CS Project- Corporate Restructuring L&T Print

Project

Restructuring Issues: Larsen &Toubro Ltd

Prof. Dr. P. Rameshan

SubmittedBy: Sanjay Bhatia(ePGP-03-162)

Indian Institute of Management, Kozhikode

January 2011

Comments of Directing Staff

Restructuring Issues: Larsen & Toubro Ltd


Contents

1.

Executive summary

2.

Aim

3.

Scope.

5.

Methodology and Source of data.

6.

Evolution of L&T

7

Analysis of Current Corporate Structure

8.

The Restructuring Plan

9.

Conclusions

10.

References

11.

Exhibits (a)

Exhibit 1

:

Brief History of L&T

(b)

Exhibit 2

:

Spread of L&T

(c)

Exhibit 3

:

Organisation Structure of L&T

(d)

Exhibit 4

:

Organisation Chart of ECC

(e)

Exhibit 5

:

Organisation Chart of LTV

(f)

Exhibit 6

:

Consolidated Financials of L&T

(g)

Exhibit 7

:

Excerpts of Interview by CMD Mr A M Naik




Executive Summary “There is no one right organization …..Rather the task… is to select the organization for the particular task and mission at hand.” Peter Drucker

L&T may be split into nine firms, says chairman Naik1. “No other company in the world is as complex as L&T... not even General Electric,” he said. “No one chairman can manage such a complex operation. I was able to do it because I have been with L&T for 46 years and have started 60% of these businesses.”……….. Economics Times reported on 5 Jan 2011. 1. As the news flashed slip in share price of L&T greeted the Chairman’s announcement. The restructuring of complex conglomerate numerous entities, subsidiaries, joint ventures is not an easy task. Most of the ill-informed stakeholders, like me, were suspicious of the restructuring move which was announced by Chairman barely 15 months before his retirement. 2. The onerous task of corporate restructuring is a lot easier when the companies carry out mergers, acquisitions or divestments. The space is required to be created in the existing folds for the acquired firm in case of mergers or acquisitions and the minor reframing is required while divestments are carried out. The restructuring process in the changing business environment to keep up the squeezing margins or cost cutting measures is slightly more painful. But, the requirement of restructuring when the company, of the stature of L&T, is exploring new vistas of Nuclear Energy, Infrastructural development was baffling as it is analogous to laying a fighting fit man on an operation table. 3. The deep plunge into the corporate affairs of L&T, as a part of project, revealed the actual trouble brewing in the company. Though the financial health of L&T is apparently good but the company is having serious obesity problem. The mass it gathered in the process of evolution is presently the cause of concern. Coupled with that the absence of succession plan for the current CMD Mr A M Naik has necessitated the emergent plan to shipshape the L&T. 4. Larsen & Toubro Ltd is often compared with the conglomerate GE in terms of its extent of businesses and complexities of operation. The statement of CMD, as above, also reflects the similar sentiments. The situation that it itself is in today is somewhat similar to what GE was in recession period of early 1980s, with the only difference that CEO of GE Jack Welch had enough time to experiment and implement his restructuring plan under his constant supervision and control, whereas, current CMD of L&T does not have that luxury. The restructuring plan, which will be crystallized by Feb 2011 will have to be implemented under guidance of Mr A M Naik. Only the time will tell how the events will unfold for L&T.


AIM 5. The aim of this project is to study the correlation between the leadership, organizational structure and corporate strategy required to achieve the focused growth in a large, diversified company. Scope 6. The scope is limited to study the reason leading to proposed restructuring drive at Larsen & Toubro Ltd. Methodology 7. The study is primarily based on information available in course book and internet on topics such as “Organisational Structure”, “Mergers and Acquisitions” and “Divestment strategies”. The input from interviews and speeches by Chairman and Managing Director and Board of Directors are analyzed in the backdrop of organizational details of the company. The financial and organizational details including “Corporate Governance” of L&T have been taken from 65th annual report of 2009-104. The structural changes brought in GE by Jack Welch 5 are taken as guideline to outline the possible changes in organizational structure of L&T in years to come. 8.

For the ease of understanding the study is divided into following topics:(a)

Evolution of L&T.

(b)

Vision.

(c)

The Corporate Governance

(d)

Analysis of Current Corporate Structure.

(e)

Leadership Crisis.

(f)

The Restructuring Plan.

(g)

Conclusion.



