Mergers and Acquisitions- A Strategic Perspective


By
Jayasree S
Jyothi K.R
Nadia Farook
Surya K.V
S2 MBA
Institute of Management in Kerala
Thiruvananthapuram
E-mail:
jayasree_hari66@yahoo.co.in
 


Mergers and Acquisitions have become the need of the hour. With the India government signing the WTO and subsequent liberalization has paved way to merger and acquisitions as a way to add new products and enter new markets rather than the traditional way of organic expansion. The year 2004-05 witnessed a number of M&A in all sectors of business both in Indian as well as international market, the FMCG sector is not an exemption.

The most important acquisition that happened recently is the acquisition of Balsara group by Dabur and of Gillette by P&G.

A major reason for this M&A are to obtain the strategic benefits i.e., if a firm decided to expand in a particular industry, acquisition of a firm engaged in that industry may offer several strategic  advantages like it can prevent a competitor from establishing a similar position in that industry, it offers a special timing advantage because the merger alternative enable a firm to leap frog several stages in the process of expansion, it may entail less risk and even less cost, in a saturated market simultaneous expansion and replacement (through a merger ) makes more sense  than creation of additional capacity through internal expansion.

Let us consider the rationale behind the acquisition of Balsara by Dabur

1. It Strengthens Dabur's position in oral care
Balsara has three oral care brands - Promise which has a unique clove oil positioning, Babool toothpaste in the value segment and Meswak toothpaste in the premium segment. Together, the company holds 6% share of the oral care market. Balsara's were the pioneers in herbal oral care products launched in the seventies. Balsara's herbal oral care range is a good strategic fit for Dabur whose products are also positioned on the herbal platform.

2. Adds a new avenues of growth: Household care
The acquisition enables Dabur to enter the Rs.20 bn household care business through well-entrenched brands. Balsara has a diverse portfolio of brands in extremely attractive categories which are growing at a CAGR of 15-25% pa.

3. Enables Dabur to expand regional presence
45% of Balsara revenues are from west & south. These would complement Dabur's regional saliency, as Dabur has a higher revenues share coming from the markets in the north and the east. Balsara has a direct distribution reach of 340,000 and 1.5 mn indirect reach.

4. Economies of scale from combined business
The acquisition would provide several synergies to Dabur on the manufacturing and marketing front:

* Balsara has three manufacturing facilities at Silvasa (Home Products), Kanpur (Home products) and Baddi (Oral Care products). Rs.150 mn have been invested in the Baddi unit and fiscal benefits will start flowing in from the FY06.
* Combined business would provide economies of scale in marketing, sales and distribution.
* Herbal equity of brands like Babool and Meswak fits well with Dabur's herbal specialist strategy.
* Backend synergies in supply chain, operations, purchase, IT, etc.
* Balsara's international business, which is currently 15% holds good growth potential. Balsara does some private label manufacturing for global companies, which could be a future area of growth.

The acquisition also marks Dabur's entry into niche segments of household care products providing it completely new area of growth which could be capitalized on in the future.

Many firms have begun organizational restructuring exercises in recent years to cope with heightened competition. Mergers, takeovers, divestitures; spin-offs and so on have become a major force in the economic environment all over the world. Mergers & Acquisitions represent a very important form of corporate restructuring. The principle economic rationale for this is that the value of the merged entity is expected to be greater than the sum of the independent values of the merging entities.
 


Jayasree S
Jyothi K.R
Nadia Farook
Surya K.V
S2 MBA
Institute of Management in Kerala
Thiruvananthapuram
E-mail:
jayasree_hari66@yahoo.co.in
 

Source : E-mail March 28, 2005

 
 
 

 

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