Mergers & Acquisition

Case Study Analysis of Spartek Ceramics India Limited

Group Members:
Pooja Bhatia 83
Brinkle Shah 119
Apurva Sood 125
Akshay Yeole 49

CONTENTS

PARTICULARS

PAGE NO.

1) Formulation of Corporate Strategy .3

2) Analysis of Sparteks current situation
i) SWOT Analysis ..3
ii) Sources of Differentiation..4
iii) Competitive Environment .4
3) Diversification opportunities .5
4) Developing Acquisition Criteria.5
5) Screening and selection of acquisition targets
i) Somany Pilkingtons Ltd. (SPL) 6
ii) Neyveli Ceramics and Refractories Ltd ..7
6) Conclusion ..8

FORMULATION OF CORPORATE STRATEGY

Spartek works with the motto: Innovation that Pays
In 1988, options available with Spartek were:
Expansion of Sparteks Capacity to 40000 TPA,
Diversification
Merger or Acquisition
ANALYSIS OF SPARTEKs CURRENT SITUATION

Spartek has produced marketable quality product from the very first day of production
90% first grade output was achieved within days
100% capacity utilization within 2 weeks of the commencement of commercial production

STRENGTHS
Availability of Raw Material in abundance
Use of Ceramic is Pharma and Chemical industry unlike
mosaic
Use of Single Fast Firing Technique which cuts down the
process time leads to 70% fuel saving.
As much as80% first quality tiles output
Use of LPG, the cleanest fuel, giving the best colour
development
Marketable quality products from very first day
First Mover benefit as this industry was created by
Spartek
Strong brand imageand credibility
Strong hold in Andhra Pradesh area
Resourceful Dealers
Subsidy Benefits

OPPORTUNITIES
Due to strong brand image, it can diversify into new
segments
It can expand and capture themarket share
It can acquire another company in order togrow
further
Growth of housing industry and construction industry

WEAKNESS
Retail Visibility is low

THREATS
Ceramics Industry is saturated
Diversification can lead to disastrous
outcomes
Competitors of Spartek have undertaken
an expansion route

DIFFERENTIATION SOURCES:
Single firing of less than one hour. This improves the inherent quality of tiles and results in 70%
fuel saving.
LPG Fuel used for the first time in India. LPG is the cleanest fuel and given the best colour
development of all.
Pressing by high capacity hydraulic presses (680tonnes. This result in fast cycles and very high
first quality products (about 95%)
Glazing is possible by all the different methods of glazing known till date to achieve very special
effects, surface and shades.
Decorations are permanent as they are beneath the glaze decoration and are fired at a high
temperature of around 12000 C.
COMPETITIVE ENVIRONMENT:
High threat of new entrants due to:

The lack of entry barriers

No prior licence from the government was required to start a tile unit

Major expansion programmes were carried out by the players in the industry

The new players consisted of both established brand names and new entrants.

Most of the new entrants signed up with well-known ceramic tile producers for technical
collaboration and chose proven equipment suppliers

Spartek can adopt the role of a cautious acquirer a company which purchases many small firms and
avoids placing too much of its funds into any one acquisition as it is a cost effective strategy wherein its balance
sheet will take hits many times, but of only small amounts.

DIVERSIFICATION OPPORTUNITIES
Spartek should mainly concentrate on its own industry sector for expansion
However, along with the Ceramic Industry, Spartek can consider sanity ware, Stoneware pipes etc. as
these are in the related line of business.

CRITERIA FOR ACUISITION

Size of Investment:
In order to carry out its role as a cautious acquirer, Spartek should invest in a small firm in order
to minimize the cash outflow
Type of Technology:
Spartek should ideally acquire a firm which also uses the same technology as Spartek so that
there is smooth merger of the operational activities
Industry Focus:
Spartek should acquire a company within the industry and which is closely related to its existing
line of business
Geographic Location:
Spartek should acquire an industry which is present in different geographic locations so that the
retail reach of its product will increase.
Strategic Fit:
Spartek should acquire a company which will complement Spartek and which will add value to
Spartek Ceramics India Limited and help it to attain further growth.

SCREENING AND SELECTION OF ACQUISITION TARGETS

Somany Pilkingtons Limited
Plants in both Gujarat and Haryana with capacity of 12000 MT and 21600 MT respectively
Expansion plan and new units for increasing capacity by 30400MT in Gujarat and Haryana
Has a significant presence in sanitary ware sector
It is a veteran in the tile industry
Has shares trading at Rs 100 in May 1988
Has acquired Orient Ceramics Limited (OCL) which has acapacity of 5000 TPA
Long term borrowing = 10.34 million
Earnings After Tax = 20.57 million
D/E = 0.1
Enterprise Value = 45.91
Enterprise value/sales = 0.2

Neyveli Ceramics and Refractories Limited (Neycer)

Plant in Pondicherry with a capacity of 10000 MT
In the business of manufacturing sanitary ware, ceramic ware, stoneware pipes etc.
Strong brand image and excellent retail visibility
Shares trading at face value of Rs 10 in May 1988
Long term borrowings = 129.66 million
Earnings After Tax = (18.94) million
D/E = 4.15
Enterprise Value = 144.28
Enterprise value/sales = 1.06

CONCLUSION

Whereas Neycer is in major troubles due to the loss it has incurred as well as the heavy burden
of borrowings to finance the cost over runs. However, Neycer has a strong brand image and excellent
retail visibility in South Indian market. Also the capacity of their Pondicherry plant is exactly what
Spartek needs to reach the government sectioned limit of 40000 MT. Their D/E ratio is high and Enterprise
value to sales ratio is high as well.
Hence, Spartek should acquire Neycer.
The synergy that Spartek would achieve because of this would be significant, influencing it to a big industry player
in terms of capacity and also making it a player in the sanitary ware sector.
From the target companys point of view, Spartek has the necessary expertise in the ceramic tile industry
where as Neycer is experiencing large cost and turnover-runs.