"Whenever you see a successful business, someone once made a
courageous decision"--Peter F. Drucker
INTRODUCTION
Restructuring refers to multidimensional process. However, the term
corporate restructuring is used here for operational restructuring as
long term strategy of business. Operational restructuring is an ongoing
process, which includes improvement in efficiency and management,
reduction in staff and wages, sales of assets (for example, reduction in
subsidiaries), enhanced marketing efforts, and so on with the
expectation of higher profitability and cash flow (1). Rising
competition, breakthrough technological and other changes, rising stock
market volatility, major corporate accounting scandals have increased
the responsibility to managers to deliver superior performance and
enhance market value to shareholders. The companies which fail to deal
with the above successfully may lose their independence, if not face
extinction.
According to a study by the Harvard Business School (2), corporate
restructuring has enabled thousands of organizations around the world to
respond more quickly and effectively to new opportunities and unexpected
pressures, thereby re-establishing their competitive advantage.
In India, corporate houses have recently witnessed an increase of
restructuring in different organizations. The main reasons for the
sudden impetus to restructure in India are as follows: a) deshackling of
strict MRTP (3) provisions and new government policy of relicensing b)
increased competition is another key element for giving rise to
corporate restructuring. c) mounting pressure on margins have
necessitated higher volume of business, resulting in mergers and
acquisitions or the grand concentration of strategy has led to demergers
of non profitable businesses, and d) all round resource optimization in
existing businesses to streamline operational profit and to stay fit in
competition. However, some organizations have done their restructuring
through acquisition and mergers and some through demergers. There is
also corporate restructuring done through changes in corporate structure
and optimization of resources including financial structuring. When the
market price of shares are rising, the companies like to use their
shares to acquire other companies. Acquisition is a process of taking
over companies and merging with the entity in order to improve the
margin. Here the advisors of the company may suggest and encourage
mergers after taking over the other company. Demerger is a process of
corporate restructuring in which single or multiple business units are
spun off as a new entity. Demerger is just the opposite of merger. In a
market of falling prices, mergers and initial public offers are less
popular and the merchant banks, who normally earn their fees from
corporate activity, start to look at demerger possibilities of their
clients (4). A framework of corporate restructuring shown in Figure 1
below explains all about corporate restructuring
[FIGURE 1 OMITTED]
OVERVIEWS
There were various corporate restructurings in India during the
last few years. However, this paper deals with successful corporate
restructuring of three Indian companies which immensely enhanced the
shareholders' market value and strengthened their competitive edge
in recent times. These are Reliance Industries Ltd., Larsen and Toubro
Ltd., and Siemens Ltd.
For example, the acquisition, merger, and demerger of Reliance
Industries Ltd. like their acquisition of IPCL (5) mergers of Reliance
Petrochemicals Ltd., and the recent demergers of four entities like
Reliance Communication Ventures Ltd., Reliance Energy Ventures Ltd.,
Reliance Natural Resources Ventures Ltd., and Reliance Capital Ventures
Ltd. which spun off from Reliance Industries Ltd. (RIL), and were
perhaps the most prominent restructurings in recent times.
Even the recent demerger of the cement division of Larsen and
Toubro Ltd. (L&T), named Ultratech Cement Ltd., seems to be one of
the L&Ts grand strategies to concentrate more on infrastructure,
engineering, energy and turnkey businesses. Other kinds of restructuring
through structural changes, to improve sales and profit, or all round
optimization of products, processes and systems in Multinational like
Siemens Ltd. are worthy examples of successful restructuring in Indian
industry. This article discusses in detail the tools and techniques used
by these companies for successful restructuring in their organization.
RESEARCH METHODOLOGY
The entire research was carried out into four stages, and each
stage was approximately of three months duration. The first stage was
solely devoted to exploratory studies. The second stage was on annual
company report surveys. The third was on operational study, and the
fourth was on action research. The objectives of the multilayer studies
were i) to obtain insights as to why restructuring in organizations is
necessary ii) what relationship exists between restructuring and
competitive advantage iii) examining samples of three successful
companies like Reliance Industries Ltd., Larsen and Toubro Ltd., and
Siemens Ltd. which practiced restructuring processes successfully iv)
drawing inferences if restructuring could lead to shareholders'
market value as well as competitive advantage.
CASE OF RELIANCE INDUSTRIES LIMITED (RIL)
Background
At the age of 16, a young man left his rural Gujarat village for
the Arabian Peninsula in 1949. His first job was pumping gas at Yemen.
Soon he demonstrated his entrepreneurial spirit and managed to negotiate
for people whose insurance claims had been rejected, splitting the
settlements he managed to negotiate. He returned to India in 1958 with
$3,150 (in those days) and set up a trading company to export spices to
Yemen. It was then called Reliance Commercial Corporation. The
entrepreneur of this company was Shri Dhirubhai Ambani. By the late
1960s, with 70 employees, Reliance was manufacturing textiles with four
wrap-knitting machines. To explore the need of the society, Dhirubhai
applied his innovative spirit when most corporate bosses were content to
sit behind India's walls of protectionism and rake in profits from
obsolete, overpriced goods. For example, to overcome the
wholesaler's monopoly of the cloth market, he set up a chain of
franchises. Today the Vimal brand of textiles is one the industry's
top sellers. At the starting stage, banks often spurned him; hence, he
turned to small investors to fund his expansion plans into synthetics
and petrochemicals.
