Mergers and Acquisitions

Indian Institute of Management, Lucknow

Mahindra Ssangyong Deal

Submitted to Prof. Neeraj Dwivedi Group 2, Section B
Abhineet Gaurav Apurv Raj Bharani Kumar Dhaval Chudasama Neeraj Gupta Tapan Bhatia PGP27198 PGP27206 PGP27247 PGP27018 PGP27032 PGP27256

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Contents
REFERENCES 15

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Pre-Merger Analysis
A 70% share of SsangYong was acquired by India's Mahindra & Mahindra Limited in February 2011, after being named the preferred bidder in 2010 to acquire the bankruptcy-protected company which cost Mahindra 522.5 million Won. Mahindra's acquisition was approved by South Korea's Free Trade Commission.

Firms Involved, Context of the Merger and the State of the Industry
Ssangyong Motors
As a premier manufacturer of sports utility vehicles (SUV) and recreational vehicles (RV), SsangYong manufactured premium products in Korea. Founded in 1954, it had been manufacturing automobiles for more than five decades. In 1988, it developed a compact 4WD SUV, Korando Family, which was the first SUV manufactured in Korea. Since then it has established its reputation for innovation, leadership, and quality in the SUV field in Korea. Its next SUV the Musso was a great success in Korea and key export markets like Western Europe. In 1997, it launched a luxury passenger car, the Chairman. Since then it has launched a number of SUVs and a new luxurious version of the Chairman named Chairman W in 2008. Its latest SUV, a monocoque compact SUV, named Korando C was launched in export markets in October 2010. Ssangyong had a strong domestic network of over 130 dealers and exports to over 90 countries through over 1,200 dealers. Ssangyong Motor Co. was the fifth largest automaker in South Korea, in a market that is largely dominated by names like Hyundai and Kia. The companys largest production is in the light SUV segment, but it also had the Chairman, which is a luxury sedan. Ssangyong, Korea's smallest carmaker, is mainly a manufacturer of low-priced but robust SUVs such as "Rexton", "Kyron" and "Actyon" that are sold globally.

Mahindra Group
Mahindra embarked on its journey in 1945 by assembling the Willys Jeep in India and is now a US $7.1 billion Indian multinational. It employs over 1,00,000 people across the globe and enjoys a leadership position in utility vehicles, tractors and information technology, with a significant and growing presence in financial services, aerospace, after-market, real estate, hospitality, logistics. The Mahindra Group today is an embodiment of global excellence and enjoys a strong corporate brand image. Mahindra is the only Indian company among the top tractor brands in the world. It is today a fullrange player with a presence in almost every segment of the automobile industry, from twowheelers to UVs, SUVs and CVs. Mahindra has acquired a majority stake in REVA Electric Car Co Ltd. (now called Mahindra REVA), strengthening its position in the Electric Vehicles domain. Its flagship company Mahindra & Mahindra Limited earned the distinction of being the only Indian automobile manufacturer to feature in the top 10 list of the Carbon Disclosure Leadership Index in India, 2010, created by the Carbon Disclosure Project (CDP). CDP is an independent not-for-profit

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organization holding the largest database of primary corporate climate change information in the world.

Context of the Merger and the Industry

Mahindra, which was seeking to go global, had been eyeing Ssangyong to gain access to new technologies for sport utility vehicles (SUVs) and expand its overseas presence. Having Ssangyong it gives Mahindra access to markets like Russia, Europe, Middle East and China where Ssangyong vehicles are already being exported. In one move Mahindra managed access to brands and distribution networks globally. The coming together of Mahindra and Ssangyong would result in a competitive global UV player. Together with its financial capability, Mahindra offers competence in sourcing and marketing strategy while Ssangyong had strong capabilities in technology. The securing of a solid partner who has both financial capability and is engaged in diverse markets would allow Ssangyong to emerge as a global SUV player through the strengthening of R&D, investments in product development, better business competitiveness and global sales expansion. There were strong complementarities between the Ssangyong and Mahindra portfolio of products, providing an opportunity to create distinct positioning. The wide sales and distribution networks and complementary product lines would provide access to many overseas markets for both companies. There was also an opportunity to introduce a premium portfolio of SUVs in the Indian market, providing a new growth avenue for Ssangyong and further strengthen our dominant position in the UV segment.