Evolution of L&T 9. Strong Foundation. Larsen & Toubro was founded by Danish engineers Henning Holck-Larsen(4.7.1907 - 27.7.2003) and Soren Kristian Toubro(27.02.1906 - 4.3.1982) in 1938. In the early years, they represented Danish manufacturers of dairy equipment for a modest retainer. But with the start of the Second World War in 1939, imports were restricted, compelling them to start a small work-shop to undertake jobs and provide service facilities. Germany's invasion of Denmark in 1940 stopped supplies of Danish products. This crisis forced the partners to stand on their own feet and innovate. They started manufacturing dairy equipment indigenously. These products proved to be a success, and L&T came to be recognised as a reliable fabricator with high standards. The war-time need to repair and refit ships offered L&T an opportunity, and led to the formation of a new company, Hilda Ltd., to handle these operations. L&T also started two repair and fabrication shops - the Company had begun to expand. Again, the sudden internment of German engineers (because of the War) who were to put up a soda ash plant for the Tatas, gave L&T a chance to enter the field of installation - an area where their capability became well respected.2 10. Thus the company established itself as importers and contractors for manufacturers of tractors, agricultural machinery, dairy machinery and general industrial and engineering plants. Subsequently, from 1969 onwards, the company grew by mergers and acquisitions of related businesses3 and joint ventures with foreign collaborators. The details of milestones achieved by the company since inception are given at Exhibit 1. 11. Over the period the company evolved as highly diversified, multi divisional conglomerate having businesses in various industry segments. 12. The Present Stature. As on March 31, 2010, Larsen & Toubro Group comprises of 110 subsidiaries, 21 associate companies and 12 joint venture entities within its fold spread across the globe ( Exhibit 2). These Group companies broadly operate in and focus on the following sectors4:(a)

Information Technology Services.

(b)

Financial Services.

(c)

Engineering & Construction services.

(d)

Power Equipment manufacturing.

(e)

Power Development projects.

(f)

Infrastructure and Property Development projects.

(g)

Electrical & Electronics.

(h)

Machinery and Industrial products.

(i)

International Investments Restructuring Issues: Larsen & Toubro Ltd


13. With Rs 43854 Cr consolidated sales and Rs 3796 Cr PAT for the financial year 2009-10, the conglomerate, under the leadership of CMD Mr A M Naik is surging ahead. Vision 14.

The vision as laid down in annual report,

truly reflects the sentiment at L&T, which can be translated into following objectives:(a) Professionalism (b) Customer Satisfaction (c) Innovativeness (d) Entrepreneurial mindset (e) Enhancing Shareholder Value (f) Quality Product and Service The Corporate Governance. 15.

The Company has four tiers of Corporate Governance structure as given below:(a) Strategic Supervision - by the Board of Directors comprising the Executive and Non-Executive Directors. (b) Executive Management - by the Corporate Management comprising the Executive Directors and two senior Managerial Personnel. (c) Strategy & Operational Management - by the Operating Company Boards in each Operating Division. (d)

Operational Management - by the Strategic Business Unit (SBU) Heads.

16. The company has a firm belief that the four-tier governance structure, besides ensuring greater management accountability and credibility, facilitates increased autonomy of businesses, performance discipline and development of business leaders, leading to increased public confidence. Roles Of Various Constituents Of Corporate Governance In The Company 17.

Board of Directors (the Board): (a) To oversee the management functions with a view to ensure its effectiveness and enhancement of shareholder value. (b)

The Board reviews and approves management’s strategic plan & business

objectives and monitors the Company’s strategic direction. 18.

Corporate Management (CM): (a) Strategic management of the Company’s businesses within Board approved direction and framework. This includes ensuring that effective systems are in place for appropriate reporting to the Board on important matters.

19.

Chairman & Managing Director (CMD): Restructuring Issues: Larsen & Toubro Ltd


(a) The CMD is the Chief Executive Officer of the Company. He is the Chairman of the Board and the Corporate Management. (b) His primary role is to provide leadership to the Board and the Corporate Management for realizing the approved strategic plan and business objectives. (c) 20.

He presides over the Board and the Shareholders meetings.

