Corporate Restructuring at Larsen & Toubro Ltd.IntroductionOnly 21 months were left for the retirement of Mr. A.M. Naik,the Chairman and Managing Director of Larsen & Toubro,counting from January, 2011. The question, “Can a single manrun L&T which is not one company but a group of 25 companies?”made him impatient every day. In past few decades, L&T hasbecome increasingly unmanageable & complex in structure with152 businesses & its revenues going beyond Rs 50000 crores.When people asked Naik why he does not leave a successor, hetold them that the day he would find a man in the world whowould kill himself four times a day, has worked for more thana century, has himself started more than 60 per cent of acompany with devotion and passion, and not bothered about hisown family, would be his successor. He wanted to hire a personwith international experience to take charge of theengineering giant L&T which has businesses ranging frommachinery and industrial products to industrial andconstruction machinery to rubber machinery and valves, as itsCEO. He spent nine hours of his fourteen working hours a dayon restructuring and interviewing ten persons a week. He couldnot find any such person so he decided thatL&T could not berun as it ran before. His passion and possessiveness for L&Tcan be understood as he has spent nearly half a century in theorganisation and has taken the company to the new heights.            Complex structure of the company & retirement ofNaik were not the only problems. Some of the Naik’s close &trusted associates Director J. P. Nayak , Director andPresident, Construction, K. V. Rangaswami, Directors K.Venkataramanan and V. K. Magapu who were by his side in thecompany for a few decades were also retiring in a few comingquarters. Naik along with these directors was managing thebusinesses well for decades. The company reported revenuegrowth & increased order inflows but much lower than theguidance of management. The huge compensation received by topexecutives at L&T & their share holdings were also inquestion. To solve these problems, the 69 year old Naik whohad just 21 months left for his retirement from L&T wanted to

risk all that he has built by restructuring of L&T bysplitting it into nine entities.

Era of A.M. NaikAnil Manibhai Naik was born on June 9, 1942, third to hisparents after two girls. His family background is of teachers& belongs to a village Endhal in Guajrat. His father wasa high school mathematics and science teacher. When, Naik wasin fifth standard in his school, his family shifted fromMumbai to Kharel in southern Gujarat. Suddenly from an eliteschool, he came down to a cowdung swept floor. Aftergraduating in mechanical engineering from BVM EngineeringCollege in Vallabh Vidyanagar in Gujarat, he went to meetViren J. Shah who was working in Mukand Iron & Steel WorksLimited in Mumbai, on his father’s reference, for applying forjob. Naik was asked by his manager to work on his English &improve the proficiency of the language. Naik started workingon it & in the meantime joined a Parsi owned firm, NestlerBoilers. In 1965, due to the change of the owner & differentworking style put in place at Nestler Boilers, his shunned hisjob there & started looking for another job. On 15 March,1965, Naik joined L&T as a junior engineer. 

He was raised to the post of General Manager in 1986 &became the chief executive officer and managing director ofthe company in 1999. After he was promoted as CEO, he visited38 locations to meet all the 35000 employees of L&T within 100days.During his tenure as CEO, the revenue of the company grew fromsome Rs 7,400 crore to Rs 46,800 crore (See Exhibit 1). Laterin 2003, when Naik took over as chairman, the L&T stockcreated enormous wealth upwards of 700 percent for itsshareholders & the BSE Sensex gained around 250 per cent.Revenue and profits also recorded an increase of 25 per centand 29 per cent respectively. He created a new vision & a newstrategy for proper functioning of the businesses of thecompany. He studied various businesses of the company and putthem in different categories. He sold small and non-corebusinesses like glass bottles, leather shoes which were notmaking profit & were dependent heavily on foreign technology.He started nearly 60 % of the L&T’s business & took only 45days leave in his past tenure of 46 years at L&T.

            On 26 January, 2009, he was awarded the India'sthird highest civilian award, Padma Bhushan. The same year, hereceived the Business Leader of the Year award by EconomicTimes. Currently, he is the chairman of IIM Ahmedabad & plansto develop a school which was started by his father in Kharel,a village in Gujarat. He plans to write a book titled ‘V toW', “Village to World," post his retirement.

