Expansion Strategy

INTRODUCTION:

When a firm aims at substantial growth, it adopts growth strategy. The growth

strategy is also called as expansion strategy. To achieve higher targets and objectives than

before, a firm may enter into new markets, introduce new product lines, serve additional

market segments, substantial increase in market share and/or increase in sales targets. This

strategy involves greater effort and risk as compared to stability strategy.

DEFINITION OF GROWTH STRATEGY:

According to William Glueck “a growth strategy is one that an enterprise pursues

when it increases its level of objectives upward in significant manner, much higher than its

past achievement level. The most frequent increase indicating a growth strategy is to raise

the market share and or sales objectives upward significantly”.

MEANING OF EXPANSION STRATEGY:

A strategy used at the adapter level to identify whether objects should be loaded or

not in the representation model. The expansion strategy defines how an object is going to

behave when it is expanded. It also indicates whether load on demand is implemented. We

further define an expand strategy as one in which we are growing significantly faster than

the market or market segment is growing overall.

MEANING OF GROWTH STRATEGY:

Growth is a way of life. Almost all organizations plan to expand. This strategy is

followed when an organization aims at higher growth by broadening its one or more of its

business in terms of their respective customer groups, customer functions, and alternative

technologies singly or jointly – in order to improve its overall performance.

E.g.: A chocolate manufacturer expands its customer groups to include middle aged and

old persons among its existing customers comprising of children and adolescents.

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NEED AND IMPORTANCE OF GROWTH/ EXPANSION

STRATEGY:

1. Survival :

In the long run, growth is necessary for the survival. If a firm does not grow, new

entrants may push it out of the market. Also, firms adopting growth strategy would be

in a better position to withstand pressures during recession. Growing firms may be in a

better position to face the challenges of business environment.

2. Innovation :

Growth strategy enables innovation in the organization. Due to growth strategy, the

organization gets higher performance. As a result, the employees get higher incentives.

Therefore, the managers and employees come up with innovative ideas in respect of;

new products, new methods, new schemes, etc. innovation gives competitive

advantage in the market.

3. Motivation to Employees :

The growth strategy generates higher performance. The higher performance enables

the firm to motivate employees with incentives: monetary incentives and non-

monetary incentives. Due to motivation the employees work with application and

dedication, which it turn improves efficiency of the organization

4. Customer Satisfaction :

Growth strategy may lead to customer satisfaction. The growth strategy enables the

firm to enhance customer satisfaction by providing quality goods at right prices.

Customer satisfaction takes place when product performance matches with customer

expectation.

When product performance is less than customer expectation; customer gets

dissatisfied.

When product performance is more than customer expectation; customers are

delighted.

5. Corporate Image :

Growth strategy helps to improve corporate image of the firm. Due to the growth

strategy, the firm’s performance improves. Therefore, the image of the firm improves

in the mind of various stakeholders: customers, employees, shareholders, suppliers,

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dealers, etc. The support of various stakeholders is required for the survival and

success of the organization.

For instance, if the performance of the firm improves, the shareholders may get

higher dividends, employees may get higher wages and incentives, customers may get

quality goods at right prices, dealers may get higher incentives, etc.

Mergers generate goodwill in the market. For instance, the merger of ICICI and

Prudential in the insurance sector has enhanced the image of ICICI-Prudential not only

in the Indian markets, but also in the global markets.

Also Takeover strategy gains goodwill in the market. Large takeovers such as Mittal

Steel of Arcelor Steel, and Tata Steel of Corus gave them a wide publicity in the

markets worldwide. At times, takeover increases the confidence in the shareholders of

the company. Customers may also develop a good image of the company, especially

when the takeover is of reputed firm.

6. Competitive Advantage :

Growth image provides competitive advantage to the firm. Due to growth strategy,

the firm makes every possible effort to face competition in the market. The firm comes

up with proactive decision rather than being reactive. The proactive decisions give

competitive advantage in the market.

Takeover strategy also helps to face competition in the markets. For instance, in

1993, Coca Cola took over Parle Breweries brands of Thums Up, Limca, Mazza, etc.,

in order to consolidate in the Indian market, and to overcome the problem of

competition from Parle Breweries.

Also, Matsushita Electric of Japan took over 80% control of privately held anchor

Electricals (from the Mumbai based Shah Family- now controls only 20%) in order to

overcome the problem of competition from Anchor in India. At the time of taking

control, Anchor was having 33% of the Indian domestic electrical market.

