Philips-Indal

New Venture Integration (NVI)

Up until 2007, many acquisitions had been left standalone (or “preserved”) rather than fully
integrated (or “absorbed”) into the Philips organization. Following the initial acquisition spree,
Philips realized it needed to start capturing cost synergies. To do so required acquisition-integration
capabilities. Therefore, an NVI department was set up in 2007. Philips had engaged in acquisitions
long before 2007. Yet previously, attention was devoted largely to deal making (i.e., finance and
negotiation) instead of deal integration.

Philips decided to hire Shafer as an acquisition-integration specialist. Shafer had inherited the
“speed is everything” mindset (i.e., the faster integration goes, the more cost synergies can be
achieved). This expertise would help Philips jumpstart its ability to integrate acquired firms and
realize cost synergies.

Though Shafer and his team had extensive experience fully integrating standalone companies into
Philips’ organizational structure, the team had also learned that realizing sales synergies was more
difficult than realizing cost synergies. However, Philips’ corporate strategy put a premium on
realizing sales synergies.

Philips adopted a “symbiotic method” of acquisition integration. The conventional approach to

integrating a target with overlapping products, capacities or processes called for full (functional)
integration. Such full integration was organized top-down mainly to save costs. Sales synergies,
however, were generated by using customer centricity to design the organization bottom-up. Both
the target and acquirer would have to jointly deliver the integration growth plan and sign off on
targets set. Such an approach fostered a “symbiotic” method of acquisition integration. Like other
serial acquirers, Philips absorbed most of its targets, which meant that it fully integrated the
acquired firms into its existing operations. “Absorption” was attractive when there was a high need
for strategic interdependence and a low need for autonomy. However, seeking to be both locally
responsive and globally efficient implied that the needs of both “autonomy” and “strategic
interdependence” were high. “Symbiosis” was therefore the most obvious acquisition-integration
approach.

Post-Merger Integration-

In Philips, post-merger integration was governed by two steering committees: the Country
Committee, which reported to the Central Committee (see Exhibit 5). The PMI leaders at both the
acquiring and acquired companies sat on both levels of committees. On the central level, the PMI
leader supervised the Commercial program manager and the Operations program manager.
Different functions such as human resource management, information technology and research and
development reported to the PMI leader through their respective program managers. The same
applied to the country level, where the PMI leader oversaw the entire integration in each region and
each function through Commercial and Operations program managers (see Exhibit 5).

Shafer was appointed as PMI leader responsible for the integration of Philips-Indal, part of the
Outdoor Lighting Business Group. This group oversaw Philips-Indal’s most profitable business
segment, which would be substantially expanded after the acquisition. The estimations for the
combined firm’s compound annual growth rate (CAGR) from 2011 to 2016 contained double-digit
figures. Despite strong growth potential in outdoor lighting, especially in LED lighting, the CAGR
figures posed a challenge.
Indal was a peculiar case in Philips’ acquisition program, as the company had similar types of
customers, markets, products and supply chains, as well as a similar sales force and back office. The
acquisition also coincided with Philips’ re-organization of the Lighting sector, which made the
integration more complex.

Lighting Sector: Macro View:

Lighting was an industry over 100 years old and dominated by a few large players. This traditional
market had been dominated by three incumbents — GE, Osram and Philips — that jointly had over
50 per cent of the overall market. entire lighting market was expected to grow to €110 billion by
2020, expansion was largely driven by growth in population, urbanization and increases in demand
for lighting products. Global concerns about climate change and energy efficiency pushed companies
to develop energy-efficient lighting products.

Vividly aware of the disruptive impact LED would have on the conventional lighting market, Philips
had invested in LED since the 1990s, when the LED market really took off. The benefit of LED was
obvious: LED lighting used 50 per cent less energy than conventional lighting.

By 2010, the global LED lighting market was worth an estimated €7 billion, or 10 per cent of the
entire lighting market. Annual growth rates were 35 per cent from 2010 onwards, leading to a LED
market share of approximately 40 per cent by 2016, with revenues of some €40 billion. After that,
the growth was predicted to slow down to less than 15 per cent per annum, resulting in an LED
market share of around 60 per cent in 2020 and revenues of around €65 billion. Besides Philips, six
other dominant players were active in this industry: General Electric, LG, Nichia, Osram, Samsung
and Seoul Semiconductor. However, Philips clearly dominated the market, with an over 50 per cent
market share.

The disruption that LED caused had two primary drivers:

First, the value chain of the lighting industry had changed. Traditionally, the value chain of the
lighting market had included materials and chips, packages and lamps, fixtures and controls, control
systems, and services. The early stages had been largely commoditized. Yet, the value chain had
been changing rapidly. New players from the semiconductor and consumer-electronics segments
were entering the LED market with products such as portable devices, displays and signage, traffic
signals, automobiles and medical devices.

Second, the industry had been disrupted due to the shift from replacement to new-fixture
installation. By 2012, the demand for replacement of traditional technology presented the biggest
opportunity in the lighting market. European Union regulation had pushed the introduction of
energy-saving lamps in municipalities. However, the market for lamp replacement would dwindle as
fewer replacements would be needed, given LEDs’ longer lifespan.

These developments had led to greater price erosion for LED lamps than anticipated. By 2015, it was
predicted that prices would be one-fifth of the 2010 prices and by 2020, one-tenth. Technology
development and competition, especially from Asia, were the main factors driving down prices.
Higher raw material costs on top of falling product prices had created pressures on the margins of
LED makers. In order to ensure a sufficient margin, rather than merely sell LED products, Philips had
moved into selling lighting solutions.

About Indal-
In June 2011, Philips announced the acquisition through a share purchase of Indal, a Spanish
luminaires company focused on outdoor lighting solutions. Indal was one of Europe’s leading players
and had traditionally been a fierce and proud competitor in the LED market. Whereas Philips
produced light sources and components (e.g., fixtures) for the indoor and outdoor market, Indal was
a producer of fixtures for the outdoor market. While Indal focused on the professional or industrial
market, Philips was also active in the consumer or residential market. With the acquisition, Philips
wanted to improve growth potential in professional lighting and create a platform to further
strengthen its market position in Europe. The joint market share of Philips and Indal would vary from
country to country but would be highest in France and amount to over 40 per cent.

Indal was especially known for its expertise in LED-based outdoor lighting, including urban, highway
and tunnel lighting. It was particularly active in this business through its subsidiary Indal WRTL,
which was the sole supplier in very large projects of LED street lighting in various cities in the United
Kingdom, including its capital, London. Indal’s flagship product, Stela, was an outdoor LED solution
that could produce up to a 78 per cent reduction in carbon dioxide emissions and provide high-
energy savings without dimming or switching off during the night. The product’s innovative design
could also keep light pollution to a minimum. Having a modern aesthetic appearance, Stela was
popular with city planners who commonly used it for roads, walkways and parks.

Philips and Indal were both active in the Outdoor Lighting segment. Philips knew that Indal products
featured more attractive margins, that its supply chain was efficient and that Stela counted for a
large chunk of Indal’s revenues. But beyond that, Philips did not know Indal’s exact customers,
product mix or margins. Moreover, products that featured similar functions had different
appearances and had different names across the two companies.