Corporate Restructuring

          Session 2




        Abhimanyu
        September 06, 2009
Excess Capacity

   Why Restructure?
Excess Capacity Situations

            •   Symptoms of mature industries
            •   Excess capacity and free cash fl...
Cement Industry: Asian Scenario

            India’s cement market is highly
            fragmented with significant exces...
Cement Industry: Indian Scenario
            • Small players tend to have single locations
                     – 38 small...
Cement Industry: Indian Consolidation

           Rs. Crores              1997            1998             1999        200...
Value Chain

  Key Concepts
Value Chain Framework
           • Managing costs effectively requires a broad focus,
             external to the firm, c...
Value Chain Analysis: Strategic Decisions
            • A firm may specialize in one or more value
              chain act...
Value Chain Analysis: Process
            • Define the industry’s value chain and assign
              costs, revenues and...
Value Chain: Tea Industry
                                  TEA GARDEN


                             PROCESSING CENTER


...
Tea: Overall Cost Structure

            Cost Element                                 % of Total Costs
            Labour ...
Tea: Cost Structure Till Auction

            Description                                           Amount (Rs./kg)
      ...
Tea: Cost Structure Packaged Tea

            Description                             Amount (Rs./kg)
            Raw mate...
Tea: Cost Structure Wholesale & Loose Tea

            Description                              Amount (Rs./kg)
          ...
Tea: Cost Structure Vending Sales
                          Stage               % of cost incurred           Cost Incurred...
Methods Of Restructuring

        Key Concepts
Changed Business Environment


           •   Acquisition or Sell-off / Divestiture
           •   Merger
           •   J...
Acquisition or Sell-off / Divestiture
            • Acquisitions can be made for multiple reasons:
                     – ...
Merger
           • Merger is a joining of hands by two
             companies:
                    – Which have complimen...
Joint Venture
            • Joint Venture is a ‘marriage of convenience’
              where two companies agree to work t...
Going Public or Going Private
            • Going Public / IPO is an option when the company
                     – Wants ...
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Crest Sep06 Sesssion 2