7. Economies of Scale :

The growth strategy enables a firm to take proactive decisions. Therefore, there is

increase in demand for the firm’s products. Increase in demand results in large scale

production and distribution, which in turn brings economies of scale:

Economies of large scale production such as discounts on bulk purchase of materials,

saving in labour costs due to installation of labour savings devices, etc.

Economies of large scale distribution such as freight concessions on bulk shipment or

distribution, economies relating to sales force, etc.

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8. Efficiency :

The growth strategy generates higher efficiency in the organization. Efficiency is

the ratio of returns to costs. Firms adopting growth strategy may undertake various

activities such as:

Technology up-gradation.

Training and development.

Research & development, etc.

All the above activities result in higher efficiency to the organization, i.e., the firm

gets higher returns at lower cost.

9. Expansion of Business :

The growth strategy facilitates expansion of the business. Due to the growth

strategy, the performance of the organization improves in terms of sales, market share

and profits. Therefore, the firm would expand from local to regional level, from

regional to national level, and from national to international level.

10. Optimum Use of Resources :

Due to growth strategy, the company gets higher demand for the goods/services.

Increase in demand results in large scale production and distribution. Therefore, a firm

can make optimum use of resources such as: physical resources, capital resources, and

manpower.

11. Tax Advantage :

Merger can be used as effective source of tax planning, especially, when one of the

merged entities was having accumulated losses. In such a case, it can result in several

tax savings for the merged entity.

At times, takeover helps a firm to gain substantial tax benefits. For instance, if a

firm takes over a loss making domestic firm, then the firm can claim tax benefits.

Also, a foreign firm acquiring a domestic loss making company, then it can claim tax

benefits in certain countries.

12. Spreading of Risks :

Business growth helps to spread business risks. For instance, a diversified firm can

spread its business risks. If there are losses in one area of business, the losses may be

covered up from profits of other areas or other types of businesses.

TYPES OF GROWTH STRATEGIES:

The growth strategy can be further classified into:

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Internal Growth Strategies : which include diversification strategy and intensification

strategy.

External Growth Strategies : which include mergers, takeovers, strategic alliances and

joint ventures.

I. Internal Growth Strategies :

1 DIVERSIFICATION STRATEGY :

Diversification is one type of internal growth strategy. It involves entry into new

products and in new markets. Diversification can be defined as entry of a firm into new

product or product lines, new services or new markets, involving substantially different

skills, technology and knowledge.

When an established firm introduces a new product which has a little or no affinity

with its present product line and which may be meant for a new class of customers

different from the firm’s existing customer groups, the process is known as conglomerate

diversification.

Types of Diversification Strategies:

Diversification can take place in several forms:

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i. Vertical Diversification:

It consists of extending the activities of a firm. It can be in two forms:

a) Backward Integration : In backward integration, a company moves one step backwards

from the current line of business. For instance, a firm may tie up with supplier of raw

materials, or take over a firm that supplies raw materials, or may itself decide to

manufacture raw materials and/or components required to manufacture its final

product. For instance, Hero Cycles has set up a subsidiary to manufacture cycle wheels

and tubes.

b) Forward Integration : In this case, the company moves one step ahead of its current line

of business activities. For instance, a cloth manufacturer may enter into readymade

garments business. The company may also diversify into distribution activities by

opening up its own retail shops like that of Bata or Raymond’s.

ii. Horizontal Diversification:

When a company enters into a new business which is closely related with the

existing line of business through processes, technology or markets. For instance, a

gent’s readymade garments manufacturer may enter in the business of ladies

readymade garments.

iii. Concentric Diversification:

It involves diversification into such areas or products, which are indirectly related

to its existing line of business. In concentric diversification, the new business is

linked to the existing business. For example, a car dealer may start a finance company

to finance hire purchase of cars.

iv. Conglomerate Diversification:

It involves entry in a totally new area or business. It is an attempt to diversify

outside the present market or product. In conglomerate diversification, no linkages

exist between the new business and the existing businesses. For instance, a firm may

enter into several types of business such as computer software, banking, insurance,

airlines, etc.

