Ajay G Piramal, Chairman, Nicholas Piramal India Can one be "better" than the other? Frankly no. Growth through mergers and acquisitions (M&A) has its own purpose in a strategy and M&A is a key corporate-growth strategy. Our M&A has never been a shot in the dark but a well thought-out option in a basket of corporate development initiatives where we have grown sales and earnings at above-projected growth rates, unlike much of the industry. Nicholas Piramal's business model has been, and continues to be, unique in the Indian pharmaceutical industry. The company has grown through a combination of organic growth and inorganic growth (acquiring large operations of global pharma companies in India). Underpinning this strategy has been a commitment to Intellectual Property Rights (IPR). This has led to a strategy of "partner of choice" whereby Nicholas has been able to successfully leverage its acquisitions and its domestic marketing skills to market through in-licensing/partnerships the products of the global pharmaceutical giants in the Indian market. But the strategy has also been a bit of a constraint in that we have made a commitment to never "copy-cat" and reverse-engineer drugs or challenge global pharma with Para IV filings. Therefore, while we have grown organically, we have acquired considerable capabilities through M&A over the years. Nicholas Piramal has grown from No. 48 in the Indian industry in 1988 to No. 4 overall (according to ORG-Marg) and is the second-largest domestic pharma player through its combination of organic and inorganic growth. The ability to derive benefits and long-term financial returns from successful M&A is critical to its success. An objective assessment of the capabilities/competencies is critical "" brands, marketing and sales, distribution and manufacturing, R&D and process development, supply chain management and so on. Having acquired, one must integrate "" efficiently and quickly "" in order to derive benefits. Choosing the specific capabilities/competencies or defining the growth objectives is critical to successful M&A. Our follow-up actions are well-planned and unfold in concert with clearly-defined goals and we measure our post-acquisition performance in terms of whether it achieves its objectives. The recent Rhone Poulenc acquisition was integrated with Nicholas Piramal in a period of 12 months, while the acquisition of the ICI pharma business was integrated in a record period of five months. The payback from our Rhone Poulenc acquisition was achieved within 18 months and we acquired it cash for Rs 240 crore for 60 per cent of its equity. The company's now-institutionalised ability to acquire and integrate can be seen from the table below.
The key attribute of our strategy is that even while using M&A as one of our growth tools, we have, and will continue to invest in, cutting-edge technologies while maintaining our IPR-based philosophy. This strategy makes us distinctive in an Indian context and ensures that we continue to play at the high-value end of the market. The fact is that M&A, in the Indian pharma industry, will continue. In fact, over the past five to seven years, almost every large Indian player, whether a domestic company or a multinational, has taken the M&A route. Consolidation in the Indian market has been critical as scale and size become the determinants of leverage in both topline and bottomline terms. Consolidation is, therefore, inevitable, especially in the post-2005 era. Within this framework, M&A will have to play a critical role in the strategy of any Indian pharmaceutical company that wishes to exploit all the opportunities that arise in the Indian market. R Zutshi, Sales director, Samsung India I do not think this is an issue on which a verdict can be given as a straight black-and-white. I think a case can be made out for both "" organic growth as well as acquisition-led or inorganic growth. But which approach will work for a company depends on the stage of its business operations. The long-term strategy in terms of business "" where does the company see itself in the long run and how does it plan to get there "" is also critical. The experience of most companies across the world shows that organic growth is generally the wiser choice when it comes to building up a business. But once a critical level is achieved, a successful acquisition can help that company grow rapidly. Since an acquisition plays a critical role in a company's growth path, it is important to consider all the aspects that go into making an acquisition successful. Do the businesses complement each other? If they do, are there synergies between the cultures of the two organisations? Can the distribution networks work in tandem? What are the relative strengths of the brands in question? What will be the command structure in the new set-up? All these issues will have to be addressed before an acquisition can contribute in a positive way to a company's future growth. But, to my mind, the most important factors relate to manpower and organisational issues. Thus, unless management and people issues can be dealt with successfully and harmonies established, there is little point in opting for the inorganic route of growth. The advantage with the organic route of corporate growth is a consistency in the growth path, a lack of turbulence and the ability to chart and structure the company's future activities. At Samsung India, we are growing organically by establishing a harmonious organisational culture, by a structured market study and demand creation, by creating a strong brand equity and by fully exploring and utilising the synergies that exist between our diverse business groups. The businesses that we are operating in India are consumer electronics, home appliances, IT and telecom. In all these