Corporate strategy of the Firms Involved

Mahindra & Mahindra
Mahindra & Mahindra Limited is one of the largest automobile manufacturers by production in India and a subsidiary of Mahindra Group conglomerate. The company was founded in 1945 in Ludhiana. Over the past few years, M&M has expanded into new industries and geographies. They entered into the two-wheeler segment by taking over Kinetic Motors in India. M&M also has obtained controlling stake in REVA Electric Car Company. Mahindra vice-chairman and managing director Anand Mahindra said earlier this month that the tie-up the largest investment by an Indian company in South Korea would create a platform for global expansion and create an Asia-focused SUV player." Around the time of the deal Mahindra, which was seeking to go global, had been eyeing Ssangyong to gain access to new technologies for sport utility vehicles (SUVs) and expand its overseas presence. Having Ssangyong it gives Mahindra access to markets like Russia, Europe, Middle East and China where Ssangyong vehicles are already being exported. In one move Mahindra managed access to brands and distribution networks globally.

Ssangyong Motors
Ssangyong Motors (SYMC) is a South Korean company making SUVs and cars. Founded in 1954, it began its business as a manufacturer of commercial vehicles. In 1986, the SsangYong Group acquired Page 4

Keohwa Motors, a specialized UV manufacturer, with the brand Korando. In 1988, it developed a compact 4WD SUV in the Korando family, which was the first SUV manufactured in Korea. SsangYong originally started out as two separate companies; Ha Dong-hwan Motor Workshop (established in 1954) and Dongbang Motor Co (established in 1962). In mid-1963, the two companies merged into Ha Dong-hwan Motor Co. In 1964, Hadonghwan Motor Company started building jeeps for the US Army as well as trucks and buses. Beginning in 1976, Hadonghwan produced a variety of special purpose vehicles. After changing its name to Dong-A Motor in 1977, it was taken over by Ssangyong Business Group in 1986 and changed its name to SsangYong Motor. In 1991 it started a technology partnership with Daimler-Benz. The deal was for SsangYong to develop an SUV with Mercedes-Benz technology. This was supposedly to allow SsangYong to gain footholds in new markets without having to build their own infrastructure (utilizing existing Mercedes-Benz networks) while giving Mercedes a competitor in the then-booming SUV market. In 1997, Daewoo Motors bought a controlling stake from the Ssangyong Group, only to sell it off again in 2000, because the conglomerate ran into deep financial troubles. Change in ownership (twice till 2004), coupled with financial instability resulted in underinvestment/lack of investment in SYMC's product development and business. This in turn resulted in volumes declining at a compounded rate of ~29% since CY05. With M&M acquiring SYMC, SYMC may also have been expecting a reduction in debt and interest burden. Focus will return to business and product development. With stable management and improvement in financials, we expect normalcy in operations to return.

Nature of the Merger

Horizontal Merger resulting in a Complementary Portfolio
A horizontal merger occurs between companies in the same industry. Horizontal merger is a business consolidation that occurs between firms who operate in the same space, often as competitors offering the same good or service. Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry. Ssangyong Motors (SYMC) had six models under five brands, including a luxury sedan, four SUVs and one MPV. SYMCs portfolio complements M&M's, which had entry and mid-level products (up to Rs1m price range). The acquisition of SYMC adds a premium SUV (above Rs1m) and a luxury car to M&M's portfolio. It gives M&M access to a good SUV product portfolio and marketing network of over 1,400 dealers (of which 138 are in South Korea) in South Korea, Europe, Russia and other Asian countries. The combined entity will, thus, have a larger market and expanded product basket.

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As far as the nature of the merger goes, it can thus be classified as a Horizontal Merger.

Specific Intent/Reasons of the Merger

1. Synergies in operations, coupled with technical strength
M&M will leverage its India advantage of low-cost component sourcing, as well as economies of scale for global sourcing. Sharing of product platforms and powertrains will help reduce cost of product development and time to market. SYMC's ~600 R&D staff and modern R&D infrastructure will significantly enhance M&M's R&D efforts. Joint R&D program will enable optimization of investments in product development. This coupled with product lifecycle experience accumulated by SYMC over 40 years will supplement M&M's product lifecycle management. SYMC already used engines developed in-house and will enhance M&M's capabilities in engine development. It will also give M&M access to petrol powertrain, along with its diesel powertrains.