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2 INTENSIFICATION/EXPANSION STRATEGY:

In the case of intensification strategy, the firm pursues growth within the existing

businesses. Intensification strategy involves three alternative strategies:

i Market Penetration Strategy:

In this case, the firm continues with its current products and current markets but it

tries to increase its market share through aggressive marketing in the areas of

advertising, sales, promotion, price cuts, etc.

ii Market Development Strategy:

The firm enters into new markets apart from current markets by offering the existing

range of products. For this purpose, the firm has to undertake market research, right

pricing, effective promotion-mix, and appointment of good dealer’s network.

iii Product Development Strategy:

The firm may continue with the existing markets but introduces improved products

and substitutes. It may also enter in new markets with the help of improved and new

products.

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II. External Growth Strategies:

1 MERGER STRATEGY:

In merger two firms, agree to move ahead and exist as a single new company. Merger

can be:

Merger of equals: both companies are of equal sizes.

Merger of unequal’s: large company merges with smaller one.

Voluntary process: consent of both companies. Name of new merged entity is usually a

combination of both parent companies.

Mergers are mostly financed by a stock swap. Both companies surrender their stocks

and stock of the new company is issued as a replacement.

Types of Mergers:

i Horizontal merger:

When two merging companies are of the same industry and produce similar

products. Example: Footwear Company Merging with Footwear Company.

ii Vertical merger:

When two companies are producing the same goods, but are at different stages, it is

a vertical merger. Example: Footwear Company Merging with Leather Tannery.

iii Concentric merger:

When two companies are related to each other in terms of customer functions or

customer groups. Example: Footwear Company merging with another specialty

Footwear Company.

iv Conglomerate merger:

When two companies operate in different industries. Example: Footwear Company

Merging with Pharmaceutical Firms.

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2 TAKEOVER/ACQUISITION STRATEGY: Acquisition is a deal when one company takes over another company and buyer

becomes sole proprietor. At times takeover occurs when the target company does not

want to be purchased. However with better offering of prices shareholder are attracted

by acquirer. In legal terms, the target company ceases to survive. The buyer swallows

the company and the buyer’s stock continues to be traded. Unlike mergers which arc

friendly, acquisitions can be friendly and unfriendly.

Advantages of Takeover/Acquisition Strategy:

i It can bring benefits of size and synergy.

ii It may improve operational efficiencies.

iii The firm may enjoy tax benefits, if the taken over firm had accumulated losses.

iv It may facilitate higher growth rate.

v It may generate economies of large-scale production and distribution.

vi It can help to face competition in the market.

3 STRATEGIC ALLIANCES: A strategic alliance is a form of affiliation that involves a mutual sharing of

resources or “partnering” to improve efficiency. In strategic alliances, the focus is on

“sharing” of resources rather than seeking change in control. Equity investment in each

other’s company is not any focus.

Types of strategic Alliances:

i Pre competitive alliance:

Vertical value chain alliances b/w manufacturers and suppliers. Partnerships which

brings two firms of different industry.

ii Non-competitive alliance:

Intra industry partnerships b/w noncompetitive firms like two firms in same

industry but different geographical locations.

iii Competitive alliance:

Partnerships which brings two rival firms in a cooperative arrangement where

intense interaction is necessary.

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Reasons for strategic alliances:

i Market entry:

A strategic alliance can ease entry into a foreign market. E.g.: strategic alliance

between British Airways and American Airlines.

ii Share risk & expenses:

Firms involved can share risks. E.g.: In early 1990’s film manufacturers Kodak and

Fuji joined with camera manufacturers Nikon, Canon. and Minolta to create cameras

and film for an “Advanced Photo System.

iii Synergistic Effects of Shared Knowledge and Expertise:

Help a firm gain knowledge and expertise Skills+ brand + market knowledge+

assets= synergizing effect. E.g.: For example, in the early 1990s, Motorola initiated an

alliance among various partners, including Raytheon. Lockheed Martin, China Great

Wall, and Nippon Iridium, to develop and build a global satellite-based

communications network.

iv Gaining Competitive Advantage

4 JOINT VENTURES: An entity formed between two or more parties to undertake a specified activity

together. Parties agree to create a new entity by both contributing equity, and they then

share revenue, expenses, and control of the enterprise. The venture can be for one

specific project only or a continuing business relationship. E.g.: Sony Ericsson. Unlike

mergers and acquisitions, in joint venture the parent company does not cease to exist.

Types of Joint Ventures

(a) Between 2 Indian org. in one industry

(b) Between 2 Indian org. across different industries.

(c) Between an Indian org. & a foreign org. in India.

(d) Between an Indian org. & a foreign org. in that foreign country.

