There’s a time to buy, there’s a time to sell

[Photograph by Hans Braxmeier under Creative Commons]

Now that I have an opportunity to sit back and reminisce about what is it that sculpted Marico’s inorganic growth strategy, I’d put it down to one word: Judiciousness.

We started tentatively, and it was only nine years after our formal existence that we ventured out to acquire Mediker, an anti-lice shampoo, in 1999. It was a small brand that Proctor & Gamble (P&G) had put on the block.

We thought through it carefully. Our presence in the chemist channel was weak. But we were convinced Mediker had potential to give us access to a large number of chemist outlets across India. Equally important, it would allow us to take some of our existing line of products into this channel.

Another insight our team had was that in rural India, oil had a far higher penetration over shampoos. If we could take the same brand and offer a variant of it as a hair oil, it would allow our franchise to grow rapidly. It didn’t take us long to get the formula right and in just about a year, sales doubled. We sat pretty for five years after that, save adding a small brand like Oil of Malabar. Strategically, we intended it to play a flanker role to Parachute, our flagship.

Over the next 10 years, we built Marico into an entity that acquired judiciously and one that didn’t have any qualms either about divesting when the situation demanded it.

Before I get into more instances of how we went about it, allow me to share a bit about what was playing top of my mind when crafting Marico’s merger and acquisition strategy for the longer term.

The first thing any leader ought to keep in mind is that when it comes to mergers and acquisitions (M&As), keep your feet on the ground. This is a high impact item for both internal and external stakeholders. And any leader who has everybody’s long-term interests on mind ought to introspect hard. That is why I tell myself and colleagues whom I consult we ought to ask ourselves a series of questions and be brutally honest:

1. What role do M&As play in our growth ambitions?
2. What should be our focus and strategy when it comes to M&As?
3. How do we create value during and post an acquisition?
4. How do we institutionalize a repeatable M&A capability over time?

Ultimately, acquisitions have to perform in the long run, add value, and make business sense. End of the day, it is a means to an end and not the end by itself.

I don’t mean to offend any sensibilities here, but for whatever reasons, the media is obsessed with the drama and excitement that accompanies an acquisition. The idea too may enamour many management teams. So it is terribly easy to get carried away in the frenzy that comes with it. I cannot stress how important it is to guard against this. Those out of the way, allow me get back to Marico’s M&A strategy over the years.

Consolidation of market share is important. That is why we acquired a brand like Nihar from Hindustan Unilever (HUL). But here, we acquired only the Intellectual Property Rights (IPR)—not the people, manufacturing assets or distribution network. That made it easy for us to integrate the acquisition into our fold.

Those were the days when Parachute had a 50% market share. As opposed to this, Nihar just had 8%. However, we needed to ensure our peers like Dabur or Godrej did not acquire it. That would make us vulnerable. We were confident our understanding of the business would allow us to extract economies of scale and get the right of cost structures in place to make the business work.

HUL invited bids. For us at Marico, the deal was a strategic one. If we lost, it could impact Parachute, our resource-generating engine, and we’d have to fight fresh competition. Nihar was strong in the East of India where we were traditionally weak. When we valued the business internally back in 2006, we thought the brand worth Rs 216 crore.

We were sure Dabur, Godrej, Emami and a few private equity funds were interested as well. Much debate followed around what kind of monies these entities may bid for the brand. Initially, we thought we’d put in a bid lower than the Rs 216 crore we had valued it at internally. But when we discussed it with the board, they argued this is a strategic acquisition and that we ought not to keep a reserve.

As a thumb rule, when you bid, whatever you value the brand at, you keep a reserve of 10-15% to act as a buffer. But the board was categorical and said, “No buffer.”

If you lose on a strategic acquisition, you will repent. So we told ourselves we might as well go all out. And after that if somebody outbid us, at least we’d sleep easy knowing we had given it all we could. So we placed in our bid at Rs 216 crore and it turned out to be way above that of others in the fray.

While that was a strategic acquisition, you have to keep your sights open to proactive acquisitions as well. In our case, we kept a close eye on strategic markets in Asia and Africa. That is why Fiancée and Hair Code in Egypt got our attention. Their portfolio included hair creams, hair gels and cream gel.

They were owned by two local companies and it took us a few months to convince them to part with these brands. I must confess the journey to make both of these successful was tougher than what we had initially assessed. The governance standard in one of the companies was very poor. We had to overhaul its sales and distribution network. In turn, that had an impact on our sales in the first year. Over time though, we managed to put things in place and gained a market share of 55% in the category.

Derma Rx is another example that comes to mind of a business that satiated our need to access a highly effective and profitable product portfolio for our Kaya business. Over four years, we introduced the Derma Rx range in Kaya skin clinics in India and the Middle East.

We eventually divested the Derma Rx business at three times (in dollar terms) the acquisition cost to a venture capital firm. This was for two reasons. The first being that over the three years that we had the product in our portfolio, the 250-odd dermatologists on our rolls learnt a lot about the business. Second, we had acquired it from a Singapore-based company. At the end of three years, the promoter had an option to continue or exit. He chose to exit and we didn’t have plans on hand to extend our business further into South East Asia. It seemed the most logical thing to do.