businesses, the operating words for us remain the same: synergy, building brand strength and equity. (As told to Meenakshi Radhakrishnan-Swami) Habil Khorakiwala, Chairman, Wockhardt I would not say that acquisition-led growth is always better than organic growth. But acquisitions, if properly chosen and implemented, can allow a company to leapfrog into a new orbit of markets, customers, products and technologies overnight. It may well take several years of toil to get into that orbit if a company stuck to organic growth alone. Our acquisition of CP Pharmaceuticals in Wales, UK, is a good example. It has given us immediate access to a large base of customers in the UK, including hospitals and the National Health Service. The acquisition has made Wockhardt the largest Indian pharmaceutical company in the UK and one amongst the top 10 generic companies in the country. It would have taken Wockhardt many years to achieve such a position in the UK. With a combined turnover of over £ 50 million in the UK, we now have the critical mass for a push into the Greater European Union. When liberalisation opened up opportunities in the early-1990s, we decided to explore the acquisition route. We decided that any acquisition should, first, fill a strategic gap by way of access to new territories, product segments or technologies; second, it should help us achieve critical size by way of increasing market share; third, it should create value through improved efficiencies of the merged organisation. Merind, our first Indian acquisition, helped Wockhardt to enter new therapeutic segments like corticosteroids. The acquisition catapulted our ORG ranking from 19th to ninth. Similarly, Wallis Laboratory in the UK was a loss-making over-the-counter products company when we took over in 1997. We saw Wallis as a port of entry to the UK market. We brought in a management team from India and turned around Wallis in just 12 months. A Mahendran, Managing director, Godrej Sara Lee Growth can be led by acquisitions or through the organic route. Or a company can adopt a mix of both as a strategy. Typically, organic growth is long- term and growth by acquisitions give companies incremental gains in the short-term. In the present context, CEOs are encountering increasing expectations from shareholders and the board. If returns in the financial market are to the tune of around 6 per cent, a typical shareholder expects returns to the tune of 20 per cent. And organic business can give you at best an incremental growth of a mere 2 to 4 per cent. In comparison, growth through acquisitions deliver the following benefits. Acquisitions help companies attain rapid growth and lead to an overnight increase in market shares. Then, one can leverage on the economies of scale that organisations get through acquisitions, which will thereby reduce the total delivered cost. For instance, overheads like distribution cost can be reduced as a company can use a common distribution for the two brands. Then acquisitions give immediate bottomline and topline improvements, since the investment in acquisitions is generally amortised over a period of 10 years. The thumb rule for acquisition, however, is that the company or brand to be acquired must be valued on par with the yearly sales turnover it can deliver. In case it's a high-profile brand, the value of the acquisition can be worth the sales turnover of two years. But in these cases, the acquired company or brand must be within the category. If it is outside the category, then the company or brand must be profit-making so that it will not be a strain on the acquiring company's resources, which are generated from its existing businesses. Importantly, every acquisition should be evaluated financially for positive economic value added or as per the IRR (internal rate of returns) expectations of the company. Take a look at how a simple acquisition deal can provide companies a cushion against the business vagaries within a year. An acquisition worth Rs 100 crore, which will fetch a sales turnover of Rs 100 crore in the first year, will deliver a 40 per cent gross profit. After taking into account that the additional cost to acquire profit (marketing and advertising expenses) is not more than 10 per cent, finance cost is 6 to 8 per cent and the amortisation cost is another 10 per cent, it will still boost the bottomline by 12 to 14 per cent. Sometimes, company boards sanction the funding of acquisitions to deliver a strategic advantage "" such as the buying out of a competitor who has nuisance value in the market by cutting prices and so on. Then, acquisitions facilitate easy entry to other categories or sub-categories. However, there are some golden rules that companies need to follow in their quest for acquisitions. The acquiring company must go in for acquisitions in the same category or a related category so that it has the required expertise to manage the acquired property well. Otherwise the probability of failure is extremely high. Another acquisition rule that is important in the Indian context is that companies should try and acquire companies equal or bigger in market share terms than the acquiring company. This is to counter the mindset of the distribution network in India "" salespersons and distributors are keen to push products that are dominant. And the danger of cannibalisation is neutralised because each brand has its own loyal set of buyers and hence the brands will enjoy consumer patronage because of their equity. (As told to Prasad Sangameshwaran) | ||||||||||||||||||||||||||||||||||||||
Organic growth or Acquisition-led growth?
Industry leaders discuss which is better in this month's strategy debate
Don't miss the most important news and views of the day. Get them on our Telegram channel
First Published: May 04 2004 | 12:00 AM IST
