Feature

MAGAZINE|OCT02,2010

ANewChapter:(Fromleft)ParkYoungtaeandLeeYooil,courtappointedmanagersofSsanyongMotorswithPawanKumarGoenka,
President,AutomotiveandFarmEquipment,M&M,andAnandMahindra,vicechairmanandMD,M&M.
M&M

ResurrectionBuyouts
The Mahindra group has mastered the art of giving a second life to companies it acquires.
KUNALNTALGERI

tMahindraTowersinMumbai,mostdiscussionsaroundM&Anarrowdowntoafundamental

question:WhatcantheMahindraGroupbringintotheacquiredcompanythatitspreviousowners
couldnt?Ifthemanagementhasaclearanswertothat,onlythendothefollowingissuesassume
significance:strategicfit(howthenewcompanycomplementstheMahindracompany),cultureissues,
sizeofworkforceandthetargetedcompanysappeal.WithSsangyongMotors,thecompelling
propositionforMahindra&Mahindra(M&M)istheSouthKoreancompanysproductdevelopment
expertiseinsportsutilityvehicles(SUVs).
Intwodecades,M&Mdevelopedthreevehicleplatforms:Commander,ScorpioandXylo.Ssangyonghas
sevenSUVplatformsinaboutthesameperiod,testedandcommercialisedindevelopedmarkets.True
toitsSouthKoreanroots,Ssangyonghashitthesweetspotofdevelopingmoreatalowcost,
unsurprisinglycompetingwithpeerHyundaiMotoronforeignsoil.
Furthermore,Ssangyonghasaretailnetworkspreadover80countriesinallcontinentsbarringNorth
America.Onceyoudecidetobeatopplayer,makesureyourfootprintsarethereglobally,saysAbdul
Majeed,autopracticeleader,PricewaterhouseCoopers,onthesignificanceofMahindrasmove.
Notwithstandingthis,M&Mraisestheimperativequestion:whatcanitdotoabankruptcompanythat
Ssangyongspreviousowners,notablySAICandDaewoo,couldnot?

Theobviousansweriscash.AndwhatthatcashfetchesM&M.AccordingtoasourceclosetoM&Ms
operations,the$450500millionacquisitioncostwillactuallybeaworkingcapitalinjectionfortheSouth
Koreanmanufacturer.ThiswillhelpSsangyongforthreeyearstoraiseproductionlevelsfromits
30,000units.M&Mcouldpushitto70,000levels.Withareadydealershipoverseas,particularlyinRussia
andotherpartsofEurope,M&MwishestothenaggressivelymarketSsangyongSUVsinterritoriesnew
totheIndianOEM.AslateasJune,Ssangyongfinaliseddetailsofalongtermexportprojecttoship
160,000vehiclestoRussiauntil2017.
Practically,M&Mbearsnocostofownershipinreturnforamoreevolvedproductdevelopmentin
premiumSUVs,saysthesource.Thelessobvious,butcrucial,inputthatM&MbringsintoSsangyongis
stability.AndthispointstoawelloiledintegrationstrategythattheMahindrashavedemonstratedinthe
casesofSatyamComputerServices,KineticMotorsand,mostrecently,RevaElectricCarCompany.
CatchemLow
TheMahindraGroupM&AisspearheadedbyVSParthasarathy,itsExecutiveVicepresidentFinance.
Therehasbeenamethodtoitsshoppingplanswithinthegroup.First,identifycompetenciesusefulto
thegroupthatcancomplementandsimultaneouslybuildtheoverallstrength.Thebuzzwordis
synergise.
InJune2008,MahindraSystechacquiredanItalianengineeringdesignfirmcalledEnginesEngineering,
whichspecialisesinmotorcycledevelopment.Thegroupdidnthaveatwowheelerbusinessthen.That
cameamonthlaterintheformofPuneheadquarteredKineticMotors,whichwasstrugglingtodevelop
newproducts.
TheKineticbuyoutwasthefirststeptodevelopingtwowheelerinfrastructure.TheEnginesEngineering
acquisitionwouldgiveittheproductdevelopmentfillip.Mahindra2Wheelerswasbornaroundthen,and
itsfirstmotorcycleisexpectedearly2011.AcquiringKineticwaspossiblebecauseofthegroupsgood
health,asmuchasKineticMotorstravails.ButitdemonstratedtheformersM&Aradarandabilityto
synergiseanItaliantargetwithanaltogethernewbusiness.
Wetrytobeassetlightratherthanhaveabigliner,wedprefertobeaflotilla,AnoopMathur,
PresidentTwoWheelerSector,M&M,toldOutlookBusinessshortlyaftertheKineticMotorsbuyout.We
musthavemorestrategicpartnershipstogarnerwhateverisbestinclassfortwowheelers.So,Engines
Engineeringisanimportantenabler.Ithelped,though,thatKineticMotorsgrowthhadlessthan
flattened.
ItbringsustothesecondfacetofM&Asshoppingmethod:catchemwhentheyaredown
timingis
absolutelykey.SatyamwasinthedoldrumswhenitfittedinnicelywithTechMahindrasbuyoutplans.
WithSatyaminitsfold,theMahindrasgainedbreadthacrosssegments.Frombeingprimarilyatelecom
ITservicesprovider,MahindraITgainedafootinthemanufacturingandfinancialservicesspace,notto
mentiontheNorthAmericangeography.
Thethirdcriticalelementisprice.Inthepast,GroupVicechairmanAnandMahindrahasbeenthefirstto
admitthatacquisitionsshouldnevercomeatthecostofshareholdervalue.Thatiswhyhewalkedaway
fromtheLandRoverbidinearly2008.
BarringthehighpricedSatyamacquisition,theMahindrashavemanagedtoacquirecompetenciesand
infrastructureinthetractorbusiness,autocomponentandengineeringservices,andelectricvehicle
technologiesatattractiveprices.(See:SelectiveAppetite).
Ssangyongpromisesjustasmuch.SsangyongcertainlyfitsthebillofanM&Mprey.Since2007,its
revenuesof$2.7billionhavemorethanhalved.Ithasbeenalossmakingcompany,shortonliquidity,for
thepasttwoyears.
SelectiveAppetite

TheMahindrashaveavoidedexpensivebuyouts,unlessatargetprovidesenormousdepthandbreadth,
e.g.Satyam.

WorthOfThePain
M&Mhassizedupitstarget,alright.Itnowhastogoinforthekill,evenasitisintheconfirmatorydue
diligencephase.Butwhatreallyistheworthoftheacquisition?Savingsonproductdevelopment:both
ontimeandmoney.
ForM&M,thisnowinvolvessavingsof$15500million,whichistypicallythecostofdevelopingavehicle
platformforoverseasmarkets,dependingonthemarketprofile.WithSsangyong,its600memberR&D
teamhasalottoshowalready,anditisaheadofM&Mintheevolutionchain.Ithasalineupofpremier
SUVs,whichcanprovecriticalasandwhenitforaysintotheUSpassengervehiclemarket.
Thereareopportunitiesforinsourcingandcommonproductdevelopmentasourproductportfoliosare
similar,saysPawanGoenka,President,Auto&FarmEquipmentSectors,M&M.Ontheretailfront,as
M&MentersNorthAmerica,itcanbesureofaSsangyongnetworkinSouthAmerica.Also,SouthEast
AsiaisanewterritoryforM&M.ItispracticallyhomeforSsangyong.Thatisthedegreeofcompatibility
betweenthetwoAsianOEMs.
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