Creating value that counts — The GSK story

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A commonly cited reason behind big ticket mergers and acquisitions (M&As) is the need to create or increase value. This is communicated to both internal and external stakeholders in different forms, shapes, word play, and in complex or simple language. According to analysis done by The New York Times, a record $2.5 trillion worth of mergers were announced in the first half of 2018:

An important question to ask is whether these mergers (proposed, announced, in-progress or completed) are going to create any “value” or “value growth”. But before we attempt to answer the question, we need to get our heads around the definition of “value”. The default option (mentioned in the 1st sentence of this article) is shareholder value. Any organisation getting into a M&A process attempts to do one of these two — protect shareholder value or grow it significantly.

Shareholder value is a compound and a complex aspect. It can be anything from market capitalisation, dividend payout levels, stock prices and the ability of organisational assets to earn income at higher levels than the risk associated. From a commercial or financial perspective, these definitions make sense. But the challenge lies in aligning a long-term objective with a short-term driver.

Enter brands, which are most overlooked in the pre-M&A due diligence process and the post M&A integration phase. The reason they are overlooked as guides of value creation in M&As, is because it is difficult to measure “portfolio” level brand values. If you look at all the brand valuation techniques used in the industry, and their outcomes (which are the annual rankings), the focus is on individual brands. Out of a Top 50 list, a single organisation can have multiple brands from the same category in it, but they are still valued individually.

Organisations that approach value creation from a “brand” perspective, conduct strategic assessment at a portfolio level, rather than at an individual brand level. The GSK-Novartis buyback and associated sell-off speculations in key markets is driven by GSK’s value-creation thinking. On the surface it looks like it is putting its MFD (Milk Foods Drinks) business in India on the block to fund the Novartis buy-back deal, but there are deeper underlying reasons.

GSK equates long-term value creation with the health and growth prospects of its Power Brands, which validates its brand driven thinking. Although shareholder placation always requires a financial angle to be incorporated into M&A initiatives, but the following statement illustrates GSK’s strategic thinking clearly:

“Consumer Healthcare business well positioned to deliver sales and earnings growth, driven by category-leading Power Brands, science-based innovation and improved efficiencies. Operating margins to approach ‘mid-20’s’ percentages by 2022 (at 2017 CER)”

Which brands does GSK get full operational control over through the Novartis buyback? There are quite a few but the noteworthy mentions are Sensodyne, Panadol and Voltaren. In sum, GSK now has complete control over its consumer OTC business. To fund this $13 billion buyback and to ease pressure on operating margins and EBITDA, GSK is looking to put its MFD business in India on the block.

Why put two brands with more than 56% market share and who contribute 95% of revenues of GSK India on the block?

Stagnating sales may be a factor. Increasing competition can be another. Segment slowdown could be the final nail in the coffin. All these are valid reasons to put up a country subsidiary for sale, but not when your brands are the category leaders and (essentially) are the only sources of revenue from a market like India.

But an organisation like GSK’s can think beyond such attractive propositions if the sole objective is value creation. As I had introduced brands into the concept of value creation, I will also now introduce another fundamental — core competency.

Value creation get magnified when you operate in your core competency area with strong brands in the portfolio.

The buyback of Novartis’ stake and the rumoured sale of its Indian arm are one of the many initiatives GSK has taken to focus fully on its core competency area. The late pullout from becoming one of the suitors of Pfizer’s consumer healthcare business was also along the same lines. You do not focus on your core competency through a burgeoning product portfolio, and acquired assets take a long time before they are fully integrated and start showing positive results.

An important reaction from Reuters when it covered the GSK and Novartis deal sometime back was:

“Consumer remedies sold over the counter have lower margins than prescription drugs, but they are typically well-known brands with customers.”

Let’s analyse how letting go of Horlicks and Boost in India actually works for GSK from the perspective of global brand building and value creation. The Novartis buyback gives GSK full operational and marketing control over Sensodyne. Does a toothpaste brand has the potential to maintain GSK’s status as a leading FMCG player in India?

Sensodyne is GSK’s first billion dollar brand, which it introduced in the Indian market in 2011. Long before 2018, it had already committed its future in India to its consumer healthcare business, and not the MFD business (which continues to be the primary revenue driver). Some facts about Sensodyne’s growth in India, which illustrates GSK’s focus on strengthening its core competency in the market:

  • Within two years from launch, Sensodyne overtakes Colgate as the leading brand in the premium sensitive toothcare category (at that point in 2013, the sensitive toothpaste category was only 10% of India’s INR 5,400 crore toothpaste segment but was growing 50% annually)
  • In 2016, GSK officially announced that Sensodyne will be one of the brands (along with a few others) that will drive growth in India (and not Horlicks)
  • Buoyed by the success of Sensodyne in the sensitive toothcare segment, the portfolio was expanded in 2016 with the launch of Sensodyne Whitening, which is one of the largest selling variants of the brand globally
  • By mid-2017, Sensodyne had close to 30% market share of the sensitive toothpaste category and had effectively dethroned Colgate in that segment

GSK’s evolution and growth in India underscores important lessons from the value creation perspective. Achieving category leadership status creates a strange sense of equilibrium in organisations, wherein in reality an organisation with long-term value creation in mind should never be in equilibrium.

Achieving category leadership status with Horlicks has always been a success story within GSK. The legacy of the brand and its journey to where it is today are no doubt business school case studies and induction materials for young GSK managers. The inevitable (and sometimes painful) is the fact that “value” is a moving and expanding dimension for organisations. It takes multiple shapes and forms and forges its own identity during key economic cycles.

Starting with a pure commercial characteristic, value creation has now gone beyond ensuring consistent shareholder returns. It now incorporates the task of building strong brands (and it does not matter whether they are global, regional or local). Consistent shareholder returns is now an outcome, and not the focus. Creating brands that have operational efficiency, high profitability and a sustainable revenue strategy ensures year-on-year consistent dividend payouts.

Is GSK’s strategy the one and only way for long-term value creation? Definitely not. But it is one of the better examples of how organisation’s can create a profitable future by taking bold decisions, which do not have any element of shortsightedness. This includes letting go off prized assets, which may have taken decades to build and develop. It also involves placing strong faith in relatively new assets and their underlying vision. In sum, it requires the transition of faith and trust from the “old” to the “new”.

Disclosure: I am not an investor in GSK stocks. I just admire their organisational growth and value creation strategy

Strategy Consultant