To most Indians, the 116-year old Godrej brand is a household name, fulfilling several daily needs ranging from hair color and soap to mosquito repellant and laundry detergent. But what is perhaps less known is that Godrej Consumer Products Limited (GCPL) has been selling several of its products to consumers across the world. In the past seven years, foreign acquisitions have helped GCPL transition from an Indian enterprise to a global conglomerate.
“In our consumer products business, we work on negative working capital,” says Adi Godrej, chairman of the Godrej Group. “So we generate increasing amounts of cash every year. Earlier, we used to give out very high dividends and did buybacks. Then we found that it would be more shareholder-friendly if we used the resources for acquisitions outside of the country. Establishing a brand … in a new country [is] a long, drawn-out process. Acquiring an established business is a much quicker way of growth and we can add a lot of value.”
Godrej’s target for GCPL as well as for the Godrej Group is to grow by 10 times in 10 years, at a compound annual growth rate (CAGR) of about 26%. He expects about 15% to 20% of that growth to accrue organically and the rest to come through acquisitions. In line with this, GCPL has developed a “three-by-three strategy” to expand in three areas — household care, hair care and personal washing products — across three continents — Asia, Africa and South America. In the past seven years, GCPL has spent an estimated US$600 million on around 10 acquisitions, including Indonesia-based Megasari Makmur Group for US$250 million, the Darling Group in Africa for US$100 million, as well as companies in the United Kingdom, Chile, Argentina and the Middle East.
Several other large Indian fast-moving consumer goods (FMCG) companies have also chosen the inorganic route to growth. Beauty and wellness company Marico generates 24% of its business from overseas customers, largely through acquisitions. In 2009, Marico purchased Egypt’s Hair Code; the following year, it bought Malaysian hair care brand Code 10, South African health care brand Ingwe, and Derma Rx, a Singapore-based skin care company, for an undisclosed amount. Marico also picked up 85% stake in International Consumer Products Corporation of Vietnam.
Personal care and food products company Dabur acquired Turkish personal care products company Hobi Kosmetik Group in 2010 for US$69 million and U.S.-based personal care firm Namaste Group in 2011 for US$100 million.
Wipro Consumer Care and Lighting Group (WCCLG) purchased Unza, a Singapore-based personal care company for US$300 million in 2007. In 2009, it acquired personal care brand Yardley’s businesses in Asia, the Middle East, North Africa and Australia for US$42 million. Last year, the firm bought Yardley’s Europe and U.K. arms as well. It also acquired Singapore-based personal and health care company LD Waxson for US$144 million and is rumored to be eyeing an acquisition in the Philippines. WCCLG has spent over US$500 million on acquisitions and of its US$830 million revenues in fiscal 2013, 50% was from international markets.
In a recent interview with Indian daily, The Times of India, Vineet Agrawal, president of WCCLG said he sees no reason not to pursue future acquisitions. “We can be large in countries such as Indonesia, Vietnam and China,” he told the newspaper.
On the Right Track
According to Viswanath Pingali, assistant professor of economics at the Indian Institute of Management, Ahmedabad (IIMA), foreign acquisitions are a good move for Indian consumer goods companies at present. “The world is shrinking and there is a large degree of consolidation going on in the industry,” he notes. “Acquisitions expose companies to practices world over, and help them leverage best practices. Moreover, instead of gathering entirely new sales, marketing, and administrative teams in a new country, it helps a lot if firms acquire a local partner and leverage their connections. A reverse argument is, as the economy grows there is clamor for foreign goods [not available in India], and to cater to such demand, acquisition makes sense.”
Narsimhan Nagarajan, senior director at CRISIL Ratings, estimates that there have been about 15 small to medium-sized foreign acquisitions by Indian fast-moving consumer goods companies in the last three years totaling US$1.5 billion. Nagarajan says that while the numbers might be modest, the shopping spree suggests a strategic shift. “The domestic market has been extremely competitive,” he points out. “Given the increase in input costs, [increased] competition [and] the incremental advertising spend, there is [increased] pressure on profitability.” Nagarajan adds that acquiring other domestic firms is tough because of high valuations. “There [is] competition for the same assets from global FMCG players who have domestic operations. Given this scenario and the urge to grow, most of these entities have looked outside of India for options.”
The emerging economies have been a key focus area for Indian FMCGs looking for foreign acquisitions. As opposed to developed markets, these nations tend to be under-penetrated, have higher growth rates and reasonable acquisition costs.
According to a Crisil Ratings article on the topic, the contribution of international business to total revenue is becoming increasingly larger for prominent FMCG players in India, with much higher growth rates than domestic operations. “The contribution of the international business to the total revenues of key India-based FMCG companies increased to 23% in 2010-2011 from about 18% in 2009-2010,” the Crisil article said. “Over the past five financial years, the international businesses of these companies have registered a CAGR of over 40% — double the CAGR for their domestic businesses (these growth numbers are significantly influenced by the overseas acquisitions undertaken by GCPL in 2010-2011).”
Beyond the Numbers
Revenues aside, other considerations come into play when companies undertake overseas acquisitions. “We are not merely interested in [adding to] the topline,” notes Anubhav Rastogi, who handles mergers and acquisitions for Marico. “Our strength is in branding. So we look at whether we can add value to the local brands in terms of their overall consumer inciting processes, even though they may have more know-how on local consumers than us.”
