A firm begins with an ambition to earn profits, accumulate wealth and grow over the years. This growth can be achieved in two ways Organic and Inorganic.
Organic Growth – Growth achieved on account of operational efficiency, improved customer base, higher sales etc. of the existing entity.
Inorganic Growth – Growth or expansion achieved on account of higher sales and increased output by acquiring business, new or in the same sector by way of Mergers and Acquisitions.
Acquisition – An Acquisition is defined as a corporate action in which a company buys most, if not all, of the target company’s ownership stakes in order to assume control of the target firm. It is employed as a part of company’s growth strategy whereby it is beneficial to takeover other company’s operations to benefit its own operations. If A and B are two companies, where company A acquires company B, after the acquisition identity of company B is lost and its operations are merged with that of A’s. Acquisitions are often paid in cash or by acquiring company’s stock or both.
Acquisition of one firm by another firm of the same industry producing same types of goods or services is called a horizontal acquisition. The new combined entity has synergy and is in a better competitive position than standalone acquirer. A health care system acquiring another health care system is an example of a horizontal acquisition.
Vertical Acquisition
It refers to acquisition of a supplier of a business. When a company merges with either a supplier or a customer to create an extension of the supply chain, it is known as a vertical integration. It may be done for product extension and helps cut cost of searching for prices, contracting, supplies etc. for the acquirer. If a health care system acquires the ambulance services from their service suppliers is an example of vertical acquisition.
Conglomerate Acquisition
Acquisition of one firm by another firm which is unrelated to its business is a Conglomerate Acquisition. The example of conglomerate acquisition with relevance to above scenario would be if health care system buys a restaurant chain. The objective may be diversification of capital investment.
Product Extension Acquisition
Product extension acquisitions are types of acquisitions that combine companies that sell related products in the same market. An example of this would be a snow ski manufacturer merging with a ski apparel company. Both companies are selling to the snow skier market but, by combining their product, offering is extended.
Acquisitions that are executed forcibly and face resistance from the management of the target company are termed as hostile acquisitions. They can be executed by buying of shares of the company from the market or other sources in an effort to replace the management.
Acquisitions that are executed amicably by the acquirer and the board of directors of the target company are termed as friendly acquisitions. The board of the target firm publicly approves the buyout terms, which may yet be subject to shareholder or regulator’s approval.
A merger happens when two companies A and B join together to form a single entity, say AB limited, and the individual identities of A & B cease to exist. Whereas, in takeover and acquisition, there is not much difference between the two terms but, only the connotation differs. Takeovers are used to refer a hostile acquisition and acquisition is generally used to refer to friendly acquisitions.
Emami Group is a conglomerate having a pan India presence through a number of brands and business initiatives since 1974. The Group owes its origins to R.S Goenka and R.S. Agarwal. It has an aggregate turnover of about Rs 3700 crore. The group has business interests in FMCG (fast moving consumer goods), paper, writing instruments, edible oil and cultivation, bio-diesel, hospitals, contemporary art, pharmacy, cement, real estate and retail. The Group has its fountain of strength in value system, innovativeness and dedicated staff. Emami Limited, the flagship company of the Group, is worth Rs 1500 crore business entity and is a leading player in the personal and healthcare consumer products with over 30 brands under its portfolio.
With the help of Himani Ayurveda Science Foundation (HASF) that generates the very best of ayurvedic formulations the company has been fulfilling the human need. Emami’s products in different categories like cool oil, antiseptic cream and fairness cream for men have carved a niche for themselves the Navratna Brand being worth Rs. 400 cr followed by Boroplus Brand at Rs. 300 cr, Zandu Balm, a Rs 250 cr brand and Fair and Handsome standing at Rs.120 cr.
Brand extensions have helped Emami consolidate its position in the market and also cater to varied consumer needs. Emami covers all the states with 29 depots across India. Its supply-chain management assumes immense significance that has remarkable expansion in dealer-distribution network, outlets and manpower.
Zandu Pharmaceutical Works Ltd. was named after venerable Mahatma Zandu Bhattji to whom it owes its origin. The King of Jamnagar gave a piece of land on the bank of Rangamati River in Gujarat for preparing medicines. The oldest factory named Ras-Shala was established about 148 years ago from this date.
Zandu Pharmaceutical Works was founded in October 1910 as a private concern. The company started gaining popularity with its various products from the very beginning.
Within a decade, it was realized that it is difficult to meet the growing demands of the market and hence on 10th December1919, Zandu went Public by issuance of stocks.