Reliance was one of the first Indian companies to go public in
1977. On 27th June 1985, the name of the company was finally changed,
from Reliance Textile Industries Ltd. to Reliance Industries Ltd. Then
there was no looking back. The company continued to satisfy its
shareholders through big bonuses and hefty dividends. When India
instituted market reforms in 1991, RIL was perfectly placed; it was
lean, with state-of-the-art facilities, and a cadre of capable and
competent managers. At this moment RIL was not very concerned about
competition from Indian companies. That is why Dhirubhai Ambani once
said, "My real competitors are DuPont, Shell and ICI." Hence
RIL's next challenge was to meet its international competitors. By
the mid 90s, RIL aggressively diversified into telecommunication, power,
finance, and transportation.
The Dhirubhai Saga Continued
The RIL chairman, Dhirubhai Ambani, was listed among
"Asia's 50 most powerful people for 1998" by Asia Week
Magazine in 1998. In the same year, he was also the first Indian
recipient to get the Wharton School Dean's medal (6). In 1999, the
chairman of RIL was again voted as the "Indian Businessman of the
Century" by a worldwide multimedia poll conducted between August to
October 1999 by Business Baron Magazine.
RIL entered into the telecom segment in the year 2000. The company
also submitted open offers to take control of BSES (7) stocks and took
over BSES in 2002. It also planned to merge its finance company with
another subsidiary Reliance Petrochemicals Ltd. (RPL). In March 2002,
RPL merged with RIL. In the same yea, RIL bagged a 25 percent share of
IPCL. On July 6, 2002 the great Reliance patriarch Dhirubhai Ambani
passed away.
Mukesh Ambani, elder son of Dhirubhai Ambani, was elected as
chairman of RIL on July 31st 2002. RIL diversified further into the
areas of biotech, life sciences, mining, and insurance.
Ambani Empire Split
RIL, one of India's largest private sectors groups, was split
in June 2005 due to differences between two successor brothers. The RIL
struggle was not only a clash of egos between estranged brothers, but it
was also about big money in the area of Rs.1000 billion which was not
easy to share. Also not easy to understand were the complexities
involved in running such an empire with two power centers.
On January 17th '2006, a unique trading and investment era was
over. As per the demerger approved by RIL board in August 2005, both
brothers, Mukesh and Anil--headed different businesses and five listed
companies emerged as potential investment opportunities for investors by
March 2006.
Among the group companies of RIL, Reliance Energy (earlier name was
BSES) and Reliance Capital, were already listed at the exchanges. The
remaining four companies were listed by the end of March 2006.
The New Structure
The new RIL structure gave Mukesh complete independent control in
the business of oil exploration, refining, petrochemicals, and textile
businesses through a stand alone entity in RIL along with IPCL. His
shares also included biotech firm Reliance Life Sciences and Trevira, a
company in Europe which manufactures polyester fibers. Anil got control
over power, communication, and financial businesses through four
companies which came under Anil Dhirubhai Ambani Enterprise (ADAE) as
part of the Reliance group.
These four companies were named as Reliance Capital Ventures Ltd.
(proposed to be merged with another listed company Reliance Capital
Ltd.),Reliance Energy Ventures Ltd. (proposed to be merged with existing
company Reliance Energy Ltd.), Reliance Communication Ventures
Ltd.(these include both Reliance Infocomm and Reliance Telecom) and
Reliance Natural Resources Ltd. (which includes businesses in gas based
energy undertakings).
Outcome of Demerger
After the demerger, share prices of the listed five companies (8)
were quoted differently at the Bombay Stock Exchange and National Stock
Exchange. Prior to the demerger, RIL's share was traded around Rs
978 per share, but after the demerger the combined demerged share values
of five companies came to around Rs. 1235. This is a gain of almost 26
percent for every shareholder. This overall gain has to be seen from
long-term perspectives when the demerged entities will be further merged
with the running businesses of Reliance Energy Ltd. and Reliance
CASE OF LARSEN AND TOUBRO LIMITED (L&T)
Background
L&T was established by two Danish engineers H. Holck Larsen and
S.K.Toubro in 1942. Within a span of fifty years L&T became one of
the most respected companies in India (9). The sales turnover of the
company during last seven years rose from Rs. 53.88 billion in the year
1996/1997 to Rs. 115.25 billion in the year 2003/2004 (10). The company
is a leading manufacturer and engineer in turnkey projects having
diversified activities in electrical and electronics; construction
projects; cement manufacturing; medical equipment; shipping; earthmoving
equipment; heavy engineering and information technology. From the year
2000, the company was planning to restructure some of its business
divisions through demerger and consolidation in order to concentrate
more on infrastructure and turnkey businesses.
Reasons for L&T's Demerger
L&T was trying to protect itself from a takeover bid by Grasim
Industries Ltd. (GIL) a flagship company of Aditya Birla Group, from the
year 2001. GIL was trying to take over control in L&T management by
purchasing shares of L&T from the open market. The company first
acquired 15 percent stake in L&T and also made an open offer to
L&T shareholders to increase its stake. However, it could not get
very good response from the existing L& T shareholders.
