Will the Novelis deal prove Kumar Birla right?

A view from the top stretches far and wide and that probably explains why Kumarmangalam Birla made the most audacious transaction of his life, a USD 6 billion deal that will do down in history as India’s second largest global acquisition of its time. This was not a spur of a moment decision; this deal was two years in the making. It was July, 2006 - the end of a year-old hunt and the beginning of a year-long chase.

A special M&A team at the Aditya Birla Group had just identified a new growth opportunity, one that fit group company Hindalco’s strategic architecture perfectly. Hindalco is the world’s largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia. Now, metal can be a volatile commodity but aluminium products are not. Hindalco had been working hard to increase its share of value-added products, which in 2006 contributed just half of the revenue.

And Novelis seem like just the right answer, except it was almost three times Hindalco’s size in sales. Chairman, Aditya Birla Group, Kumar Mangalam Birla explains, "I started off by being a little cynical about it, it fit the bill completely, it fit into Hindalco’s strategic architecture like a glove but it was very large and I thought that maybe this might be too much of a stretch. At the same time, it would be an inflectional point, so it was compelling enough not to say no to it outright, which perhaps I would have done otherwise for a transaction of this size. So, it did require a leap of faith to start it."

Debu Bhattacharya went to meet the then CEO of Novelis, Brian Sturgell. He may have found it tough to swallow but Sturgell promised to take this seemingly small Indian company’s acquisition offer to his board. It had been two years since the demerger from Alcan and Novelis was having trouble finding its feet. Competitive pressure had forced it to sign fixed priced contracts to manufacture cans - one of its most important products. These contracts turned loss-making as metal prices went up.

Due to all those problems, Brian Sturgell was fired in August 2006 but Hindalco wasn’t about to give up. After all, Novelis was the world’s largest aluminium rolled products manufacturer. It has 36 plants in 11 countries with clients ranging from Coca-Cola to General Motors. Number one in Europe, Latin America and Asia and number two in North America, Novelis has a fifth of the world market. It’s also a technology leader, working to spur new uses of aluminium. In August 2006, Hindalco re-established contact with the Novelis board and by then, Birla’s team has gone through round after round of internal debate.

Birla recalls, "It took me a long time to get a Managing Director to come around to a point of view and I remember spending half a Sunday with him in the office - he works on Sundays! So, a little bit of histrionics because I landed up on Sunday and I said, I had miscellaneous work to do, so I have come in on a Sunday, can I sit and chat with you. Once I had my MD on board, I had brought in more people with his help into the transaction and the team sort of grew and I think that it required a process of conviction."
 
Bhattacharya adds, "He made the point that it could be a transformational change for Hindalco and that was so true and that perhaps convinced me more than any other scientific logic."

Birla continues, "There were good reasons. The first one is, it does the add value, the second is that it does take us forward in a strategic roadmap for the business. The third is, it does bring competencies to the table in terms of people’s skills, may be technology that we cannot create ourselves or would take a long time to create ourselves. And the fourth and perhaps the most important is what’s the team like? If you have 12,800 people in Novelis, I wouldn’t have done the transaction although the physical assets are world class and global in scale. If the team was mediocre, I do not think I would have moved ahead on the transaction at all. I do not think I could have hoped to turnaround the company."

"We have the advantage of taking on board companies that we have acquired, and merging them seamlessly. We have for eg. L&T that’s now UltraTech Cement, we have the example of Indal, which is now also part of Hindalco and in both those cases, we were very successful in integrating those companies. They both are working well now at optimal capacities and profitability. So, I think the fact that we had a track record of amalgamating acquired companies was a great positive for us."