You are on page 1of 24











I take the opportunity to thank Sinhgad Business School, Pune for giving me this
opportunity to do this project.

I would like to thank our Director Sir Mr. Anil Keskar, our class coordinator Mrs. Sridevi,
special thanks to the Guide Sir Air Mshl Prakash Honmode and all faculty members and
all those people who have helped me directly and indirectly in the successful completion
of this project.

Manish Khatri

I hereby declare that the project report entitled


Submitted in partial fulfillment of the requirement for the award of diploma of


to Sinhgad Business School, Pune is prepared by me.

Place: PUNE
Date: 08/12/2008
Signature of the student

The Project Report of



is approved and is acceptable in quality and form.

Signature: _____________________
Name: ________________________
This is to certify that the Project Report entitled

Submitted in partial fulfillment of the requirement for the award of diploma of


Sinhgad Business School, Pune

Has prepared under my supervision and guidance and the Project Report is made by
him only.


TOPICS Particulars
1. Re-engineering

2. Financial Re-engineering

3. Innovative Financial Reengineering

4. Various forms of Financial Reengineering

5. Meaning of merger and acquisition

6. Case study on Hindalco and Novellis

7. About Hindalco and Novellis

8. Synergy

9. Risk associated

10. The deal

11. Outcome of deal for both the companies

12. Recommendations

13. Bibliography

Re-engineering is the radical redesign of business processes and

organisational structure in order to achieve significant improvements in performance,
such as productivity, cost reduction, cycle time, and quality. It is the basis for many
recent developments in management.

The cross-functional team, for example, has become

popular because of the desire to reengineer separate functional tasks into complete
cross-functional processes. Also, many recent management information systems
developments aim to integrate a wide number of business functions. Enterprise resource
planning, supply chain management, knowledge management systems, groupware and
collaborative systems, Human Resource Management Systems and customer
relationship management systems all owe a debt to re-engineering theory.

Re-engineering represents the recognition of problems and outlines methodologies for

resolving occurs in a series of four steps, which can feed back into
the first step, if necessary, with leaders conducting activities to aid that effort on a daily
basis. It includes the 4 E’s they are as under: - Examination, Establishment, Execution
and Evaluation.

Re-engineering is not downsizing, restructuring, re-organization, automation new

technology etc. It is the examination and reform or change of five components of the
business that are:

1. Strategy
2. Processes
3. Technology
4. Organization
5. Culture

We can understand these components with the help of an example of

Purchasing Department, which is as follow: -

Most Purchasing departments or systems are still wrought with

excessive paperwork and approval processes, most of which can be eliminated with
very little effort. Look for day-to-day procedures that are task orientated, and refocus on
functionality by simply asking staff if the process adds value to the employee's job or to
the entity's or company's product or service.

Take a look at purchasing staffing. When purchasing professionals must do their own
typing, filings, faxing, etc., their salaries are being wasted on low-value functions. There
are many ways to address this issue, but before additional staff is employed, there
should be an analysis of all current and future tasks to determine which are really
necessary, elimination of those that are not mandatory, and then utilization of other
support staff on a part-time basis to accomplish repetitive procedures.

Reduce the number of POs, even to the point of eliminating them all together. Reassign
purchase order processing to the user departments or automate it. Once the all
encompassing major contract is in place, use draw down slips, the telephone,
procurement cards to place the order.

When the products needed are covered by an existing contract, Purchasing should not
be involved with the order or payment processes. Purchasing professionals should be
kept busy establishing new master agreements, training users, administering existing
contracts, identifying items for long term contracts, keeping abreast of current and future
concepts, and their continuing education.

Purchasing, in conjunction with a cross-functional team, can identify the major suppliers,
then bid or negotiate an all-encompassing agreement that can be utilized by the user.
Purchasing should be responsible for monitoring or administrating these major

Purchasing should remain responsible for procurement of all items not contained in the
major contracts. These procurements should fall within existing buyer authority, or be so
small that the item may even be purchased without competition by a user via a credit
card or petty cash.

To be effective, Purchasing must be included in the planning stages of all major projects
and acquisitions. They are the best source of cross-functional information for the entire
plant or entity, and should be able to offer procurement expertise on how to accomplish
the purchase efficiently, timely and at the best cost.