To diversify the production, an associate company Zandu Chemical Ltd. was established in 1990 at Ankleshwer in Western India to manufacture bulk drugs and intermediates.
In 2008, Emami, with an investment of approximately Rs 730 crore acquired Zandu Pharmaceuticals Works Ltd, from the Parikh family, keeping in mind the huge synergy between the Emami and Zandu brands in various categories. With this acquisition, Emami acquired brands like Zandu Balm, Pancharista, and Nityam Churna apart from the other Zandu ayurvedic range of products. The FMCG business of Zandu has been merged into Emami. This has helped consolidation of FMCG business of Emami and Zandu into one entity.
EMAMI PAPER MILLS LIMITED
EMAMI CHISEL ART
CRI LIMITED
SOUTH CITY PROJECTS (KOLKATA) LTD
ADVANCED MEDICARE & RESEARCH INSTITUTE LTD
(AMRI)
FRANK ROSS LIMITED
EMAMI REALTY LIMITED
EMAMI RETAIL PVT LIMITED (STARMARK)
EMAMI BIOTECH LIMITED
EMAMI CEMENT LTD
ZANDU REALTY
The company was formerly known as The Zandu Pharmaceutical Works Limited
It changed its name to Zandu Realty Limited in March 2010.
Zandu Realty Limited is based in Kolkata, India.
Zandu Realty Limited operates as a real estate company in India.
Emami Group of Companies, with core competence in personal and healthcare consumer products and FMCG works with the vision of reconciling the Ayurveda platform and modern science with quality and innovation.
Emami has stuck steadfast to its belief that family-way to do a business is the right way. Emami presents a unique hallmark of perseverance and consistency in coordination through family business.
The group also has interests in paper and newsprint, writing instruments, edible oils, bio-diesel and contemporary arts, and real estate.
The Company enjoys first mover advantage in various products and brands. With Products like Boroplus, Navratna Oil and Fair and Handsome the company was able to acquire a large share of the market. Boroplus holds 74% market share of the anti-septic cream segment in India. Navratna Oil enjoys 48% market share of the 540 Cr market. Emami is the first company to launch a fairness cream exclusively for men which enjoys 84% share in 137 Cr market. The company used this fact as an ingredient in promoting Fair and Handsome.
Association with top Bollywood actors and product placement in songs and movies has been Emami’s hallmark marketing strategy for years. The company also utilizes the opportunity available of promoting through regional stars. For example, when the song “Why this Kolaveri Di” became popular Emami immediately signed a deal with Dhanush to promote their Navratna Oil with the movie “3”.
Bright colors, appealing illustrations, attractive graphics and innovative designs – Emami implemented this new mantra in its annual report to communicate with its shareholders.
The Emami Group has Pan-India presence with six regional sales offices and 29 depots. A strong network of 3,500 distributors and 2,500 sub-distributors, with a direct reach across over 4,50,000 retail outlets and market presence across over 65 countries with subsidiaries in Bangladesh, Egypt, Dubai and the UK.
In May 2008, Emami Limited brought the entire 23.62 % stakes of the Vaidya family, one of the co-promoters of Zandu, taking its total holdings to 27.5% as they already owned 3.9% equity. The deal was worth Rs 130 crore and share price of Rs 6900 per share was paid.
Subsequently, after 2 days Emami announced an open offer to buy 20% additional Shares from shareholders of Zandu. The Offer price was Rs 7315 per share. At this juncture, Parikh family headed by Mr. Girish Parikh, one of the promoters, holding 22% stake in Zandu termed this as an attempt for a hostile takeover and alleged Emami had Violated SEBI Takeover Code (1997).
This matter was moved to SEBI who transferred it to Company law board (CLB). Further, the Parikhs moved to Bombay High court stating their right for first refusal in respect of Vaidyas selling their 23.62 % stakes to Emami.
Both High court and CLB held back the open offer by Emami and instructed both the parties to settle the matter out of court.
With advent of the proceedings, share prices of both Emami and Zandu came crashing down in the stock market and in a revised bid Emami doubled its original open offer price for Zandu pharmaceuticals from Rs 7315 to Rs 15000.
In September 2008, SEBI cleared the open offer for Zandu. Over and above the price of the share there was a valuation fee of Rs 1500 per share so the total comes up to Rs 16500 per share. Open offer was executed and closed the following month.
In October 2008, there was a compromise between Parikh family and Emami with Parikhs offering 18.18% stakes to Emami at the open offer price of Rs 16500. Total deal amount came to a whopping Rs 242 Cr. Now Emami had a total stake of 65.7% in Zandu.
