The Employee Buy Outl

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The Employee Buy out:

Team

Jose

Renju.V

Shemesh

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What Does Employee Buyout -

EBO Mean?

A restructuringstrategy in which

employees buyamajoritystake in their

own firms. Anemployee buyout isan increasingly

popularsuccessionoption. Ineffect,you

sellthe businessto itsemployees.The

employees becomethenew owners -thoughoftenmostexisting businessand

managementstructuresstay inplace.

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Objective

To findoutthe Employee Business Model

Adopted byTatas.

The factorsthatareessential forthesuccessofEmployee Buy Out.

Analyzethesuccessof EBO insouthern

operationofTatasand its failure intheir

northernoperations.

Finally inunderstanding in what wayhasthe

EBO Modelensuredcorporatesocial

responsibilityofthecompany,TataTeaand

socialtransformationasa whole?

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Index

INTRODUCTION

Companyprofile Tea in India

Crisis inTeaplantations in India

TheTata Group

Tea PlantationsofTatas

The Employee Buy Outandthe Formationof KDHPCL

Managementof KDHPCL: BottomupasagainstTop

down

EBO Model: CriticalSuccess Factors

EBO at KDHPCL: A Win - WinSituation?

EBO asa CSR MeasureoftheTatas

EBO: A Suitable Model for NIPO?

CONCLUSIONS 411/20/2010


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Company Profile

Set up in 1964 as a joint venture with UK-based James Finlay and Company

Represent the world's second largestglobal branded tea operation with productand brand presence in 40 countries.

The Company is headquartered in

Kolkata and owns 27teaestates in thestates of Assam and West Bengal ineastern India, and Kerala in the south.

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The importance of this company to Indiaseconomic performance is reflected through itsrevenue of $ 21.9 billion (in the year2005-2006)

Market Capitalisation of $ 52.3 billion. TheTata Group companies employ nearly2,50,000 people and have operations in morethan 54 countries across six continents.

Integrity, understanding, excellence, unity andresponsibility are studded as core values ofthe company

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Products and Brands

Five major brands in the Indian market - TataTea,Tetley, Kanan Devan, Chakra Gold

and Gemini. Tata Tea's distribution network in the country

with 38 C&F agents and 2500 stockists catersto over1.7 million retail outlets (ORG MargRetail Audit) in India.

With an area of approx 15,900 hectares undertea cultivation, Tata Tea produces around 30million kg of Black Tea annually.

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Specialty of Munnar

The company has a 100% export-orientedunit manufacturing Instant Tea in Munnar,

Kerala. The unit's product is made from a unique

process, developed in-house, of extractionfrom tea leaves, giving it a distinctive liquoringand taste profile.

Instant Tea is used for light density 100%Teas, Iced Tea Mixes and in the preparationof Ready-to- drink (RTD) beverages.

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Subsidiaries

TataTea has subsidiaries

TheTetley Group,Headquartered in Great Britain, Tetley

is the second largest tea bag brand in the world, and Tetleyproducts are on sale in over 40 countries.

Tata Coffee,the largest Coffee Plantation Company in Asiawith estates located in Coorg, Hassan & Chickmagalurdistricts of Karnataka. The Company also grows Pepperand Cardamom in its Coffee Estates. The Company'sTimber resources include Rosewood, Silver Oak and othermiscellaneous trees.

TataTea Inc,United States

Associate Companies Watawala Plantations Limited, Sri Lanka. Kanan Devan Hills Plantation Company Pvt. Ltd,Kerala

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Quality Control

TeaSourcing TATA Tea estates spread across Assam, Dooars and

Kerala. Auction centres located at Guwahati, Calcutta, Siliguri,

Cochin, Conoor and Coimbatore

Tea Blending experienced and skilled team of Tea Tasters and Blenders . specific requirements of Tea Tasting to deliver consistent

quality of tea as per the standards.

Tea Packeting Units experienced and skilled team. 5 wholly owned Packeting units and 4 Third Party units

where a team of Quality Group Personnel are located tomonitor and oversee laid down Quality standards.

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Customer Complaint ManagementSystem regular feedback on quality deliveries is encouraged by

interacting with valued Customers.

customer complaints are studied, analyzed.

Bench Marking to maintain product superiority, competition, regular

Benchmark tasting of competitive Brands is carried out bythe Head Quality Group.

Developmentof New Blend Formulations Q-Group works closely with the Marketing team to designand develop new blends for emerging markets.

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In February2007- decidedtodivesta

majorportionof itsshares in its NIPO.

To becalledas Amalgamated PlantationsPvt. Ltd. (APPL), it wouldcovera vast

portionofteaestatesof24,000hectares

in Assamand West Bengal.

Focusonlyonmarketingof itsproducts

andenhancingof its brand image intea

business.1211/20/2010


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Kanan Devan Hills Plantation

Company Pvt Ltd

TheTataTeahadsoldoff 17tea

estates intheSouthtotheco-

operatives formed by itsemployees

named KDHPCL.

Reason:

Excessof Production

Declining Prices for itsproducers.

Severecompetition fromthe restof

the World.1311/20/2010


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Tea in India

India took a lot of pride for its teacultivation mainly due to the fact that

tea has been indigenous to India andtea industry has been a substantialcontributor to the countrys GDP and

its foreign exchange earning. It contributes to around 30% of global

tea production.

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Crisis in Tea plantations in India The tea plantations were stuck with severe crisis from

the early 1990s. Reason:

Producer prices had dropped sharply

There was a decline in the global demand for tea.

The increased use of tea bags and soluble instant teaeffectively reduced the quantity of tea leaves neededper cup.

