Siemens-elpro Acquisition

Siemens-Elpro Acquisition

Abstract: Organisations either grow by organic or by inorganic manner. Organic method is always time consuming and costly, while inorganic one has been proven profitable by many organisations. Whole world has witnessed last decade as a year of overseas, and domestic mergers and acquisitions. Best examples of that are Tata-Corus, Arcelor-Mittal, and Hindalco-Novelis etc. Addition to these examples is Siemens acquiring Elpro International Ltd.

Followings are the main issues to be discussed for critical review of this case: 1. What is the strategic rationale for this acquisition? 2. What is the future outlook of this acquisition? 3. What are the advantages to both the parties for acquisition?

INTRODUCTION: Siemens Ltd. acquired Elpro International Ltd. to acquire Elpro's isolator business. Strategically, the acquisition of Elpro takes Siemens India onto the technology to produce isolators indigenously. The acquisition of Elpro by Siemens bodes well for both the entities. Elpro produces high voltage isolators. This is exactly what Siemens India wanted to manufacture. This makes the bond a perfect fit. Currently Siemens, an integrated player, manufactures all products related to power transmission and distribution. In fact Siemens is a global player with $78 billion revenue last year. Siemens has completed this acquisition through its subsidiary Siemens India Ltd. and has acquired 100% of Elpro shares. The deal made Siemens acquire technology with cost advantage and access to 10% of south-Asian market in isolators. Siemens Ltd has completed its acquisition of Elpro International Ltd. under an agreement in which Elpro will operate as a subsidiary of Siemens ltd.

Siemens Ltd. Siemens is today a technology giant in more than 190 countries, employing some 475,000 people worldwide. Their work in the fields of energy, industry, communication, information, transportation, healthcare, components and lighting has become essential parts of everyday life. In the Energy sector, their expertise ranges from power plants to turbines and in the Industry sector; they build airports, as well as produce contactors. They have a wide presence across the globe with network of 475,000 people, operating in over 190 countries, which serves to enhance their standing. Siemens energy is world leader in isolator, high voltage circuit breaker, transformers, and contactor business. They manufacture these products in varied capacity from 17 KV to 800 KV. But, before Siemens acquired Elpro they didn’t have any isolator produced in India. So to get into that business in India, they acquired business of Elpro.

Elpro International Ltd. Elpro International Limited (Elpro) was incorporated in July 1962 as a public limited company, in technical and financial collaboration with General Electric, USA. The Company’s corporate headquarters are located in Pune, and its manufacturing facilities are based out of Pune and Hyderabad. Elpro International is the one of the few manufacturers outside the United States manufacturing Surge Arresters and Zinc Oxide Discs with GE technology – acknowledged to be the best in the world. The company set up a metal oxide varistor manufacturing plant in its Pune facility in 1986 with technical expertise from GE. The company also acquired an Isolator & Switchgear manufacturing unit in 1994 in Hyderabad. Some of Elpro’s national clients include ABB India; Bharat Heavy Electricals Limited (BHEL); National Thermal Power Corporation of India (NTPC); Reliance Industries; Siemens India; Tata Power Company and international clients include GE USA; Isoelectric Italy; KWPA Iran; Saudi Electric Company; Taiwan Power Company and Virginia Transformers USA.

Pre Acquisition Status:-

Siemens:1. Loss of business due to incomplete product portfolio as clients would want to have complete contract given to one entity only as it was convenient for them to handle. 2. Siemens is a global brand which has a well built goodwill in international market but they were also facing a stiff competition in india and developing countries by L&T, ABB, Kirloskar & Elpro. 3. They had to import isolators from European countries which were costly or from Chinese company which were inferior in quality which ultimately resulted in loss of business. 4. They would also outsource isolator manufacturing to the competitors which took undue advantage of Siemens’s condition and charged them with high profits. 5. They were looking for an opportunity which would facilitate them to produce isolator cost-effectively & efficiently.

Elpro International Ltd:1. Elpro International is the one of the few manufacturers outside the United States manufacturing Surge Arresters and Zinc Oxide Discs with GE technology – acknowledged to be the best in the world. 2. The company also acquired an Isolator & Switchgear manufacturing unit in 1994 in

Hyderabad. 3. They had diversified models of isolators products only so if they had to grow they

would have to expand their facilities for which it would have taken them at least 5yrs to design products and next 5yrs to stabilize in market for which they had no funds and lack of time to build new facility before competitors would peep into their business.

