|Kaushik Datta and
04 October 2010
Mangalam Birla overruled managers
and took the risky decision to buy Novelis for
$6 billion. Now, he's rolled up his sleeves
and turned it around.
was steak for lunch. As the two Indians at the
JW Marriott in Atlanta cut into it, they gave
the American seated across the table something
to chew on. "We would like to buy Novelis."
Bhattacharya, the managing director of flagship
Industries, which was less than one-fourth
the size of Novelis, had just uttered the bravest
words of his career. It was August 2006.
W Sturgell, the then president and CEO of Novelis,
kept chewing. "I must say that he was not
utterly shocked," recalls one of the Indians
who sat at the table that day. Sumant Sinha,
the second Indian, and then the group CFO, had
done much of the preparatory work that enabled
Bhattacharya to pop the question. Their boss,
Kumar Mangalam Birla, the 42-year old chairman
of the group, had been closely studying Novelis,
a manufacturer of aluminium products, for six
months. He was keen to buy it.
Sturgell finished his steak and took the proposal
back to his board. Eleven years after taking
charge of the Aditya Birla Group as a 27-year-old,
Mr Birla had just initiated the boldest move
of his career. "It was an intimidating
proposition. But after a lot of thinking, I
found it too compelling an opportunity to let
go of," recalls Mr Birla.
months have passed since that luncheon meeting.
The world has changed in the meantime. A global
recession has come and gone. Billions of dollars
were raised and invested. Three people have
sat in the corner office at Novelis, a bunch
of senior executives have gone and others have
come. Aluminium prices have gone up and down,
so have credit ratings. Over a thousand employees
have been retrenched, one plant is shut, and
another is under closure notice. "At one
stage, we were wondering what is going to hit
us next... the poor liquidity was hurting us,"
recalls Mr Bhattacharya. Through it all, Mr
Birla, the one man keenest on this $6-billion
wager, has held his nerve and resolve to make
the deal work.
turbulent weather at Novelis is now giving way
to a calm horizon. Novelis is on its way to
an adjusted EBIDTA of over a billion dollars
this financial year, Steve Fisher, senior VP
and CFO, Novelis announced at a mid-September
Credit Suisse conference in Miami. "Novelis
is certainly Kumar's biggest achievement so
far," says Basant Kumar Birla, chairman
of the BK Birla group and Kumar Mangalam's grandfather.
Birla first considered the possibility of acquiring
Novelis in 2006. "When we presented the deal,
Mr Birla immediately sensed this could define
his career," recalls a top group executive.
"He knew the deal would help him to break
into the Fortune 500." The $2.6-billion Hindalco
was game to buy the $11-billion Novelis.
inadvertently, the two men who first discussed
the transaction in 2006, over steak, only made
the Herculean task even more difficult for Birla...
each in a different way.
Sturgell took Mr Birla's proposal to the Novelis
board, but he quit weeks after the luncheon
meeting. Some reports say he was fired. Novelis
chairman William T Monahan was appointed as
its CEO. The board appointed Morgan Stanley
to invite prospective buyers into a competitive
bidding process. Mr Birla was hoping to seal
the deal quickly and quietly. But he only pushed
Novelis into play. Hindalco would eventually
pay a lot more than what it had originally imagined.
Bhattacharya came home, watched new bidders
hover around Novelis, saw the asking price rise,
and decided it was not worth buying anymore.
It was better for Hindalco to stay focused on
investments in its core area of expertise
the upstream (raw materials) side of the aluminium
the next few months, Novelis remained in play,
with private equity majors like TPG showing
interest. Mr Birla went to work on Mr Bhattacharya.
"He could have overruled Bhattacharya.
But he just kept on persuading him," recalls
a top executive. "Mr Birla even offered
to bring in his personal money through a rights
issue to ensure that Hindalco did not run out
of funds for the upstream expansion projects
that Bhattacharya was keen on. This went on
for six months."
it was time to decide one way or the other.
