crest sep06 sesssion 2

Corporate Restructuring

Session 2

AbhimanyuSeptember 06, 2009

Excess Capacity

Why Restructure?

September 6, 2009 Corporate Restructuring | Session 2 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


Cement Industry: Asian Scenario

India’s cement market is highly fragmented with significant excess capacity.

516India

313Philippines573Korea593Indonesia422Malaysia713Thailand552Taiwan

% of capacityTop Players

(Nos.)Country


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.


Cement Industry: Indian Consolidation

50.52%46.38%45.13%43.58%40.10%Market share of Top 6 Players

9,1558,3467,2656,2115,807Top 6 Total

411362321277250JK Corp.

286357327350336Raymond

2,1931,9321,6161,2901,116L&T

1,9931,7311,236953887Grasim

1,3031,2521,145930731GACL

2,9672,7102,6172,4082,484ACC

18,12117,99316,09814,25514,482Total Industry Sales

20012000199919981997Rs. Crores

Value Chain

Key Concepts


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.


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


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


Value Chain: Tea Industry

PACKAGED TEA / VENDED BEVERAGE

CUSTOMER

EXPORTSWHOLESALER AND

LOOSE TEA VENDORS

AUCTION HOUSE

BONDING / WAREHOUSING

PROCESSING CENTER

TEA GARDEN


Tea: Overall Cost Structure

21%Other Costs

5%Repair and Maintenance

9%Stores and Spares

7%Power and Fuel

12%Selling Expenses

46%Labour

% of Total CostsCost Element


Tea: Cost Structure Till Auction

-3.53%Operating Margin (%)

-2.05Profit

58.00Auction Price

60.05Total Costs

1.00Blending & Warehousing1.50Transportation costs1.00Packaging costs1.30Excise duty

55.25Variable costsAmount (Rs./kg)Description


Tea: Cost Structure Packaged Tea

12%Operating Margin (%)

15.00Profit

125.00Selling Price

109.94Total Costs

50.94Other costs1.00Blending costs

58.00Raw material costsAmount (Rs./kg)Description


Tea: Cost Structure Wholesale & Loose Tea

7.5%Operating Margin (%)

6.00Profit

80.00Selling Price

74.00Total Costs

15.00Other costs1.00Blending costs

58.00Raw material costsAmount (Rs./kg)Description


Tea: Cost Structure Vending Sales

20%Retailer Margin (%)

4100.00%Price To customer

3.3383.33%Total Retailer Cost

0.410.00%Cost of cup0.9824.50%Whitener0.020.50%Water0.12.50%Electricity

Delivery Cost1.8345.83%To Retailer1.742.44%To distributor1.5438.58%To premix manufacturer

Cost Incurred(Per Cup)

% of cost incurredStage

Methods Of Restructuring

Key Concepts


Changed Business Environment

• Acquisition or Sell-off / Divestiture• Merger• Joint Venture• “Going Public” or “Going Private”


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


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


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


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

crest sep06 sesssion 2

Economy & Finance

value activity

value chain activities

cost incurred cost

value chain analysis

value chain framework

corporate restructuringsession

industrys value chain

cost of cup