Mr. Srinivasan Suresh, Ex CFO, Emirates Airline, holds forth on the subject of Mergers & Acquisitions at the Department of Management Studies, IIT M

The Corporate Wisdom forum of the Department of Management Studies (DoMS) invited over Mr. Suresh Srinivasan, Ex CFO of Emirates Airline, for a session on the intricacies of Mergers & Acquisitions (M&A).

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 good companies that succeed at integrating acquired companies concentrate on the areas that 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. In such circumstances it can go for a Joint Venture (JV).

Describing the process of a typical acquisition, Mr. Srinivasan said that a company interested in acquiring another first gives an intention of target to one it’s interested in. Then a Non Disclosure Agreement (NDA) is signed between the two. After this, an Expression of Interest is given to the target company after which financial advisors for this process are appointed. 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 interested company appoints legal advisors.

After these steps are over, the selected suitors are invited by the target company and given a separate room that contains its confidential data, for the process of due diligence. After the creation 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 the Tata-Corus deal as a successful deal and said 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 with his 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 a Memorandum of Understanding between the interested companies, a business plan, a JV agreement, 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 been outsourced to a highly respected firm in that business, which ensured that it was managed professionally 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 to R. Balaraman, and the 1st and 2nd prizes for the previously-held quiz on M&A to Vivek Jain and Neha Barnawal, 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.

Kunal Lal

DoMS Interface Team

Class of 2009

Dr. Asha Krishnakumar, Divisional Manager Ashok Leyland, emphasized on CSR at DoMS IIT Madras.

Corporate Wisdom forum of DoMS IIT Madras invited Dr. Asha Krishnakumar, Divisional Manager Ashok Leyland for a talk on Corporate Social Responsibility (CSR).

The distinguished guest started with asking the fundamental question of “what is CSR?” She quoted Friedman and said motive of organizations is to make profit for the stakeholders, then why go for CSR? Tracing the history of CSR she said at the end of 19^th century many corporations in Europe and US had set up 100s of philanthropic trusts. CSR was seen as capitalism with a heart. During last 2-3 decades, with increasing globalization CSR has gained augmenting popularity. Now many theory exists in favor and against of CSR.

Discussing the global CSR scenario, Dr. Asha said that it all primarily started with bad press. Organizations like Dow Chemicals, Enron and Nike etc. were battered by press for their unethical business practices. Many customers shunned Nike after discovering that it employs child labor in developing countries. So as a part of damage control activity, these companies started focusing on CSR in a big way. They have started cleaning up their supply chain and many big global retailers like Conron, Ikea & Bodyshop who source glassware, brassware etc. from India, are working with NGOs to improve the lives of children. Now “No Child Labor” logo is a coveted one.

Dr. Asha elaborated on types of CSR activities which are- cause promotion, corporate social marketing, community volunteering and socially responsible business practices. She also revealed that now we have many CSR watch dogs & CSR monitoring institutions in form of Dow Jones Sustainability World Index, Social Accountability 8000 (SA 8000) etc. All these factors have led to an increased activity in CSR space across the world. For example Vodafone transferred money through text messages to those without bank account in Kenya; Honda took road safety initiative in China & Japan; HSBC focused on education & financial literacy classes and Sony initiated recycling programs & electronic drop boxes.

Talking about the Indian CSR scenario, Dr. Asha said though India moved slowly towards CSR, now Indian companies have started to wave the CSR flag. Now the mind set is changing from “Why should I do it?” to “How should I do it?” The reason could be that the pressure for CSR is building up now and also companies now think CSR looks great on company mission statement and value codes. The CSR in the country has evolved over a period of time from “adhoc charity” to “allied charity” to “focused charity”. Now strategic philanthropic is also taking shape. For sustainability and good returns on CSR spending, well defined processes need to be put in place. Social objectives need to be clear, measurable and linked to the economic goals of the organization. ITC’s e-chaupal initiative was one highly successful model which linked the CSR to its core business. It has been found that CSR helps organizations in enhancing brand value, credibility, giving competitive advantage, increasing customer loyalty & community trust and motivates employee.

Dr. Asha then expounded on CSR initiative at Ashok Leyland. CSR at Ashok Leyland is very structured and involves socially relevant activities to build trust among employees, community and stakeholders. Many focused groups and initiatives have been taken up to engage employees and their families in form of SHGs (Self Help Groups). Organization has been doing activities like HIV/AIDS awareness, afforestation drive, and relief operation during natural calamity, coaching for poor school students, driver de addiction centers etc. Company has also started a green initiative wherein it implemented a green supply chain management which includes reduction, recycling, reuse & substitution of materials.

In the end Dr. Asha concluded by saying that “CSR is not only about doing good for the society, it makes sound business sense also”.

