Surinder Kapur/Forbes India
Auto component-maker Sona Koyo's chairman recollects how he cleaned up and rescued his German acquisition
DESIGNATION: Chairman, Sona Group
THE CHALLENGE: Kapur acquired BLW, a German precision forgings company in February 2008. Three months later, the company was on the verge of insolvency. To save it from going under, he needed cash. But he didn't have any money.
HOW HE DID IT: Kapur started by firing the management, taking charge himself, cleaning up the stockyards of all inventory, working closely with his customers and successfully negotiating wage cuts with his workers.
About 50 years ago, BLW, a forgings company in Munich, made a major breakthrough in technology, which would not cut the gears but forge them directly. Before I started Sona Koyo Steering Systems, I ran a company called Bharat Gears. One of the products made was differential gears. In 1984, I went to BLW and asked for a licence. I was refused.
In 1992, when I started Sona, I went to Mitsubishi Materials, which was a licensee of BLW, and I got the licence from them. That's how I started Sona Okegawa, Sona's forgings division. In 2005, I approached BLW again. By then, the company had been sold to the ThyssenKrupp group and was called ThyssenKrupp Precision Schwede. I approached them and said, 'Let's try to merge. Or maybe you can buy me or I can buy you.' But they said, 'No, we are not selling.'
However, in 2007, I got a mail from their chairman's office, asking if I was still interested in the company, because they were selling it. We met in July 2007 in Stuttgart and I signed a non-disclosure agreement. I came back to India, met the chairman of ICICI Bank to ask for acquisition funding. They agreed in principle.
Now remember, this was in 2007, during the economic boom. Everybody was acquiring everything. At that time we were a Rs 200-crore company (Sona Okegawa), and ThyssenKrupp Precision Schwede was worth Rs 2,000 crore. So, this was a huge acquisition for me. I knew it was a huge risk.
I decided to go ahead. On February 1, 2008, we became the owners of the company. I paid 75 million euros for it. In my mind it was really about buying a company that had come up with the first breakthrough in precision gears. Munich gives the technology to Japan, Japan gives it to India and then I go out and buy the original company. Of course, by then this company was no longer just in Munich. It had two other plants in Germany and one in the USA. So, from my perspective, this one jump gave me the opportunity of getting the who's who of the world as customers and becoming a global player.
But I soon realised that the management had not been transparent with me. Even when we were buying it in 2007, the company was beginning to have problems. Because the market was looking up, the management was buying material indiscriminately. They had undercapacity, which meant demand was so high they were outsourcing a lot of their work and losing money. They didn't disclose that to us. By June 2008, we ended up in a real cash bind. So, I had bought the company in February and on June 18, 2008, the managing director wrote to me saying, 'Please bring 20 million euros more otherwise we will have to take the company into insolvency.' I was aghast!
The Clean-up Plan
The first thing I did was to hold an emergency supervisory board meeting, fire the commercial managing director and get on the management board myself. I changed the management board totally. Some people left, but some were asked to leave, which was a costly affair. Then I saw that our inventory was at 58 million euros, compared to what it should have been [28 million euros]. That's where our money was. So, I contacted my customers and told them I was in a cash bind, and requested them to start paying on delivery rather than wait for 45 days. I was very upfront in saying that, otherwise I would have to declare insolvency.
Second, I got R Bala, one of my finance guys here in Gurgaon, and put him in charge. We reduced the inventory to 30 million euros in about three months. We decided that no purchases of these items would take place and just cleaned up the shop.
A drop in sales
Then, I had another problem. I didn't have any money to invest because of the financial crisis that started in October 2008, and our sales dropped from 29 million euros a month in February 2008 to 12 million euros in December.
I spoke to a lot of consultants and everybody said, 'Why don't you hire a re-structuring officer?' I looked around and asked, 'Where do I find one?' You know, it is horrible being in a foreign country without knowing the real industry and without having a partner to operate. But finally I hired a guy, who came in and said we need to fire about 500 people. I said, 'How will you fire them?' They will all claim [severance pay]. He said, 'Yeah, yeah... So, bring in some money.' And he asked me to bring in 15-20 million euros. And I said, 'Listen, if I had to do that, I would have paid those guys.' So, within a few months I fired this guy.
What I found terrible in my situation was that I had inherited a company from a large corporation, so it was very bureaucratic while ours was a mid-sized business. The company had become a mid-sized company, but its people were functioning as if they were still in a large company. For instance, my plant manager told me, 'I am meeting my cost objectives. Profitability is not my headache.' There was nobody in charge of profitability, nobody in charge of cash flows. Because it had been part of a big company, if they were ever short of cash, they would get it. The management was not flexible. It just sat around waiting for somebody to tell them what to do.
Frankly, what was required in the company was a 30 percent cut in salaries across the board. The management I inherited was focussed on, 'How do we get rid of people?' You can't get rid of people in Germany without paying them. More than 50 percent of the people had been in the company for 30-odd years. That was a lot of money. I couldn't come back to ICICI and ask them for another 20 million euros! They would have asked for personal guarantee, more collateral, which I didn't have.
Understanding the workers
Then I sat down with the unions myself. I had detailed discussions with them.
I began to understand that in Germany the people who are most affected by a plant's closure are the workers, not the managers. The managers get up and leave and find another job. Workers don't want to leave a company. So, eventually I did an agreement with the union where they gave up 10 percent of their wages for a year. I said to them, 'Look, we have had a similar situation in India (slowdown). If we lower wages, then we don't have to fire anybody. Because tomorrow I will require these skills and I will have to retrain people, which will be another additional cost.'
I have three plants, each of which has a works council. Each of the leaders of the works council worked with me and the union to form a new tariff agreement where everybody gave up certain rights. They gave up their Christmas bonus, they agreed to work for two hours extra every week and not take any salary increments for a year. All of this gave me the feeling that I was now able to collect the employees of the company towards a common goal, which is to create a profitable company.
I have given time to this company, going to Germany every month, staying in a 300 sq feet apartment. All of this was unplanned. At times I have spent three weeks a month there. I did not buy the management's argument that workers are tough. By going there every month, I have sent a signal that I am committed to this company.
Three years ago, we had a -9 million euros EBITDA; this year we have come to a +25 million euros.
(As told to Ashish K Mishra)
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