Purchasing should receive invitations to high level meetings, be included on the

circulation list of written information, and make and receive daily one-minute oral
updates to help the Purchasing staff be an effective contributor to the success of the
entity or company. The Purchasing Manager needs to cultivate information opportunities
with all individuals in upper management. This valuable asset is gained through trust
and confidence.

Here there is a strategy, which makes processes, which is implemented

through a technology, in an organization and if the strategy is good it will become a
culture. So these all steps are recementing which has to be done by purchase
department which is an example of Re-engineering.

Financial Re-engineering is the recementing or changing of products, systems, people,
brands and technology which has to be done with financial restructuring and financial
requantification of every qualitative business variable. Such type of recementing is
called as ‘Financial Re-engineering.

Financial Re-engineering therefore may be approximately defined

as a conscious effort to recement products, systems, brands, people and technology, to
serve a redefined purpose on a sustainable basis, because most of the reengineering
exercises are carried out with an impulsive reaction to the market variables or internal
problems. Some reengineering exercises prove to be very idealistic, and hence are
inappropriate and very expensive. Organizations carry out the process of reengineering,
without a time-bound program and without detail planning. The management of the
process of reengineering, post reengineering results, the overall cost-benefit analysis of
each phase and the impact of reengineering have all to be worked out ; optimistic,
moderate and pessimistic projections. The new purpose and the required dose of
reengineering need to be quantitatively and qualitatively well defined.



 The key objectives of the Finance Re-engineering are:

 Facilitation of the New Budget Framework;
 Standardize University financial processes, reporting and communication ;
 Identification, review and improvement of key process controls;
 Improve the efficiency and accuracy of financial data capture;
 Introduce structures to facilitate future introduction of project costing and
provide more useful and reliable information to a wide range of decision
 Reduce the number of cost centre’s in the General Ledger;
 Reduce the number of and reorganize item codes; and
 Improve financial (statutory) and management reporting.


 The introduction of the reengineered Finance system, together with process

improvements and a new reporting framework will lead to transformation day-
to-day financial operations.
 Ease of Access Benefit - Improvements in the availability and accessibility of
financial reporting through the establishment of easier “one stop” access to
financial detail.
 Ease of Analysis Benefit - Improved cross-University results analysis as a
direct outcome of reusability and homogeneity of key financial processes and
 Better Decision Making Benefit - Enhanced financial management capability
through a standardized budgeting and reporting approach that provides
visibility of gross contribution.
 Research Reporting Benefit - Improved visibility of research project activity
and contribution.
 Risk Management Benefit - Identification and implementation of key process
controls, with resultant improvement to operational risk profiles.
 Continuous Improvement Benefit - Improved “process capability” through a
thorough grasp of the processes - reflected in an enhanced ability to mould
and evolve practices in accordance with internal and external needs.


A strategist should always apply innovations to financial products
and processes, keeping in mind the holistic design of an entire business process. The
connection between the two phases of this process has to be perceived in the light of all
the phases of the process, along with the external variables. The holistic approach may
be summarized as follows:

Benchmarking of the earning-expectations

Product and process choices

Funding structure (variations, costs and flexibility)

Fund-deployment strategies

Monitoring and assessment systems

Programmes and policies to reward various stakeholders

Satisfaction of the shareholders

Perpetual sustenance of the financial and real growth of the business enterprise

The financial iterations and algorithms may take the shapes and combinations like as

The relationships among the different phases could be:

1. Real financial,

2. Notional financial and

3. Physical financial.
This may be illustrated as follows:-

Let us see the relationship between 1 and 2, i.e.

benchmarking of the earning expectations and choices of products and processes. The
‘real financial’ rate may be an ROI of 15%. A notional ROI on each product and process
should be the subject matter of financial engineering. Break-up of such product-wise
notional ROI would depend on benchmarked ratios of efficiency in using physical
resources, i.e. ‘plant capacity usage per employee per working day’ is a physical ratio to
be related to financial results. Another advantage of converting a notional financial ratio
into a physical ratio is that technocrats in the organization would be very comfortable
with the physical expression of a financial ratio. Very often finance executive talk about
‘5/3’ as a benchmarked ratio, which could be ‘x/y’ for the technocrats. Unfortunately the
parity between these two ratios is not adequately understood by the finance executives
or the technocrats. Therefore, a holistic approach for framing corporate strategies
cannot be adopted by the top executives.