Executive Directors (ED) / Senior Management Personnel: (a) The Executive Directors, as members of the Board and the Corporate Management, contribute to the strategic management of the Company’s businesses within Board approved direction and framework. They assume overall responsibility for strategic management of business and corporate functions including its governance processes and top management effectiveness. (b) As regards Subsidiaries, Associates and Joint Venture Companies, they act as the custodians of the Company’s interests and are responsible for their governance in accordance with the approved plans.

21.

Non-Executive Directors (NED): (a) The Non-Executive Directors play a critical role in enhancing balance to the Board processes with their independent judgment on issues of strategy, performance, resources, standards of conduct, etc., besides providing the Board with valuable inputs.

Analysis of Current Corporate Structure. 22. The present corporate structure as given at Exhibit 3 represents complex Functional Structure with five divisions, namely:(a)

Engineering and Construction.

(b)

Electrical and Electronics.

(c)

Machinery & Industrial Products Segment (MIP).

(d)

IT Engineering Services.

(e)

Finance and HR coupled with Development projects & Financial Services.

23. The Engineering and Construction Divisions accounts for nearly 85% of consolidated sales and 92% of total order inflow, thus form the core group of L&T. Therefore, each sub division of this division is headed by an Executive Director assisted by senior managerial staff. The org chart of ECC is given at Exhibit 4. Within the division, each sub units has vertical form of functional organization. The detailed organisation of LTV, one of the SBU of ECC, is at Exhibit 5. The other four divisions are headed by Executive Director each. At the helm of affairs, the CMD controls this wide spectrum of organizational maze.


Indian Institute of Management, Kozhikode Source: Annual Report 2009-2010

24. The structure gives enough strength and stability to pursue the multidimensional growth of the company, which requires:(a)

Centralised command to translate vision into reality.

(b)

Sharing of resources to achieve the economy of scope.

The surge in order inflow (Exhibit 1) and phenomenal growth that the L&T achieved during 2000- 2010 (Exhibit 6), under stewardship of visionary CMD Mr A M Naik, bears the testimony to the benefits of centralised command structure. The structure suited the autocratic style and functioning of current chairman. 25.

However, the structure has following inherent disadvantages:(a) There are too many channels between formulation and implementation of strategy. Although, when Mr A. M. Naik took over as CEO in 1999 he visited all his employees at 38 locations in 100 days. But, the gap in strategic planning and implementation can only is bridged by having lesser gap in communication channel. (b) It promotes bureaucracy which causes dissatisfaction amongst employees. This is evident from high attrition rate, which the CMD admitted in one of the interviews: ….. “I think we were among the best in IT. I strongly believe internal IT is at the core of productivity, quality of delivery and customer relation-ships. Unfortunately, we lost our IT talent in a short span of time. Quite a few of them joined Satyam and other IT firms…….”10 Also the following blog from one of the employee of L&T says it all: …Rahul Nene: Feb 24, 2010

The main problem is L&T has not been able to sustain people in the middle management group..The major reason for this is the less salaries, when compared with competitors. As an employee of L&T, i can safely say this is the main reason. This, along with the slow and multilayered decision making process which is hampering L&T's progress has brought this situation. What L&T also needs is a change in attitude of the bosses, so that the talented young generation are groomed and see a future in L&T and feel at home at L&T. Only then can L&T progress 11

(c) In this form of organisation the CMD has to be powerful with exceptionally good leadership traits. The feeling expressed during interview by CMD epitomizes this critical requirement. “….No other company in the world is as complex as L&T... not even General Electric,” he said. “No one chairman can manage such a complex operation. I was able to do it because I have been with L&T for 46 years and have started 60% of these businesses….”1 Leadership Crisis 26. The largest conglomerate is now facing the biggest leadership crisis of today. Mr A. M. Naik, took over as Chief Executive Officer and Managing Director in Apr 1999. On December 30, 2003, he was appointed as the Chairman & Managing Director 6 . As CEO, he was to retire in Apr 2003 but got extension of five years after his appointment as CMD and board of directors further Restructuring Issues: Larsen & Toubro Ltd