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Crest Sep06 Sesssion 2

  1. 1. Corporate Restructuring Session 2 Abhimanyu September 06, 2009
  2. 2. Excess Capacity Why Restructure?
  3. 3. Excess Capacity Situations • Symptoms of mature industries • Excess capacity and free cash flows • Fragmentation of the industry • Poor economies of scale • Consolidation is the only way to survival September 6, 2009 Corporate Restructuring | Session 2 3
  4. 4. Cement Industry: Asian Scenario India’s cement market is highly fragmented with significant excess capacity. Country Top Players % of capacity (Nos.) Taiwan 2 55 Thailand 3 71 Malaysia 2 42 Indonesia 3 59 Korea 3 57 Philippines 3 31 India 6 51 September 6, 2009 Corporate Restructuring | Session 2 4
  5. 5. Cement Industry: Indian Scenario • Small players tend to have single locations – 38 small players with 38 MT of capacity. – 70% of this is in market of excess capacity e.g., MP has 18 plants having a capacity of 24mnTPA against demand of 4mn TPA. • Many mid-sized and larger players are part of diversified groups facing competing demands on their scarce financial resources from their other capital intensive projects. September 6, 2009 Corporate Restructuring | Session 2 5
  6. 6. Cement Industry: Indian Consolidation Rs. Crores 1997 1998 1999 2000 2001 Total Industry Sales 14,482 14,255 16,098 17,993 18,121 ACC 2,484 2,408 2,617 2,710 2,967 GACL 731 930 1,145 1,252 1,303 Grasim 887 953 1,236 1,731 1,993 L&T 1,116 1,290 1,616 1,932 2,193 Raymond 336 350 327 357 286 JK Corp. 250 277 321 362 411 Top 6 Total 5,807 6,211 7,265 8,346 9,155 Market share of Top 6 Players 40.10% 43.58% 45.13% 46.38% 50.52% September 6, 2009 Corporate Restructuring | Session 2 6
  7. 7. Value Chain Key Concepts
  8. 8. Value Chain Framework • Managing costs effectively requires a broad focus, external to the firm, called the Value Chain. A firm’s value chain is embedded in a larger system that includes suppliers’ and customers’ value chains. • The Value Chain framework is a method for breaking down the chain – from basic raw materials to end-use customers – into strategically relevant activities in order to understand the behaviour of costs and the sources of differentiation. September 6, 2009 Corporate Restructuring | Session 2 8
  9. 9. Value Chain Analysis: Strategic Decisions • A firm may specialize in one or more value chain activities and outsource the rest. The extent to which a firm performs upstream and downstream activities is described by its degree of Vertical Integration. • Managers may consider the following: – Whether the activity can be performed better or cheaper by suppliers – The risk of performing the activity in-house – Whether the activity is one of the firm’s core competencies September 6, 2009 Corporate Restructuring | Session 2 9
  10. 10. Value Chain Analysis: Process • Define the industry’s value chain and assign costs, revenues and assets to each activity • Investigate the cost drivers regulating each value activity • Examine possibilities to build sustainable competitive advantage either through controlling cost drivers better than competitors or by reconfiguring the value chain September 6, 2009 Corporate Restructuring | Session 2 10
  11. 11. Value Chain: Tea Industry TEA GARDEN PROCESSING CENTER BONDING / WAREHOUSING AUCTION HOUSE WHOLESALER AND PACKAGED TEA / EXPORTS LOOSE TEA VENDORS VENDED BEVERAGE CUSTOMER September 6, 2009 Corporate Restructuring | Session 2 11
  12. 12. Tea: Overall Cost Structure Cost Element % of Total Costs Labour 46% Selling Expenses 12% Power and Fuel 7% Stores and Spares 9% Repair and Maintenance 5% Other Costs 21% September 6, 2009 Corporate Restructuring | Session 2 12
  13. 13. Tea: Cost Structure Till Auction Description Amount (Rs./kg) Variable costs 55.25 Excise duty 1.30 Packaging costs 1.00 Transportation costs 1.50 Blending & Warehousing 1.00 Total Costs 60.05 Auction Price 58.00 Profit -2.05 Operating Margin (%) -3.53% September 6, 2009 Corporate Restructuring | Session 2 13
  14. 14. Tea: Cost Structure Packaged Tea Description Amount (Rs./kg) Raw material costs 58.00 Blending costs 1.00 Other costs 50.94 Total Costs 109.94 Selling Price 125.00 Profit 15.00 Operating Margin (%) 12% September 6, 2009 Corporate Restructuring | Session 2 14
  15. 15. Tea: Cost Structure Wholesale & Loose Tea Description Amount (Rs./kg) Raw material costs 58.00 Blending costs 1.00 Other costs 15.00 Total Costs 74.00 Selling Price 80.00 Profit 6.00 Operating Margin (%) 7.5% September 6, 2009 Corporate Restructuring | Session 2 15
  16. 16. Tea: Cost Structure Vending Sales Stage % of cost incurred Cost Incurred (Per Cup) To premix manufacturer 38.58% 1.54 To distributor 42.44% 1.7 To Retailer 45.83% 1.83 Delivery Cost Electricity 2.50% 0.1 Water 0.50% 0.02 Whitener 24.50% 0.98 Cost of cup 10.00% 0.4 Total Retailer Cost 83.33% 3.33 Price To customer 100.00% 4 Retailer Margin (%) 20% September 6, 2009 Corporate Restructuring | Session 2 16
  17. 17. Methods Of Restructuring Key Concepts
  18. 18. Changed Business Environment • Acquisition or Sell-off / Divestiture • Merger • Joint Venture • “Going Public” or “Going Private” September 6, 2009 Corporate Restructuring | Session 2 18
  19. 19. Acquisition or Sell-off / Divestiture • Acquisitions can be made for multiple reasons: – Increasing market control – Access to specialized / cheap raw materials – Access to new markets, new technology, new products – Cost synergies • Sell-offs happen when the company thinks a particular business unit: – Is no longer core to the company’s vision – Can be better run by someone else – Does not generate sufficient returns to match other units – Can be bargained for something better September 6, 2009 Corporate Restructuring | Session 2 19
  20. 20. Merger • Merger is a joining of hands by two companies: – Which have complimentary skills – Unable to tackle competition alone – In different levels of the value chain • Merger affects both the companies as they cease to exist as they were before the merger September 6, 2009 Corporate Restructuring | Session 2 20
  21. 21. Joint Venture • Joint Venture is a ‘marriage of convenience’ where two companies agree to work together in third, separate entity – To enter an untapped market – To bring together different skills – To work around regulations • Joint Ventures do no affect either companies since the new activities are carried on in a third entity September 6, 2009 Corporate Restructuring | Session 2 21
  22. 22. Going Public or Going Private • Going Public / IPO is an option when the company – Wants to raise capital – Wants to realize the complete worth of the firm – Wants to dilute promoter holding without losing control • Going Private is often undertaken when the company – Wants to increase acquirer’s stake and control – Wants to undertake business decisions without the restrictions of public companies – Wants to take large, game changing decisions September 6, 2009 Corporate Restructuring | Session 2 22

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