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Why fast expansion is not always a good strategy for families

Fortis Healthcare, the India-based family-controlled healthcare group, acquired 10 hospitals from the Wockhardt hospitals chain for $193 million last week. Wockhardt, another family business, sold at a price that was much lower than it had planned for a year ago at the time of a failed IPO. 

The move will make Fortis the second largest hospital group in India and came at a good time for both family businesses. For the Singh brothers, Fortis founders, the Wockhardt acquisition will help them achieve their aggressive growth plans and take advantage of India's fast-growing healthcare opportunities. 

For the family behind Wockhardt it will help to ease a growing debt burden. Wockhardt has been struggling to recover from a series of aggressive growth initiatives both through its parent pharmaceutical company as well as the healthcare arm that suffered when the global meltdown began. It needed close to $1 billion, some in cash, as part of a major debt restructuring. 

However, while this may seem like just another corporate takeover, there are several interesting and important lessons.

Wockhardt was founded by Habil Khorakiwala as a pharmaceutical manufacturer that entered the healthcare sector when that market started booming in India. Unfortunately, he expanded a little too rapidly, including outside India, and ran into problems when the global economy began to slow down. He had to sell some of his overseas ventures and initiate a major debt restructuring to stay afloat.

Earlier this year, he announced a succession plan, apparently under pressure from the lenders who wanted a change in leadership. Subsequently his two sons joined the board in April 2009 – Murtaza as managing director and Huzaifa as executive director.  Khorakiwala was lucky that he got a suitor at the right time; more than half the money he receives will be used to pay off outstanding debt.

Fortis started growing from the funds the Singh brothers (Malvinder and Shivinder) received from selling their father's company, Ranbaxy Pharmaceuticals, to Japanese Daiichi – Sankya in June 2008. Eyebrows were raised when India's best-known pharmaceutical company was sold to an overseas company without a clear strategy of how the family was going to invest the proceeds. The brothers responded with an aggressive acquisition plan that has seen Fortis grow rapidly in the past year.

Although the market has viewed the acquisition as a win-win for both parties, the two businesses highlight the need for family companies to remain cautious, steady and stable no matter how the economy is faring. This is not always easy, particularly when the entrepreneurial first generation or young and ambitious second generation wants to exploit every growth opportunity in their hurry to become big.

The Singh and Khorakiwala families are lucky. The Singhs spotted that purchasing the struggling Khorakiwala family assets would aid their growth plans and the acquisition saved the Khorakiwalas from their increasing levels of debt.

But situations do not always pan out so well and can turn difficult quickly. While leveraging is fine, as the Khorakiwalas have found it is better to keep it under strict limits. Economies such as India that are registering rapid growth may induce entrepreneurial families to spread their wings too wide and too fast. This is particularly so for mid-size family groups that are witnessing tremendous growth opportunities at the present time. 

Equally, in their hurry to climb the leadership ladder, entrepreneurial family members do not always plan for multiple scenarios (including unfavourable ones) and prepare adequate contingencies.

There are several cases of family businesses that have thrown caution into the wind and paid a heavy price. Ideally, they should remember that they are in the business of growing their wealth and the rest is incidental.

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