videocons strategic acquisitions

8/6/2019 Videocons Strategic Acquisitions

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Copyright 2008 London Business School. All rights reserved. No part of this case study may be reproduced, stored in aretrieval system, or transmitted in any form or by any means electronic, photocopying, recording or otherwise without writtenpermission of London Business school.

This case was prepared by Dr Rakesh Mohan Joshi, Indian Institute of Foreign Trade, New Delhi, India as a basis forclassroom discussion rather than to illustrate either effective or ineffective handling of a management situation. The casestudy was supported by the Aditya Birla India Centre at London Business School.

ecch: 310-279-1Dr Rakesh Mohan Joshi London Business School REF: CS-10-003

Date: 2008

Videocons Strategic Acquisitions to Become a GlobalPlayer in Consumer Electronics

Videocon struck a deal to acquire the Thomson colour picture tube (CPT) business on 29 thJune, 2005. With this deal, Videocon acquired global CPT manufacturing capacity of 19million units per year putting it in the league of global market leaders like LG-Philips,Samsung and Matsushita. This acquisition was made at a time when cathode ray tube(CRT) technology was at a decline and most global players were moving away from thebusiness and it was financed with little outflow of funds.

Background

Videocon Industries Limited was incorporated in 1987 mainly to manufacture televisions,both black & white and colour and washing machines. Over the years, the company grew(Exhibit I) to become Indias largest consumer electronics and home appliance companywith up to 80 percent market penetration on a domestic level. Videocon gradually addednew product lines such as home entertainment systems, electric motors and airconditioners in 1990, refrigerators and coolers in 1991, glass shells for CRT in 1995,kitchen appliances and crude oil in 1996 and compressors and compressor motors in 1998.

Videocon broadly segmented its domestic and international business under two coreactivities, which included the manufacturing, assembly, marketing and distribution ofconsumer electronics and home appliances, and exploration and production of oil and gas.


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London Business School ecch:

Copyright 2008 London Business School 2

It owned 17 manufacturing facilities across India and also had operations in multiplecountries as shown in Exhibit II.

The consumer electronics segment included products such as televisions, video and homeentertainment products whereas the household appliances segment included refrigerators,washing machines, air conditioners, microwave ovens, vacuum cleaners, dishwashers andsmall appliances such as irons, heaters, fans, mixers, water purifiers, etc. The companysCRT glass segment included Videocon Narmada Glass that offered glass products fortelevision panels and funnels.

The company had capacities to globally manufacture 22 million units of colour picturetubes and 32 million colour picture tube glass panels, 5.6 million TV sets, 2.5 millionrefrigerators, 1 million washing machines, and 400,000 air-conditioners annually, making itone of the largest in the world.

Videocon later entered into exploration and production of crude oil in the form of aconsortium. The company set-up Indias largest crude-oil extraction venture in the privatesector with Cairn Energy of UK at Ravva oil-fields located on the Krishna-Godavari basinoff the coast of Andhra Pradesh. It had reserves of over 250 million barrels, producing50,000 barrels of oil per day. Out of the private sector crude oil production of the country,about 7 percent was produced by Videocon at Ravva. The operating cost of the Ravva oilfield was reported to be lowest in the world, at less than 0.78 per barrel of oil. Thecompany had also acquired exploration blocks in Australia and Oman with worlds leadingoil and gas companies. The oil business was likely to help the company in acquiring globalassets in the fiercely competitive consumer electronics business.

In pursuit of further business expansion, the company ventured into diversified business

arenas such as consumer electronics, home appliances, petroleum, components, officeautomation, internet service provider and power generation. Although diversifying businesshelped mitigate risks associated with a specific industrial sector, this also led to a diffusedcorporate identity.

Among the Indian TV companies, Videocon was the only one that not only managed tosurvive the intense market competition due to multinationals entering the country in latenineties, but also exhibited growth. Its share in TV receivers (including spares and kits), asshown in Fig 1, grew marginally from 21.72 percent in 2001-02 to 23.2 percent in 2004-05,but declined subsequently to 19.91 percent in 2005-06, however, it jumped rapidly to 37.7percent in 2006-07.