2. Will give access to high potential export markets

SYMC had a presence in Europe, Russia, South America, the Middle East, Africa and Asia. It had a marketing network of over 1,400 dealers (of which 138 are in South Korea) in South Korea, Europe, Russia and other Asian countries. Export markets offer significant potential for SYMC's products. In the six months prior to the deal, it had already signed two long-term contracts totaling to annual volumes of ~26,000 units. These contracts increase the visibility of SYMC's export volumes and will probably aid its turnaround. In CY08, Western Europe accounted for 45% of SYMC's exports, Russia & CIS countries for ~25%, Asia for ~14%, South America for ~7% and MENA for 9-10%. It does not have any exports to the US market.

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The share of exports in SYMCs sales had consistently increased to over 50%

3. Focused management, financial stability will help normalize SYMC's operations

Change in ownership (twice till 2004), coupled with financial instability resulted in underinvestment/lack of investment in SYMC's product development and business. This in turn resulted in volumes declining at a compounded rate of ~29% since CY05. With M&M acquiring SYMC, we can expect reduction in debt and interest burden. Focus will return to business and product development. With stable management and improvement in financials, we expect normalcy in operations to return. SYMC has undergone change in ownership twice since 1997. In 1997, Daewoo Motors bought a controlling stake from the Ssangyong Group, only to sell it off again in 2000, because the conglomerate ran into deep financial troubles. In late 2004, the Chinese automobile manufacturer, SAIC took 51% stake in SYMC. SAIC was blamed for stealing technology and failure to make continued investments.

4. Cost rationalization, pick-up in volumes to aid cash breakeven for SYMC

SYMC has witnessed significant financial duress, especially since CY08. It got accentuated during CY09 due to 77 days strike at its plant. As part of the settlement with workers, it reduced its Page 7

manpower by 37% (~2,500 people) to 4,400 people, coupled with wage reduction. In CY08, it incurred EBITDA loss of 3%, with volume of ~82,400 units. Following the pick-up in volumes, reduction in staff cost and other cost cutting initiatives, SYMC turned EBITDA positive in 1QCY10, with volumes of ~16,000 units and EBITDA margin of 2.5%. Subsequently, its volumes have picked up further, with a monthly run-rate of 7,000 units since April 2010. Post the expected launch of 'C-200', volumes are likely to pick up further. With fund infusion by M&M to retire long-term debt, we can estimate significant reduction in its interest burden, thereby enabling cash breakeven. Further, costcutting initiatives coupled with operational synergies with M&M would enable turnaround of SYMC at PAT level.

5. Low capex requirements to support existing operations

The management indicated that SMYC had manufacturing capacity of ~120,000 vehicles and ~150,000 engines (on one-shift basis). Based on previous manpower of ~4,400 people, its manned capacity of 100,000 vehicles was more than adequate to meet its current run rate of ~7,000 vehicles per month. It planned to launch a new product named 'C-200' in CY10. The majority of the investment in tooling and product development had already been incurred. However, SYMC will have to invest in its product development program, as after launch of 'C-200' it does not have any product available for launch for another 1.5-2 years.

6. Deal appears favorable for M&M

The deal looks favorable for M&M; it will get access to new products, distribution network, technology and potential to generate value due to operational synergies. However, the extent of value creation will depend on the price paid. M&M's prospects will definitely be better, given its market dominance in core business of UVs and Tractors, coupled with cheap valuations. It was expected to be one of the biggest beneficiaries of normal monsoon, given its high dependence on rural market demand.

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Post-Merger Analysis
Deal Value and Structure
M&M gets US$ 378 Mn in share: New shares were issued, diluting other shareholders: M&M gets 70% stake M&M assumed US$ 85 Mn debt on its balance sheet Ssanyong now debt free

Ssanyong under debt of US$ 400 Mn in 2010

M&M to pay US$ 463 Mn, money used to repay debt

Deal Structure

The deal was valued at US$ 463 mn (INR 2,105 crores). This deal was a sort of debt relief program for Ssanyong which became debt free post transaction. Mahindra got 70% of newly issued shares and others shareholding was diluted. Ssanyong was to remain an independent company listed in Korea and run by Korean managers. Mahindra raised the entire money by a mixture of cash & debt.
Source of Income Statement: Financial Times