Increasing labor costs.

The lower prices for Indian tea is attributed largely tothe ageing tea bushes in estates and also due to thelower prices fetched by CTC tea. (CTC refers to cut,tear and curl, a method of manufacturing black tea inIndia, whereby the tea leaves are machine chopped

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Tea Plantations of Tatas

TheteaestatesofTatas inthe Norththroughtheir North Indian Plantations

Operations (NIPO) arespreadoverthe

statesof West Bengaland Assam.

Theirplantations inthesouthcalledthe

South Indian Plantation Operations (SIPO)

arespread inthe Western Ghat regions,themajoroneslocated inthe Idukki district in

Keralaknownasthe Kannan Devan Hills.

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The Employee Buy Out and the

Formation ofKDHPCL

Tatas and the management of SIPO thought of aunique Employee Buy Out (EBO) model whereemployees themselves became partly the owners

of the company. A business plan was formulated for running it for

the next 10 years. About 12,441 employees nowbecame the shareholders in KDHPCL holding

approximately 68% of the equity stake, 19% washeld by Tata Tea, 7% by the trust formed for thepurpose and the remaining small percentage byother parties.

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A fine blend of debt andA fine blend of debt and equity @ KDHPCLequity @ KDHPCL

Employees

Holding 68%

Share

19%

By Tata Tea

equity stake87%

Trust

7%

Debt13%

EBO

Financial

Institutions

6%

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Continued.

The new company would be free to auction

its teas to any prospective buyer. company would not need to maintain Tata

Teas high cost offices in Kolkata and Kochi.

Tatas retaining 19% of equity in the newcompany provided a sense of security and aboost to the morale of employees who wereventuring into a challenging task.

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The arguments put forth in favor

of an EBO model are:

Sincetheemployeeshaveashare inthe

companyssuccess,an EBO keepsthemotivation

levelofemployeeshigh

Whensellingthe business fortheparty becomes

inevitable,thenthe EBO ensuresthatthe

workforceandthestatus quoofthecompany is

maintainedeliminatingtheuncertaintyarising from

sellingtoanoutsideparty

Anemployee buyout isattractivesince itspreadsthe wealthacrossalargernumberofpeople

Itmay raisemoreequity which results in

transactions beinglessdependentonexternaldebt

financing. 2011/20/2010


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Management ofKDHPCL:

Bottom up as against Top down

The formationof Boardof Directors washighly

representative innature withdue representationof

workersandstaff inthe boardalong withtwo

independentdirectors.

KDHPCL atrulyparticipatorynature were factslike 68

percentof itssharesheld bynearly 12,441 employees

ofthenew company,a workers' representativeanda

staff representativeonthe boardofdirectors,and

severaladvisoryandconsultativeparticipatory

managementcommittees comprisingacrosssection

ofemployees ateveryleveloftheestate, factory

management,andcompanylevel

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EBO at KDHPCL: A Win -Win

Situation?

Thenew companysannual reports in2006 revealed

aposttaxsurplusofRs2.37crore .

Companyhaddeclaredadividendof 14% onthe

very firstyearofoperations.

Theaverageproductivityofthecompany which wasabout28-30 KgundertheTataTeahadgoneupto

46 Kgunderthe KDHPCL.

Thecompanyhadalso receivedthe biggest

exportorderof35million Kg worthof INR21

crores from fourcountriessuchas Kenya, UK,

Iranandthe US.

Won Golden Leaf India Awardheld in Coonoor

and Dubai in2005and2006.

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The EBO model through the

creation ofKDHPCL benefited

the employees too. Increase in the motivation level of

employee turned owners.

Positive impact on the performanceand the productivity of the plantationsbecause of private incentive.

The very feeling of working for theirown company gives them immensesatisfaction.

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EBO as a CSR Measure of the

Tatas

The EBO model in itselfensures factorslike

economic,socialandenvironmental

sustainability byprotectingtheemploymentof

theemployees,ensuringastatus quo with

respecttotheirgeographical working

environment.

For improvingthe weakersectionsofthe

plantation workers,theTata'shaveprovedthemselvesto be responsibleto runmany

organizationsand welfareprojects intheareas

surroundingtheplantations.

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EBO: A Suitable Model for NIPO?

It wouldcompriseof20teaestates in

Assamand four in West Bengal.Tatas

wereto retain20% stake inthenew

company, IFC and ILFS20

% eachandthe remaining40 wereto beshared by

Global ManagedServices,Tata

Investment Corporationandthe

plantation workers who wereexpectedtohaveastakeof 15-20%.Theprocessof

transformation wasto becompleted by

April2007.2611/20/2010


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Failure of the model in the

northern operations of the Tata's

Theplantationtradeunionsopposedthemove.

there wasnostrong willingnessto buyamongthe

employeesoftheplantations inthenorth forthe

fearthatthey would bepushedoutofthepurview of

the Plantation Labour Act ifthey became

shareholdersofthenew company.

Theemployeespreferredto be securedemployees

than challengingentrepreneursaimingatlongterm

benefits. offeronly 15% staketotheemployeesof NIPO inthe

new company APPL.

Theotherprivatepartieslikethe ILFS, IFC,and GMS

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CONCLUSIONS

On analyzing the reasons for thefailure of this model in the north, onecan conclude that many critical factors

for the functioning of an EBO weretotally missing.

There was no willingness to buy on the

part of the employees and there wasthe absence of a capable employeeteam.

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TATA TEA changes name -

Tata Global Beverages Ltd

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Thanx !Thanx !

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The Employee Buy Outl

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