In this situation, if L&T's demerger plan of cement
division had gone through, GIL's stake in the cement business would
have gone down to 3.75 percent. At this moment, GIL had already spent
over Rs 10 billion in acquiring its L&T stake and was not ready to
allow the latter's plan to demerge the cement business. GIL accused
L&T that through demerger plan, L&T was trying to retain control
of the cement division within itself, without focusing the interest of
shareholders. According to GIL, under the L&T demerger plan, L&T
shareholders would have only 24 percent stake in the new cement company
where individual shareholders would hold very little control in this new
entity.
Demerger: The Three Steps
Finally, at the extraordinary general body meeting held on 3rd
February 2004, shareholders approved the demerger of L&T's
cement division. The name of the demerged entity was made public as
UltraTech CemCo Ltd. (UCL). This extraordinary general body meeting
witnessed a lot of heat amongst the shareholders. On two main
resolutions, two polls were conducted on the scheme of arrangement,
involving the reduction of share capital of residual engineering from
Rs. 2.48 billion and demerger of L&T cement division.
The face value of L&T share was also reduced from Rs.10 to Rs
2, awaiting poll results. L&T wanted 51 percent of the
shareholder's approval who were present in the meeting and voting
of 75 percent of value to go through for demerger. GIL was interested in
acquiring the cement division of L&T and was confident that all the
above objectives would be comfortably achieved. The proposed open offer
of cement division closed after the listing with the new company. With
the demerger of the cement business, L&T needed to restructure the
equity capital.
In a three step demerger plan, it was decided that in the first
phase L&T would spin off the cement business into a new company,
UltraTech CemCo Ltd. (UCL), where L&T would hold 20 percent and the
balance of 80 percent would be held by existing shareholders of L&T.
In the second phase, GIL would buy 8.5 percent of UCL from L&T
@ Rs. 342.60 per share and make an open offer to other shareholders of
another 30 percent at the same price. It would take GIL's stake to
51 percent in UCL, if this offer was fully subscribed, and on the sale
of its stake in UCL, L&T would realize Rs. 3.62 billion.
In the third phase, L&T Employee Welfare Foundation would
acquire the GILs 15.3 percent stake in the residual engineering company.
Hence, after the demerger, GIL gave an open offer to UCL
shareholders and purchased the shares to cover a 51 percent hold in UCL.
Table--2 below, shows in short the sequence of the demerger process in
L&T Ltd. Immediately after the acquisition, GIL finally changed the
name from UltraTech CemCo Ltd. to UltraTech Cement Ltd.
Outcome of L&T Demerger
There were two important issues in this demerger. The first
important issue was that to protect the interests of both existing and
former employees, L&T Employees Welfare Foundation was given a stake
in the company. The second issue was how shareholders at large also
could benefit from this demerger. During early 2003, L&T's
ten-rupee face value share prior to demerger was hovering around Rs.
350/400 per share. After the demerger, for every 100 shares of L&T,
shareholders got 50 shares of L&T of Rs. 2 face value each and 40
shares of UCL with face value of Rs. 10 each.
Around April 2004, the entire demerger process was complete.
Although initially there were some corrections in the market, later
share prices of both L&T and UCL started rising. Within three years
shareholders of erstwhile L&T increased their wealth with a growth
more than SENSEX or Nifty. In March 2006, the face value of Rs. 2 a
share of L&T was quoted between Rs. 2375 to Rs.2616 (11) per share,
while of UCL was quoted between Rs. 562.5 to Rs 689 12 per share on the
Bombay Stock Exchange. This means shareholders' value went up by
more than 100 percent within two years, which was unprecedented in the
history of demergers of any company. Financial highlights shown in Table
3 endorse the point as to how this company's restructuring strategy
has been implemented successfully.
CASE OF SIEMENS LIMITED
Background
Siemens Engineering and Manufacturing Company of India Limited was
incorporated in the year 1956, as a subsidiary of Siemens AG., Germany.
The company started manufacturing switchboard products at its Worli
Factory, Mumbai. Thereafter, as the business grew, the company expanded
its business into other product segments of power generation, power
distribution, and medical engineering products.
By the year 1966, the company had four factories in different parts
of the country employing more than 2500 people. In 1990, the name of the
company was changed to Siemens India Ltd. In the same year, the company
was divided into six products divisions and formed into strategic
business units. In the year 1991, there was further restructuring of
business divisions. Again, in the year 1994, the name of the company was
further changed to Siemens Ltd. In the same year, product divisions were
further sub-divided to achieve operational efficiency. The number of
business divisions was increased to ten. However, to be very precise,
from the wide range of the above-mentioned businesses--the major
business segments of Siemens Ltd were in power, communication, medical
solution, industrial automation, and railway and transport systems.
Despite many changes and repeated divisional restructuring, the
company could not get the desired result to counter all-time
competition. Then in the year 1996 -97 (13) (18 months period), the
company made a loss of almost Rs.1.5 billion for the first time since
its inception in the Indian business. This situation compelled the
Siemens management to go for intense all-round corporate restructuring.
The meaning of this corporate restructuring was to give a new structure
to rebuild and rearrange the organization.