Mr Bhattacharya habitually spent the first half
of Sundays at office, before taking his wife
out for lunch or a movie later in the day. Mr
Birla walked in on one such Sunday. "I
chose to do it on a holiday so that there would
be no distraction. We had a long chat,"
recalls Mr Birla.
the end of it, Mr Bhattacharya still would not
budge. At that point, Birla stood up and said
that he was exercising an entrepreneur's call:
he was going ahead with the bid. The next moment,
Mr Bhattacharya said he would fall in line as
a manager and do everything possible to make
the transaction work. The man who had first
ambushed Novelis over steak was now back in
the deal. Operation Red Sox, the codename of
the Novelis acquisition, was in motion.
story started with steak, but the next twist
has to do with Indian food. By early 2007, all
bidders, including Hindalco, TPG and a few others,
had completed the due-diligence process. With
only a week to go before the bids had to be
submitted, employees at Novelis' Atlanta headquarters
organised a high-profile Indian food festival.
"It was a subtle, yet loud message,"
recalls Mr Birla with a smile. The employees
wanted Hindalco to win the race. "We visited
many plants during the due-diligence process
and it was apparent to us that Novelis employees
wanted us to win."
the honeymoon was short-lived, at least for
Hindalco. Mr Birla and his team were aware of
many problems that plagued Novelis. But after
the deal, the full reality of the mess hit home.
Novelis was contracted to sell aluminium cans
to customers at prices lower than its raw material
cost, the liquidity situation was bad and proper
accounts had not been filed. Finally, Novelis
was confused about its business model. "It
was only a converter of aluminium into can stock,
but it was behaving like a metal producer,"
recalls Mr Bhattacharya. "Their risk management
needed immediate improvement," he adds,
in a reference to the can price contracts.
came in, offering to help us with the integration.
They offered us a magic wand," he says.
Hindalco wanted to do things its way. "They
must have thought that I was stubborn and overconfident."
Soon, he and Mr Birla rolled up their sleeves.
"I made critical interventions that added
value. I did not get into operational issues,"
says Mr Birla.
Birla can be very hands-on when he chooses to
be," recalls Sumant Sinha, the former group
CFO. "In this case, he chose to be."
Mr Sinha now runs his hybrid investment banking/consulting
firm, SaVant Advisers.
is another area. Mr Birla opted for a consultative
approach. He chose not to set aggressive 90-day
integration targets, often deployed in such
acquisitions. "The task was to create awareness
before cutting costs," he recalls. "Nothing
was thrust upon them. Every decision was elaborately
discussed and debated. They not only participated
in the talks, they also added value," he
says. Another hard call Mr Birla was involved
in, was to shed about 9% of Novelis' workforce.
Blue Sox was the next step. Under this, Novelis'
can stock plant at Rogerstone, Britain, is being
shut down and shipped to Hirakud in Orissa.
This is a small, but significant step to mesh
Novelis' high technology with India's low cost
advantage. A second unit in UK, a foil rolling
and packaging plant at Bridgnorth, is also being
shut down. "Our approach was to establish
Novelis as a value creator, not a volume filler,"
says Mr Bhattacharya.
In fiscal 2010, Novelis posted an EBIDTA of $754
million, its liquidity improved by $640 million
to $1 billion, net profit stood at $400 million
and sales at $8.7 billion. It was Novelis's best
performance ever. Can price ceilings were eliminated
on January 1. "We will never enter into a
contract like that again," vows Mr Bhattacharya.
Soon Moody's upgraded Novelis' junk-bond rating
by three notches.
Novelis was contracted
to sell aluminium cans at prices lower than
its raw material cost, the liquidity situation
was bad and proper accounts had not been
filled. And it was confused about its business
first setback hit Novelis soon enough. Less
then two years after the acquisition, Martha
Finn Brooks, president & COO and the woman
spearheading these initiatives at Novelis quit.
Mr Birla took charge of the search for the new
CEO. Internal candidates were considered, but
the job demanded someone with the experience
of running a large profit and loss account.
Several outsiders were screened, including two
Indians. Finally, Philip Martens was offered
the hot seat, but only after Birla had four
meetings with him. The search took four months.
was surprised that we did not choose an Indian
to succeed Brooks," recalls Mr Birla. "It
showed that we did not want to thrust ourselves
upon them." In fact, only five mid-management
Hindalco employees were transferred to Novelis.
"It's very unusual for companies to send
so few managers into such a large acquisition,"
Martens fits the typical rock-star-American-CEO
mould, starting early and rising fast. At 34,
he was the chief programme manager for the Panther
range of cars at Ford Motor. By 43, he was head
of product creation for North America. He became
president and COO of Novelis when he was 49.
