Feb 17
A Cliffhanger Deal
A Cliffhanger Deal
TO ACHIEVE a mega-corporate divestment in three years – five months of which were bang in the midst of the COVID-19 pandemic lockdown when much of Indian businesses remained idle and inactive – is no mean achievement. So, it was with Schneider Electric’s acquisition of Larsen & Toubro’s Electrical & Automation (E&A), which was a rare instance of corporate divestment having the raciness of an action thriller.
 
Quite aptly named ‘Project Edison’, the deal’s geographical extent was spread over – now, hold your breath – eight countries, five factories, a plethora of conditions to be met and a slew of issues that had to be resolved within a tight timeline and an all-cash lumpsum payment of Rs 14,000 crore. All this was worked through and completed during the pandemic.
 
Reviewing its portfolio to identify thrust and growth areas to unlock value, L&T decided to divest E&A, a market leader in India for three decades. Following a rigid due diligence process of seven bidders, Schneider emerged victorious in November 2017 when L&T Group Chairman Mr A M Naik took rightful pride to declare that “the challenge was to carve out a business of this scale, with minimum disruption to the sprawling customer base”.
 
ON OFFER
 
Schneider had eyed L&T’s E&A business for years and the latter’s strengths dovetailed with that of the former. What was on offer for Schneider was an enviable R&D set-up, several patents, a vast market, a wide network of distributors and group channel partners, many factories, backed by the licence to use the most powerful “brand” for five years so as to develop India as its fourth global hub with a €1.6 billion in revenue.
 
When the transaction process began, L&T discovered that Schneider wasn’t alone. It had brought into the deal a private equity player called Temasek. Thus, Schneider’s Indian operations are owned by both – Schneider (65 percent) and Temasek (35 percent). By end-December 2017, the price was closed and the paperwork began. On 1 May 2018, L&T inked a Business Transfer Agreement (BTA) and Master Share Purchase Agreement (MSPA). With this, word was out that Schneider was set to acquire E&A.
 
As in all such stories, the proposed merger went through the mandatory, but complex, process set by the Competition Commission of India (CCI). It was after all a merger of two giants. It was complex because CCI delved deep into every aspect, including costing, auditing and financials among other things, besides appointing its own monitoring agency. The CCI clearance took slightly over a year, considering the complexities involved. 
 
PICKING UP PACE
 
Right at the inception, L&T’s Mergers & Acquisitions (M&A) wing formed several workstreams. Mr Luc Remont (Chairman, SEIPL, and Schneider’s EVP - International Operations), was appointed to interact with L&T’s Mr P R Kothari (Advisor to Group Chairman, CEO & MD), along with Mr Ramesh Seenippandian, Head Corporate M&A, with a joint steering committee, to close the deal by 31 March, 2020. But this was not to be, thanks to the pandemic.
 
Post the CCI approval, Schneider initiated cutover planning – a process to ensure there was no gap between the change of ownership. Cutover, in corporate parlance, is a “rapid transition from one phase of a business enterprise or project to another”. Schneider believed that cutover planning could be undertaken by a few joint working committees in two to three months. This was a highly challenging target to achieve because entrenched within L&T for almost 60 years, E&A had multiple legacy issues.
 
Following intense but fruitful negotiations, a 15-day ‘blackout’ period was agreed upon. But the system preparedness was so thorough that before the blackout ended, the SAP systems started at Schneider. It was smooth sailing all the way. L&T’s Corporate IT created a complete clone of the entire SAP role and helped carve out the E&A website from the L&T site. Transition Services were agreed between Schneider and L&T for L&T’s Shared Services Centre’s robust payroll and vendor management services.
 
CHALLENGING ISSUES
 
E&A’s contracts were to be transferred and given to Schneider. This involved over 8,500 contracts worth more than Rs 12,500 crore, involving close to 800 customers, 8,000 vendors and 2,000 Channel Partner Agreements. A mechanism was worked out between both the companies to transfer these contracts in a smooth and timebound manner. 
 
E&A’s employees in India received individual offer letters from Schneider. Several challenges involving parity in offers were tackled when they arose at the time of negotiations but all employees and staff at E&A accepted the offer. The transition of blue-collar workmen by Powai Works Personnel (PWP) department evolved in a consultative manner.
 
“All through this extended transaction, the interests of the employees of E&A remained foremost on our agenda. We took all possible steps to ensure that our people feel secure about the future and upbeat about their professional prospects,” says L&T CEO & MD Mr S N Subrahmanyan.
 
It wasn’t smooth sailing all the way and several rough edges had to be smoothened before the deal could go through. Getting regulatory approvals in time and dealing with multiple stakeholders simultaneously were some of the most challenging aspects of this transaction. Besides, there was a clutch of other issues that needed to be ironed out and these pertained to L&T’s business overlap of what was to be divested, dealing with both a company (Schneider) and Temasek (private equity player), the buyer’s large international team, prolonged residual elements for the deal to be fully sealed, taking care of the E&A employees’ interests, “negotiation of documents”, which was colossal, closing the deal during the pandemic and rationalising the differences in local laws and norms.
 
Further, there were challenges in obtaining original title papers of the decades-old sale deals for E&A’s countrywide premises, and despite this, the carve-out was completed on time.
 
Schneider had planned to work with two brands and two markets. Schneider was granted a five-year brand license after intense discussions on its usage of L&T’s coveted logo. Many L&T businesses had contracts with E&A. A neutral, internal arbitration committee novated inter-unit transfers. Eventually, both L&T and Schneider emerged with a win-win formula.
 
It was Schneider’s stated position that it accorded prime importance to Environment, Health and Safety (EHS) standards, which L&T arranged to resolve within a mutually-agreed-upon timeframe. E&A’s several overseas entities posed unique challenges, and so innovative solutions were developed. Saudi Arabia’s sudden introduction of a competition law in 2019-20 posed a challenge to the time schedule, but it was obtained just in time when the competition authority in that country intimated that it had approved the divestment.
 
As for clearing the deal was concerned, about 40 domestic and 30 overseas agreements had to be drawn up. L&T’s M&A team, with the active involvement and guidance of Corporate Legal, cleared all the documents – about 4,000 pages in all. In between, Shardul Amarchand, the law firm that L&T had earlier engaged, provided vital knowledge and document preparation.
 
These crucial items were handled in the high pressure of the last four months (of the deal period) when the pandemic lockdown was on. In many cases, nerve wrecking negotiations had to be carried out under time and volume pressure.
 
Throughout this process, Mr Subrahmanyan took strategic steps to remove difficult roadblocks, besides leaving his doors open for problem-solving and effecting timely resolutions. So, on 31 August 2020, the deal button was pressed and the wire transfer took place. E&A was now part of Schneider. E&A’s Malaysia, Indonesia, Australia and India properties were transferred. Multiple real estates exchanged hands in a day.

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