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Industry: Market Size & Shares, Centre for Monitoring Indian Economy, April 2008, pp 344-345

Videocon remained the largest player in the Indian colour television market. The group hadthe highest share in Indian colour TV market of total 15.879 million units in 2007 with 27.2percent, (Fig 2) followed by LG (20.4%), Samsung (10.1%), Onida group (9.8%). However,Samsung led in the Indian LCD TV market of total 407, 900 units with 36.8 percent share(Fig 3) followed by Sony (17.2%), LG (15.9%), Videocon Group (8.3), Phillips (6.6%), andSharp (4.4%), whereas LG has the highest share of 26.4 percent in Indian Plasma TVmarket of total 45,500 units1 in 2007 (Fig 4) followed by Panasonic (26.4%), Samsung(26.4%), Videocon (7.7%), Hitachi (7.7%) and TCL (5.5%).

1TV Veopar Journal, ADI Media Publication, April 2008, New Delhi, pp.55-65.

0

10

20

30

40

50

60

70

80

90

100

Fig 1: Market Share of TV Receivers

(Including spares and kits)

Videocon Industries LG Electronics Samsung IndiaMirc Electronics Trend Electronics Phillips Electronics Panasonic Others


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* Includes Videocon, Sansui, Akai, Hyundai, Kenstar & ELCOT order** Includes Onida, Igo*** Does not include Videocon's supplies of 10.7 lakhs sets to ELCOTSource: TV Veopar Journal, ADI Media Publication, April 2008, New Delhi pp.55-65

*Includes Videocon, Sansui & Akai

Fig 3: Indian LCD Television Market(In percentage)

Videocon Group*, 8.3

Phillips, 6.6

LG, 15.9Sony, 17.2

Samsung, 36.8

Others**,

Panasonic, 1.5

Hitachi, 2.1

Sharp, 4.4Onida, 2.5

Haier, 1.6

Fig 2: Indian Colour Television Market(In Percentage)

Others, 18.6

ELCOT***, 8.8

Phillips, 2.5

Onida Group**, 9.8 Samsung, 10.1

LG, 20.4

Videocon Group*, 27.2

Sony,


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** Include Toshiba, Sanyo BPL, TCL, FTD and VideotexSource: TV Veopar Journal, ADI Media Publication, April 2008, New Delhi, pp.55-65

Source: TV Veopar Journal, ADI Media Publication, April 2008, New Delhi, pp.55-65

Videocons Business Strategy

Videocons business strategy had been based on a low-cost high-turnover. Being one ofthe largest manufacturers of television and its components, Videocon had the advantageof economies of scale and low cost due to indigenisation. However, with the considerablefall in import duties on CPTs, the cost advantage of Indian manufacturers includingVideocon was on the decline.

Although the company focussed on the low-end, low-tech and first-time-buyer segment, italso adopted a multi-brand strategy so as to cater to various market segments and makeoptimum use of its deep-rooted distribution network in India.

Videocon faced stiff competition from big branded players like LG, Samsung and Haierfollowing Indias economic liberalisation. Videocons massive production capabilities atgeographically diverse locations placed it among the leading contract manufacturers tomajor global brands. Image of Videocon had been that of a brand in low to medium pricesegment whereas the MNEs relied heavily on their cutting edge technology and globalimage.

Videocon adopted a multi-brand strategy to benefit from scale economies in manufacturingand distribution. This was done by forging tie-ups with several global brands to serve the

Fig 4: Indian Plasma Television Market(In Percentage)

LG, 26.4

Panasonic, 26.4Samsung, 26.6

Videocon , 7.7

Hitachi, 7.7 TCL, 5.5


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needs of all customer segments in the low-end, middle class and even in the up market.Apart from the flagship brand Videocon, the company housed about ten brands likeToshiba, Sansui, Akai and Hyundai, catering to almost 30 percent of the entire Indian

market.

Videocon acquired Akai India, from Baron International in 1999, but could only manage tosell a few products at select dealer outlets in small towns. It also bought manufacturingand marketing rights of Hyundai electronics in 2005 for the high-end consumer durablerange but Hyundai could not compete with other Korean brands such as LG and Samsung,which enjoyed tremendous brand equity in India.

Multiplicity of brands at the same price point also led to cannibalisation of sales among thebrands. For instance Sansui competed in the same price segment of companys umbrellabrand, Videocon, leading to erosion of its market share. Over the years Videocon, thegroups mother brand slipped in the Indian market and found it difficult to compete in the

high-end space. At best, it was positioned as a main market brand. This led to a state ofdiffused positioning for its brands. Videocon seemed to be struggling over its desire tocontinue with its multi-brand strategy.