Re-engineering, the radical redesign of business

processes and organisational structure is consist of various forms which are as follows:-

1. Financial Restructuring
2. Corporate Restructuring
a. Mergers /Acquisitions
b. Divestitures
c. Demergers
Let us have a look at each of the forms of re-
engineering specifically:-


Companies have access to a range of sources from which they finance

business. These funds are called ‘capital’. The sources of capital can be divided into two
categories; internally generated funds and funds provided by third parties. Whichever
form of capital is used, it will fall into one of the two categories - debt or equity. A
company should always try to seek a balance between its debt and equity in its capital
structure and the funding of the resulting deficit. The targets a company sets in striking
this balance are influenced by business conditions, which seldom remain constant.
When, during the life time of a company, any of the following situations arise, the Board
of Directors of a company is compelled to think and decide on the company’s financial

• Necessity for injecting more working capital to meet the market demand for
the company’s products or services; when the company is unable to meet its
current commitments; when the company is unable to obtain further credit
from suppliers of raw materials, consumable stores, bought-out components
etc. and from other parties like those doing job work for the company.
• When the company is unable to utilize its full production capacity for lack of
liquid funds.

Financial restructuring of a company involves a rearrangement of

its financial structure to make the company’s finances more balanced.


Corporate restructuring is one of the most complex and

phenomena that management confronts. Each company has two opposing strategies
from which to choose: to diversify or to refocus on its core business. From this
perspective, corporate re-structuring is a reduction in diversification.
Corporate restructuring entails a range of activities including
portfolio restructuring, financial restructuring and organizational restructuring.
Accordingly, portfolio or asset restructuring involves the redeployment
of corporate assets through divestitures of business lines that are considered
peripheral to the core business strategy. Significant changes in a corporation’s
capital structure are termed financial restructuring. In organizational restructuring, the
focus of change is on management and internal corporate governance structures.


During the last two decades or so, the global industrial landscape had been completely
redrawn by the forces of globalization, deregulation and unprecedented technological
development. Companies have responded to the competitive pressures unleashed by
these forces through extensive repositioning programmes involving mergers,
acquisitions, alliances, divestitures and demergers. Back home in India most Indian
companies and business groups would seem to have been caught unawares initially by
the momentous and rapid changes brought about by the economic reforms. However
after the tentativeness of the early years of reform, several of them would seem to have
come to terms with the new realities of an intensively competitive domain and have been
undertaking extensive restructuring both at the operational and at the strategic levels. As
Indian companies stand on the threshold of the next phase of growth it is inevitable that
several of them would find themselves required to make more decisive choices in
respect of the portfolio of businesses in their stable. In the process, Indian companies –
public sector included – would be increasingly called upon to pursue focused growth
through mergers and acquisition on the one hand, and divestiture and demerger on the


A transaction where two firms agree to integrate their operations on a relatively coequal
basis because they have resources and capabilities that together may create a stronger
competitive advantage


A transaction where one firm buys another firm with the intent of more effectively using a
core competence by making the acquired firm a subsidiary within its portfolio of

Reasons for acquisitions:-

 Increased market power

 Overcome entry barriers

 Cost of new product development

 Increased speed to market

 Lower risk compared to developing new products

 Increased diversification

 Avoid excessive competition

Attributes of Effective Acquisitions:-

 Low-to-Moderate Debt

Merged firm maintains financial flexibility

 Flexibility
Has experience at managing change and is flexible and adaptable

 Emphasize Innovation

Continue to invest in R&D as part of the firm’s overall strategy


The case discusses the acquisition of US-Canadian

aluminum company Novelis by India-based Hindalco Industries Limited (Hindalco), a
part of Aditya Vikram Birla Group of Companies, in May 2007. The case explains the
acquisition deal in detail and highlights the benefits of the deal for both the companies.
It also examines the valuation of the acquisition deal and how the deal was financed.
The case concludes by describing the challenges that Hindalco would face in
integrating the operations of Novelis and analyzing if the deal was overvalued as opined
by some industry experts.