If I were to sum up all of my learnings on what makes an acquisition successful:

• It must allow the latitude to consolidate market share and add significant value when the business is in your hands. Nihar is a case in point.
• It ought to be a strong brand like Derma Rx that is on financially good ground as well.
• It is a market leader like Mediker and X Men.
• It has the muscle to provide entry into a strategic market like Fiancée and Hair Code did.

Talking about financials, to fund acquisitions, on two occasions we had to dilute equity by issuing fresh shares. But our consistent performance, governance standards and high quality investor relations allowed us raise equity on good terms.

Most financial analysts and foreign institutional investors do not like acquisitions. They think it lowers the return on capital employed. But it is for the management to have clear performance targets to improve their perception.

What emerges from all of this is that you retain the ability to evaluate objectively at any given point in time. Maintain focus. Study not just the financials, but intangibles as well like governance standards, quality of management, the culture of an organization and the processes it follows.

I place a premium on all of these because empirical evidence suggests more acquisitions fail than succeed. And I have had my own share of failures.

For instance, we acquired two soap brands, Aromatic and Camelia in Bangaldesh. Their market shares weren’t high and we had to eventually withdraw. Then there was this once when we thought Manjal, a brand built in Kerala, to be a good fit. Manjal means turmeric in Malayalam and is widely thought to be good for the skin. For various reasons though, the brand bombed in neighbouring states. We thought the fight not worth it. Our key takeaway was that soaps as a category is a highly competitive one and success doesn’t come easy.

SIL, a brand of processed foods, jams and canned foods, is another brand that comes to mind. We acquired it when the market share was in the low single digits. We could increase it to the mid-teens. But after that we figured we didn’t have a key differentiator to take on Kissan, the market leader, and exited.

Around the time we got started with Kaya, we entered a new business called Sundari in the United States. Sundari was into Ayurveda-based products and was a supplier to the spa businesses in developed markets. In hindsight, this was a bad move for various reasons.

Sundari operated in a niche and had a business-to-business (B2B) model. We didn’t have any hands on experience in this segment. When we acquired it, the size of the business was just about $1 million. On the back of our efforts, we could ramp it up to just $3 million over seven years. But by then, our domestic and international businesses had grown significantly and Sundari formed a small part of our turnover.

Not just that, geographically the US was not one of our core markets, making it difficult to glean some key insights to make it work. Eventually, we sold it to the team managing it in the US and exited.

Where we failed, by way of an explanation, the only thing I can offer is that we were tentative. We weren’t completely convinced we ought to get into it, but we did. And we paid the price for it.

You have to remember that when a company gets acquired, people who work there feel unsettled. It is a challenging time for them because they don’t know what to expect. It is then incumbent upon you to reassure them no abrupt changes will be made. Inevitably, because of the uncertainty that comes with an acquisition, good people leave, and you’re left with the bad apples. It is incumbent on the leadership team to ensure good people continue to stay in the system.

Ideally, before acquiring, you must do a due diligence on the quality of leadership in the company as well and be completely aware of what changes you need to make.

Not just that, you have to have the humility to be flexible. Oftentimes, somebody who sells out to you may want to continue in the business. At Marico we’ve had two such cases where the seller was the promoter. We agreed—but with a caveat—that the terms would be revisited after three years. At the end of the term, we’d review the performance and then take a call on whether or not to extend the tenure.

It is a big challenge for organizations when the promoter selling to you is involved. Our experience has shown that in such cases, the promoter wants to do things in a certain way and may not be amenable to change. I cannot impress enough how important it is to deal with this tactfully.

It comes to a point when you often have to evaluate whether continuity is a good thing. You want to buy a business. But you know you can’t change the promoter’s mindset who insists on staying on. Sure, that is a negative. But if the promoter argues he won’t sell if you won’t let him continue, what are you to do? You may just end up losing a good target company. That’s when you weigh the pros and cons and figure out what tradeoffs you need to make.

In doing that though, you have to build guardrails to ring-fence yourself. For instance, if you agree to part ways after three years, you have to ensure the person won’t go out and dump stock, create governance issues or begin to compete with you.

I’m often asked what I think of joint ventures. The past has presented us with many opportunities to participate in such arrangements with international FMCG (fast-moving consumer goods) players. Personally, I’d much rather stay away from them.

This is because in a JV with a large FMCG, the brand ownership remains with the principal. But the marketing spends will have to be shared by the JV. Implicit to this is room for conflict.

Then there is the fact that most global FMCGs are large entities. That means daily negotiations will have to be with somebody who operates two to three layers below the CEO. Add to all of this the time a JV can consume in getting the alignment right.

The only times I thought it worth my while to stay open to the idea of a JV was when we got into a sales alliance with P&G for their non-focus brands and Indo Nissin for Top Ramen noodles. We had spare capacity in our sales force team and that was the only resource we had to deploy. It worked well. I think it a clean arrangement. But we ended the alliance with Indo Nissin when it decided it wanted to handle the sales on its own at the end of the term; it was also time to deploy our sales force on our own products. So both parties mutually decided not to renew the agreement.