Rationale

At a time when the markets were fast moving away from CRT/CPT to plasma and LCD(Liquid Crystal Display) technology, Videocon explored its fortunes in the outdated assetsof Thomsons CPT business. With the breakthroughs in technology, the new trend intelevision industry was Flat Panel Display (FPD). The FPD market comprised of LCD TVand Plasma TV. FPD market was undergoing metamorphism turning from high price, lowvolume and low consumer awareness to affordable pricing and consumers growing desirefor enhanced technology and cinematic viewing experience. As the technology becameincreasingly available, the prices of LCD TVs were likely to fall considerably leading toincrease in market share in all parts of the world.

In high income countries, the LCD technology had already penetrated deeply in marketswhereas in low income countries, it was still making inroads. The LCD TVs accounted for86 percent market share in Japan, 84 percent in west Europe and 78 percent in North

America

2

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Despite CRT technology being in the declining phase of life cycle, it remained the mostwidely used technology in the Indian colour television segment. The share of CRT TV waslikely to decline3, as shown in Fig 5, from 92.9 percent in 2008 to 45.2 per cent in 2012whereas the LCD was likely to become most prominent technology from a meagre share of

2iSupply Corporation, March, 2008.

3Display Search India TV Market: TVs Emerging Land of Opportunity, Sep 2008 .


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6.6 percent in 2008 to 56.2 per cent in 2012. Besides, the PDP (Plasma display) was likelyto grow from 0.5 percent in 2008 to 1.3 percent in 2012, as shown in Fig 5.

Source: Display Search: India TV Market: TV's Emerging Land of Opportunity, September, 2008

Videocons global acquisition strategy had been based on buying distressed assets atthrough away prices, financing them through innovative means and turning them aroundby leveraging its experience in managing large scale operations at diverse locations andcomplex supply chains. To consolidate its operations on a global scale, Videocon hadbeen eyeing the ailing electronic business of South Koreas Daewoo Group4. It also hadacquisition intentions across the globe including Japans Pioneer, Taiwans ChungwaPicture Tubes and a host of other companies.

Videocon had a relationship with the French media and electronic major Thomson SA whohad been supplying colour picture tubes to Videocon for the last 15 years from itsEuropean factories. Thomson SA also purchased glass from Videocons Glass Plants inIndia. In 2004, Thomson also sold some equipment and provided technology support toVideocon.

On June 29, 2005 Videocon entered a deal with Thomson SA to acquire its CPTmanufacturing business for 240 Million Euros. This gave Videocon ownership control overThomson SAs CPT manufacturing plants across China, Poland and Mexico with anaggregate capacity of around 19,000,000 units of CPTs along with 4000,000 pieces CPTglass per annum. In a separate deal, a month earlier it acquired Thomsons Italian CPT

4Morgan Arm Ahead in Race for Daewoo Electronics, Business Standard, February 17, 2008.

Fig 5: Indian TV Segment Forecast by Technology(in percentage)

96.292.9

86.4

74.2

57.8

45.5

3.6.

12.9

24.8

41.0

56.2

0

20

40

60

80

100

120

2007 2008 2009 2010 2011 2012

CRT LC PDP


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plant for US $100 Million. A week later, on July 8,2005, Videocon announced takeover ofSwedish white goods major AB Electroluxs loss making Indian operations, ElectroluxKelvinator Limited (EKL). As a result, Videocons total turnover were expected to double to

US $ 4billion with more than US $2 billion coming from its global operations

5

.

The Thomson CPT deal also provided Videocon access to over 2,000 patents and state-of-the art manufacturing and R&D (research and development) facilities in Italy, Poland,Mexico and France. The acquisition also helped Videocon group achieve a global scale ofoperations and efficiencies in integrated manufacturing of CPTs with CPT glass andtransform into one of the largest players in the world.

Valuation & Due Diligence

Videocon adopted an aptly crafted strategy to finance its trans-national acquisitions. Thedeal to acquire Thomson SAs CPT business was completed through a special purposevehicle, Eagle electronics. While, Videocon agreed to pay the asking price of 240 millionEuros without negotiating, the net of cash and debt, continued to be Thomsons. Videoconmanaged to sell its oil and gas story to Thomson as a great investment opportunity and gotit to agree to invest 225 million Euros in Videocon Industries Limited for a 15 percent stakeand two board seats. Thomson SA also agreed to buy a limited number of strategic equityinterest for 15 million Euros in Videocon International Ltd. This financing strategy gaveVideocon a good cash-flow for expanding further in international markets.