Larsen & Toubro HistoryIn 1938, Larsen & Toubro was set up by Henning Holck Larsenand Soren Kristian Toubro in Mumbai. Both the engineers camefrom Denmark to India with dream to dare & created history bysetting the huge engineering giant. Larsen graduated fromthe University of Copenhagen as a chemical engineer & cameto India in 1937 working for FL Smidth & Co. of Copenhagen.His schoolmate & colleague, Soren Kristian Toubro was a Civilengineer. He came to India in 1934 for an erection andcommissioning project at the Madukkarai Cement Worksnear Coimbatore and the Rohri Cement Factory in Sindh. Whenvery few Europeans saw the potential for industrial growth inIndia, the risk taker, Holck Larsen & the conservative,Kristian Toubro realised the scope of business with moderntechnological and management skills. While he was with Larsenin in a hill station Matheran, near Mumbai, for holiday, theidea of Larsen & Toubro evolved. They turned their idea intoreality using their intelligence & experience.            Larsen & Toubro was started as a company formanufacturing of dairy equipments. The first office started bythem was so small in size that only one of them was able towork at a time. However in 1939, the company facedrestrictions on imports due to the second world war.Therefore, both the partners decided to provide servicefacilities & started a small repairing & fabrication workshop.Germany invaded Denmark in 1940, so supplies of Danishproducts were banned. Thus, L&T entered into the business ofrepairing & refitting of the ships damaged in war. This led tothe formation of a new company called Hilda Ltd. L&T got itsbreak when it won the deal of constructing a plant for sodaash for Tata Group.  This proved to be a turning point forL&T. It entered into the field of construction & installation.            In 1944, L&T, ECC was incorporated with focus onconstruction projects. By 1945, the company with foreign

collaborations started manufacturing machinery used formanufacturing products such as hydrogenated oils, biscuits,soaps, glass etc. L&T signed an agreement with CaterpillarTractor Company of USA in 1945, for marketing of earth movingequipment. Larsen & Toubro Private Ltd was formed on 7February, 1946 to raise the finances & equity capital requiredfor the Caterpillar equipment.            Post-independence of India, offices of the companywere set up in Calcutta, Chennai and New Delhi. Looking for asite for manufacturing an undeveloped forest land of areaaround fifty five acres was acquired in Powai near Mumbai in1948. With a capital of value about Rs 2 million, L&T recordedthe turnover of Rs 10.9 million & went to be a public companyin December 1950. A big part of the company's office in Mumbaiwas shifted to ICI House in Ballard Estate, Mumbai in 1956,which is currently called L&T house & is the corporate officeof L&T. In sixties, the company joined hands with otherinternational companies to form joint ventures like UTMAL in1960, with Audco India Limited in 1961, Eutectic WeldingAlloys in 1962 and TENGL in 1963. For last two decades, L&Thas evolved to become an Indian conglomerate consisting ofvarious businesses. It has been delivering services forEngineering, Procurement and Construction (EPC) in thehydrocarbon sector in India, Africa, South-East Asiancountries & Australia (See Exhibit 2).

Operating DivisionsL&T has been fulfilling the expectations of customers,stakeholders & employees since its formation with the visionof creating value & achieving global reach while beinginnovative & entrepreneurial. While committed to doingbusiness, the company also focuses on fulfilling environmental& social responsibilities by conserving natural resources &serving society with trust & caring.

Infrastructure & Engineering activities have contributedmost to the growth of the company. Infrastructure segmentwhich constitutes nearly 36 percent of the L&T’s businessesincludes construction of roads, bridges, ports, harbours,airports & their modernisation, railways,  metro rails in tierII cities, buildings and factories, urban infrastructure andwater. The design wing of L&T ECC called as Engineering Design& Research Centre (EDRC) provides consultancy &

engineering solutions for residential & commercial projects.L&T ECC accounts for the 85 percent of the company’s revenue.