Ssangyong Motors EV US $ Million Sales COGS Gross Margins SG&A EBITDA Depriciation InterestExpense Other Expense PBT PAT

70% for 463 661.428571 CY04 2,884 2,331 553 400 153 126 33 53 49 10 CY05 CY06 CY07 CY08 CY09 3,355 3,093 3,357 2,311 841 2,739 2,501 2,725 2,026 791 617 592 632 286 50 464 382 411 358 225 152 210 221 -73 -175 154 182 174 138 56 31 40 34 39 84 -40 -52 10 -415 43 -58 -60 12 -657 -273 -101 -205 12 -657 -273

Enterprise Value EV/Sales EV/EBITDA

0.786479 -3.77959

If we look at the financial performance of Ssanyong motors and try to find a value for the organization, we would be hard pressed as financially the company was in turmoil over the last five years which is visible in its financial performance over the time. This implies an EV/Sales of 0.78, which is very high considering relatively healthy companies in auto sectors such as Honda & GM trade at EV/Sales of 0.40 and 0.16 respectively. However, one can clearly see that CY09 figures

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were particularly depressed which might be due to the uncertainty surrounding the company and 77 day long strike. So the value may not have been too high after all. Further any sort of EV/Ebitda analysis would be meaningless due to ve Ebitda. Also, Cashflow based analysis is difficult due to weak financial condition of the company. Deal Valuation template
Group 2_ Section B_Mahindra & Ssanyong Deal_M&A.xlsx

Potential Source of Value for Mahindra This deal can lead to savings such as low material cost due to joint sourcing and reduced R&D expense due to synergies. The following table summarizes potential savings from the deal. Assumption WACC Cost Per Unit Material Cost Material Cost Saving R&D R&D Saving Most of the Synergy will be captured by 2020 12% 10,00,000 30% 5% 5.00% 5%

Calculation of the synergies: Our own Analysis

Synergy Factor Realization in INR crorers Mahindra UV Sales: actual Total Input Cost Material Cost Material Cost Savings in Crores R&D Cost R&D Cost Savings Total Savings PV of savings Total Savings 1 2 30% 50% FY11 FY12 2,10,000 2,30,000 21,000 23,000 6,300 6,900 95 173 1,050 1,150 16 29 110 201 98 160 2326 in Crores 3 85% FY13 2,60,000 26,000 7,800 332 1,300 55 387 275 4 100% FY14 3,00,000 30,000 9,000 450 1,500 75 525 334 5 100% FY15 3,40,000 34,000 10,200 510 1,700 85 595 338 6 100% FY16 3,60,000 36,000 10,800 540 1,800 90 630 319 7 100% FY17 3,70,000 37,000 11,100 555 1,850 93 648 293 8 100% FY18 3,80,000 38,000 11,400 570 1,900 95 665 269 8 100% FY19 3,40,002 34,000 10,200 510 1,700 85 595 240

The deal promises a savings of roughly INR 2,400 Crores against the price paid of INR 2,105 crores. This deal seems to be a good one for Mahindra even assuming the standalone value of Ssanyong to be Zero.

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To add to this we can expect faster product development cycle for M&M in SUV segment which will also carry some value which is difficult to quantify. So even if there will be some integration cost not high as Ssanyong will remain independent, this deal is a winner for Mahindra.

Standalone performance of Ssanyong Motors post deal

D e a l

Ssanyong Motor Stock since the deal (Source: Financial Times) M&M took stake when price was around 10,000 KRW now price is 5,420 KRW, KRW has appreciated 20% against INR, Still looks like a lost case on the surface

Korean Won (KRW) Vs INR (Source: Google Finance) Korean won has appreciated from 0.04 INR in 2010 to 0.05 in 2012. The stock which was equal to INR 400 is now worth INR 272 only resulting in loss of 32%. However, we must consider the potential costs savings worth INR 2400 Crores and other synergies compared to INR 2105 crores paid before passing a judgement on the decision by M&M to acquire Ssanyong. Page 11

Gains to the shareholders of the target and the acquirer

Complementary Competencies leading to complementary benefits

Company Mahindra Ssangyong

Competency Sourcing, Marketing, Financially more stable, low-end SUV Technology, exports to 35 countries, High-end SUV