Manpower Downsizing
As a first step in July 1997, the company introduced a voluntary
retirement scheme (VRS) followed by three such schemes till the year
2001 for all its employees in the factories at Worli, Kalwa and Joka,
especially for those who were above 40 years of age or had completed 10
years of services. Those who were interested in VRS were paid a maximum
lump sum amount of six hundred thousand rupees as compensation and those
who were not interested in the VRS scheme were offered alternative jobs
in different functions / locations. However, regular dialogues with the
employees helped the management to reduce and adjust employees at the
Worli, Joka and Kalwa factories. At the same time, the company faced the
new problem of training the remaining employees who were required to do
different jobs in new areas and with new skills.
These downsizing processes on four occasions reduced the employee
strength by more than 4500 employees. However, the cost of VRS,
relocation, and retraining of around 1000 (out of 4600) employees hit
hard on the company's financial result. The company during the
financial year 1997-98 made a further loss of Rupees 560 million. With
the successes of downsizing, the processes of manpower reorganization
had been a commanding task in the organization. The employee strength
came down to 3896 in the year 01/02 compared to 8322 in 96/97. These
downsizing processes revamped the human resource planning in the
organization and removed many operational deficiencies.
Financial Restructuring
From the very inception, the company had engaged a renowned
auditing firm, M/s Fergusson & Co. Ltd., to carry out its annual
financial audits. However, despite good results year after year, the
company fell short of working capital every year. Therefore it had to
borrow capital from banks and from other investors at a high interest.
At the end of every financial year, after paying the interests to the
creditors, the company was short of working capital to run the business.
The company, in the year 1997-98, appointed M/s KPMG Ltd. to look
after its financial audit. During the process of preliminary findings,
it was observed that a large amount of inventory items were in the
stocks, both as finished goods as well as raw materials, which were slow
moving for a long time and were continuously audited as stocks, year
after year. Similarly, there were some customers who did not pay their
dues for long periods of time, on some pretext or another, and were
shown as outstanding customers. Hence, the KPMG advised the company to
write off the old stocks as well as long outstanding payments from
customers.
The decision to write off the old stocks and doubtful dues from
customers was agreed upon by the company. These measures added further
financial loss during 1997-98. However, the company could dispose off
some obsolete stocks and recover few pending dues from customers at
later dates. The revenue generated was added up as surplus to the
organization. This one time action of writing off the old / obsolete
stocks and doubtful dues from customers helped the company to stop
borrowing from banks and other financial brokers / institutions. The
debt /equity ratio of the company in the year 1997-98 was 1.3:1. In the
year 2002-03 this figure went down to 0.01:1 (14), which showed how
financial restructuring helped the organization to overcome the problem
of working capital.
Restructuring of Processes and Systems in Different Divisions of
Siemens Ltd.
Apart from downsizing the employee strength in some strategic
business units and financial restructuring the company, in the year
1997, introduced Time Optimised Processes (TOP). These were similar to
the business process re-engineering segments of its business. The
processes started optimizing business processes of every function like
sales, marketing, manufacturing, service, finance and human resources
which were not tuned to productive performance. The uneconomical
processes were removed to cut cost and improve the quality of business.
The company went further to look for economic consideration of its
capacity utilization in the factories. It was observed that the return
on capital investments made in earlier years in different factories was
not paying proper dividends as planned during the budget period.
Therefore, the company decided to go for outsourcing of products and
services in different factories to achieve operational efficiency
through a process of cost reduction. At the same time, the company also
introduced stringent measures to follow the ISO 9000 quality system
along with resurgence and renewal in all its divisions.
Medical Solutions Division (MSD)
The manufacturing of medical products in Siemens India commenced in
the year 1957 at the premises of Worli Works, in Mumbai. The process of
restructuring started in the Medical solutions division in early 1993
with the objective of manufacturing high-end medical solutions products
for Siemens AG to cater to the South East Asian market. In 1994, a new
manufacturing site was selected in the state of Goa, which had the cost
advantage as sales taxes were exempted for the first five years for the
new companies which set up industries there.
At the same time, the central government also exempted corporate
taxes for these industries located in Goa for a period of five years.
However, this project did not give any economic advantage to the
company, as required by its principal in Germany. The company
subsequently decided to restructure the local manufacturing in phases
over the next three years to counter the increased manufacturing cost at
its Worli factory in Mumbai. In the year 1997, the Medical Solutions
Division of the company had manpower of 375 people in the factories
which included 340 employees at Worli and 35 employees at Goa, including
all officers.
In mid 1997, the company decided to procure the low-end products
from outside vendors who had the requisite technology and could spare
their machines and equipment for manufacturing these products. The idea
was formulated to close down the Worli factory. However, the company
continued manufacturing the core technology products like oil immersed
multi-pulse X-ray generators at its Goa factory. In mid 1997, despite a
lot of opposition from the employees at Worli for relocation, the
company discussed the issue with workers and staff unions and offered
transfers to relocate people in different departments / divisions of the
organization.
With the all-round success of VRS, Siemens was able to transfer 140
employees to other locations and remaining took voluntary retirement
from the division. With this action of the management, the employee
strength in the Worli factory became zero, while at Goa, it was only 35.
By the year 1999, the company was running the business of low-end
products at one factory at Goa with just 35 people producing the same
sales turnover of rupees 250 million which was earlier produced in the
year 1996 at Worli with 340 people. With this restructuring, the low-end
medical device products of the company became competitive and the
company could regain its strength through a higher margin. Table 4
exhibits the sequence of strategic changes in details that took place in
the medical solutions division.
