Sector of the Merging Companies

FMCG sector

• Fast-moving consumer goods
• Products that are sold quickly and at relatively low cost
• Examples include non-durable goods such as soft drinks, toiletries, over-the-counter drugs, toys, processed foods and many other consumables
• Market size of US$13.1 billion
• The 4th largest sector in the economy.
• Intense competition between the organized and unorganized segments

Tata oil mills company ( TOMCO)

• TOMCO was incorporated as a public limited company on December 10, 1917.
• It was engaged in the manufacture and marketing of
  • Soaps
  • Detergents
  • Glycerin's
  • Vanaspati
  • Edible oils
  • Toilet preparations
  • Cattle and Poultry feeds
  • Oil cakes
  • De-oiled meals
  • Fish and Fish products.

TOMCO affiliates/associate companies:

• Industrial Perfumes Ltd.
• Tata Vashisti Detergents Ltd.
• Tata Ceramics Kerala Ltd.
• Kalyani Soap Industries Ltd.
• Tata Oil Company Ltd.

Background TOMCO

• Listed at Bombay, Cochin, and Madras.
• In 1991 - 92, TOMCO's turnover was Rs 425 crore
• It employed about 5,700 people
• Sold 1,66,000 tonnes of soaps and detergents
• During 1991-92, Tata Sons (a holding company for other Tata companies) decided to review their business strategy.
• Was decided to concentrate on few core areas of competence.
• TOMCO was seen as a company that did not suit the new strategy of Tatas.
• TOMCO was seen as poor in marketing and distribution.
• The raw material cost and wage bill were also excessive.
• The company continued to make losses and
• In 1992-93, the dividend was skipped.

Balance sheet of TOMCO

Profit and loss TOMCO

Equity share data TOMCO

The market price as on June 17,1993 was Rs 52.50 per share.

Hindustan lever Limited

• HLL was incorporated as a private limited company on October 17, 1933 and was converted into a public Limited company on October 27, 1956.
• It is a subsidiary of the Anglo-Dutch international giant Unilever.
• HLL is engaged in the manufacturing and marketing of soaps, detergents, toilet preparation, basic chemicals, fertilizers, and other agricultural inputs.
• HLL is also a recognized export trading house.
• HLL’s presence in the Indian soaps and detergents market is truly dominant: some of its brands such as ‘Lifeboy’ ‘Lux’ ‘Rin’ and ‘surf’ are household names in India.
• These brands are also unilever’s international bands.
• It was generally opined that HLL’s brands did leave gaps in the product line.
• In fact, Nirma exploited this weakness of HLL fully in the 80s.

Affiliates/associate companies of HLL

• Brooke Bond India Limited
• Lipton India Ltd
• Pond's India Ltd

Background HLL

• The HLL equity shares are listed on stock exchanges at Ahmedabad, Bombay, Calcutta, Cochin, Delhi and Madras.
• Between 1984 and 1992, HLL's gross turnover grew at 16 per cent
• The profit before tax grew at 18 per cent per annum
• The profit after tax showed an annual growth rate of about 21 per cent per annum
• During 1956-1992, a period of 37 year, HLL earned profits and declared dividend in every year.

SWOT analysis of HLL

Strengths

• HLL enjoys a formidable distribution network covering over 3400 distributors and 16 million outlets.
• This helps them maintain heavy volumes, and hence, fill the shelves of most outlets.

Weakness

• HLL's market dominance, originating from its extensive reach and strong brand presence, allowed it to raise the prices even as raw materials were getting cheaper.
• Hence, though the volumes decreased, the margins grew, and company was able to earn more profits.
• But higher margins attracted competition in areas of operations.
• HLL's strategy remained focused on creating power brands and earning higher margins.

