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Darkness to light

How a smart turnaround strategy helped Havells to make a comeback

Manu Kaushik Print Edition: Aug 18, 2013

Executive Summary: When electrical goods company Havells acquired Sylvania in

2007, all that it was looking for was growth and a strong global presence. Instead, it
had to grapple with a major crisis at Sylvania, triggered by the global financial
turmoil. The situation threatened to pull Havells down, and it had to come up with a
smart turnaround strategy. This case study looks at how Havells pulled it off.

Qimat Rai Gupta quit his job teaching in a school in Punjab, and came to Delhi in
1958 with Rs 10,000 in hand. He started an electrical goods trading company in the
old part of the city, but the market was too small for his ambitions. He spotted an
opportunity in the distressed Havells brand, named after its founder, Haveli Ram
Gupta. He bought it for around Rs 7 lakh in 1971, and followed up with a series of
acquisitions, joint ventures and entry into new product categories. Today, Havells
India Ltd is a Rs 7,248-crore company. The journey hasn't always been smooth, but
the roughest patch was easily the 2007 acquisition of German lighting and fixtures
maker SLI Lighting, owner of the Sylvania brand.

SLI was then the world's fourth-largest lighting company and 1.5 times bigger
than Havells. It took Gupta minutes to make up his mind about buying it, while
his senior management - including son Anil Rai Gupta, nephew Ameet Gupta and
Group CFO Rajesh Gupta - were still weighing the pros and cons.

In February 2007, when negotiations with Sylvania's owners took place, some of
Havells's top bosses flew to London to seal the deal. Anil, Havells's Joint Managing
Director, recalls the sleepless night before they signed on the dotted line. He and
cousin Ameet reckoned they were paying more than they should. "The next
morning, I called my father," says Anil. "I told him we have paid i3 million (Rs 23.4
crore today) more. He said that in the big picture, the figure was insignificant."
Havells bought Sylvania for i200 million, plus pension liabilities of i35 million.
The Turnaround Team 1. German Jaime, General Manager, Andean Region 2. Rajiv
Goel, President, Sylvania 3. Angelica Valderrama, General Manager, Mexico 4. Anil
Rai Gupta, Joint MD, Havells India Ltd 5. Rajesh Gupta, Group CFO and Director -
Finance, Havells 6. (Sitting) Qimat Rai Gupta, CMD, Havells 7. Ameet Gupta,
Executive Director, Havells 8. Surjit Gupta, Director, Havells 9. Jose Luis Perez,
General Manager, Central America & the Caribbean 10. (Sitting) Tiago Pereira,
Country Manager, Costa Rica & the Caribbean 11. Celso Santos, Country Manager,
Qimat Rai was betting on Sylvania's strong 100-year-old brand in about 50
countries, and its worldwide network of 10,000 distributors and dealers. "My father
said we would not be able to replicate these two things," says Anil.

Havells had a track record of five successful acquisitions, and high growth in
its Indian operations. In 1983, it bought the loss-making Delhi-based Towers and
Transformers Ltd and turned it around in a year. Between 1997 and 2001, Havells
also bought ECS, Duke Arnics Electronics, Standard Electricals and Crabtree India.
The last was a 50:50 joint venture between Havells and the UK-based Crabtree, and
Havells later acquired Crabtree's stake in the JV. India revenues had a compound
annual growth rate of 50.08 per cent between 2002/03 and 2007/08. In March 2007,
Havells bought Sylvania. And then the global financial crisis struck.

As the meltdown rocked European markets, Sylvania's sales fell, leading to net
losses of Euro 16.3 million in 2008/09 and Euro 26.1 million in 2009/10. From Euro
515 million in 2007/08, revenues dropped to Euro 438.4 million in two years.
Trusting Sylvania's management to deal with the situation turned out to be a
mistake on Havells's part. Paul Griswold, then CEO of Havells Sylvania, was hired
by the company's previous owners, a group of private equity investors that included
DDJ Capital, Cerberus Capital Management and JP Morgan. He had turned
Sylvania around after it slipped into bankruptcy in 2002 and made it profitable
before Havells bought it, but the magic touch eluded him now. The Havells
management sacked him.
In September 2008, Sylvania's bankers, led
by Barclays Capital, hit the panic button as
the company breached its covenants. Put in
place by lenders, covenants are a set of
financial ratios that the borrower must
maintain. Sylvania's acquisition was
funded by debt - a Euro 120-million loan
based on operating cash flows and an Euro 80-million loan taken out by a Havells
subsidiary. Havells repaid i80 million by raising money from the sale of a stake to
Warburg Pincus. "Covenant breach was as good as repayment default," says CFO
Rajesh Gupta. "The bankers asked us to repay the loan or hand over the company to