Post-acquisition two major strategies were employed by M&M and Ssangyong together Joint R&D and production strategy: M&M and Ssangyong jointly began developing a family of six small enginesfrom 1 litre to 1.6 litresto power some of their proposed new launches. The three and four-cylinder engines will be used by both companies irrespective of their origin leading to sourcing benefits. The engine development game plan is part of a common strategy to draw upon combined synergies to slash operating costs and scale up product quality. Major part of this would come from the joint sourcing strategy discussed below. Joint Sourcing Strategy: The objective of this strategy is more about finding the right sources at an optimum cost, the right technology and quality for our requirements. For example amongst Indian suppliers to Ssangyong's suppliers are Bharat Forge for crankshafts and Magal Tech for connecting rods. Similarly M&M meantime started sourcing deals with Korean suppliers Daerim for cylinder heads, GMB for water pumps and Shin Han for engine valves. The estimated cost benefits are in the range of 7% - 15% for both the players

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Reaction of Stock markets post the deal:

Fig1. Share price of Mahindra and Mahindra from 2008-2010 Research suggests that the stock price of the acquirer generally declines post an acquisition. This is in line with what actually happened. Also the point that can be inferred from the stock chart is that the deal is pretty small for Mahindra and the shareholders are acknowledging that.

Fig2. Share Price of Ssangyong from 2008 to 2012 According to research findings, the stock price of Ssangyong should show an increase post the deal. But this actually did not happen. One of the reasons could be that Ssangyong was

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financially unstable and markets appreciate the fact that it needed some time for M&M to bring Ssangyong to positive EBITDA compan

Benefits to shareholders of Ssangyong post acquisition Firstly the cash crunch for Ssangyong was sorted out. M&M infused $200 million in equity helping Ssangyong to reduce liabilities down from Rs 4,452 crore to Rs 3,550 crore, thus improving the debt-equity ratio from 179.3% to 97.1%. Hence banks restored credit limits and also opened up hedging limits to SUV maker which exports two-third's of its production. The labor problem was also sorted out. Post the acquisition the labor union in SsangYong Motors has committed to support the restructuring plan, devised jointly by major stake holder M&M and SsangYong management by giving written commitment to stay away from strikes. The joint sourcing and product development strategies would help Ssangyong to realize long - term cost synergies as discussed above. Mahindra would help Ssangyong to establish a market for its high end SUVs in India and also extend the marketing strategy support in which Mahindra is comparatively stronger Post coming into the Mahindra fold, Ssangyong would receive support in setting up assembly bases across BRIC nations. A deeper penetration into the BRIC markets will drive volumes. The distribution network of Mahindra and Mahindra would help Ssangyong to sell its products in South Africa. Slowdown in the Korea and China has led to a reduction in volume forecast for Ssangyong but the introduction of new products and entry into new markets such Rexton in India are likely to shore up Ssangyongs volumes going forward

Benefits to shareholders of Mahindra and Mahindra post acquisition Mahindra majorly benefits from the access to higher-end SUVs, R&D capabilities and a multination dealer network especially in European and South East Asian countries Mahindra is now using crash test facilities from Ssangyong in its recently developed research valley in Chennai M&M can now sell its product in Russia through Ssangyong's distribution network. The joint sourcing and product development strategies would help Mahindra to realize long - term cost synergies as discussed above.
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How did the deal proceed? Where there any roadblocks? What were the reactions of various stakeholders (Competitors, regulators, investors)? Timeline <Neeraj>

Important Regulatory and Legal Issues in M&A highlighted in the merger <Tapan>

Recent Happenings, Did/would the merger realize its intended objectives (add 1 2 paragraphs)? <Tapan>

Learnings from the project

Key learning from the case: 1) The way a financially unstable company can be acquired debt free, by using some portion of the acquisition value to acquire majority stake and other portion to pay off debt Bargain that is possible when acquiring a distressed company 2) The reaction of stock markets post the deal and how it affects the shareholders. 3) Benefits to short holders in short term and long term. Also how the proposed synergies realize and benefit the share holders 4) The steps taken by both parties i.e. formulating joint sourcing and product development strategies to actually materialize the synergies estimated. 5) The valuation of the deal will depend not only the standalone value but the potential value created by the joint organization. Here, on standalone basis seems that Mahindra overpaid but on overall analysis the price is okay.

References
All links accessed on December 03, 2012: xyz Page 15

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