(e) Between an Indian org. & a foreign org. in third country.

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MC KINSEY GROWTH PYRAMID:

The McKinsey model argues that businesses should develop their growth strategies

based on:

1) Operational skills are the core competences that a business has which can provide the

foundation for a growth strategy. For example, the business may have strong

competencies in customer service, distribution, technology.

2) Privileged assets are those assets held by the business that are hard to replicate by

competitors. For example, in a direct marketing-based business these assets might

include a particularly large customer database, or a well-established brand.

3) Growth skills are the skills that businesses need if they are to successfully

manage a growth strategy. These include the skills of new product development,

or negotiating and integrating acquisitions.

4) Special relationships are those that can open up new options. For example, the

business may have especially string relationships with trade bodies in the industry that

can make the process of growing in export markets easier than for the competition.

Growth can be achieved by looking at business opportunities along several dimensions

which can be summarized in the diagram below:

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The model outlines seven ways of achieving growth, which are summarized below:

i Existing products to existing customers:

The lowest-risk option; try to increase sales to the existing customer base; this is

about increasing the frequency of purchase and maintaining customer loyalty.

ii Existing products to new customers:

Taking the existing product base, the objective is to find entirely new segment of

the customers that might buy.

iii New products and services:

Market development & diversification strategy taking a risk by developing and

marketing new products. Some of these can be sold to existing customers or to

entirely new customers.

iv New delivery approaches:

This option focuses on the use of distribution channels as a possible source of

growth.

v New geographies:

With this method, businesses are encouraged to consider new geographic areas into

which to sell their products. Geographical expansion is one of the most powerful

options for growth but also one of the most difficult.

vi New industry structure:

This option considers the possibility of acquiring troubled competitors or

consolidating the industry through a general acquisition programme.

vii New competitive areas:

This option requires a business to think about opportunities to integrate

horizontally or consider whether the skills of the business could be used in other

industries.

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COMPANY OVERVIEW:

Aditya Birla Group traces its origin back to the tiny village of Pilani in the Rajasthan

desert, where, late Shri Seth Shiv Narayan Birla started cotton-trading operations in 1857.

Then one visionary – the late Shri G.D Birla setup India’s first integrated aluminium

manufacturing unit at Renukoot, in1962, backed by captive power plant at Renusagar in

1967.It further evolved under the dynamic leadership of the late Shri AdityaVikram Birla

– a prominent figure in the Indian industry, under whose stewardship Hindalco attained its

leadership position in aluminium. Today the Group chairman, Dr. Kumar Manglam Birla

has put together the building blocks to make Indian business a global force.

An industry leader in aluminium and copper, Hindalco Industries Limited, the metals

Flagship Company of the Aditya Birla Group is the world's largest aluminium rolling

company and one of the biggest producers of primary aluminium in Asia. Its copper

smelter is the world’s largest custom smelter at a single location.

Established in 1958, they commissioned the aluminium facility at Renukoot in

eastern Uttar Pradesh, India in 1962. Later acquisitions and mergers, with Indal, Birla

Copper and the Nifty and Mt. Gordon copper mines in Australia, strengthened their

position in value-added alumina, aluminium and copper products.

The acquisition of Novelis Inc. in 2007 positioned them among the top five

aluminium majors worldwide and the largest vertically integrated aluminium company in

India. Today they are a metals powerhouse with high-end rolling capabilities and a global

footprint in 13 countries with a consolidated turnover of USD 14.8 billion (Rs. 80,193

crore).

Hindalco is one of the leading producers of aluminium and copper. Their aluminium

units across the globe encompass the entire gamut of operations, from bauxite mining,

alumina refining and aluminium smelting to downstream rolling, extrusions, foils, along

with captive power plants and coal mines.

Their copper unit, Birla Copper, produces copper cathodes, continuous cast copper

rods and other by-products, such as gold, silver and DAP fertilizers.

Their units are ISO 9001:2000, ISO 14001:2004 and OHSAS 18001 certified.

Several units have gone a step further with an integrated management system (IMS),

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combining ISO 9001, ISO 14001 and OHSAS 18001 into one business excellence model.

They have been accorded the Star Trading House status in India. Hindalco's aluminium

metal is accepted for delivery under the High Grade Aluminium Contract on the London

Metal Exchange (LME). Their copper quality standards are also internationally recognized

and registered on the LME with Grade A accreditation.