Sylvania's poor performance began to affect consolidated numbers, but Havells's

growth in domestic operations made up for Sylvania's losses - for a while, at least.
For the Guptas, it wasn't just their money but also their reputation at stake.
Havells's top management drew up an 18-month restructuring plan. In the first
phase, called Phoenix (January to September 2009), the aim was to improve
profitability by cutting manpower costs and closing factories. The second phase,
called Prakram (September 2009 to June 2010), focused on further reducing the
headcount, and increasing the sourcing of products from low-cost locations such as
India and China.

Layoffs were a challenge, as severance packages cost money and can hurt sales.
"The first three months were difficult," says Anil. "We had meetings with the top
people at Sylvania. In the beginning, some didn't agree with us, but with more
meetings, more people turned believers."

The next challenge was to persuade banks, which were reluctant to fund the
restructuring plan. It didn't help that the Indian electricals market had crashed.
"We told the banks we had goofed up, and asked them to give us six months," says
Ameet, who is Executive Director at Havells. The banks agreed only to a twomonth
deferral of repayment of loans, helping Havells with a Euro 24-million cushion for
that period. So Havells poured some Euro 12 million into the restructuring plan.

To begin with, a factory each in Brazil and Costa Rica were closed. Operations at a
UK factory were suspended and shifted to India, where labour accounts for four to
five per cent of the total cost (in Europe, it accounts for 22 per cent). Noncritical
staff - accounts, IT, factory personnel - in European and Latin American operations
was also laid off. Some back-office jobs were shifted to India. The total headcount of
3,800 (at the start of 2009) was reduced by 41 per cent to 2,233.

Remarkably, the layoffs did not result in a single day's strike. The company strictly
followed labour laws in each country, and ensured that final settlements went off
smoothly. "We would give out payments before the due date," says CFO Gupta. Both
phases together led to annual savings of Euro 34.4 million. The company also spent
around Euro 4 million less on the restructuring than the Euro 36 million
anticipated. Besides reducing the headcount, several areas were targeted including
logistics, inventory management, and product pricing. Havells worked closely with
logistics companies and shut down some warehouses, reducing logistics costs from
14 to six per cent of total cost.

To reduce the
working capital
the amount of
inventory at the
company level
was cut from
Euro 70-75
million to Euro
40 million
affecting the
ability to serve
customers on
time. Since
from India and
China has
jumped from 38
to 60 per cent.

products were
priced 15 per
cent lower than
those of rivals
Philips, Osram
and GE. This
was of little help
to Sylvania, which makes high-end products, and also diluted the brand. "We raised
prices in Europe and Latin America by five to eight per cent," says Sylvania's global
operations head Rajiv Goel. He adds: "For some 20-odd years, Sylvania was owned
by financial institutions looking for short-term gains. We told employees that we are
here for the long term."
Angelica Valderrama, head of Mexican operations, who joined Sylvania 15 years
ago, says: "Unlike the earlier management, we were given flexibility to think about
new ways to earn profits."

The results soon began to show. In 2010/11, Sylvania made a net profit of Euro 7
million on revenues of Euro 449.4 million. Since then, profits have grown steadily:
Euro 10.2 million in 2011/12 and Euro 30.5 million in 2012/13, although revenues
stayed somewhat flat (Euro 449.4 million in 2011/12 and Euro 439.9 million in
2012/13). The company has seven factories (it closed one more in the UK in 2009)
and a workforce of 2,200 in 50 countries.

The persistent slowdown in Europe remains a concern for Sylvania. Europe

contributes 55 per cent to its top line, down from 70 per cent some years ago. "The
macroeconomic situation in Europe is not hunky-dory," says Rahul Gajare, analyst
at Edelweiss Securities. "The construction sector in Europe, which is expected to
drive Sylvania's growth, is subdued."