L&T set up its Power division with focus on coal, gas andnuclear power plant projects & formed joint venture with MHI,Japan for the manufacturing of boilers in supercritical rangeand turbines for steam generation. Power segment is thesecond-largest segment of L&T accounting for 32 per cent ofthe company’s order book which includes generation ofelectricity & its transmission and distribution.            Hydrocarbons segment constitutes 12 percent of theL&T’s order book & focuses on the construction & installing ofpipelines, fertilisers and valves. It involves offshore &onshore engineering projects for oil & gas plants.

Process segment holds the share of 16 percent in orderbook & includes the extraction of minerals and metals and bulkmaterial handling projects. It involves extraction of ferrous& non-ferrous metals for steel & power industries.

In the shipbuilding business, the company has a shipyardat its heavy engineering centre at Hazira, Gujarat which hasthe capacity of constructing vessels upto 150 metres in length& 20000 tonnes of weight. The shipyard can take up theprojects for the construction of commercial ships, Heavy liftcargo vessels, vessels for defense & submarines etc.

L&T is also known to be an international manufacturer ofvaried range of electrical & electronic products like switchboards, meters & control & automation systems for industrieslike power, petrochemicals & refineries. Electrical &Automation division is world’s largest supplier ofswitchgears.

L&T Infotech offers software & services to manufacturingindustries & embedded intelligence & engineering space.

In the machinery & industrial products division, L&Tmanufactures & provides services for mining & constructionsector, rubber processing machinery, industrial valves and arange of welding alloys. The main manufacturing site for thisdivision is located at Kansbahal in Orissa.

EWAC Alloys Limited, a subsidiary of L&T manufactures &supplies special welding electrodes & torches, atomised metalpowder alloys etc.

L&T Finance came into existence as a Finance company as anon-banking institute in November 1994 & offers products &

services in finance for corporate, infrastructure&construction projects etc.

L&T Integrated Engineering Services (L&T IES) offersdesigns for mechanical machinery, designs for electrical andelectronic sectors, civil and architectural services etc. forengineering services in the plants for products likeautomotive, trucks and other heavy vehicles.

L&T Valves manufactures industrial valves for Powerindustry at its manufacturing Unit in Coimbatore. The companyhas spread its reach in the countries like USA, Africa, Arabiaand China for the distribution of valves.

In the long run, L&T has gained competitive advantage &has developed over the last few decades due to the technologyit has acquired from its alliances with Mitsubishi, RollsRoyce, Boeing and Westinghouse etc. Today, L&T stands proud ofbuilding India’s first nuclear powered submarine, Asia’shighest viaduct, world’s largest coal gasifier ,  terminal 3of Indira Gandhi International airport, Delhi, the Dhamra portin Orissa, launching and tracking systems for India’s spacevehicle, Chandrayaan I & of being the India’s largest range ofswitchgear. It has established the reputation of executingwell, any landmark project it takes.

Rising Concerns for the CompanyA.M. Naik was set to retire on September 2012 after servingL&T for 46 years. L&T became giant engineering company &unmanageable with 25 companies operating in 152 differentbusinesses. The multi-layered decision making was hamperingL&T’s growth & progress. There were many smaller companieswith revenues of less than Rs 500 crore which either need tobe scaled up or sold off in the next 15 months before Naikleaves. Being an infrastructure company, it was vulnerable toa slowdown in GDP growth rate with drying up of the orders,high inflation, high interest rates, high commodity and crudeprices, land acquisition problems etc. L&T had to compete withChinese & Korean players in the power segment. The hydrocarbonsegment faced crisis & halts in projects because of thepolitical turmoil in Middle East and North African countries.Many oil & gas engineering projects were postponed.