VISION:

To be a premium metals major, global in size and reach, excelling in everything we

do, and creating value for its stakeholders.

MISSION:

To relentlessly pursue the creation of superior shareholder value, by exceeding

customer expectation profitably, unleashing employee potential, while being a responsible

corporate citizen, adhering to our values.

VALUES:

i Honesty in every action.

ii On the foundation of integrity, doing whatever it takes to deliver, as promised.

iii Missionary zeal arising out of an emotional engagement with work.

iv Thinking and working together across functional silos, hierarchy levels, businesses

and geographies.

v Responding to stakeholders with a sense of urgency.

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BUSINESS SEGMENTS:

I. Aluminium:

Hindalco's major products include standard and speciality grade alumina’s and

hydrates, aluminium ingots, billets, wire rods, flat rolled products, extrusions and foil.

The integrated facility at Renukoot houses an alumina refinery and an aluminium

smelter, along with facilities for the production of semi-fabricated products; namely,

redraw rods, flat rolled products and extrusions. The plant is backed by a co-generation

power unit and a 742 MW captive power plant at Renusagar to ensure the continuous

supply of power for smelter and other operations.

A strong presence across the value chain and synergies between operations has given

us a dominant share in the value-added products market. As a step towards expanding the

market for value-added products and services, we have launched various brands in recent

years — ever last roofing sheets, Freshwrapp kitchen foil and Freshpakk semi-rigid

containers.

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Aluminium

MinesCopper

II. Copper:

Birla Copper, Hindalco’s copper unit, is located at Dahej in Gujarat, India. The unit

has the unique distinction of being the largest single-location copper smelter in the world.

The smelter uses state-of-the-art technology and has a capacity of 500,000 tpa.

Birla Copper also produces precious metals, fertilizers and sulphuric and phosphoric

acid. The unit has captive power plants for continuous power generation and a captive

jetty to facilitate logistics and transportation.

Birla Copper upholds its longstanding reputation for quality copper cathodes and

continuous cast copper rods by assuring its management processes meet the highest

standards. It has acquired certifications such as ISO-9001:2000 (Quality Management

Systems), ISO-14001:2004 (Environmental Management System) and OHSAS-

18001:2007 (Occupational Health and Safety Management Systems).

III. Mines: Hindalco acquired two Australian copper mines, Nifty and Mt. Gordon, in 2003.

The Birla Nifty copper mine consists of an underground mine, heap leach pads and a

solvent extraction and electrowinning (SXEW) processing plant, which produces

copper cathode. Hindalco's two Australian copper mines, Nifty and Mt. Gordon, were

acquired in 2003

The Mt. Gordon copper operation consists of an underground mine and a copper

concentrate plant. Until recently, the operation produced copper cathode through the

ferric leach process.

In 2004, a copper concentrator was commissioned to provide concentrate for use

at Hindalco's operations in Dahej.

Both Nifty and Mt. Gordon have a long-term life of mine off-take agreement

with Hindalco for supply of copper concentrate to the copper smelter at Dahej.

IV.

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MANAGEMENT TEAM:

Hindalco’s management team consists of experienced individuals with strong

credentials.

Board of Directors:

i Mr. Kumar Mangalam Birla, Chairman.

ii Mrs. Rajashree Birla.

iii Mr. C. M. Maniar.

iv Mr. M. M. Bhagat.

v Mr. K. N. Bhandari.

vi Mr. A. K. Agarwala.

vii Mr. N. J. Jhaveri.

viii Mr. Ram Charan.

ix Mr. Jagdish Khattar.

x Mr. D. Bhattacharya, Managing Director.

xi Mr. Satish Pai, Deputy Managing Director.

Chief Financial Officer:

Mr. Praveen Maheshwari.

Head – Corporate Projects & Procurement Cell:

Mr. B.B Jha.

Company Secretary:

Mr. Anil Malik.

Chief People Officer:

Mr. Vineet Kaul.

Business / Unit Head:

Mr. Dilip Gaur, Group Executive President, Copper

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Mr. Sachin Satpute, Chief Marketing Officer, Aluminium.

Mr. Satish M Bhatia, Advisor, Foil and Packaging.

Mr. Sanjay Sehgal, President, Chemicals.

Mr. D. K. Kohly, Chief Officer Operations, Renukoot Unit & Renusagar Units.

Utkal Alumina International Ltd:

Mr. Rajesh Jha, CEO.