Later in the same month, Emami Ltd came forward and brought another 4.64% stake for a total of 54 Cr to reach a tally of 70.34%. This paved the way for acquisition of Zandu Pharmaceuticals by Emami Ltd. The entire deal was close to Rs 713 crore.
Pursuant to the compromise between Emami and Parikhs, Emami had also invited members of Parikh family to join their restructured board as independent members.
Zandu was a strong name as it was a century old company and hence a target Emami would wish to acquire.
Zandu was a zero Debt Company.
It was an attractive target for domestic as well as international FMCG Players.
Product portfolio of Zandu consisted of more than 300 herbal as well as ayurvedic products.
Zandu had a tremendous business potential since it had an avid R&D division coupled with long entrepreneurial vision.
Similar product lines can help achieve better sales target and grow faster.
Zandu’s product line, fused with Emami’s marketing dynamism and fiscal disciplines could lead to an increased market share, higher revenue and enhanced profitability with a multiplier effect on shareholder’s returns and hence investors sentiments strengthens.
The Parikhs increased their stake in the company by 1.4% as soon as the acquisition cloud was hovering over Zandu.
Used the legal defense of right of first refusal in respect of the shares sold by Vaidyas.
Filed petition against Emami in SEBI. It led to the open offer by Emami to get delayed by 3 months.
Emami first approached Vaidyas and later on, after acquiring reasonable stakes in Zandu from public, went to Parikhs for a reasonable negotiation over the remaining stakes.
Emami eventually managed to reach a consensus with Parikhs and could acquire their stakes.
Emami had acquired 23.62% stake from the Vaidyas in two parts. After the acquisition of shares from Vaidyas, Emami made a public announcement of its open offer under the Takeover Code on June 1, 2008 to acquire additional 20% of the shareholding of Zandu.
Zandu and the Parikhs alleged before the Bombay High Court and later the Company Law Board (“CLB”) that Emami was in violation of the Takeover Code. Emami on the other hand contended that the parties may have negotiated to acquire the shares over a long period but the Takeover code only comes into effect when a proper contract for transfer or payment of a consideration is put into place. Apart from this, Emami stated that the shares were acquired from different parties irrespective of the fact that they were related to each other, each transaction was a separate transaction.
In view of Regulation 14, it is evident that a written agreement is not the only trigger for open offer, and a mere “decision” to acquire alone may be enough to trigger an open offer. However, in the absence of a written contract, the time and fact of “decision” to acquire would be subjective and would depend upon the conduct of the parties concerned.
The Parikhs stated that Devkumar Vaidya was a senior employee of Zandu designated as the Management Executive. Also, he was invited to be on all the board of directors meetings since September 2005.
It was further alleged that he was present in the meetings held there on and would position him as an “Insider” under the Insider Trading Regulations as he was in possession of unpublished price sensitive information and hence, was barred from dealing in securities of Zandu without obtaining clearance and approval from Zandu.
The Company Law Board stated that as per Clause 41 of the Listing Agreement, within 15 minutes of finalization and approval of the accounts by the board the same is to be communicated to the concerned stock exchange. Therefore, the information relating to the accounts and financials of Zandu was in public domain and not Unpublished Price Sensitive Information. Also, Devkumar Vaidya was not involved with Zandu’s management from 2005 due to friction and misunderstanding.
Every listed company is required to frame an internal code of conduct for its directors and designated employees for dealing in securities of the company (above a minimum threshold limit) in consonance with the Model Code of Conduct provided should obtain pre-clearance from the board regarding possession of Unpublished Price Sensitive Information or not.
The Parikhs approached the Court claiming they had the right of first refusal on the shares held by Vaidya in Zandu and therefore the Vaidya’s were obligated to offer the shares to the Parikhs before transferring to Emami. In pursuance of this dispute Zandu did not register Emami as the owner of the acquired shares in its books. However, the Parikhs could not substantiate the claim.
The Parikhs right of first refusal on the shares held by Vaidya’s could not be substantiated and proved. The enforceability of such transfer restrictions in case of an Indian public company still remains untested. However, one pertinent issue that arises is the impact that the right of first refusal could have had on the transfer had the right of first refusal been proved?
The Parikhs filed a petition alleging violation of the Takeover Code and Insider Trading Regulations Act.
Emami argued that the issues raised were in relation to acquisition of shares which is governed by the Takeover Code and that the entire matter fell under the Jurisdiction of the SEBI. SEBI has the authority to cause a target company to suspend voting rights on the shares acquired by any person or withhold the target company from transferring shares in favor of an acquirer.
