and it has smaller positions in the cable and wire (C&W) and electrical consumer durables (ECD) industries, both of which faced stiff competition. Even though, Havells has a good footing in their Indian domestic market, competition is now increasing due to globalization and governmental policy changes. The liberalization policy of the Indian government has brought new international entrants into the Indian market increasing domestic competition.

Havells needs to plan for an acquisition to diversify their operations geographically and through their product offerings. SLI, whose primary operations are in Europe and Latin America, would provide this geographic diversification. For SLI, as their competitive landscape increased, their management is also looking expanding its geographic reach. As well, Havells’ business is predominantly in electrical control gears with a small presence in lighting. The acquisition of SLI, whose product offering is primarily in lighting and lighting fixtures will give provide Havells product diversification.

As Havells currently has a small presence in lighting, the acquisition of SLI could bear fruit to positive synergies if these operations are combined successfully. SLI’s wide marketing network is perceived as a good channel for marketing Havells’ products in Europe (page 8). Combining the two companies R&D knowledge could bolster innovative products for both segments. These possibilities of synergy and the need for diversification due to competition make this acquisition lucrative from a strategic view.

2. The major risks with this acquisition are cultural/geographic differences of the companies, different product mix, and the size of the target in comparison to the acquirer. The cultural differences stem from the geographic locations of the two companies. The culture in Indian companies is much stricter than that of Europe. These create risks of organizational cultures clashing and proving to be counter-productive.

The different legal requirements due to operations in varying geographic markets create risk because of the need to have specific restrictions in each market that need abiding. The legal risks can be managed by involving third party firms who understand legal requirements in various geographic areas. The cultural risks can’t be managed away and need to be carefully monitored to avoid conflicts in the two organizations.

The different product mixes stem from the fact that Havells is primarily in the electrical segment of the industry whereas SLI is primarily in the lighting segment. This causes a risk in operations as Havells doesn’t understand that market segment. This risk can be managed through combining Havells small lighting division with SLI and leveraging SLI’s marketing to bundle electrical and lighting to target larger bids.

The size of the target, SLI, will create a large financial risk if the acquisition, requiring heavy external financing, does not create positive synergies. Lenders of this large acquisition would require their money paid back, and if something doesn’t go according to plan Havells would face liquidation risks. Financial risk cannot be avoided but can be managed through cost control, layoffs, and divestments to make the companies lean and more efficient.

3. Management would face cultural challenges between the two organizations’ management teams. Havells’ is a family business managed by relatives whereas SLI is not. This brings up the challenge of convincing SLI employees to follow a leader who is appointed due to his/her connection to the family. In promoting management to SLI, Havells’ cannot be bias to family members as SLI’s culture is not used to the family nature of the business. Succession planning, grooming talent, and appointing various leaders both from Havells and SLI staff to share leadership roles will help to build mutual respect amongst the management teams.

Since SLI is a more matured and established firm it is slower, more stable, and has a lot of process and hierarchy restrictions on decision making. Havells on the other hand is an entrepreneurial firm that is flexible, aggressive, and reacts quicker to changing conditions. This creates a clash of operations and poses a challenge in consolidating the companies. In order to combat this, Havells management should remove process and hierarchical red tape in SLI’s decision making and grant SLI management power to take on a more aggressive operations role.

Management would also face the challenge of Havells being a company half the size of SLI. Havells management does not have the size, or experience to manage both company operations. This challenge can prove to be very important as both companies expect to grow and prosper. Havells management can tackle this challenge by restructuring both companies and placing key Havells’ employees in charge of large segments overarching both organizations. As well, introducing key talent from SLI into Havells board and senior management will provide some experience in handling the combined organization.

4. I have created a framework of 10 key factors to quantifiably assess the likeliness of success of the proposed acquisition. These 10 factors are the top 5 advantages and top 5 disadvantages in the deal.

Using this framework, as shown in the appendix, I have determined the likelihood of success in this acquisition is 45%. One of the major success factors was the cross-segment benefit that arises, such as leverage bundling deals and SLI’s wide marketing network. A major success factor is the geographic diversity that this acquisition provides, which allows Havells to move into other regions. One of the major failure factors is the management differences due to one company being family run and more aggressive and entrepreneurial while the other company, which is non-family run, is mature and conservative in nature.

A major failure factor is the huge financial risks that have to be taken ($200 million) to finance the acquisition of SLI by Havells. If Havells cannot pay back the lenders, management may have to break up and sell its parts. As an advisor, I recommend proceeding with this acquisition as its success factors outweigh its failures. Even with a 45% chance of success, these risks can be managed and challenges can be dealt with, these opportunities to expand operations are not abundant.

Rationale:

Cross-segment benefit was given a score of plus 9 due to the fact that there are many positive synergies to be gained from the acquisition. SLI’s wide marketing network is a good channel to sell Havells’ products in Europe (Page 8). Also, products in the electrical and lighting segment can be bundled together in large offerings and bigger products.

Geographic diversity was given a score of plus 10 due to the fact that expanding operations geographically is on the mandate for both companies and it will allow for Havells to not be squeezed by domestic competition.

Product diversity was given a score of plus 8 due to the fact that offering various product lines allows for diversifying business operations. Also, the combination of knowledge and experience between Havells small presence in lighting, and SLI’s large presence can prove to bring positive synergies.

Vision alignment was given a score of plus 7 due to the fact that in 2006 both companies were facing immense competition in their industries and both had the vision to expand globally.

R&D Synergy was given a score of plus 4 due to the fact the combination innovation in R&D can prove to provide newer more innovative products to their industry segments by combining knowledge in both fields. Although, this is not a high importance to current market conditions, it will prove worthy for differentiation in the future.

Cultural differences was given a score of minus 4 due to the fact that the differences in the culture of the two companies will create problems as one is based in India and the other is in Europe. Although, it is not of high importance due to the fact that Havells doesn’t plan to consolidate the operations of either company so they will stay geographically apart. This plays a role only from a management standpoint.

Management differences was given a score of minus 5due to the fact that it is a larger problem for Havells management team. The family-run nature and the entrepreneurial nature of the Havells will create controversies with that of Sylvania. Although, this score isn’t higher because with restructuring this risk can be minimized.

Financial risks was given a score of minus 7 due to the fact that Havells will be acquiring a company twice its size and is seeking heavy external financial investment. This risk is outlined in the write-up but an overview of the problem deals with the risk if management isn’t able to pay lenders back due to potential negative synergies.

Legal requirements was given a score of minus 3 due to the fact that Havells will have to comply with a lot of requirements specific to various geographic parts of the world. This is given a low score of 3 for the ability to mitigate this risk through external consultations from legal experts.

Different product mixes was given a score of minus 2 due to the fact that Havells and SLI have different product mixes which either one has little experience with the others. Although, since operations are not being consolidated SLI can remain in charge of their own product mixes with little overlap.