Novelis Inc.:

Mr. Philip Martens, President and Chief Executive Officer.

Aditya Birla Minerals Limited:

i Mr. D. Bhattacharya, Chairman.

ii Mr. Sunil Kulwal, CEO and MD.

iii Mr. Peter Torre, Company Secretary.

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AWARDS AND ACHIEVEMENTS 2011-2006:

Hindalco has won several awards for community welfare, environment protection,

and also for quality and export performance.

2011:

i Hindalco bagged the prestigious CII – EXIM Bank Business Excellence Award 2011

for its "strong commitment to excel on the journey towards business excellence".

ii Birla Copper, a division of Hindalco, won the IMC Ramkrishna Bajaj Quality Award

Commendation Certificate.

iii Hindalco Renusagar won the Greentech Safety Gold Award 2011 in power sector for

outstanding achievement in safety management, by Greentech Foundation, New

Delhi.

2010:

Renukoot:

i "NIPM Gold Award for Best HR Practices" for the year 2010 by National Institute of

Personal Management (NIPM).

ii Greentech Gold Safety Award 2010 for Occupational Health and Safety Management

in the Mining & Metals sector by Greentech Foundation, New Delhi.

iii Greentech Environment Excellence Gold Award 2010 in the metals sector for its

efforts towards environment management, by Greentech Foundation, New Delhi.

iv The Golden Peacock Award for Corporate Social Responsibility for the year 2010.

v National Energy Conservation Award (Second Prize) 2010, in the metals sector,

presented by the Ministry of Energy, Government of India.

vi Silver Certificate of "Indian Manufacturing Excellence Award — 2010" by Economic

Times and Frost & Sullivan.

Quality Circle Awards:

i Gold Awards to four Hindalco Renukoot Quality Circle Teams — Kushal, Vaibhav,

Pragati and Nirantar — at the International Quality Circle Competition (IQCC 2010)

held at Hyderabad.

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ii Silver and Bronze Awards to Hindalco Hirakud Power Quality Circle Teams —

Aryan and Power — respectively at the International Convention on Quality Concept

Circle (ICQCC 2010) held at Hyderabad.

iii Quality Circle teams from Renukoot, Hirakud and Birla Copper Dahej Units excelled

at the National QC Convention (NCQC 2010), winning Par Excellence, Excellence,

Distinguished and Runners-Up Awards.

2009:

Hindalco Renusagar's power division bagged the Golden Peacock Environment

Management Award during the Global Convention on Climate Security. The convention

was held at Palampur, Himachal Pradesh from 12 to 14 June 2009. Dr. Madhav Mehra,

President World Council for Corporate Governance honored Renusagar's power division

with the award in the services category.

2008:

i Greentech Safety Gold Award 2008 for outstanding achievement in safety

management in coal based power sector.

ii Hindalco Hirakud Systems ranked runners-up at the state level IT Competition 2008

organised by CII in association with the department of information technology,

Government of Orissa.

iii Hirakud smelter was awarded the state level safety award for Best Occupational

Healthcare 2006 — presented in February 2008 at Bhubaneswar.

2007:

i The Golden Peacock Award 2007 by the World Environment Foundation for its

remarkable achievements in occupational health & safety.

ii The Safety Innovation Award 2007 for excellence in the field of occupational

health, presented by The Institute of Engineers India.

iii The National Energy Conservation Award 2007, second prize, awarded by the

Ministry of Power and Energy, Government of India.

iv Hindalco won the prestigious “D.L. Shah National Award for Economics of

Quality” given by quality council of India. Chief manufacturing officer, Mr. R. P.

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Shah and Mr. Arun Kumar received the award from the President of India, H.E.

Dr. A.P.J. Abdul Kalam on 9 February 2007 at New Delhi.

2006:

i The prestigious “National Energy Conservation Award-2006” was awarded to

Hindalco by Ministry of Power, Government of India.

ii The IT department of Hindalco received prestigious IT certificates BS15000 (IT

services), ISO 9001 (Software development) and BS7799 (Information security).

Hindalco Renukoot IT department is the first in our group as well as in India to be

recommended for all these certifications in an integrated manner.

iii Hindalco received the Integrated Management System Certificate from D.N.V.

certification agency. This certificate was for ISO-9001, ISO-14001, OHSAS-18001

in an integrated manner.

iv Hindalco, Renukoot has won the National Award for Excellence in Water

Management 2006 organised by CII.