In the financial year 2011, the company reported 18.8percent revenue growth & 13 percent growth in PAT. Order

inflows also were raised by 15 percent but the growth recordedwas much lower than the target of 25 percent set bymanagement. During the last five years, the company’s revenuegrew at a compounded annual growth rate (CAGR) of 25.76percent, profit after tax (PAT) grew at the rate of 34 percent. Over the last five years, the company recorded a highaverage return on equity of 27.9 percent but the debt equityratio was 1.26. The stock was trading at a 12 month trailingPE of 24.8, which was lower than its five-year median PE of32.6, not considering the recent slowdown in the sector. PAT &revenue growth, in the last three years (24 % & 21 %respectively) was slower than that over last five years (28 %& 26 % respectively). The financial growth was affected by therecession but still was less than the predicted growth rate.

A.M. Naik with outstanding leadership led L&T to suchOlympian heights & he deserved the credit. But there was alsoconsensus that compensation & payments to L&T’s directorsthrough stock options was obnoxiously high. The value ofshares held by Naik alone amounted to Rs 227 crore, Rs 252crore for JP Nayak, Rs 246 crore for YM Deosthalee and Rs 128crore for K Venkataramanan. The compensation which was paid tothe directors of L&T was unfair & was higher than any othercompany in the history of Indian business. Also, all thedirectors including Naik sold their shares consistently in2010. (See Exhibit 3) It was open to question that whetherthey sold shares due to weak stock market environment. On theother hand, L&T was not able to sustain employees at themiddle management level. The reason expressed was the lessersalaries provided to them as compared to the competitors.

Besides this the company did not have any policy for theage of directors in the company & their tenure on the boardlike one of the directors, Rajagopal who was on the board for10 years. Another director Talwar aged 73 years was on boardfor around seven years & was director of 55 other companies.It was said that board members at L&T did not have authorityand had to consult with Naik in every matter.

 L&T Employee Welfare Foundation was formed during thesale of Ultratech Cement to Grasim in 2004. Grasim sold the14.95% of its stake which it held in L&T back to the Welfarefund for Rs 470 crore. Over the time, with 12.2 percent ofstake in L&T, the value of the fund grew at an impressiverate. As a result now, the foundation had availability of the

funds of Rs 10000 crore. There was no clarity over how thatfund would be used.

Corporate RestructuringFunctional StructureDuring his tenure as CEO, A.M. Naik guided the L&T group ofcompanies while directors run their operations (See Exhibit4). All the divisions were grouped together by commonsupervision under Naik from the bottom to the top of theorganization. All the directors located in different divisionswere responsible for the underlying activities. Power was inthe hand of Naik only & therefore the directors had tocommunicate with him for every single matter or for making anyimportant decisions. The company had a multi-tiered structurewhich ensured greater management accountability & increasedautonomy of the businesses. However, this structure waseffective only when Naik who was in depth expertise of theorganisation because of his rich experience of 46 years ruledthe organisation & was effective in meeting organisationgoals. There was very little need of horizontal coordinationamong the directors & divisions. Naik alone was able to handlethe vast businesses of the company. But, the retirement ofNaik & huge size of the organisation led to the planning aboutrestructuring of the organisation. Vertical linkages were usedin the organization for the coordination among top & bottom ofthe organization. In the large sized organisation, verticalhierarchy becomes overloaded with the piling up of decisions &lack of coordination. While the need of the hour wasinnovation to survive in the competitive world, the presentstructure restricted the view of overall goals & led to slowresponse to the environmental changes.

Divisional StructureOn January 2011, A.M. Naik announced the restructuring ofL&T & its division into nine independent companies operatingin different segments each with its own CEO, CFO, HR head & aboard of directors, & its own account for monetary matterslike profit & losses incurred (See Exhibit 5). Divisions wereto be organized according to individual services, businesses,profit centers & organisational outputs. The restructuringproject – Lakshya 2 which began in October – November 2010 was

being advised by being advised by Bain & Co and Mckinsey. Asper Naik, no other company in world was as complex as L&T, sorestructuring was necessary to streamline the businesses forproper operation of the company which became complex due tovaried business interests evolved over the years & to make thejob easier for his successor after his retirement.Restructuring aimed to decentralize the power & give thedecision making authority to independent companies bringingthem closer to the business. The restructuring was more orless similar to the navaratna status assigned by the Indiangovernment to public sector enterprises which gave them thegreater power than other state run entities to competeglobally. Other conglomerates like Tata & Birla had alsoearlier restructured themselves successfully.