Core reason for Acquisition:Siemens was looking for ready diversified isolators business with ready customer base and available market.

Siemens acquires Elpro's isolator business: Siemens Ltd on 3rd may 2006 announced the acquisition of the isolator business of Elpro International Ltd for Rs 25 crore. As part of this deal, Siemens has acquired the manufacturing unit of Elpro located at Hyderabad. The newly acquired business will be integrated with Siemens Power Transmission and Distribution division, with all its 108 employees becoming part of Siemens. The isolator division of Elpro International at Hyderabad provides high quality isolators covering the entire spectrum up to 420 kV. Isolators are used in transmission and distribution lines for isolation of the circuit during maintenance or breakdown. Mr. J. Schubert, Managing Director of Siemens Ltd, said, "The acquisition of the isolator business from Elpro International is part of our investment-led growth strategy. This new business will enable us to close the gap in our PTD portfolio and further strengthen our position in the growing power sector." The sale has resulted in a Cash Inflow of Rs.25 crore for the Elpro international Ltd.

STRATEGIC RATIONALE FOR ACQUISITION: Siemens:1. Siemens had no isolators in their business portfolio in India till they acquired Elpro’s Hyderabad based isolator business.

2. Till the date they used to import the isolators from Germany or any other Siemens factory where isolators were made.

3. The isolators imported were too costly for sale in India, as many of the clients are cost conscious and prefer inferior quality-less cost over high quality-high cost.

4. Competitors who had isolators would condition clients that if they want isolators from them they will also have to buy breakers from them only. Thus, affecting the breaker business of Siemens.

5. Again, for the same reason of high cost, Siemens isolators from Germany were not sellable in African, south-Asian, and south-American countries. So, business of Siemens was confined only to Europe and north-America.

6. Also, the product portfolio of Siemens India ltd. was incomplete because they didn’t have any isolator producing there.

7. Also the facilities for manufacture of variety of isolators was readily available to Siemens India Ltd so they could also innovate new technology with less cost incurred.

8. It would have taken at least 10yrs for Siemens India Ltd to design, produce & introduce that product into market & that would have taken about 100crores.

Elpro International Ltd:1. Elpro Ltd foreseen the stagnancy in the present product market they were in. They

could neither see the growth in their current business nor any opportunities which had potential growth for the company. 2. The company has 30 acres of land located at Chinchwad, Pune. Out of this, around 15

acres is used by the business operations of the company and the balance is available for development. 3. The company has tied up with M/s Trump Properties Ltd. for development of a small portion of land out of the total area available for development. The company has plans to develop the land in a phased manner. 4. The company has invested Rs.12.95 crores in the Equity Capital of Metlife India Insurance Company Pvt. Ltd.. Elpro holds 1.295 crore Equity shares of Metlife India, allotted at par.

Post Acquisition Status:Advantages to Siemens:1. Access to South American, South Asian and African market with low cost and quality better than the competitors at same price. 2. Completion of total power transmission and distribution product portfolio has been achieved by Siemens India Ltd since they acquired Elpro International Ltd. 3. It has also facilitated Siemens India Ltd for expansion in varied models in isolators

only, as production facilities are readily available; with the better technology. 4. Before the acquisition, competitors would take the contracts away with the only strength that they had isolators being produced in their factories. For this very purpose they would condition the clients that if they want isolators from them they would have to buy other products also. Thus now with the availability of isolators in portfolio this threat has been extinguished. 5. Elpro had 10% of market share in South Asian countries now this market will readily be available to Siemens. Also customer base will be readily available to Siemens. 6. Siemens is well known for cost efficient production so, they will be earning more profits on the same sales volume. 7. Elpro had a ready market and customer available, which were readily available to Siemens India.

Advantages to Elpro International Ltd:1. U.S. $ 5 million is a very good consideration for a business wherein only one product

of isolator was being Produced. 2. As they had foreseen the stagnancy in the business and no growth it was obvious for

them to sell off their business because sooner or later the big rivals like L&T, Siemens, ABB & Kirloskar would have hampered their business.

3. Also they were interested in new business like real estates and insurance sector so they got enough money on time when Real Estates & Infrastructure sector is in boom. 4. They can now concentrate on other business Surge Arresters and Zinc Oxide Discs with GE technology – acknowledged to be the best in the world.

Conclusion:There are two ways for the growth of business:1. Organic Method 2. Inorganic Method Inorganic Method is the method adopted by most of the Organizations today with the only motive of achieving their goals within less time and less cost incurred.