CLB thus held that it had no jurisdiction over the subject matters and directed the matter to SEBI and Central Government which were the appropriate authorities to decide the matters.
The Company Law Board dismissed the petition filed by the Parikhs as the subject exceeded its jurisdiction. The Section 15Y and Section 20A of the Securities and Exchange Board of India Act, 1992, grants exclusive powers to SEBI to deal with the matters relating to the Takeover Code and it cannot be exercised by anybody else.
After completion of acquisition in October 2008 and taking control of management on 5th November, 2008, plans to merge the FMCG wing of Zandu Pharmaceuticals with Emami ltd. emerged. Finally as a part of the restructuring process, separation of the FMCG and realty business of Emami ltd. to allow efficient functioning of both businesses was decided upon. Following was decided in June 2009:
FMCG business of Zandu Pharmaceuticals would be merged with its counterpart Emami Ltd. The shareholders of Zandu would get 14 Emami shares of par value Rs. 2 for every Rs. 100 Zandu share they hold.
The CEO – Finance Mr. Bhansali of Emami ltd. was of the view that this integration will ensure several operational synergies, more focus, improve profitability, lead to optimum utilization of the current manufacturing facilities and bring about consolidation of Distribution and Sales channels of the two Companies.
Apart from this, the realty undertaking of Emami ltd. would be demerged into a separate entity, Slick Properties Private Limited, to be rechristened as Emami Infrastructure. Shareholders of Emami would get a share of Rs. 2 of Emami Infrastructure for every 3 shares of Emami held by them.
The existing shareholders of Zandu will hold the shares and the company will be renamed as Zandu Realty.
(Process completed on 28th December, 2009)
In December 2008 Emami ltd. surfaced plans for seeking funding up to $40 – 50 million via the Private Equity route for its healthcare section of Business.
On 29th December 2010, Emami decided to divest close to 19% of its equity from Zandu Pharmaceuticals (later renamed as Zandu Realty) for Rs. 100 crore. This was after the demerger of Emami infrastructure from Emami ltd. Emami’s holding in Zandu Pharmaceuticals reduced to 52.01% from 72.8% after the divestment. Emami chairman R.S. Agarwal said it was a well-thought-out business decision and the money would be used for general corporate purposes and would increase liquidity in Zandu without compromising Emami’s majority holding in the entity.
Analysis of the standalone sales and profit figures of Emami ltd. before and after the acquisition:
Year
Sales(in Rs. Cr.)
Net Profit(in Rs. Cr.)
2007-08
604.81
92.75
2008-09
739.79
87.52
2009-10
1021.64
165.40
2010-11
1276.66
227.49
2011-12
1404.01
256.81
Before the acquisition, Emami had a turnover of Rs. 604.81 crore in the financial year 2007-08.
The management expected a steadfast growth due to addition of Zandu’s ayurvedic product range like Zandu Balm, Zandu Chyavanprash which would complement Emami’s power brands like Boroplus cream, Fair and Handsome fairness cream.
A target of turnover exceeding Rs. 1000 crore and clearance of debt for funds raised for the acquisition by 2009-2010 were made.
As the figures above depict, the acquisition helped Emami ltd. not only achieve their sales target of Rs. 1000 crore by the year 2009-10 but, it could also clear its total debt raised for the transaction.
Net profits and Sales grew at a compounded growth rate of 11.45% and 10.727% respectively during the 4 year period.
Currently due to increase in rural demand, management expects a growth of 17-18% in sales for the next financial year.
Acquisition of Zandu Pharmaceuticals helped Emami add to its kitty, Zandu Pharmaceuticals’ R&D capabilities and thereby adapting to the changing environment more rapidly than could be achieved if Emami were to develop it internally.
Although Zandu Balm was present for more than a century in the Indian market, it wasn’t marketed well and losing brand recognition. Post-acquisition and approximately 2 years after the famous ‘Zandu Balm’s reference in the ‘munni badnaam…’ song, Malliaka Arora Khan became its Brand ambassador. The same quarter net sales of Zandu Balm was up 35% (Source: Economic Times Nov 2, 2010) owing to the company’s surprising new jingle. Adding glamour to this brand has definitely helped Zandu Pharmaceuticals expand its reach as it commands 43% market share in its segment and remains the largest selling balm in India.
Markedly placed products reaching to every segment of society.
Integrated supply chain and well spread manufacturing units. Emami has more than 3,500 distributors, 160 super-stockiest, 4,000 sub-stockiest, 5, 00,000 retailers and five mother warehouses (cumulative storage capacity of 2.78 lacs sq. ft.)
