It is a common knowledge in industry that increases in volume (of production) reduces costs and maximizes profits. So how is this possible? By expansion, setting up new plants or outsourcing from other plants. None of these are practical or economical. The best method successful industries are following is through Acquisitions and Mergers. Industries are planning to hive off some of their businesses which do not form a part of their core business strategy. Such businesses can be acquired by companies which form a part of their core business strategy. That is how the businesses are acquired and volumes increase.
Mergers are possible when different plants under the same group of companies working in a decentralized system as separate profit centers can be brought under a single CEO with common resources. This can consolidate the existing volume, bring down costs and finished products can reach the customer from nearest geographical location thereby cutting down transit time.
We are giving below the strategy recently followed by Bilt.
Indiaâ€™s leading paper manufacturer Ballarpur Industries will buy Malaysiaâ€™s Sabah Forest industries in a $261 million (Rs. 1174.50 crore) deal. The buyout will bring in the much needed forest land, about 3 lakh hectares, for Biltâ€™s raw material besides paper and pulp capacities. Bilt will have have about 75% stake in Sabah, while JP Morgan which brokered the deal will hold 20% with Bilt buying that out within three years. The deal will be closed within four months.
Bilt has bought Sabah from Malaysiaâ€™s Lion group, which said that competitive advantage of the business has diminished and it did not have sufficient incentives to operate it.
Bilt Vice chairman said that the business might not have made sense for Lion focused on steel and retail businesses the deal make a great sense for his company Bilt would invest around $500 million to set up a new pulp plant at the existing site in Malaysia, on top of the buyout amount, but it would happen over 5-6 years. Sabah has annual paper and pulp capacities of 1.44 lakh tons and 1.2 lakh tons respectively.
Most of the paper made by Sabah was exported, but it was not of the quality that Bilt supplies. The main attractions for Bilt in this deal were forests, easy supply of raw material, strategic fit for growth and regional presence. Besides, the acquisition will enhance Biltâ€™s revenues by over $ 100 million (about Rs. 460 crore). Last year, Sabah had a profit of $9.62 million . This year, however, Sabahâ€™s pulp-and-paper division is reported to have accounted for most of Lion groupâ€™s $7.4 million losses.
Forestry rules in India were a big stumbling block in meeting the demand for raw materials. In Malaysia, however, the state government of Sabah itself was a partner and had leased forests for 99 years and the policies there encouraged utilization of forest resources.
Bilt is moving towards doubling capacity to a million tons over the next few years, and this acquisition is expected to help the company move towards that goal.
Post liberalization with relaxation of government rules there are many cases of mergers and acquisitions in India itself. Larsen & Toubro, a hard core engineering conglomerate, has hived off its cement business to Grasim who are leaders in cement production. Earlier Reliance Industries has acquired ICI for polyester and nylon textile yarns. Hindusthan lever also acquired a host of food product manufacturing companies and they even started retailing household requirements on door delivery basis. Numerous examples are there world over and it is no longer a secret but a planned strategy by companies. The intention and intelligence must be there and the volumes can go up for the asking.