Low Voltage Distribution Systems Division (LVDSD)
With the increased demand of power in the country due to
industrialization immediately after the second five years plan, the
company expanded the manufacturing of switchboard products. In the year
1960, the company set up a workshop at Hide Road, Kolkata, for
manufacturing and repair of power distribution equipment for the eastern
region. In the year 1980, with the further demand of energy equipment,
this factory was relocated to a new plant at Joka, just a few kilometers
away from Kolkata. This division was then considered as a part of
switchboard division. In the year 1999, the name of the switchboard
division was changed to Energy Division. When the manufacturing facility
at Joka was transformed into a sub division, it was named Low Voltage
Distribution Systems Division. (15)
However, in the year 2000-01, the low voltage industry was
suffering from excessive manufacturing capacity due to the presence of a
large number of players and dwindling demands as a result of depressed
market conditions. The overall market for Low Voltage Distribution
Systems Division remained stagnant and was characterized by intense
competition, putting the price under tremendous pressure. As a
consequence, the Lower Voltage Distribution business posted a 40 percent
drop in both turnover and order value. In its endeavor to make
operations viable, the division proposed to introduce several measures;
this included an offer of alternative jobs to its workers at the Siemens
Metering, a plant in the neighborhood. This process of implementation
made some delays resulting in the unit making even more production
losses, thus affecting the result. At the end of the year 2001, the
company closed down the Joka factory and adjusted its employees to
Siemens Metering Ltd. After the closure of this factory, the division
started procuring the low voltage products from the switchboard factory,
thus making full-scale utilization of free capacity at its Kalwa
factory.
The twin initiatives of closing down the high cost manufacturing
operation at Joka and implementing a completely new business process of
deploying a lean cost structure whilst maintaining high quality
standards supported the division's turnaround. The entire business
restructuring was achieved within a time period of less than two years.
As a result of focused market approach, the division achieved an
increase in the market share. Customer loyalty and satisfaction was
evidently demonstrated as it received several orders. The division
developed new products. The concentrated focus on its spares and service
business helped it record a four-fold increase in turnover in this line
of business over the last three years. To further augment its service
network, the division entered into a franchising arrangement with a
Kolkata-based company, which utilizes the services of former employees
of Joka works. Table 5 below gives a short detail of strategic changes
in Low Voltage Distribution Systems Division.
Personnel Division
The process of renewal and resurgence was not confined only to
factories of a few divisions, but also to the other areas of corporate
systems. Being a part of corporate systems, the personnel division
handled the human resource functions in the company. During the year
1994, the personnel division for the first time introduced an Enterprise
Resource Planning (ERP) system, People-soft, to upkeep the employee
data, and created an information highway for its concerned executives
and managers. Then in the year 1997-98, the personnel division of
Siemens Ltd. achieved a milestone for successful downsizing and
implementation of corporate goals and objectives by retraining and
relocating people for the emergent needs of the organization.
Apart from downsizing the manpower in other divisions, the
personnel division also initiated VRS and relocations of some of its own
employees and managers and outsourced some of the human resource
processes and activities from outside parties who had much more
experience in this field. For example, the company outsourced the entire
process of employee benefit schemes like handling of Provident Fund (PF)
and gratuity payments to an outside agency, M/s India Life Pension
Services, with headquarters at Bangalore. This outside agency maintained
all accounts of PF, gratuity and other pension schemes, and advised the
personnel division of Siemens to make necessary payments after the
retirement or separation of employees. The personnel division also
outsourced the processes of salary payment to one of its affiliates,
Siemens Information Systems Ltd. (SISL), which developed a software
package of such services.
Then in the year 2000, in order to systemize its operations in
personnel, the division opted for the ISO 9000 quality system, to
regulate all the processes of personnel function and became one of the
very few companies in the country holding independent ISO 9000
certification for its personnel function.
In the year 2005, the company introduced a new HR initiative on
performance management to be known as EDGE (16). EDGE stands for
Employee Dialogue for Growth and Entrepreneurship. EDGE was developed
looking at the overall growth and development of employees from a
holistic and long-term perspective. In the same year, as per companies
shared service initiative, HR processes across all Siemens'
entities were now streamlined and aligned with Siemens BPO global
processes under one organization.
Outcome of Restructuring
The overall restructuring in Siemens started showing results after
a few years of operations resulting in all-round satisfaction of
stakeholders. The financial highlights beginning from 1998-99 in Table 6
exhibits the unique results of corporate restructuring. The share price
of Rs. 10 (face value) which was hovering on the Bombay Stock Exchange
(BSE) or National Stock Exchange (NSE) around Rs. 140 / 150 in 1997 rose
to Rs 5500 / 5600 in March 2006. As per ET 500 (Feb.'06), Siemens
ranks one of top ten performing companies in India and a leader among 49
listed multinational company at BSE / NSE. While in the same footing
Siemens AG stock price on 30th Sept 2005 was quoted 64.10 [euro]
compared to 41.89 [euro] in Sept. 2001. The five-year summary of Siemens
AG., shown in Table-9 could be a point for discussion.
Initially, restructuring processes followed by Siemens resulted in
some amount of uncertainty in the minds of the employees. However, after
the positive results of restructuring started pouring in, the cloud of
uncertainty cleared. These were the moments when Siemens took care of
handling the remaining productive employees.