Hindalco Industries Ltd has informed BSE that Novelis Inc. on May 15, 2007 has
announced the completion of its acquisition by the Company. The transaction makes the
Company with Novelis, the world’s largest aluminum rolled products Company and one
of the largest producers of primary aluminum in Asia, as well as being India's leading
copper producer. Novelis will operate as a subsidiary of the Company. The Company
entered into an agreement with Novelis, dated February 10, 2007, to acquire the
Company in an all-cash transaction which values Novelis at approximately US $ 6.0
billion, including debt. Under the terms of the agreement, Novelis shareholders will
receive US $ 44.93 in cash for each outstanding common share. Novelis shareholders
approved the transaction at a special meeting on May 10. Based in Mumbai, India, the
Company is the flagship Company of the Aditya Birla Group, a multinational
conglomerate with annual revenue of US $ 14 billion and a market capitalization in
excess of US $ 23 billion. The transaction was accomplished by way of a statutory plan
of arrangement under Canadian law. The Company through its wholly-owned subsidiary
AV Metals Inc. acquired 75,415,536 common shares of Novelis, representing 100
percent of the issued and outstanding common shares. Immediately after closing, AV
Metals Inc. transferred the common shares of Novelis to its wholly-owned subsidiary AV
Aluminum Inc. Novelis’ stock has ceased trading on the New York Stock Exchange. De-
listing on the New York Stock Exchange and the Toronto Stock Exchange is expected to
occur shortly.

Novelis is the world leader in aluminum rolling, producing an
estimated 19 percent of the world's flat-rolled aluminum products. They are the No. 1
rolled products producer in Europe, South America and Asia, and the No. 2 producer in
North America. Novelis is a global leader in the production of aluminum rolled products
market. It has operations in four continents comprised of 34 operating facilities in 11

The company caters to markets like:

a. Building and construction g. Distribution Services

b. Cans and closures h. Technology sales.
c. Flexible and semi-rigid
d. Printing and Lithography
e. Specialty Consumer and
f. Automotive and

With industry-leading assets and technology, they

produce the highest-quality aluminum sheet and foil products for
customers in high-value markets including automotive, transportation,
packaging, construction and printing. Their customers include major
brands such as Agfa-Gevaert, Alcan, Anheuser-Busch, Ball, Coca-
Cola, Crown Cork & Seal, Daching Holdings, Ford, General Motors,
Lotte Aluminum, Kodak, Pactiv, Rexam, Ryerson Tull, Tetra Pak ,
ThyssenKrupp and others.

Novelis is also the world leader in the recycling of used

aluminum beverage cans. Annually, we recycle more than 35 billion
used beverage cans -- enough to circle the earth more than 100

Novelis is globally positioned, operating in 11 countries

with approximately 12,900 employees. In 2006, the company
reported net sales of $9.8 billion.
Hindalco, based in Mumbai, India, is one of the most
cost-efficient aluminum producers globally. Hindalco’s stock is
publicly traded on the Bombay Stock Exchange, the National Stock
Exchange of India Limited and the Luxembourg Stock Exchange.
Hindalco is the flagship company of the Aditya Birla Group, a $14
billion multinational conglomerate, with a market capitalization in
excess of $23 billion

A key tenet of Hindalco's strategy is

continuous growth. The Company has taken two major initiatives in
this direction in the recent past. In 1999, the company acquired a
74.6% controlling stake in Indian Aluminum Co. Ltd. (INDIAL), a
leader in the alumina and semi-fabricated business. The second of
the initiatives was a brownfield expansion of facilities at a cost of Rs.
1800 Crores. The expansion added 100,000 TPA to Smelting
Capacity along with a 210,000 TPA increase in Alumina Rifining
Capacity and matching augmentation of Power Generation Capacity

SYNERGY:-The reason behind the merger.

The combination of Hindalco and Novelis will
establish a global integrated aluminum producer with low-cost
alumina and aluminum production facilities combined with high-end
aluminum rolled product capabilities. The complementary expertise of
both these companies will create and provide a strong platform for
sustainable growth and ongoing success.