approved another extension of three years in 200914. The board was aware of the vacuum in succession plan, but the extended tenures granted to Mr Naik further reinforced his indispensibility in organisation.. 27. The situation is further compounded by the fact that there was no concerted effort from CMD, to identify, nurture and groom the second echelon leader to take over the reins in 2012. As Mr Naik believes that he could handle this mammoth business because of his 46 years long association with L&T, it was all the more reason to plan succession in advance .The mentoring of successor should have commenced in early 2007. 28. Therefore, the leadership crisis has acted as the catalyst to restructuring exercise in L&T so that the new CEO takes over a streamlined organisation to command. The Restructuring Plan. 29. The restructuring process was concieved by the current CMD in early 2000. His vision is reflected by the following excerpts from an interview; First of all, I started restructuring in 1999, almost as soon as I took over as CEO. It was noticed more widely in 2003 when we demerged the cement business and prepared to sell it to Grasim. The new vision we came up with in November 1999 was the result of 7,500 people participating in an interactive process across the country. The central message was that L&T would become a multinational and create shareholder value. We always took pride in very high quality and difficult projects, but missed the fact that L&T shareholders deserve more. Changing that orientation was critical and it became a part of transformation itself. We put together our first five-year strategic plan for 2001-05 in 2000: a project for creating a blue-chip company. We got rid of a lot of small businesses — glass, ready-mix concrete and, finally, cement. In 2004, we began the next one, for 2006-10, which will end in March next year. Now we are working on the 2011-15 blueprint, which should be ready by JanuaryFebruary 2010. That is where we have included our strategy in defence, nuclear energy, big-ticket infrastructure projects; areas where we will be taking on global competition. We have to go for very large projects ($1-2 billion), driven by our engineering excellence. We have to be more international, be globally competitive. Restructuring has been a way of life; our transformation is a journey we started in 1999.10 The outline of the plan was given by CMD on 05 Jan 2011(Exhibit 7). On 24 Jan 2011, Mr J P Nayak, President (Operations) and Executive Director, disclosed the new proposed structure, which the industry anlysts have termed as cross between the structures adopted by Tata Group and Aditya Biral Group8. The restructuring plan closely resembles the organisational structre of GE of 19925. The same sentiment is echoed by Mr J P Nayak in an interview with Business Standard:“….In effect, this is decentralization of power wherein each of the independent companies will be run as autonomous units. These companies will be inducting external expertise on their board and making the decision-making closer to the business, instead of the parent company deliberating on its board meetings.” ….



“…..General Electric Co. (GE) successfully diversified its businesses by restructuring in a similar fashion,”9 30.

Salient Feature of Reorganisation (a) Business is divided into nine independent companies(ICs). L&T's power, hydrocarbon, machinery & product, switchgear, heavy engineering, infrastructure, building & factories, metals & minerals and electrical businesses will make up the nine independent companies (ICs)7. (b) The new look L&T would like itself to be called a “hybrid holding company” for it would have both subsidiaries and independent companies.12 (c) “Each will have a separate board consisting of a chairman, a chief executive officer designated as business head, three executive members and three non-executive directors. In addition a member of the L&T board of directors will also be on the board of each company.”13 (d)

These independent companies will not be separate legal entities.

(e) Brand value and most of the services offered by the corporate centre will have to be paid for over a period of time. (f) The company's other subsidiaries-L&T Infotech, L&T Infrastructure Development Projects Ltd (L&T IDPL) and L&T Hyderabad Metro Rail Pvt Ltd-will tap the capital market as and when they require funds.7 31.

Benefits of Restructuring. (a) The performance of independent companies will improve due to focused and stronger leadership. (b) The improved transparency and competitiveness in business will improve the working environment. (c) The restructuring will help the businesses make faster decisions and make the process autonomous, Mr Nayak said. "The units will grow as fast as they are capable of with entrepreneurial skills."7

Conclusion. 32. Restructuring in an organisation is an ongoing process carried out primarily to align the business strategy with the corporate strategy. These restructuring exercises are usually carried out after merger, acquisition or divestment. Such restructuring activities were seen throughout the history of Larsen & Toubro. Now in the third phase of restructuring, the corporate structure of L&T will undergo major changes, in order to streamline the command and control and simultaneously to provide greater autonomy to business heads in dealing with operational issues in their SBU. The expected structure that will emerge after successful implementation of restructuring plan will be similar to Competitive form of Multidivisional Structure, which is best suited for highly diversified company like L&T. 33. The ongoing turmoil at L&T brings out two major issues regarding corporate strategy. First, a good succession plan is an important function of command which should be placed well in time to avoid confusion in all ranks and file of the organisation. Second, the corporate restructuring is unavoidable in the process of evolution of an organisation. As organisation Restructuring Issues: Larsen & Toubro Ltd


grows it gathers mass, but,the growth is stalled if the the oraganisation structure is not adapted to the change. Time factor is the major impediment in successful implementation of the present restructuring plan at L&T. The successful implementation of these plans at L&T call for strong and stable leadership which can ruthlessly but swiftly carry out the required changes. Current CMD, Mr A M Naik has insurmountable task at his hand before he retires in Apr 2012.