Naik wanted to create companies within the parent companyso that all the companies run like a listed company with atleast 75 percent potential to get listed on Stock Exchange,have proper governance, an understanding CEO & well managedboard members. Market experts predicted that restructuringwould create benefits & opportunities for investors. Investorswill get options to unlock the profit from different unitslisted on Stock Exchange. Each independent company wasdesigned to carve so that it has revenue not less than abillion dollars or has the potential to get billion plus soonwith focus on their fast growth. The restructuring wasexpected to increase the revenue of Rs 46900 crore in the year2010 by four times by the year of 2015.

A corporate centre was planned to be designed forfacilitating business dealings between nine new independentcompanies, to formulate strategy for the group, to provideservices to them with charging of fees. One division could nowbid for the projects of another division. To maintain thegroup synergies & competitive advantage one or two directorswere planned to govern each independent company.

Divisional structure is helpful when organisations becomeunmanageable through the ancient vertical hierarchy & goalsare aligned towards innovation & change. Each division issmall enough to adapt to the changes in market. Each divisionhas its own policies, budget & staffing. Horizontalinformation sharing reduces the communication barriers betweendivisions & departments to achieve unity among employees &achieve the organizational objectives.

Other Changes at the OrganisationThe subsidiaries with growth potential whose valuations didnot count in the annual report of the company would beidentified for seeking opportunities for growth. To reduce thecomplexity of the organisation, the small businesses whichcontributed little to the revenue & profit of the companywould be sold. There were discussions about putting in placethe policy of the age bracket of 55-59 years for CEOs of theindependent companies with no succession challenges for next5-10 years. This was a move to solve the issues raises due tolong tenures of directors at L&T.            To deal with the issues of unfair compensation,policy was formed to determine the remuneration for theexecutive directors. The policy was formed considering thesalary, retirement benefits & commission which depended on theperformance of the directors. The final compensation waspassed after the approval from board & shareholders & wasbased on the guidelines of Nomination & Remunerationcommittee.

Issues with restructuring

There were several issues related with the restructuring ofthe organization. One of the most important issues wasthat the restructuring may cause the problem of empty seniorslots. Due to the formation of new divisions, multiple slotswere created for top executives to govern them. So, Naikwanted 36 top professionals for filling up the vacant slotscaused. Double staffing of the faces was an option with a headlooking after two companies thereby serving dual roles. In onecase, the director, Rangaswami besides being the advisoryboard chairman for the infrastructure segment & metallurgicaland materials handling virtual companies, was also supposed tobe the CEO of the power transmission distributionbusiness. Also, dividing the company into nine small companiesmade them vulnerable to take over. Many employees expresseduncertainty & lack of coordination over the job ofrestructuring as they feared loss of power & even jobs.

Implementing the changes

To make the restructuring work, hardships of days & nights wasrequired to think & reinvent the businesses. With only 21months left for his retirement, Naik was working harder thanever before putting more than 100 hours a week. He wantedvalue out of each minute he worked. He assessed theeffectiveness of his each day by recording the output & scoreof his each meeting in a balance sheet. He created a war roomin Powai, where he had confrontation with those who were notfollowing or were not able to match the pace of change. Histhreat was enough to get the work done for the implementationof change. He wanted to see the change before his retirement.            Clear communication of vision to employees wasrequired so that they were able to understand the change &give their time & energy to endure possible hardships. Naikcreated sense of urgency for change by putting more difficult& hectic tasks for employees. Meetings & discussions were heldin the war room on daily basis to record the progress. Thereare certain barriers for change like resistance to changebecause of employees uncertainty & fear of loss of power orjobs. Proper communication & training was provided toemployees when they showed resistance towards change. Thecompany used top-down approach for the formulation of strategy& implementation of the sustainable change.