Vishal Chourasiya

Rajeev Karwal, Ex-President & CEO, Consumer Durables Vertical of Reliance Retail Expounds on the Future of Retail in India at DoMS, IITM

The CEO Connect forum of the Department of Management Studies (DoMS), IIT Madras invited Mr. Rajeev Karwal, Ex-President & CEO, Consumer Durables Vertical of Reliance Retail to share his valuable insights and enlighten students about the present scenario and future prospects of the Retail sector in India.

Starting off a session marked by sharp comment, he candidly talked about his own experience with heavy traffic and jams in metropolitan cities. Mr. Rajeev Karwal emphatically said that organized retail in India has miles to go before it revolutionizes the common man’s life. He backed this argument by saying that today a typical metro was plagued with poor road infrastructure, transport services and scarcity of land. In the face of such challenges you can’t expect a typical family of four which rides a two-wheeler to travel small distances on vehicle-infested and pot-holed roads.

However, according to him, the organized retail revolution has begun to slowly find its feet in India. Big Bazaar, Pantaloons and Reliance Retail have begun in earnest. But they have to invest heavily in areas such as infrastructure, technology, training and in-house advertisements. Such activities typically shave off portions of returns giving back only about 5-6%. Giving them a tough fight are the good old kirana stores, who are well entrenched in the nooks and corners of the country and don’t need the same investments. They are also not bound by any obligations that a company has towards its stakeholders and the stock markets.

Talking about the size of the organized retail market in India, he said that it is just about $238 bn big, which is less than the revenues of $ 351 bn of that of Wal-Mart. So there of course lies immense potential in this sector but the demands that it places on the operant companies are immense. Describing a typical mall, Mr. Rajeev Karwal said that it would need at least one major anchor in the form of brands such as Shopper’s Stop or Big Bazaar, a food court or chains such as McDonald’s, Pizza Hut or Haldiram and movie theatres. However there was a shortage of such anchors since many preferred to set up their own shops in the face of high rental prices at malls, resulting in agonizingly long times to reach a semblance of break even.

Mr Rajeev Karwal emphasized that organized retail isn’t about putting together retail in an organized looking place. Just setting up snazzy shops with great looking interiors doesn’t qualify you as an organized retailer. You need to give the customer what he or she demands. Despite so many requirements you need to give low prices at good quality. While many players like Reliance Retail have made decent attempts at extracting the maximum value out of the supply chain, they still fail in providing the personal touch that the Indian consumer demands. He asserted that is where the kirana store owners score. They are ready to drop by to your house to give you a bottle of cold drink every time a guest drops by. They know you favourite brands. They are willing to give you credit. Through relationships built over the years, they provide you peace of mind and product guarantee and replacement. These are the survival tactics of the kirana store owners at work, determined old timers who will leverage upon old practices and still innovate and fight to retain their traditional customers.

Sharing the difficulties that organized retail faced, Mr. Rajeev Karwal said that the back-end supply chain operations were of prime importance. They also require lots of cash as the farmer would need to be paid for 2 seasons of crops before a company could be assured of a steady supply. In contrast, organized retail in developed nations required brand owners and product manufacturers to fund organized players. Such features make the challenges of the Indian market unique, for which retailers must innovate to stay and grow. Mr. Rajeev Karwal said that the cause of organized retail is also not being helped by different and inconsistent policies framed by different governments at different times. In addition, the sector needs foreign investments, an important input that still doesn’t find favour with the powers-that-be.

Confidently claiming the market share of organized retail to be very low, Mr. Rajeev Karwal said that it would be at least 10 years until it would reach 20% of the entire retail pie. That was because product manufacturers would not give up on sales avenues in the form of traditional neighbourhood kirana stores and would woo them more aggressively than the organized players.

However, the scope of growth for organized retail was humongous as there was tremendous confidence and momentum in the market. That is because today the consumer is looking at an entire experience, something that the retailers know about and are working on. Hailing the popularity of mobile phones in India, Mr. Rajeev Karwal stated that their numbers had grown faster than Internet connections and credit cards. Enabling shopping by promotions through such a medium or offering credit or debit through such a route would revolutionize the retail sector in the coming times.

With the stage being opened for questions, students posed their queries. Answering a question about the future of online organized retail, Mr. Rajeev Karwal opined that the average Indian consumer was very value conscious. He or she likes to compare various offerings and touch and feel each of them before making a choice. Online shopping not only blocks the consumer from doing that but also is helpless in the face of limited Internet penetration and the low trust it evinces.

On being queried about the potential of the rural retail sector, he said that there were a thousand unorganized retailers who were supplying goods without being recognized on government papers. This ensures that the rural economy provides cheap goods without worrying about the excise and sales tax and VAT. But still organized retail’s stronghold was the variety it offers to the urban consumer.