The company which had losses for the first time since its inception
decided to undertake a cleansing operation by downsizing manpower,
optimizing all processes, outsourcing products and services and keeping
the quality standards ahead of all future actions. These also included
maintaining high employee morale at this juncture of productive changes.
Even when there was a need for financial restructuring, the company
did not spare much time to take action. Continuous shortage of working
capital forced the company to change auditing systems. Initially, this
action made incurred losses for the company but it helped the management
to reduce heavy interest payments in the long run. Above all, this
course of operational restructuring finally helped the organization to
go into the black. From the year 2000-01 onwards, the company did make a
turnaround and started earning regular profits, resulted from the
processes of progressive restructuring which are still continuing in the
organization. Financial highlights shown in Table-6 above prove that
point.
POINTS FOR DISCUSSION
From the above cases of restructuring, the point may arise that,
prior to restructuring, none of these companies were managed properly.
They were huge in size; the company management could not select the
right strategic options to push their businesses ahead of other
priorities. Or, even, the core competency levels had reached to its
saturation points when these business units were no longer viable and
therefore restructuring was the only option to avoid losses or
stagnation. The above arguments may be well suited to L&T Ltd. and
Siemens where these companies had enough strength in power,
infrastructure, medical equipment and Turnkey projects. L&T had its
weaknesses in the cement business and Siemens had its advanced
technologies but with huge manpower and multiple operations which were
not cost competitive. All these forced the above companies to go for
all-round restructuring. L&T took a wise decision and demerged its
cement business.
Siemens Ltd. took a cultural shift and made an all round resurgence
and renewal in its business through corporate restructuring. Even the
parent company Siemens AG., despite having vast sales regions as shown
in Table 7 and business areas as shown in Table 8, could not do that
well compared to its counterpart in Siemens India Ltd., as can be seen
in Table 9.
All these studies finally reveal how progressive organizational
restructuring can be incorporated in an organization. When any company
makes losses or is likely to face odds in business, all-round pro-active
changes are needed for the survival of that organization. For Siemens,
in implementing the processes of manpower downsizing in different
divisions, the company started making changes in a progressive manner.
But for RIL, the recent demerger was the outcome of a family feud
between two brothers, which lead to the demerger of four strategic
business divisions. This was more of a balancing act between two
brothers to gain control in their areas of business. However, this
demerger has definitely brought some transparency in the working of RIL
which one may say was more complex prior to this arrangement.
However, all the above process of restructuring have added
shareholders market value and can be construed as successful
restructuring from the point of competitive advantage. Such innovative
restructuring should always be made in the strategic plans for the
survival, growth, and remain competitive in the market.
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www.rediffmail.com
www.finnanc-glosarry.com
www.hindu.com
(1) Corporate Restructuring--Lesson from Experience (2005). Edited
by Pomerleano Michael, Shaw William
(2) www.exed.hbs.edu/program/crma/index.html
(3) MRTP--Monopolies and Restrictive Trade Practices rules, 1970.
(4) Global Investor Glossary, http://www.finance-glossary.com
(5) Indian Petrochemical Corporation Limited
(6) A medal instituted by Wharton Business School, Wharton for the
best businessman of the year
(7) Bombay Suburban Electric Supply Ltd, a power generation company
in Mumbai
(8) The five companies are, Reliance Industries Ltd., Reliance
Capital Ventures Ltd., Reliance Energy Ventures Ltd., Reliance
Communication Ventures Ltd., and Reliance Natural Resources Ventures
Ltd. Capital Ltd. However, it appears that the cornerstone of all these
demerged entities will be Reliance Communication Ventures Ltd., which
may further add value to shareholders. In addition to the above, the
financial highlights of RIL (shown in Table 1) witness how the profit
after tax in the company has grown over the years.
(9) Independent survey conducted by Business Word and MARG, 1993
(10) The Challenging Face of Indian Inc--ET 500, Feb. 2006, an ET
Intelligence Group Presentation, Mumbai
(11) Larsen and Toubro Ltd. Annual Report 2005-2006
(12) UltraTech Cement Ltd. Annual Reports 2005-2006
(13) Siemens Annual Report 2003, India
(14) Siemens Annual Report 2005, India
(15) Low Voltage Distribution Systems manufactures Power Control
Centers, Draw-out, Non Draw-out Motor Control Centers. Automatic Power
Factor Control Panels etc.
(16) Siemens Annual Report 2005, India
G.C. Nag, Ph.D. (gcnag@ibsindia.org) is Adjunct Professor, Icfai
Business School, The Icfai University, 71 Nirlon Complex, Western
Express Highway, Goregaon (West), Mumbai--400 063, India , Tel No. +
91-22--40434392 / 300, Fax--91-22 26850066
R.D. Pathak, Ph.D. (Pathak_R@usp.ac.fj) is Professor, School of
Management and Public Administration., The University of the South
Pacific, Fiji Islands. Phone--(679) 3212489 / 3313900--ext. 2489, .Fax
No. (679)3301487
TABLE--1
Performance Highlights Reliance Industries Ltd
Particulars FY00 FY01 FY02
(Rs.in mil.)