Opportunities

• World's largest producer of FMCG goods but its exports are miniscule as compared to production.
• Though Indian Cos. have been going global, their focus is more towards Asian countries because of the similar preferences.
• HLL is one of the top companies exporting FMCG goods from India.
• An expansion of horizons towards more and more countries would help HLL grow its consumer base and henceforth the revenues.
• Opportunity in Food Sector - The advent of modern trade has opened up greater opportunities for HLL to diversify its brand and strength its food division.

Threats

• ITC has reduced its dependence on the cigarettes business - Contribution of the core business in revenues has come down from 87% in FY99 to 70% in FY05.
• Over a period of five years, ITC has extended its presence into areas like foods, retailing, hotels, greetings, agri, paper, etc.
• These are businesses that can give it growth impetus in the long run.
• With ITC gaining momentum in each of these businesses, it is turning into a consumer monolith, and hence, the greatest threat to HLL's Business.

Balance sheet HLL

Profit and loss HLL

Equity share data for HLL

Foreign shareholding - 51.16%

FIs - 16.79%

Public - 32.05%

• The share capital of HLL as on December 31, 1992 was Rs 140 crore
• The market price as on June 17, 1993 was Rs.375 per Share.
• For 1991 and 1992 enlarged capital base to bonus issue of 1:2

Sales mix HLL and TOMCO

The merger

• 90% of the shareholding power agreed to merger -sec 394-391 of companies act
• 2 shares of HLL to 15 shares of TOMCO face value Rs.10 - valuation techniques.
• Experts examined the valuation on 3 criterias
  • Comparison of book value of asset per share
  • Market price on date
  • Present value of the future cash flows of the two companies if merger did not take place.

Accounting of merger

• In the account for the year ended December 31, 1994 the following notes appear with regard to the merger of Tomco:
• Pursuant to the scheme of amalgamation of the Tata Oil Mills Company Ltd. (Tomco ) with the company sanctioned by the Hon'ble Bombay High Court
• During the year, the assets and liabilities of Tomco were transferred to and vested in the company with retrospective effect from 1st April 1993
• The amalgamation has been accounted for under the ' pooling of interests ' method and, accordingly, the difference, aggregating Rs 6,74.76 lakh being the net assets taken over less the paid-up value of the shares of the company issued and other reserves assumed, has been added to the company's General Reserve.
• The Share Swap Ratio Tomco Share Capital: Paid-up equity capital 2,15,04,849 @ Rs 10 each Ratio: for every 15 Tomco = 2,15,04,848 2 / 15 Shares two HLL shares = 28,67,314 shares in HLL

Synergies of the merger

• Access to the Indian markets
• Enhanced HLL market share
• Using the brand they launched various variants in different products.
• With Lyril freshness concept was leveraged with Lyril liquid gel
• Life boy brand was leveraged using stretching it to different segments.
• Similarly for Le-cancy, Rexona etc.
• Rural market was exploited with 75gm soap bars.

Cultural Differences

• Main Setback – productivity of TOMCO employees was only 60% of HLL Employees.
• Since TOMCO employees were assured complete absorption, the management could think only of elevating productivity
• The same could be done only within a span of 3yrs.

Perception of laborer

• HLL labor felt that their bargaining power will weaken
• TOMCO labors felt that they will be axed as a direct consequences of the synergy
• HLL was known to be tough employer
• Job insecurity in TOMCO as they thought that they will thrown out after the merger

Perception of the consumer

• Will create a monopoly in market
• Consumer interest will be lost

Law suits

• Shareholders of TOMCO
• Labors of TOMCO
• Consumers of TOMCO
• Workers of HLL

Post merger

• Low scale for TOMCO labors
• Gave a VRS scheme to Axe TOMCO workers
• HLL gave very short notices to TOMCO workers to analyze their options
• No schemes for retraining of retrenched staff
• Lead to market share above 60%
• HLL became a monopoly in Indian FMCG sector
• Reach to Indian markets.

“Mastering the art of deal making is what transforms an every day company into a leading business Empire”

- Written by our Associate Advocate Noopur K. Dalal during her MSOP Training at ICSI WIRC