Distribution is another area of Marico’s expertise. India has a unique distribution network with several sales points and distributors. “Most of the geographies in Asia and Africa that we are targeting have a similar kind of distribution network,” Rastogi says. “As in India, the modern retail percentage to the total trade [traditional retail] is very low. We know how to manage the complex distribution environment and how to leverage information technology to drive sales.”
Another critical synergy for successful acquisitions is cross-leveraging of products. Without the ability to successfully market Indian products abroad and sell foreign goods to Indian consumers, “you don’t really get synergy,” accord to Rachna Nath, executive director and leader of retail and consumer issues at PricewaterhouseCoopers (PwC). For instance, Marico has brought its successful Parachute brand of hair cream from the Middle East into India. But there are limitations to those efforts, Rastogi points out. “The portfolio of products from South Africa can never come to India and the other way around because the hair type [of consumers in the two countries] is so different. However, we can leverage the learnings in terms of category management, supply chain management and so on. And we can take the products from South Africa to sub-Saharan Africa.”
Godrej offers another perspective. “While cross-leveraging is very important, we don’t bring brands in or take brands out. We use the local brands,” he notes. “But we exchange a lot of product knowledge, technical know-how and business processes.” For example, GCPL is the largest manufacturer of powder hair colors in the world. But the firm’s African operations had no powder hair color technology prior to the acquisition, creating an opportunity to transfer that process from India to the African market. Likewise, GCPL brought its unique technology for crème hair colorants in sachets from Argentina into India.
IIMA’s Pingali adds that in order to leverage the acquired firm’s expertise in the home country, the acquiring company should also have some novel products. “I think at this stage, most major Indian FMCG companies have such products that could be of interest to people outside India. However, if an acquisition were to work, then it is mandatory that the company is confident about the quality of manufacturing processes. It should be in a position to have some manufacturing units that meet international standards or should be in a position to set up some within reasonable expenditure.”
The People Challenge
Financial, operational and product integration challenges are obvious items on the acquisition checklist for any company. But PwC’s Nath warns that something that many companies overlook is cultural integration.
To best facilitate a cultural fit, GCPL retains much of the original staff of the companies it acquires. Marico’s Rastogi notes that cultural integration varies from market to market. Marico considers three criteria when tackling this issue after an acquisition — the quality of management at the acquired firm, the quality of its second line of command and retaining continuity within the team as much as possible. “Theoretically it is not possible to [re]-culturize the entire operation because people in different countries have been brought up differently,” Rastogi says. “An Indian will be Indian and a South African will be South African. It’s unreasonable to expect otherwise. To the extent possible, we like to continue an association with the seller or the management team. We get into a partnership only with like-minded people.”
One of the hidden challenges of foreign acquisitions is skill enhancement of the workforce. How can a company train its entire workforce, in India and abroad, to think and act globally? According to PwC’s Nath, “You must be able to put the skill-set of Indian companies that are making global acquisitions at par with a Coke or a Pepsi, which [already have a presence] all over the world. So far, Indian companies have let their acquisitions be. Over a period of time, I’m sure there will be a shuffle in terms of people going from India to those companies in management positions.”
Crisil’s Nagarajan adds: “The ability to understand newer markets in a short period of time is critical. While a lot of it can be done through systems and processes and technology, at the end of the day, the market knowledge and the nuances that you need to get are essential. [That information] can come through people [and] through institutionalization of that knowledge…. That is what I think is the differentiator.”
Another challenge of acquisitions is a firm’s credit capability and financial risk profile. “Given that we believe that most of these acquisitions were reasonably valued, and the fact that most of them had fairly strong financial risk profiles in terms of capital structure [and] cash accruals … the accruals for those acquired entities … would have helped service some of that debt,” Nagarajan notes. “So putting all of that together, we have seen that the credit quality of most of these entities post-acquisition also has remained stable.”
Godrej emphasizes the importance of maintaining a reasonable debt-equity ratio. GCPL’s debt-equity ratio, despite the number of recent acquisitions made, is about 0.5 to 1 because it has raised equity as well. The company’s debt to market cap ratio is less than 0.1, making it very low-risk. “We would like to be very clear that we are not overly leveraged,” Godrej says. “By and large in most of our acquisitions, we have had accretive profits after taking the cost of the acquisition into account, more or less from day one. Our Indonesian acquisition has gone up in value four-fold in three years. Some investment bankers recently approached us to list the company in Indonesia at a market cap of one billion dollars.”
All of Marico’s acquisitions are also profitable, says Rastogi. But he concedes that sometimes they may take a few years to break even. Rastogi points out that higher advertising spends for newly-acquired businesses sometimes eat into initial profits and result in lower operating margins for their international business — 11% as opposed to 18% domestically. “But we take a longer-term view because we believe we can add a lot of value going forward and we’re going to be there for the long term. Our internal thought is that we can increase the margins of our international business in the next three years by 200 to 250 basis points.”
The analysts, however, remain cautious. “It is very early days to tell whether these acquisitions are a success or not,” PwC’s Nath notes. Adds Crisil’s Nagarajan: “Many of these acquisitions are quite recent and it takes time for any acquisition to settle in before you can start saying it is a success or a failure. We believe they are reasonably valued from a financial point of view and other operational synergies, so I think they should play out. But one has to wait and watch.”