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Media enquiries
should be directed to: (Please use this contact for media
enquiries only ).
Dr. Pragnya Ram
Group Executive President
Corporate Communications
Aditya Birla Management Corporation Private Limited
Aditya Birla Centre
1st Floor, 'C' Wing
S.K. Ahire Marg
Worli
Mumbai 400 030.
telephone:
91-22-6652 5000 /
2499 5000
fax:
91-22-6652 5741/ 42
email: pragnya.ram@adityabirla.com
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Economic
Times
6 April 2008
Continued
from page 1
KMB:
Let me ask about M&As. What is it that
you are really looking for in terms of numbers,
in terms of qualitative factors around an
acquisition?
JI: In our case we have a fairly deepfilled
strategy for each business that we are in.
So we actually have a kind of war room when
we track 50 or 100 companies...or couple of
100 companies at all times that would just
be relevant to us…. Infrequently they
are not big companies, may be small companies
that we see a strategic fit with. We always
know what our strategy is, I’d say we
are 100 per cent strategy driven.. you know
we would never do something to just do, it
has to fit strategy. Financially typically
we look for a 15 per cent cash on cash return
by the fifth year.
KMB: A 15 per cent cash return?
JI: Fifteen per cent kind of cash on
cash return, so by the fifth year we’d
like to have the sense that the ongoing cash
flow rate of return has reached 15 pwer cent
. If we did a billion-dollar deal, by the
fifth year you are actually generating between
$150 and $200 million free cash flow from
that deal. That’s just a number we use.
We’d like to target deals between $200
million to $2 billion. So we try to match
those financial criteria with our strategic
criteria when we go for the deal.
KMB: Typically, what stage or what
size of acquisition do you review?
JI: Very small…like I would review
every deal, every industrial deal in excess
of $10 million and I would review financial
deals lets say where the portfolio is in excess
of $50 million.
KMB: You know Jeff, a lot of Indian
companies like ours are going global, making
lot of acquisitions globally, there’s
a new found confidence in India. What are
some of the post-merger integration issues
that you focus on to make sure that the merger
or acquisition doesn’t fail?
JI: Every year we go back and review
what we learnt about integration, what we
could have done better. I would say typically
what makes mergers not succeed are more soft
issues, the social issues rather than the
hard issues. We are very adaptive. We have
a system for consolidating manufacturing system,
financial systems, information systems. We
are good at all that stuff.
KMB: And what would be the first year
targets in terms of integration normally Jeff.
Are there any sort of guidelines you have
for integration as in that the integration
must happen in the following way, in the first
year of acquisition?
JI: We have milestones. So we got a
kind of 90-day plan, 100-day plan and so what
I would say is that we try to have most of
our cost synergies probably take place in
three years, the first year being 50 per cent
of them. The growth synergies might again
be over three years. We find growth synergies
are much more difficult to track, to anticipate,
than cost synergies.
KMB: So when you budget it for, the
returns that you are looking at, bulk of the
synergies are on account of cost reduction?
On the flip side Jeff what about divesture.
What has led you to divest some of the businesses
that you had. What were some of the criteria
that you’ve used to come to a decision
about divesting a particular business?
JI:
We have a tough-minded strategic review of
our businesses, when we come to the conclusion
that if its going to be some kind of secular
change or that someone could run a business
better than we could, its time for us to divest
a business. You know usually when a business
goes through a secular change and it can no
longer meet our financial goals. Sometimes
there are businesses that can meet our financial
goals but where we think somebody would be
a better steward than us. Last year, we sold
our plastic business and it was clear to us
that unless you’re backward integrated
in chemicals business, you can’t be a
good owner of it, even though we were financially
doing ok. We felt we were just not the best
owner of the business and we decided to divest
it off.
KMB: You know there is a constant debate
about this, especially with analysts, about
focused companies versus conglomerates and
GE has very deliberately chosen for a very
long time to be and to stay as a conglomerate
and I assume you have a lot of questions coming
at you from analysts about whether that is
going to be the case forward, so what is the
case that you put forward for remaining a
conglomerate?
JI: The first thing I would say for
decades the company basically has always been
a conglomerate. We run it that way, we have
central research, central training, we’ve
got our own management education centre, we
run a common capital allocation process, we
drive a common culture. We
spend a lot of time and effort on the oneness
of the company, to bring things together.
One of the things that differentiates GE from
a lot of other mega companies is from the
day you walk into the door to the day you
retire we want it to feel as really one company.
I think that’s been a quarter of our
strength.
Second thing I would say for investors. Conglomerates
and big companies go in and out of style but
the ability to have diversified earnings power
through the cycles, makes us grow earnings
in a steady fashion equal to or greater than
SNP 500. So automatically it comes down to
a financial case, for why the company exists
and that can only be through our performance.
If you look back over 10 years, 15 years,
20 years, 30 years we financially outperformed
over a long period of time... automatically
that gotta be the case you make. And the last
one I would make is, particularly when I look
at my friends like you, these new successful
companies coming out of India, they are all
going to be conglomerates of some way, because
you want to be around for a long time and
if you want to grow, it’s very difficult
to grow just in one industry. Successful industrialists
almost always grab a take to adjust in different
business where they can apply their expertise
and there is nothing wrong in that..I would
say it’s quite natural.
KMB: I couldn’t agree with you
more.
JI: So we gotta stick in this together.
KMB: Absolutely!
JI: I think some of the great business
stories right now are coming out of India,
especially some of the new business models.
One of the things investors write here is
that if you went to India you saw some of
the most exciting companies being formed today.
They are all conglomerates fundamentally and
they are creating tremendous shareholder value.
I find that is very persuasive with our investors
to say that there is nothing wrong with this
business model. I’d clearly say where
we are today, in the six crore businesses
that we are in, we feel we’ve got a real
competitive advantage.
KMB: Do you see the portfolio of GE
changing drastically in next five years Jeff?
JI: I like where we are right now.
I would say the answer is no. Mainly because,
when I look at energy, health care, transportation,
some of our infrastructure businesses, the
entertainment business, the financial services
business, we have got good position in huge
industries that have a lots of room for growth.
So I just don’t think we need to do substantial
portfolio restructuring in the next five years.
We’d do small things but nothing huge
to be successful.
KMB: I completely understand and relate
to that Jeff. Are you concerned about the
overdependence of GE on GE Financial, the
finance part of the business?
JI: No, I think we are great at risk
management, investors have told me that they
really don’t want it to be greater than
50 per cent of our earnings. I would say that
our investors are comfortable at 50 per cent
of our earnings. They probably won’t
be comfortable if it became more. Even in
a very difficult year for our financial business,
our write offs have been small…
KMB: And one more thing on investors.
You’ve spoken consistently about building
businesses for the long run, you’ve talked
to people that they must look at their careers
from a longer perspective. So you’re
clearly someone who looks at businesses from
a long term point of view. But you also have
to live quarter by quarter. So how do you
actually reconcile the two? It must be a very
difficult thing to do.
JI: You know, what do I say ... you
live in the same world. I think what we want
to have is a highly disciplined, well executing
company. Strong executing companies know how
to predict quarter in and quarter out what
they are going to do. Vast majority of our
businesses are very long cycle and therefore
we have to be making investments that may
not pack back for 10 or 15 years and I think
that you have to have the whole constancy
of the purpose, understand the responsibility
both in the short and the long term. That’s
why I think business leadership is both fun
and challenging as we have to balance the
short term and long term pressures and somehow
be good at both.
Continued...
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