"Martens is methodical, yet prone to action,
which helps drive his decision-making,"
says Gary S Vasilash, editorial director, Automotive
Design & Production, a magazine. Vasilash
has tracked Martens' career for many years now.
acted quickly (after joining Novelis),"
says Henry Unger, a veteran business journalist
with The Atlanta Journal-Constitution,
a newspaper. "I didn't think he had time,
partially because the company was facing several
pressures, including the recession and falling
liquidity," says Mr Unger, who interviewed
Mr Martens last month.
days after taking charge, Mr Martens centralised
a very decentralised company. It made no sense
for Novelis, which has a homogeneous manufacturing
system and global customers, to operate by dividing
the world into four regional fiefdoms,"
Mr Unger adds.
called this programme 'One Novelis'. Says Mr
Birla: "Large corporations have many divisions
and zones that tend to become independent. What
has been done is the integration of the whole
company to maximise the whole as opposed to
optimising the parts. I give credit to Phil
(Martens) for doing this." Hindalco declined
to allow ET to interview Martens for this story.
then 18 months after taking over a troubled
Novelis, Mr Martens is now helping it overtake
rival Alcoa as the largest North American maker
of metal for beverage cans. "In the US,
we will be the dominant can-sheet provider...
Alcoa took a different position within the US
market and that has opened up opportunities,"
he told Bloomberg News in an interview this
job, though, is not yet complete. Novelis had
$2.4 billion in debt when it was acquired. Now
it has $ 2.7 billion. About 90% of this will
come up for repayment from 2014.
Martens was a good choice for the role of Novelis
chief for another reason. He is an auto industry
veteran and knows Ford Motor inside out - the
company and the auto industry are major Novelis
customers. At present, 54% of the aluminium
processed by Novelis goes into cans, only 7%
into cars. But that equation is going to tilt
towards cars. In the next five years, demand
for aluminium from the world car industry is
expected to grow by 10%, while demand for beverage
cans will grow at less than half that pace.
Aluminium's properties as a lighter, more malleable
metal meets the auto industry's need for lighter,
more fuel-efficient cars.
an intense, hands-on phase at Novelis, it is now
time for Mr Birla to do what he does at all other
group companies sit back and let the professional
CEO take the wheel. It's a pity that he is vegetarian...
otherwise he could have taken some time out to
enjoy the steak at the Marriott in Atlanta.
Novelis produces 19% of the world's flat-rolled
aluminium products, including sheets from
which beverage cans and car body parts,
among others, are made
include Coco-Cola, Ford, General Motors
a global footprint: 31 manufacturing plants
in 11 countries, 11,600 employees
| It is
the world's largest recyler of used aluminium
beverage cans:, 34% of its can stock production
was made using recycled aluminium
buck stops with me
from an interview with Mr Birla
you expect Novelis to turn around so quickly?
There was a certain amount of trepedition
when I took over Novelis. I threw the team
a challenge. They accepted it knowing fully
well that turning it around would be an
uphill task. I expected it to turn around
in March 2010. It's very gratifying that
the team has accomplished that. All of us,
especially Mr Bhattacharya, did a tremendous
at that point of the acquisition, it was
an entrepreneur's call... your call?
Absolutely. But there was a sense
of trepidation. You had to lay off 9% of
the Novelis workforce and cut costs. The
task was to create awareness (of the need
to do so) before cutting costs. The Novelis
team was a very close alliance partner in
this. Nothing was thrust upon them. Every
decision was elaborately discussed and debated.
They not only participated in the talks,
they also added value.
is your relationship with Phil Martens,
the new Novelis COO? Is it different from
what you have with other group CEOs?
It is very similar. I give strong
oversight. My role is to take strategic
decisions. And I take calls after having
a dialogue with him. I make only critical
interventions that add value. As long as
we were on the same page in terms of what
Novelis needs at this point in time, we
have no issues. We are now at a stage where
we complete each other's sentences.
that how you relate to other professional
CEOs in the group?
My involvement with with a business goes
up if something extraordinary happens there.
In all my businesses, I have very good teams
and I trust my people completely. But I
take all strategic decisions after very
extensive dialogues, because at the end
of the day, the buck stops with me.