References:-

1.

http://economictimes.indiatimes.com/news/news-by-company/corporate-announcement/lt-to-be-split-intonine-independent-entities/articleshow/7219616.

2.

www.larsentoubro.com/lntcorporate/common/UI_Templates/html/common_AABL_BHIS.htm

3.

http://www.sify.com/finance/stockpricequote/Larsen_Toubro_Ltd-LTB/history.html

4.

65th Annual Report 2009-2010 pg 88.

5.

Course Handout Pg 455.

6.

http://en.wikipedia.org/wiki/A._M._Naik and associated sites

7.

http://www.moneylife.in/article/8/13420.html

8.

http://www.business-standard.com/india/news/lt-restructuresideaspeers/422914/

9.

http://www.livemint.com/2011/01/24231307/LampT-to-turn-itself-into-9.html

10.

http://www.businessworld.in/bw/2009_08_03_Restructuring_Has_Been_A_Way_Of_Life.html

11.

http://business.in.com/commentarchive.php?id=10422&flag=c#ixzz1CIhXiJH7

12. http://www.dnaindia.com/money/report_larsen-and-toubro-rejiggers-with-a-four-fold-40-billon-growthgoal_1498759 13.

http://www.mydigitalfc.com/companies/lt-restructures-9-independent-firms-051

14.

http://business.in.com/article/boardroom/lt-faces-leadereship-vacuum/10422/5



Exhibit 2 (Refers Para 12)

ORGANISATION STRUCTURE: LARSEN & TOUBRO LTD




Spread of L&T



Exhibit 4 (Refers para 23) Organisation Chart : ECC



Exhibit 5 (Refers para 23 )

Organisation Chart : LTV









INTERVIEW BY L&T CHAIRMAN TO ECONOMICS TIMES

L&T may be split into nine firms, says chairman Naik

news

05 January 2011 Larsen & Toubro, India's biggest engineering conglomerate, may be split into nine companies, some of which may be listed by 2015, the company's chairman A M Naik told a newspaper. Twenty-one months before he retires, Naik has kicked off a restructuring plan that will divide the Rs37,000-crore company into nine virtual companies.

Each of these 'independent companies' will have a full-fledged chief executive officer, chief financial officer, and human resources head, and will manage its own profit and loss account, Naik said. Each will even have its own board of directors with at least three independent directors. Some of these independent companies could be spun out of L&T and listed on the bourses before 2015, he said. ''By March 2012, each of these independent companies should by 75 per cent ready to get listed, should we want to list them,'' Naik said. ''We will decide which ones get listed as we go along. I can't tell you now how many will be spun off by 2015.'' The nine boards that will soon be set up at the independent companies will not have any legal or statutory standing, but will merely advise the chief executive officer and management of these entities. Ten of the 27 independent directors needed at these nine companies have already been identified. Naik declined to disclose any names. ''The independent companies will act as if they are listed entities, short of facing the shareholders,'' he said. The L&T board has approved this restructuring, and implementation of the plan is on in full swing. Power, hydrocarbon, machinery and products, switchgear, heavy engineering, infrastructure, building and factories, metals and minerals and electrical businesses make up the nine independent companies. Each is worth a billion dollars in revenues or has the potential to get there soon. Naik said the restructuring is part of an exercise to ''make the job easier for his successor'' by streamlining L&T's sprawling and complex web of 64 businesses ranging from power to roads to aerospace to switchgear. ''No other company in the world is as complex as L&T... not even General Electric,'' he said. ''No one chairman can manage such a complex operation. I was able to do it because I have been with L&T for 46 years and have started 60 per cent of these businesses.'' Naik said this new structure for L&T is unique. It is different from models followed by other conglomerates like the Tata Group, for instance. ''Chairman Ratan Tata guides the group, brings in vision and philosophy, while the chief executives of the group companies run their operations. It's an easy task. L&T is a jungle where one man (chairman) manages all 64 businesses,'' he said. Restructuring Issues: Larsen & Toubro Ltd





CS Project- Corporate Restructuring L&T Print

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