Joint Managing Director Anil says Sylvania will grow through acquisitions in areas
such as lighting, switches and mini circuit breakers. "We have the financial
capability and managerial bandwidth to make a i50-200 million acquisition."

Soon after the restructuring, Sylvania shifted its global headquarters from
Frankfurt to London with the aim of multiplying its growth prospects. The brand
has literally gone places - among the things it lights up are the National Museum in
New Delhi, Madame Tussauds in London, the Channel Tunnel and IndiGo aircraft.

It appears that much of Havells's post-merger problems was the

result of environmental factors: Bala V. Balachandran
A Classic Turnaround Case

A sequential process involving strategy, plans, identification of

possible targets, negotiation, evaluation, streamlining of the final
deal, value creation, culture fit and growth aids a successful
acquisition. Valuation techniques which take into consideration synergies accruing to
buyer and seller, digressions, deal structure, performance measures, cost, market,
management of talent, accountability and so on are other critical issues in evaluating
a marriage between two companies. The final critical point is that the agreed value of
an M&A deal needs to be justified by sales turnover, profitability, cash flows and so
on, which the acquisition is supposed to yield. Without establishing the worth of these
variables, it is impossible to identify the value of the company being taken over. This
said, the Euro 3 million excess paid for Sylvania is marginal, considering the value of
the deal was Euro 200 million.

Even after doing all this, the decision to execute a cross-border takeover of a company
that is 1.5 times bigger than the acquirer, with worldwide sales and production, is not
easy. It appears that much of Havells's post-merger problems was due to
environmental factors - an economic downturn and Sylvania's operational
inefficiencies. In fact, this can be seen as a blessing in disguise - many tough decisions
such as restructuring and layoffs find greater acceptability among staff when the
environment is bad. Havells's decisions to close three factories, increase sourcing from
cheaper markets, move their focus to Latin America and Asia, and reduce dependence
on European markets, competitive pricing, and so on were all steps in the right
direction. Likewise, fixed cost reduction was an important first step in the
turnaround. Havells also involved the local management in decision-making and let
go of their ineffective CEO. True, they could have done this earlier, but it is important
to time and sequence one's moves so they don't backfire. It takes time for the results
of broad-based changes to show, and HaveIls has recorded increasing profits year-on-
year since 2011.

Bala V. Balachandran, J.L. Kellogg Distinguished Professor of Accounting and

Information Management, Northwestern University

Havells was able to convey that it was not 'taking over', and that it
sought to work jointly with the local management: Sanjeev

Indian companies' overseas forays have had mixed results. For

every JLR, there is a Corus, and for every Taro there is a Zain or
an Imperial. If one looks at India Inc's 20 largest overseas deals so far, the majority
appear to have hurt financial health. The issue could be the price paid, financing, the
global economic scenario, or how the company went about managing its investees
after the acquisition. The last is possibly the most important.

From the large number of overseas purchases by emerging Indian majors, Havells's
acquisition of Sylvania is amongst those that have got the most attention. It is easy to
see why. It is a turnaround story - something larger Indian companies have struggled
to achieve. Two things contributed to Havells's success in turning Sylvania around:
acceptance of the challenges facing Sylvania a year after the acquisition, and the
collaborative way in which restructuring was carried out.

In the year following the acquisition, Havells let the business run as is. As it began to
struggle, it was quick to learn that Sylvania's business had been reconstructed few
years earlier by private equity investors. What was missing, however, was the passion
to create a sustainable business, something that Havells itself has done over the
years. It redeployed its thin management resources to Sylvania and launched a
restructuring programme.
Some senior executives left. Havells worked with the second line of Sylvania's
management to turn around the business together. Havells was able to convey that it
was not "taking over", but sought to work jointly with the local management to
salvage the Sylvania brand (where Havells saw great value). Havells sought to ease
supplyside bottlenecks and restructure operating costs, including headcount
reduction. The strategies were largely executed by the local management, so the
restructuring seemed to be about "us", rather than "we" and "they". I attribute the
success of Sylvania's restructuring to the Havells leadership. It is an example for
India Inc.

The views expressed here are personal.

Sanjeev Krishan, Executive Director and Leader - Private Equity, PwC