A strategy lies behind the proposed merger

between India's largest aluminum producer, Hindalco Industries, and
Canada's Novelis the biggest producer of flat-rolled aluminum
products, whose customers include Coca-Cola Anheuser-Busch and
General Motors.
With Hindalco's own cheap supplies of bauxite and
coal, the purchase of a downstream producer like Novelis, which was
spun off from Alcan (nyse: AL - news - people ) after its former U.S.
parent bought Pechiney of France in 2004, would make Hindalco the
same sort of integrated producer that many oil companies strove to
be in the 1990s.

This will not only help Hindalco penetrate highly valued US and
other western markets (Novelis has operations in 11 countries) but
also help the shareholders to regain their investment (Novelis is
presently a loss making company).

Both the companies involved in the merger action

are present leaders in their respective markets; Hindalco in the low
cost aluminum production and Novelis in the aluminum rolled

The most important synergy that the companies can be

looking for with this merger is the fact that Novelis is a producer of
aluminum products whereas Hindalco is the lowest cost base metal
producer in the world as far as aluminum is concerned.

Before the merger the issue with Novelis was to procure

raw material from the market, which it converts into value-added
products at the most reasonable prices. Hindalco on the other side
has announced capacity expansion plans in a major way in the
coming three to five years. Once that is done, it can supply the raw
material to Novelis at a very economic cost as Novelis does not
produce the inputs to its process (aluminum) in part or whole. This
will help Novelis in bringing down its cost of production, particularly at
a time when metal prices, particularly aluminum are running strong,
which in turn will help Novelis to improve upon its margins and it will
get reflected in the balance sheets of both the companies.

Hindalco’s motive behind this merger action has been

the major market share that Novelis possesses. For Hindalco to build
such a big market presence as that of Novelis by its own would had
taken a very long time, which is the reason why this would be a very
advantageous move for Hindalco as far as company strategy is
One of the matters of concern for Novelis right now is the
price that it is paying to have got into contracts with some major

According to this contract, Novelis will provide cans at a price which

is tapped, beyond which Novelis will incur the cost. With aluminum
prices going over through the roof, Novelis has to bear it all. From the
performance reports, it was evident that Novelis had incurred huge
losses which will tend to decrease as most of its contracts with
tapped prices will get over by the end of 2007. Along with this, if the
aluminum prices go down in the coming months, it would add to the
profitability of the group companies.


The risk associated in the merger of these two

entities is perceived to be a little higher on account of the sheer size
of the two companies. There has been a school of thought which
says that Hindalco which paid a price of about 6 billion USD is a little
too much for the merger. This was one of the reasons for the poor
performance of Hindalco stocks after the merger took place. But with
three months into the merger it is too primitive to comment on
whether the merger has been a success for the two companies or
not. The major risk that can be associated as of now for both
companies are the post-merger integration issues for the two
companies. Also one of the reasons which lead to an immediate fall
in the prices of for Hindalco is the fact that Novelis has a high amount
of debt which is in the range of 2.33 billion US dollars and a debt to
equity ratio of 7:1. Strategy wise, hindalco will try its level best to
provide Novelis with raw aluminum at the lowest possible prices but
the effect of Hindalco’s raising debt for the merger on Novelis’s books
and its effect on the consolidated balance sheet of Hindalco is a
matter of concern for most investors. Also in the backdrop of
increasing prices of Aluminum, Hindalco will gain but Novelis will be
at a loss considering the contracts with the clause of tapped prices
for supplying aluminum cans is concerned. So there is a possibility
that the performance of the two companies may be completely
opposite to each other

The counterview to the argument that deal being over-priced is that

Hindalco is getting a ready-made market, ready-made customers,
ready product profile and its size has also tripled by the merger. Here
economies of scale are to make a big impact on the extend of
success of the merger. For Hindalco, technology and process
leadership, cost-effective manpower and ready market will help
rationalize the cost structures and balance the pressure on the
bottom lines.


