Demerger Analysis

RATIONALE AND BENEFITS OF DE-MERGER

•  Family Settlement - Split among family members can be reason for demerger.

Example: Reliance split into – Reliance Capital Ventures, Reliance Communication Ventures, Reliance Energy Ventures and the Global Fuel Management Services.

• To attract investors – Demerger of a company can attract specific institutional investors having interest in particular sectors.

For example, retail company Pantaloon was attracting only retail investors. By spinning off a private equity fund, Kshitij, it attracted a different set of investors.

RATIONALE AND BENEFITS OF DE-MERGER

To focus on core business: Demerger helps to separate less recognized investment out of the core business. They can focus on core business and exploit the benefits of core competencies and utilize surplus cash in a productive way.

Ex. De-merger of cement business of Larsen &Toubro Limited into Ultra Tech CemCo Limited (Aditya Birla Group Company) which enabled L & T to become a focused engineering company.

CONCLUSIONS

INTRODUCTION

• Demerger is a form of corporate restructuring in which the entity's business operations are segregated into one or more components. It is the converse of a merger or acquisition.
• The original company may exist or it may cease to exist.
• In demerger the share of the new companies are distributed among shareholders in proportion to the value of their original shares.

Introduction

• Demerger poses an important challenge to the HRM division - to keep the employees motivated and avoid an increase in attrition rate.

• In many cases, the demerger of a corporate giant helps the management to be more focused and efficient. i.e. the core Human Resources can be managed better.

• Demerger of a large enterprise into smaller entities provides a viable option for company to restructure itself (like RIL opted for multi-divisional structure) accordingly, i.e. goal/ field specific management.

• A common measure which has been taken: Giving the employees a stake in the company (eg: C&W, L&T).

• HR issues could not be ignored during a demerger . This cannot be truer than in the case of highly people oriented businesses.
• During demerger ,the employees become anxious which leads to the exit of some of the best talent , as competitors and head hunters use the opportunity to wean away talent when they are most vulnerable.
• Also there could be a possible fall in productivity due to significant diversion in management leading to a change in culture.
• Management of the new enterprise should move proactively and aggressively to address potential concerns of employees and building the new brand of company as valued as earlier joint-entity.

To improve valuation – In Dabur, demerger was done to create a global presence for Dabur’s pharmaceuticals business and provide focus to maximize penetration in global markets.

The FMCG business including personal care, healthcare

and ayurvedic speciality products also benefited from

this move as it lead to better and more efficient

management of its resources and facilitated more

accurate benchmarking with industry which lead to

improvement in valuations for both businesses.

RATIONALE AND BENEFITS OF DEMERGER

EFFECT OF DEMERGER ON HR

offshore

gas fields

Backward

Integration

petroleum

oil fields

While expanding or diversifying into new businesses, a crucial catch point often missed is focus on retention of existing businesses, RIL’s growth came mainly through consolidation in backward integration.

Fiber Intermediates

Reliance Wellness

Reliance Demerged Group under RIL put its targets at vertical integration, expansion and diversification at the first glance.

Reliance Fresh (Fresh)

multiple disciplines

After a demerger an alarming issue for an organisation are related to its growth and integration over time.

multiple geographies

" With a view to achieve greater management focus and keeping in mind the paramount and overall interests of the shareholders” of RIL ... Shri Anil D. Ambani will lead financial services, power and telecom businesses

and

Shri Mukesh D. Ambani… will "continue to lead the other businesses including petrochemicals, oil and gas exploration and production, refining and other businesses comprising the Remaining undertaking…”

Explanatory statement by board of directors

As RIL has its units in more than 36 countries all over the world, it offers global opportunities for its employees.

DEMERGER ANALYSIS

- A Human Resource Perspective

multiple functions

From 2005 onwards, RIL strategical focus has primarily been on organic growth for venturing into new businesses.

RELIANCE INDUSTRIES DEMERGE

HR strategies after demerge

BEING

SPECIFIC

Engineers

The

Reliance

Split

Motivational Aspects

A scheme launched by RIL called ESOS (Employee stock option scheme)

=> Offering eligible employees the option to purchase RIL shares

It sponsors a certified management course for its engineers: MPRE (Management program for Reliance Engineers) at IIT-Bombay

Filling the empty spaces

It has also a tie-up with IIM-Bangalore for an official Reliance Engineering Course for graduates joining RIL

Continuing on path of internal growth

Primary step for internal growth starts with the retention of its Competency employees.

Managers

Group 10

Shalin Mishra (2010EE20528)

V Rajeev (2010EE20532)

Abhishek Anand(2010EE10434)

Karan Jindal(2010EE20520)

Rohan Nim(2010CH10134)

Sharing of Profits

NOW

“GROWTH IS LIFE”

Internal Growth Continued...

• “People of Reliance who make the difference”

2001-02

In keeping with this belief, new recruits are given an accelerated training through a unique initiative called “Dronacharya Scheme”. The scheme has been launched at Jamnagar under which senior personnel (Dronacharya) takes charge of 2-3 youngsters each (the Arjunas) and vow to mentor them for independent positions in 3-6 months.

Initial results have been extremely encouraging and the scheme is likely to be replicated at all other locations. Over 1500 young people have been recruited from different industries in the past year and are being trained to meet the targeted expansion plans.

• To provide a boom its MULTI-DIVISIONAL structure ,it started introducing customized management programs to train its employees to enquire marketing and several other communication skills.

• The Company also supported development of all other employees with a highly scientific Key Result Area (KRA) based Performance Management System and Career Mapping exercises.

Nurturing “Ordinary” people to produce “extraordinary” results

It conducts manufacturing leadership programs for its senior manager executives.

Average employee age of 34years and still steeping downwards depicts company's ethos of providing responsibilities and entrusting the young ages.

An in-house training program: Moving on the path of Learning & Development strategies , the Company has focused mostly on E-learning as a medium is much sought after by the employees for upgrading skills and competencies since people can learn when needed at their own convenience.

CABLE AND WIRECLASS Plc.

Background

• The average length of service remained at 8.2 years, and voluntary attrition at about 7%.

• Back in 2006, the business was losing about £1.6 million a day. In 2009 it reported pre-tax earnings of £326 million, making it the second best-performing telecoms company in the world.

• Around 2006 C & W had hit a dead-end  that comprised two distinct arms: an international division that was doing well and a UK business that was struggling to compete against the market leader, British Telecom.
• The board had identified the need to demerge the two arms, which had little synergy and were, if anything, an unhelpful distraction to each other.
• But with the UK business performing poorly, radical reinvention was clearly going to be necessary before it was ready to survive on its own.

OUTCOME

THE CASE OF

Cable & Wireless

Worldwide

Handling HR:

At demerger, employees were given £500 worth of shares each. 

• This means they have a direct interest in the performance of the business, and could see a personal benefit from the success of the company. 
• In addition to this, they operated a 'two-for-one' scheme on share purchases for colleagues, encouraging the workforce to invest in the company.

Communicating the strategy:

A major Challenge is to ensure the workforce also has a feel for longer term goals – what the company will look like a year, two years, or four years down the track.

.. CONTD.

Developed a programme of management webinars to build leadership capability and cascade corporate strategy and messages through the company structure .

• The Company top officials worked closely with Employee Consultative Forum (ECF) – elected representatives from across the business – to ensure colleagues not only had a voice, but could take an active part in shaping our change strategy.

• Two way communication helped employees feel a part of the company.

.. CONTD.

• Helped build a sense of importance among employees .
• Helped them realise their way forward with the company.

.. CONTD.