The year of 2011-2012 witnessed the successful implementationof change in its structure. The Order Book as on March 31,2012 recorded projects worth Rs 1457230 million as compared toRs 1309486 million as on March 31, 2011. This was direct 11percent year on year growth. Gross Revenue from operationsincreased to Rs 537378 million from 442961million leading to21 percent growth over 10-11.

Restructuring resulted in the formation of, actually 10independent companies (IC’s). Following were the companiesformed:

1.      Infrastructure: This division was set up to meet theinfrastructure needs of the India, Gulf countries & South EastAsia. The company possesses the capabilities of constructingroads & runways, metro & mono rails, corridors & tunnels,hydropower & nuclear power plants, ports, & defence & railwaystructure. The division has spread its reach in Gulf countriesby bagging projects for the construction of metro rails.

2.      Heavy Engineering & Shipbuilding: This division offers hugeopportunities in heavy engineering sector by providing totalsolutions ranging from design to construction of commercialships, chemical tankers, defence vessels, submarines etc. Thecompany has its main manufacturing site at Hazira, near Suratin Gujarat. Also, shipyard was constructed at Katupalli, avillage near Chennai for manufacturing purpose.

3.      Hydrocarbon: L&T Hydrocarbon provides solutions in the oil& gas sector. The company has R&D centres, joint ventures withinternational companies to deliver offshore engineering. TheCompany has bagged major projects in Saudi Arabia, Gulfcountries, Australia, South East Asian countries and Kuwait.The company is also well prepared to construct onshore gasprocessing plants worldwide.

4.      Power: This division was set up with focus on power sectorin India & other countries to construct coal & gas based powerplants. The company builds supercritical & ultra-supercriticalboilers for coal fired power plants. It also manufacturessteam turbines, coal pulverizers, air preheaters & fans, &electrostatic precipitators. It is also moving towards Gulfcountries & South East Asian countries for setting up Gasbased Power Plants.

5.      Metallurgical and Material Handling: The Company was formedto meet the specific needs of ferrous & non-ferrous metalslike steel, aluminium & copper. It also has the bulk materialengineering systems & ash handling systems for powerindustries, mining sector & long distance conveyors.

6.      Electrical & Automation: This business division operatesthrough its two Strategic Business Groups: namely Products andProjects. The Product Group consists of two Business Units :Electrical Standard Products (ESP) and Metering & ProtectionSystems (MPS) while the  Projects Group functions inElectrical Systems & Equipment (ESE) and Control & Automation(C&A). This division has established its name worldwide in themanufacturing of LV & MV switchgear & meters.

7.      Machinery & Industrial Products: This business consists ofthree groups : Construction Machinery, Industrial Machinery

and Industrial Products. Construction Machinery markets theconstruction & mining equipment like hydraulic excavators.Industrial Machinery offers crushing & mining machinery, &equipment for processing industries like paper, pulp, rubberetc. Industrial Products markets valves, electrodes, welding &cutting equipment etc.

8.      Information Technology & Integrated Engineering ServicesBusiness: L&T Infotech provides services to Banking &Financial Services, & Insurance companies. It also providessolutions to Energy & Petrochemicals industries, Manufacturingand Product Engineering industries. The company also offerstechnology like cloud computing and cloud advisory consultingservices. It also deals in giving solutions to its clientslike SAP, Oracle etc. L&T Integrated Engineering Servicesprovides engineering solutions to industries like automotive,aerospace, railways, infrastructure etc.

9.      Financial Services: This division was set up to providefinancial products & services to corporates & constructionindustries. The business has successfully acquired variousmutual funds & housing finance businesses.

10.  Developmental Projects: This division focuses on upcomingconstruction projects like roads, ports, power etc. Thecompany plans for the availability of funds for commissioningof projects.

In 2012, L&T was ranked 9th in the list of top innovative companies in the world in 2012 by Forbes & 4th in the list of green companies in the world by Newsweek. The company has beengrowing in terms of revenue, profit, structure & assets since its formation & therefore was ranked 500th among the 2000 worlds’ largest & most powerful public companies in 2014 by Forbes.

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