When quizzed about the emergence of private labels by organized retailers, Mr. Rajeev Karwal replied that these were the tactics of firms to cut off established brands from the reach of the consumer as they offered low margins. He said that private labels can be created at low costs and thus provide higher margins as well as brand recognition for the retail brand.

At the end of the session, Mr. Rajeev Karwal said that retail giants, though growing, still had miles to go before they can confidently say that they have acquired the faith and trust of the Indian consumer. Till then, the kirana store owner shall rule supreme. Finally, speaking in context of his new venture, Milagrow Business & Knowledge Solutions, he signed off by saying that with strong fundamentals, great ideas and ample opportunities at their disposal he would urge the students of DoMS IIT Madras to become entrepreneurs like him and explore the possibilities that the retail market is offering today.

Kunal Lal

DoMS Interface Team

Class of 2009

Twenty Fifth Endowment Lecture held at DoMS, IIT Madras

Department Of Management Studies, IIT Madras had the honor of hosting the twenty fifth endowment lecture in association with EFSI (The Employers’ Federation of Southern India). Mr. K Pandia Rajan, Managing Director & CEO Ma Foi, was the chief guest of the evening.

The program started with welcome note by Mr. Shaji Varghese, President EFSI. He briefly touched upon the history of EFSI, which was setup in 1920, immediately after ILO (International Labor Organization) was setup in Geneva. EFSI was the first organization for employees dealing with issues like labor policies and labor management. The Endowment Lecture was started in 1970s, in association with Humanities Department of IIT Madras. This was followed by Presidential Address by Prof. TT Narendran, who in his hallmark style recalled the early years of Endowment Lecture. Prof. Narendran welcomed the Chief Guest and stressed upon the importance of HR in today’s dynamic job environment. He also introduced the topic of the session i.e. ‘Changing Nature of Work & Employment’.

The stage was then handed over to Mr. K. Pandia Rajan, chief guest of the event. Mr. Pandia Rajan has a B.E Honors from Coimbatore and a MBA from XLRI Jamshedpur. He founded Ma Foi, which currently has 1750 professional across 100 locations. Mr. Pandia Rajan started with recalling that this was his third lecture at IIT Madras in last one year and how much he loves coming to the campus again and again. He posed a very thought provocative question of ‘Who am I? An employer, an employee, owner, entrepreneur or something else?’ He explained how he is a bit of all, depending on the situation and in today’s dynamic world the distinction between all these is vanishing. He revealed a deal, he just signed before coming for the event, with Achimasala, a SHG (Self Help Group) of about 700 women with a turnover of Rs 280 Crore. The deal pertains to door to door marketing of Achimasala products and Mr. Pandia Rajan was very excited about how he would be helping many women in upgrading their living standard. He admired the ShaktiAmma initiative of HUL which covers 50000 villages as of now and ITC’s e-Chaupal which covers one seventh of rural areas in the country.

Mr. Pandia Rajan used Wheel of Migration as a framework to explain current dynamic scenario. The four planks of the wheel namely Migration of products and services, Migration of talent, Migration of capital and Migration of business processes precisely explain the various dynamics of today’s enterprise. If US blocks H1B Visa, more and more jobs will be outsourced to India. If UK blocks nurse visas, more and more patients will start coming to India for treatment leading to what is now famously known as health tourism. Hence, this link between migration of talent and business processes is creating many different business models.

Mr. Pandia Rajan also touched upon how attitude and mid-set towards HR as a stream is fast changing. He took example of a famous HR & BPO company named Exult Inc., which in 2000 reached a valuation of $1 million with just one single employee and just one client. Later on it was acquired by Hewitt Associates. VCs (Venture Capitalists) today are lining-up to invest in good ideas unlike old time when many good ideas died for lack of fund. People have now started asking ‘What is your business model?’ instead of simply business which was the case earlier. The entire scenario of entrepreneurship is getting redefined. Mr. Pandia Rajan raised the issue of transience & transition by sighting the decreasing longevity of employment. Nobody today is talking about life long employment. The options available today are plenty and have increased many folds.

Mr. Pandia Rajan shared a very interesting anecdote that, while inaugurating his 100^th office at Hong Kong, the room had 112 people of 50 different nationalities. This is the extent to which the world has globalised. He also stressed on the fact that now the perception of India in the world is changing. India is no longer a punishment posting destination instead an Indian stint is now a requirement for the CEO Job. As an individual we are living in a very exciting time. We have an opportunity to be at the very top. He cited one issue that is really holding back our Country is that of labor laws. Country has 176 conflicting labor rules which are proving to be a major roadblock for the country. Interestingly labor ministry has the highest attrition with 9 labor ministers changed in last 10 years. Mr. Pandia Rajan ended the lecture by stressing on need of labor law reforms.

By:

Vishal Chourasiya

DoMS Interface