Market penetration with deep distribution structure and very strong geographical presence.
M&A deals are aided by high level of cash and appetite, with the net cash level comfortably sitting at the 350 crore mark Emami looks poise should any opportunity arise.
Innovative R&D: Emami’s understanding of consumer needs and systems for building consumer insight is superlative. Few examples:
Redefining hair oil market by substituting traditional stickiness of oil with a relatively lighter equivalent.
Creating a niche for men’s fairness cream (recognition that men sheepishly use women’s fairness creams to lighten their skin tones)
They changed Zandu Pharmaceuticals’ tagline to “desh ka balm” as part of their brand re-building exercise.
FMCG Industry as a whole is pretty much insulated from the global financial crunch.
Brands: Emami’s brands along with Zandu in their kitty assume a leadership position in their respective segments.
Product Endorsement: Endorsed by prominent (national and regional) film personalities. For example- Amitabh Bachhan, Shah Rukh Khan, Bipasha Basu, Govinda, Madhuri Dixit.
Chewing more than it can digest: In its effort to hunt for potential target for acquisition, Emami should tread the rocky road very cautiously. They’ll have to draw a line somewhere between aggressively pursuing a target company and be content with other players in the industry. For example- In 2010, Emami set out to acquire Paras chemicals, a company that produces moov, d’cold total, valued at approximately 2,950 crore but the deal could not materialize. During the entire process when the deal was still under the table, Emami’s stock fell 25% over the concern that its debt burden would increase.
There is a growing competition in this sector where the profitability is largely a function of volume than margin. It leads to considerable rise in the marketing cost of the product and as is very evident from the increasing advertisement and sales promotion cost on year-on-year basis.
Competitors focusing on a particular product and eating up Emami’s share.
Like Zandu Pharmaceuticals, there are many other smaller companies with strong brands that complement Emami’s product line and if consolidated, will extend its product offering. For example- Amrutanjan, livon hair products, zatak deodorants and Himalaya drug line.
Growing consumer base due to increasing income levels with people from lower income group climbing the ladder to the mid and upper level.
Market for branded Ayurvedic medicines is largely untapped. This is one field which can be explored by Emami and is in line with their existing business.
Cross-border expansions.
Emami has plant setup in areas like Pantnagar (Uttaranchal), where there are 10-year excise and income tax exemption. Commencing production of Zandu Balm, which is relatively a high consumption-high production item, would bring down the overall cost of production and hence, increase profitability.
Excellent credit worthiness: with zero debt and cash and cash equivalent of 350 crores Emami has a solid in-house available capital to provide for any new venture plus the fact that it has an almost zero debt/equity ratio, raising funds would be relatively easy.
Inventory prices have shot up over the years due to high inflation rate in the economy. Maintaining the same level of profitability would be a tougher task if inflation could not be brought under control.
In order to ensure brand recognition, heavy advertisement costs are incurred by Emami and increased competition in the core categories from upcoming companies will require even more advertisement costs.
Cheap “Me too” counterfeit products pose a serious threat to Emami’s profitability in rural areas and small towns as there are different pirated competitors in different areas.
With high inflation, not only input prices go up but real income or the disposable income of the consumers come down too, thereby decreasing the demand.
Cynical rural demand.
With the Indian government pushing for reforms it is likely that import restrictions would be eased in the FMCG sector thereby causing increased competition from international players.
In conclusion the acquisition of Zandu Pharmaceuticals was a beneficial venture for Emami’s FMCG organization. The benefits achieved by Emami are as follows:-
Before the acquisition, Emami was the market leader in two categories: Boroplus cream, with 70% market share, leading the Rs. 190 crore antiseptic creams market, and Navratna oil, with over 50 percent market share, leading the Rs 397 crore cooling oil category.
After acquiring Zandu, with Rs.120 crore Zandu Balm in its product line, Emami leads the local pain ointment category with a combined market share of more than 25%.
Zandu’s Sona Chandi and Kesari Jeevan Chyawanprash gave Emami a larger market share in the Rs. 170 crore Chyawanprash category which was ruled by Dabur Chyawanprash.
Consolidation in the ayurvedic medicine market which was until now led by Dabur with 10% market share.
Advantage of product improvisation, customization and price variations.
Emami and Zandu products could be placed across a wider format and footprint in India and 60 countries across the globe at a lower cost and affordability.
Emami is poised to become a serious FMCG player.
The net worth of Emami Ltd. increased multifold from Rs. 600 crore in 2007-08 to approximately Rs. 1500 crore today.
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