Videocon also consolidated its operations by an amalgamation of Videocon International(consumer electronics) and cash rich Petrocon (oil and gas) into Videocon IndustriesLimited. Apparently, it was carried out to offset the sagging consumer electronics segmentwith the shoring up of revenues from oil business with an amalgamated balance sheet.The merger of oil business with consumer electronics also led to challenges related tocompanys identity crisis.

Prior to acquisition of Thomsons CPT business, televisions contributed 50.4 percent ofVideocons revenue in 2005, as shown in Fig 6, followed by glass shells (16.1%),refrigerators (9.1%), washing machines (6.5%), air conditioners (5.8%), components (4.9%)and others (7.1%), whereas after the acquisition, in 2008, televisions contributed 31.9

percent (Fig 7) followed by Thomson CPTs (31.3%), glass shells (9.9%), refrigerators(8.2%), washing machines (4.6%), air conditioners (5.8%), components (4.3%) and others(3.9%).

5Videocon Emerges as US$ 4 billion Indian Multinational,Press Release, Videocon, June 28,

2005.


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Source: Videocon

Source: Videocon

Fig 7: VIL's Revenue Break-up of the Consumer Electronics & Components Segment

In percentage (2008)

Televisions, 31.9

Thomson CPTs, 31.3

Glass Shells, 9.9

Refrigerators, 8.2

Washing Machines, 4.6Air conditioners

Components, 4.3Others, 3.9

Fig 6: VIL's Revenue Break-up of the Consumer Electronics & Components Segment

In percentage (2005)

Televisions, 50.4

Glass Shells, 16.1

Refrigerators,

Washing Machines, 6.5ACs, 5.8

Components, 4.9 Others, 7.1


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Post Merger Integration

Videocon leveraged upon its acquisition of Thomson SAs CPT business to achieve scaleeconomies by vertically integrating the glass shell and picture tube business on a globalscale. The acquisition provided strategic edge to the company to access markets such asEurope and North America, which otherwise presented a much greater hurdle for an Indianfirm to penetrate. The Chinese production facilities offered the most cost-effectiveproduction locations in the world with a good infrastructure support providing competitiveadvantage to grab international markets. By way of consolidating its global operations andinducing professionalism in managing the company, Videocon aspired to become anIndian multinational.

Upgrading product quality and improving productivity appeared to be Videocons newfocus. The acquisition of Thomsons R&D facilities helped the company in creating anetwork of five global research centres. The company had three product developmentcentres at China, India and Italy. As a part of quality improvement efforts, the companyimplemented quality systems across all its offices and manufacturing locations in India. Italso undertook a six sigma campaign and implemented an optimal supply chainmanagement system.

Videocon was in the process of consolidating operations on global basis so as to achievecompetitiveness in the global marketplace. Its Thomson CPT segment was organised intothree strategic business units which were - services that provided end-to-end managementof business-critical services (physical media, electronic media, network operations);systems and equipment that offered video-focussed systems and equipment; andtechnology that developed and monetized technology (research, licensing, silicon solutions,software and technology solutions), providing third-party licensing.

Videocon planned to upgrade the facilities acquired from Thomson SA by adding newproduct lines including Slim Tube, Plasma, LCD and other FPDs. It re-engineered theItalian plant for assembling end-products such as CTVs for the EU market. It was in theprocess of setting up an air conditioner assembly line and a plasma panel assembly line tomeet the growing demand of FPD TVs from the EU region.

Videocons plant in Poland employed around 4,100 personnel and manufactured allcomponents in the value chain, including glass, electron guns and yokes. It had an annualproduction capacity of approximately 5.4 million CPTs and around 4 million glass shells. Itcatered to the Turkish market, Western and Eastern Europe (including TV assemblerssuch as Beko and Vestel) as well as the Russian market. Being cheaper than other EUnations, Poland also acted as a low cost manufacturing base for the company in the EU.

The Mexico facility was strategically located to cater to the NAFTA, Latin American andEuropean markets. Chinese facilities located in Dongguan and Foshan had capacity of


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around 4.9 million CPT units. These were aimed at serving the huge domestic market inChina and exported to Europe, Russia, NAFTA and South East Asia.

However, Videocon seemed to be hovering upon the issue of consolidating its globaloperations so as to evolve a leaner operational structure and cut cost significantly toimprove business profitability6. The company was also struggling with the decision torationalise its manufacturing in India by reducing the number of manufacturing facilitiesand retaining the most effective ones.