Hindalco has acquired Novelis in an all-cash

transaction which values Novelis at approximately US$6 billion,
including approximately US $2.40 billion of debt. Under the terms of
the agreement, Novelis shareholders will receive US $44.93 in cash
for each outstanding common share roughly 15 per cent premium to
the market price

AV Metals — the A V Birla group's Canada-based special

purpose vehicle (SPV) - will infuse US$ 3.5 billion to finance
Hindalco's proposed acquisition.
Putting aside the US$ 2.4 billion debt burden of Novelis, the
cash component for financing the deal stands at US$ 3.5 billion.
Of this amount, AV Metals will take loans worth US$ 2.8
billion from three financial institutions, namely UBS, ABN Amro and
Bank of America. This includes a bridge loan of US$ 1.4 billion at a
coupon rate of 7.2 percent. These three institutions have underwritten
the debt amount with UBS taking care of the majority portion. UBS is
the financial advisor to Hindalco.

Essel Mining & Industries, a closely held company of the

group, will bring in US$ 300 million while Hindalco will mobilize US$
450 million from its treasury operations.
Hindalco would need at least 10 years to replace Novelis' assets,
which have a replacement value of US$ 12 billion

Novelis' revenues stood at $8.5 billion in 2005 and it posted

net loss of $102 million during the third quarter of 2006 (the calendar
year is the company's fiscal year). It is a widely held company and its
shareholders are largely hedge funds and institutional investors.
The company operates in 11 countries, has 36 operating units
and 12,500 employees. The deal would be financed through recourse
debt of $2.8 billion. Hindalco's treasury would contribute $450 million,
while SL Iron Ore Mining, another group company, would contribute
$300 million as debt

Novelis already carries $2.4 billion of debt, of which

$1 billion comprises term loans and $1.4 billion high-yield loans. The
deal will lead to the debt-equity ratio of Hindalco going up. The ratio
is at present at 0.2-0.
Post-acquisition, over 50 per cent of the group's business could come
from operations outside India, which is currently at 30 per cent.



• The acquisition will help Hindalco to shorten the learning curve

for technology, which was a need for Hindalco. Hindalco has
strong presence in upstream and metal businesses, while
Novelis is a world leader in downstream businesses. The
combination will make us immune to the high volatility in
commodities markets.
• A recent research note from Merrill Lynch speculating on the
possibility of such a deal said the negatives could outweigh the
positives. Merrill analyst Vandana Luthra pointed out that
during periods of rising aluminum prices, margins are sharply
squeezed, as selling prices for finished product do not
increase commensurately. For instance, price ceilings on
beverage cans in the U.S. recently hurt Novelis margins - in
the first nine months of 2006, the company lost US$ 170
million. "In my opinion, they are overpaying," said Stewart
Specter, an aluminum-industry consultant with offices in New
York and Florida. "It seems to me that US$ 6 billion is an awful
big premium to pay for a messy operation."

• According to Hindalco's Bhattacharya, the deal made strategic

sense. "The Novelis acquisition will give us immediate scale
and a global footprint," he said.
Hindalco would need at least 10 years to replace Novelis'
assets, which have a replacement value of US$ 12 billion, he

• Hindalco would enter the Fortune 500 league three years

before it was scheduled to do according to its internal targets.

• Overseas operations already account for nearly 30 per cent of

the group's revenue now and the Novelis acquisition would
increase it to 40 per cent in three years

• The group would now have operations in 14 countries — the

US, UK, Thailand, Malaysia, Laos, Indonesia, Philippines,
Egypt, Canada, Australia, China, Germany, Hungary and

• The acquisition of Novelis also means that the group would

become the world's largest player in the downstream
aluminum business involving value-added products.

• The Novelis management will remain unchanged after the

acquisition. Hindalco will take a call on joining the board later.
There will be no job cuts at Novelis

• Growth of M& A activity in the commodities sector was due to
factors such as economic growth, international commodity
prices, exports, growth of infrastructure, cheap labor etc.

• There are risks involved which means that Hindalco should

have before acquiring the company seen whether the
operations of the other company is going in the feasible

• The deal showed losses at the earlier stage, it proved to be of

strategic value in the long run. The merger would give
Hindalco a global footprint, but it has to pay a price and spend
time both for it.

• For Hindalco, technology and process leadership, cost-

effective manpower and ready market will help rationalize the
cost structures and balance the pressure on the bottom lines






1. Business case studies