Net Sales 178,499 254,293 420,889
%yoy 42 65.51
Other Income 6,282 3,830 6,590
Operating Profit 38,185 46,235 79,993
%yoy ~ 21 73
Interest 10,458 12,473 18,251
PBT 21,235 21,797 40,170
PAT 24,033 26,456 32,427
%yoy ~ 10 23
Export 18,110 93,700 109,688
EPS ~ 22 25 23
DPS ~ 4 4 5
Particulars FY03 FY04
(Rs.in mil.)
Net Sales 458,978 518,015
%yoy 9.05 12.86
Other Income 11,775 13,987
Operating Profit 81,890 97,232
%yoy ~ 2 19
Interest 15,552 14,347
PBT 49,742 64,401
PAT 41,043 51,601
%yoy ~ 27 26
Export 108,519 122,879
EPS ~ 29 37
DPS ~ 5 5
Source: indiainfoline.com
TABLE--2
Sequences of Demerger Process at L & T
Date Process of Strategic Changes
15.01.2000 L & T to restructure, gain focus
13.11.2001 Low demand pulls cement prices down
20.11.2001 Grasim stake stalls L & T demerger
04.01.2002 Financial Institutions meet on Grasim
14.10.2002 Grasim to buy 20% more stake in L&T
30.11.2002 SAT ruling on Grasim open offer a victory
01.04.2003 Grasim's revised open offer for L & T
03.05.2003 Grasim's revises timeline of open offer
18.06.2003 Grasim signs deal to buy L & T's demerged
cement business
07.07.2004 L & T hands over UltraTech Management
Source--www.domain-b.com
TABLE--3
Financial Highlights of L & T Ltd.
Particulars FY05 FY04 FY03
(Rs. in mil.)
Gross Sales 132,687 98,068 98,698
Net Sales 130,918 95,615 93,601
Other Income 6,965 4,052 2,543
Operating Profit (PGDIT) 14,339 8,899 9,991
Interest 536 366 1,770
Gross Profit (PBDT) 13,803 7,688 5,102
Depreciation, amortization etc 942 845 3,119
Net Profit Before Tax 9,839 5,328 4,331
Equity Shares Dividend 4,066 2,246 2,107
(including CTD)
Particulars FY02 FY01
(Rs. in mil.)
Gross Sales 81,666 78,254
Net Sales 77,257 73,903
Other Income 2,184 2,068
Operating Profit (PGDIT) 10,461 10,131
Interest 3,161 3,613
Gross Profit (PBDT) 4,005 3,387
Depreciation, amortization etc 3,125 3,131
Net Profit Before Tax 3,468 3,151
Equity Shares Dividend 1,743 1,784
(including CTD)
Source: larsentoubro.com-INVESTORS
TABLE--4
Sequence of Strategic Change in Siemens Medical Solution Division
Year Sequence of change to gain competitive advantage
1956 Commenced manufacturing of 6 and 10 Kilowatts two pulse
generators and manual X-ray examination stand and table at
Mumbai factory
1964 Introduced semi-automatic production processes and started
making motor operated X-ray examination table.
1974 Introduced improved vacuum impregnation process in the
assembly of oil immersed X-ray generators.
1977 Introduced Motor operated X-ray examination table with
automatic screen frame.
1984 Digital display was introduced into the controls of
X-ray generators.
1988 Introduced 50 Kilowatts multi-pulse X-ray generators for
examination tables.
1991 Introduced 4 Kilowatts multi-pulse X-ray generators for mobile
X-ray units.
1993 Introduced 10 Kilowatts multi-pulse X-ray generators for
manual operated X-ray examination tables.
1993 Strategic decision to restructure the entire medical
engineering division in phases.
1994 Selection of a new manufacturing location at Goa to market
high end product
1998 Suspension of Medical products manufacturing in Worli Factory
2000 Manufacturing of all products at Goa with just 35 people and
regained competitive strength.
2005 Completes 50 years of manufacturing in India
TABLE--5
Sequence of Strategic Changes in Siemens LVDSD
Year Sequence of changes to gain competitive advantage
1960 Set up a workshop for repairing energy equipment for power
sector at Hide Road, Calcutta
1964 Started manufacturing small switchboard for the need of
Eastern region
1980 The manufacturing location was shifted to Joka works near
Calcutta
1995 Achieved all time high production of 3500 panels
1996 Became largest production unit for Low Voltage Switchboards
among all units of Siemens worldwide.