Move towards Family Based Management to ProfessionalManagement

Videocon was a family owned company controlled by its promoters. The Dhoot familyowned 67.75 percent share (Fig 8) followed by custodian (13.63%), corporate bodies(6.05%), individuals (4.7%), mutual funds (MFs)/financial institutions (FIs) (4.01%) andforeign institutional investors 7 (FIIs) (3.92%). Videocon was not only a family ownedcompany but perceived to be family managed as well rather than being managedprofessionally.

* As on 30th

June, 2008: Source: Bombay Stock Exchange Limited

To induce professionalism in the management of the company, Videocon hired a fleet ofprofessionals including the former M.D. of LG India, K. R Kim as its Vice-Chairman for theirglobal consumer electronic operations. Kim was expected to inculcate a professional work-culture in the company and rationalise and consolidate its global business. Videocon

6New-Look Videocon to Axe Brands, Plants, The Economic Times, 24 September, 2008.7Bombay Stock Exchange Limited, as on 30th June, 2008.

Fig 8: Videocon's Share Holdings*

(In percentage)

FII, 3.92MF/FI, 4.01

Individual, 4.7

Corporate Bodies,

6.05

Promoters, 67.75

Custodian, 13.63


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wanted to leverage its global acquisition of Thomsons CPT business to position itself asan Indian multinational in its promotional campaigns.

Videocon was the only group globally to have complete backward integration (Fig 9) fromsand to branded TVs. This offered Videocon a unique synergy in global CTV business as itmanufactured its own glass, CRTs and CTVs. Glass Shells (glass panel and funnels)accounted for nearly 60 percent of the CRT costs. The manufacturing process for glassshells was capital-intensive. Videocon claimed to have the highest yield (per unit ofinvestment) of 91 percent in the world in its Bharuch based glass shell facility. Thus thecompany aimed at becoming a global sized vertically integrated entity in the display devicesegment and CPT glass manufacturing.


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Fig 9: Videocon: The Vertically Integrated Company at Global Scale


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Exhibit I: Videocon: Over the Years

Year Major Events

1987 Incorporation of Videocon Industries Ltd. to manufacture televisions(Black & White and Colour) and washing machines

1989 - 2000 Initial growth in financial performance but downward trend witnessed inlater years

Gradual expansion and growth of company; New product/s lines added:

1990 Home entertainment systems, electric motors, AC,1991 Refrigerators, coolers,1995 Glass shells for CRT1996 Kitchen appliances, crude oil1998 Compressors , compressor motors

2001-03 Gradual deterioration in financial performance, drop in sales andshifting from profits to loss

Started export business with ToshibaIndonesia and Thompson-Poland

Obtained ISO 14001 & OHSAS 18001 certifications2004-05 Acquisition of Thompson CPT business in Poland, Italy, Mexico and

China Acquisition of AB Electroluxs Indian operations Gradual improvement in financial performance of the company

2005-08 Consolidation of global operations Innovation and diversification in the new areas


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Exhibit II: Videocons Global Business Activities

India TVs, Washing Machines, Refrigerators,Compressors,Air Conditioners, CPT Glass, Olil& Gas

Anagni, Italy Tubes, TVs, R&DPlaseczno, Poland Tubes, Glass, Guns, YokesMexicalli, Mexico TubesParis, France CPT, HQFoshan, China Tubes, R&DDongguan, China Tubes, GunsJapan Plasma, R&DKorea R&DOman Air ConditionersSource: Videocon

Postscript

International acquisitions had become increasingly popular instruments among the firmsacross the world to consolidate, protect, and advance their positions and enhance theirglobal competitiveness. The most attractive returns from acquisitions occurred where scaleeconomies could be achieved, which meant buying consolidation among the peercompanies.

A number of Indian companies were on the fast track to become major twenty-first centurymultinationals and likely to play a significant role in the global marketplace. These firmswere fast gaining global market share, making worldwide acquisitions and emerging asimportant customers, business partners, and competitors for the worlds largest companies.

These emerging Indian multinationals with low production costs, leadership, appealingproducts and services, state-of-art facilities and systems with their overseas expansionwere likely to radically transform industries and markets around the world. These emergingmultinationals such as Videocon whose journey to globalisation had just begun were likelyto offer formidable challenges to the established companies in quest for innovation, incompetition for supplies, in search for talents, in worldwide acquisitions, and in capturing

markets.

Amid the fear of obliteration among the most indigenous companies in face of onslaught offierce competition from MNEs, consequent to opening up of Indian economy, Videocondemonstrated its aptly crafted business strategy to achieve remarkable growth and globalexpansion rather than mere survival.

videocons strategic acquisitions

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