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HINDALCO-NOVELIS ACQUISITION:

When asked whether Hindalco is paying a higher price,

K.M.Birla, Chairman, Hindalco Industries said,”When you are acquiring a world leader

you will have to pay a premium”. ‘We look upon the aluminium business as a core

business that has enormous growth potential in revenues and earnings,' 'Our vision is to be

a premium metals major, global in size and reach .... The acquisition of Novelis is a step in

this direction´

THE THREE STATGES:

I PRE-ACQUISITION:

Hindalco was the first company to surpass 0.5mT of production in a fiscal year. On

February 11, 2007, the company entered into an agreement to acquire the Canadian

company Novelis for US$6 billion, making the combined entity the world’s largest

rolled-aluminium producer.

Novelis Inc. is a global aluminum company headquartered in Atlanta, Georgia;

Novelis is a leading producer of rolled aluminum and the global leader in beverage

can recycling. The company serves customers in sectors including beverage cans,

automotive, consumer electronics, construction, foil and packaging.

The Novelis company was spun-off from Canadian mining and aluminum

manufacturer, Alcan Inc. and incorporated in 2005. The company was acquired by

India's Hindalco Industries for $6 billion in 2007. The acquisition made Hindalco one

of the world's top integrated aluminum players. This makes Novelis a member of the

Aditya Birla Group.

Novelis is the world’s largest producer of rolled aluminum sheet, with operations

spanning 11 countries and nearly 11,000 employees. The company divides its

operations into four regions: North America, Europe, Asia, and South America. The

regional headquarters are Atlanta, Zurich, Seoul, and Sao Paulo. Novelis also has

operations in UK, Germany, Italy, and Canada. Demand for aluminum is increasing

with the continued development of emerging nations, urbanization, and the increasing

substitution of aluminum for other materials, making expansion a key consideration.

The company is investing $100 million in its first manufacturing facility in China set

to open in 2014. In response to global demand for aluminum sheet for automotive,

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electronics and beverage cans, the company has announced capital investments

including a $400 million expansion in Asia, a $300 million expansion in Brazil

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Is It a Merger or an Acquisition?

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i A merger is a combination of two or more corporations in which only one corporation

survives and the merged corporations go out of business.

ii Under AS-14, if all of the following conditions are satisfied, then this would be a

considered a merger-

Equity shareholders holding at least 90% of equity share capital should agree to

become shareholder of the company.

Such shareholders should be paid equity shares only and cash to settle fractions.

All assets and liabilities should be taken over by new company.

Such assets and liabilities should be taken at book value.

New business should carry on some old business of old company.

iii However, since this deal did not involve any payment in equity shares to the

shareholders of Novelis, to be swapped for shares for Hindalco, and instead it was an

all-cash deal structure, this exercise cannot be said to be a merger.

iv This exercise was an acquisition of Novelis by Hindalco, where a company

(Hindalco) buys most, if not all, of the target company’s (Novelis) ownership stakes

in order to assume control of the target firm. Like in most acquisition deals, it was

paid for in cash.

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II ACQUISITION:

Deal Structure:

i It was an all cash-deal (hence, no exchange ratio).ii Hindalco’s AV metals have acquired all of the Novelis’ outstanding 75,415,536

common shares at price of US$44.93 per share.iii Thus, Novelis equity was acquired for a sum of $3.6 billion against a book value

of $195 million (=$0.195 billion).iv Out of $3.6 billion, $2.85 billion was raised by borrowing, $300 million as debt

from group of companies and $450 million cash reserves.v The other leg of the transaction entailed paying a debt of $2.4 billion which

existed in the balance sheet of Novelis. For this Hindalco’s Dutch subsidiary, AV Minerals, raised bridge loan of $2.13 billion and $900 million.