2000 Restructuring of the division
2001 VRS at Joka factory
2002 Closure of the Joka factory and procurement of products from
Kalwa factory
TABLE--6
Financial Highlights of Siemens Ltd
2004-05 2003-04 2002-03
* Sales 27485 17900 14245
(477 [euro]) (311 [euro]) (247 [euro])
* Profit before Tax 3,631 2,299 1,968
(63 [euro]) (40 [euro]) (34 [euro])
As % of Sales 13 13 14
* Profit after Tax 2,548 1,514 1,394
(44 [euro]) (26 [euro]) (24 [euro])
As % of Sales 9 8 10
# Net worth per share 235.61 182.92 148.18
# Earning per share 76.88 45.68 42.06
* Dividend 481 298 249
Dividend % 145 90 75
* Debt / equity ratio - - 0.01: 1
* Investment in Fixed 277 314 243
assets (4.8 [euro]) (5.5 [euro]) (4.2 [euro])
No. of Employees 4777 4094 3811
2001-02 2000-01
* Sales 12905 11572
(224 [euro]) (201 [euro])
* Profit before Tax 1,304 964
(23 [euro]) (17 [euro])
As % of Sales 10 8
* Profit after Tax 865 687
(15 [euro]) (12 [euro])
As % of Sales 7 6
# Net worth per share 114.58 95.46
# Earning per share 26.10 19.49
* Dividend 182 133
Dividend % 55 40
* Debt / equity ratio 0.02: 1 0.01: 1
* Investment in Fixed 117 119
assets (2.0 [euro]) (2.1 [euro])
No. of Employees 3896 4167
1999-00 1998-98
* Sales 11157 10506
(194[euro]) (182 [euro])
* Profit before Tax 946 381
(16 [euro]) (6.6 [euro])
As % of Sales 9 4
* Profit after Tax 840 351
(14.5 [euro]) (6.1 [euro])
As % of Sales 8 3
# Net worth per share 79.89 68.50
# Earning per share 24.11 12.37
* Dividend 224 --
Dividend % 65 --
* Debt / equity ratio 0.15: 1 0.52: 1
* Investment in Fixed 86 317
assets (1.5 [euro]) (5.5 [euro])
No. of Employees 4342 4604
* Rupees or Euro ([euro]) in million (one [euro] is approximately
Rupees 57.6 as on 4th May 2006)
# Rupees
TABLE--7
Sales of Siemens AG. by Regions (Siemens AG Sales in billion)
1990 2005
32 [euro] 75 [euro]
Africa, Middle East & C I S 4% 8%
Asia Pacific 6% 13%
The Americas 15% 25%
Europe (exclude Germany) 30% 33%
Germany 45% 21%
Source--Annual Report Siemens AG 2005
Note: Table made from bar graph.
TABLE--8
Siemens AG Business Areas in 2005
Lighting - 6%
Medical - 10%
Transportation - 19%
Power - 16%
Information &
Communication - 23%
Automation &
Control - 26%
Source--Annual Report Siemens AG 2005
TABLE--9
Five-year summary of Siemens AG
Sales and earnings 2005 2004 2003
(in millions of euros)
Net Sales 75,445 70,237 69,775
Gross profit on sales 21,943 20,645 19,836
Research and development 5,155 4,650 4,730
expenses
as a percentage of sales 6.8 6.6 6.8
Income from continuing 3,058 3,450 2,355
operation
Net Income 2,248 3,405 2,455
Sales and earnings (in 2002 (1) 2001 (1)
millions of euros)
Net Sales 84,016 87,000
Gross profit on sales 23,206 23,105
Research and development 5,819 6,782
expenses
as a percentage of sales 6.9 7.8
Income from continuing
operation
Net Income 2,597 2,068
Assets, liabilities and share- 2005 2004 2003
holders equity (in mil. [euro])
Current assets 46,803 45,946 43,489
Current liabilities 39,833 33,372 32,028
Debt 12,435 11,219 13,178
long-term debt 8,436 9,785 11,433
Net debt (2) (2,525) 2,357 (379)
Pension plan and similar 4,917 4,392 5,843
commitments
Shareholders equity 27,117 26,855 23,715
as a percentage of total 31 34 31
assets
Total assets 86,205 79,518 77,605
Assets, liabilities and share- 2002 (1) 2001 (1)
holders equity
(in mil. [euro])
Current assets 44,062 51,013
Current liabilities 34,712 44,524
Debt 12,346 12,610
long-term debt 10,243 9,973
Net debt (2) (751) (4,017)
Pension plan and similar 5,326 4,721
commitments
Shareholders equity 23,521 23,812
as a percentage of total 30 26
assets
Total assets 77,939 90,118
Cash flows (in million of 2005 2004 2003
[euro])
Net cash provided by operating 4,217 4,704 5,419
activities
Amortization, depreciation and 3,316 3,248 3,230
impairments
Net cash used in investing (5,076) (1,689) (3,848)
activities
Capital spending (3) (6,511) (4,481) (5)
Net cash used in financing (1,403) (3,108) (487)
activities
Net increase (decrease) in (4,069) 41 953
cash and cash equivalents
Cash flows (in million of 2002 (1) 2001 (1)
[euro])
Net cash provided by operating 5,564 7,016
activities
Amortization, depreciation and 4,126 6,234
impairments
Net cash used in investing (810) (5,886)
activities
Capital spending (3) (8,013) (11,656)
Net cash used in financing (859) (95)
activities
Net increase (decrease) in 3,394 940
cash and cash equivalents
Employees continuing 2005 2004 2003
operations
Employees (4) (September 30th, 461 424 411
in thousands)
Employee costs (in million of 26,646 25,095 25,434
Euros)
Employees continuing operations 2002 2001
Employees (4) (September 30th, 426 484
in thousands)
Employee costs (in million of 27,195 27,102
Euros)
Source: Siemens AG. Annual reports, 2005
(1) Amounts for 2002 and 2001 are not adjusted for discontinued
operations. Accordingly, amounts for 2002 and 2001 periods are not
directly comparable with the Company's fiscal and quarterly data for
2005, 2004 and 2003 which have been recast for discontinued operations.
(2) Net debt includes four positions of the Consolidated Balance
Sheets: cash and cash equivalents, marketable securities, Short-term
debt and current maturities of long-term debt and long-term debt.
(3) Intangible assets, property, plant and equipment, acquisitions,
and investments.
(4) Without temporary student workers and trainees