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We got to acquire core competence in focus areas - Harsh Goenka, 1992

Acquisition based Corporate strategy model

Indian scenario post-1991 Liberalization

India saw an economic liberalization policy in 1991

It was an emerging market with Information asymmetry Regulation misguidance Inefficient Judicial System

This caused friction in business interactions and resulted inincrease in market transaction cost

1. Exit from marginal profitable business2. Identification of core sectors based on size, growth and market position3. Target capitalization of Rs.120 billion4. Long term management of portfolio of business

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TIRES

1991 1992

1993

1994

1995

1996

POWER

TELECOM

AGRIBUSINESS

RETAIL

FINANCIALSERVICES

Construction of new plants, local (Goodyear) & international (SL) JV,modernization, acquisition of Carbon & Chemical India (Total- Rs. 8.1bn)

Acquisition of Noida Power, JV & collaboration with Rolls Royce, AcquiredSAE (ABB affiliate) & international offices

Alliance with Airtouch (cellular), Sprint (service e-mail), Datacraft (WAN),UK firm, NTT & ITOCHU (paging), NTT (telephone licenses)

JV (Dutch seed Co.), JV (French Co. flowers), Increased holding in Searle,Aqua culture tech. deal with U.S. Firm

Indias first supermarket chain with Dairy Farm, Expansion of travelagency business, sold liquor & pharmaceutical division

Mutual fund & assets management Co.

FINANCIALSERVICES

New textile machinery plant, JV with UK firm (Leather mfr), JV withHoerbiger, Austria (Valves), Cotton yarn exporting plant, Razor blades

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RPGs steps to restructure the firm Diversified by regrouping themselves into related business Relied on each sector to be financially self sustaining Concept of cross holding inter company loans & investments Asset disposition of non core business to reduce debt (Nylon tire cord business)

This reduced gross inefficiencies and promoted greater entrepreneurship

Business restructuring of RPG Enterprise

Takeovers

Jointventures

Acquisition Expansions

Newfacilities

Diversification

Internationalization

Refurbishment

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I. Equity Stake before Liberalization

Usual equity in large family owned firms: 25% Goenka Family owned ~47% of equity in RPG

II. Investment strategy of Family-owned companies post liberalization CompaiSelf sustainability in each sector (Financial) by raising funds through

1. Internal sources of funds2. Capital Markets: Domestic & Foreign

Methodology of source evaluation: Relative costs and benefits of different sources of funds1. Firms own internal operations 2. Domestic Capital Markets3. Foreign Capital Market4. Access to international markets

III. Overview of capital structure in 1995 Total loans from group companies as % of Total debt: 1.12% Receivables from group companies as % of Total Sales: 1.86%

Investment in group companies as % of Total Net Worth: 13.52% As can be seen, cross holding between Goenka companies persisted despite liberalization. This can bedue to

(i) Lower cost of funds(ii) Inter-dependencies between group companies(iii) Easy accessibility of funds(iv) Phasing out of pre liberalization sources of funds

At the same time, absolute borrowings (CEAT, CESC) also increased significantly indicating positiveimpact of liberalization on investor sentiment

Business restructuring of RPG Enterprise