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III POST-ACQUISITION:

Post-Acquisition Strategic Benefits to Hindalco & Novelis:

i This acquisition of Novelis by Hindalco established the latter as a global integrated

aluminium producer with low-cost alumina and aluminium production facilities

combined with high-end aluminium rolled product capabilities. Hindalco emerged

as the leading rolled aluminium products maker and the fifth -largest integrated

aluminium manufacturer in the world. Acquiring Novelis also provided Hindalco

ready access to its existing customers such as General Motors Corp, Aston Martin,

Coca-Cola Co., etc.

ii Novelis gave Hindalco an entry into the down-stream value addition business of

rolled aluminium products. Earlier, Hindalco was limited to the upstream business

of mining bauxite and converting it into alumina, and then smelting it into

aluminium. Also, Novelis had built a unique fusion technology that helped in

increasing the formability of aluminium and products like sheet metal. The low

weight —to-strength ratio had many applications in the auto industry, which was

now advantageous to Hindalco.

iii About 35 mT of aluminium was consumed in 2006. About 40% of this was rolled

aluminium products, where Hindalco had no presence. However, Novelis had a

19% world share, which was now acquired by Hindalco. It would have costed

Hindalco US$12 billion to build assets that match Novelis’s 29 plants in 4

continents with current production of 3.3 mT in 10 years, if Hindalco had taken the

organic growth route.

iv Thus Novelis acquisition helped Hindalco gain quick access to new technologies

and large production capacities without having made the efforts towards time-

consuming R&D.

v Novelis formed a natural hedge for Hindalco. The latter was charging a higher

profit margin when aluminium prices were high on the LME and vice-versa. Thus,

Hindalco’s rise and fall in profits depended directly on the aluminium prices on the

LME. This was not the case with the aluminium rolling business of Novelis, which

usually has a constant margin. After its loss-making can contracts expired in 2010,

the Novelis business model and profitability became LME independent and a

steady cash flow was earned.

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vi Novelis was the global leader in aluminum rolled products and especially,

aluminum can recycling, with a global market share of about 19 %. The deal gave

Hindalco a strong presence in the business of aluminium recycling as it is infinitely

recyclable and requires only 5% of the energy needed to produce primary

aluminium.

Post-Acquisition Strategic Challenges to Hindalco & Novelis:

i Novelis profitability was significantly affected by the inability to pass through

metal price increases due to metal price ceilings in certain of the company’s sales

contracts till 2009. But by January 2010, all the sales contracts got expired and

profitability will increase substantially from then onwards, due to new contracts.

ii The debt component of Novelis stood at US $2.4 billion and additional US $2.8

billion was taken by Hindalco to finance the deal. This will put tremendous

pressure on profitability due to high interest burden, in light of Hindalco’s

expansion plans consisting 9 of various Brownfield & Greenfield projects costing

Rs. 25,000 crore.

iii

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PRESENT AND FUTURE GROWTH PLANS OF NOVELIS:

FY13 Highlights:

Two years ago, Novelis laid out an ambitious vision aimed at strengthening the long-

term competitiveness of their business through sustainability and innovation. They are still

in the early stages of their sustainability journey, with many hurdles yet to overcome, but

their efforts are already beginning to bear fruit. In FY13, They:

i Achieved 43% recycled inputs, up from 33% two years earlier and on track to meet

their goal of 80% by 2020.

ii Improved their energy efficiency by nearly 20% and reduced their absolute GHG

emissions by 14%, water intensity by 16%, and waste by 11% since their baseline.

iii Launched a highly successful inaugural global month of service for employee

volunteering.

iv Held the most global World Cup employee soccer and volleyball tournament to

date.

v Continued to engage employees in sustainability through talent development

programs and increased performance reviews.

vi Began operations at a new can recycling facility in Yeongju, South Korea, the

largest fully integrated beverage can recycling system in Asia.

vii Broke ground on a plant in Nachterstedt, Germany, that will be the largest

aluminum recycling facility in the world.

viii Introduced the evercan, the first-of-its-kind, independently certified, high-recycled

content aluminum beverage can sheet.

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CONCLUSION:

A key growth driver for Hindalco is the commissioning of a new project this fiscal

after a long delay. Additionally, Novelis, its international subsidiary, with its high-value

added products and increased focus on recycling will drive earnings in the event of falling

aluminium demand.

The Mahan project is scheduled to be commissioned this fiscal and will achieve

capacity utilization levels of 45-50% by FY14. The plant will be operated with better

technology, which will reduce power consumption from 14,000 units per tonne now to

around 9,000 units per tonne.

REFERENCES:

i www.hindalco.com ii www.novelis.com iii www.indiatimes.com iv www.studymode.com v www.business-standard.com vi www.livemint.com viiwww.wikipedia.com

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http://www.wikipedia.com/

http://www.livemint.com/

http://www.business-standard.com/

http://www.studymode.com/

http://www.indiatimes.com/

http://www.novelis.com/

http://www.hindalco.com/

Expansion Strategy

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