Mahindra Ssangyong Acquisition, 2011

Group 5 and Group 8 Akshay Minhas

Arun YadavNilutpal Hazarika

Vikas Aggarwal

Part of Mahindra Group

Mahindra & Mahindra (M&M) : one of India’s largest auto manufacturer

Headquartered in Mumbai

Genesis: 1945 in Ludhiana Started with assembly of Willy’s Jeep in India under license (1947)

Ranked 21st in Fortune 500 India (2011)

Product portfolio now includes: 2 wheelers, SUVs, Sedan, School buses, LCVs, HCVs, Evs, Military Vehicles, Farm

equipment

Foray into global markets US, Italy, SAC, PRC, Egypt, Brazil

Company Brief : Mahindra

Genesis: 1954 in Korea Headquartered in Seoul

Product portfolio includes: Premium SUVs , RVs, luxury sedans, Pick ups, Vans

Started as 2 different companies Ha Dong-hwan Motor Workshop (1954) and Dongbang Motor Co (1962) ;

Merged into Ha Dong-hwan Motor Co (1963) Acquired by Ssangyong Business Group in 1986

Technology partnership with Daimler-Benz in 1991 to develop SUVs

Company Brief : Ssangyong

Economies of scale Low cost combined component sourcing Economies of scale for global sourcing Reduction in time to market

Economies of scope Joint R&D efforts Sharing of product platforms, engines and powertrains Reduction in product development time Mahindra now has greater access to EU, Russia, SA, ME, Asia Ssangyong has access to newer emerging markets Mahindra also access to new products, established distribution channels

The Merger : Operating Synergy

The acquisition helped lower Ssangyong lower its D/E ratio and improve its cost of capital

Lower CAPEX requirements to support existing operations

Major tooling investments and product development costs had already been incurred

Current workforce (after slashing by 1/3rd ) more than adequate to meet existing and upcoming demand

Diversification New products and current markets New products and new markets

The Merger : Financial Synergy

A friendly takeover Ssangyong was bankruptcy protected in 2010 after running into financial

losses since 2000 Ssangyong was not new to acquisitions :

◦ 1997 : Daewoo Motors bought 51% stake, sold it off in 2000◦ 2004 : SAIC took 51% stake◦ 2009 : Ssangyong was put into receivership after recording US $ 75.42

Mn loss and worker strikes◦ 2010 : In April, Ssangyong released a statement citing interest of 5

companies in acquiring it Acquisition was approved by South Korea’s Free Trade Commission

A horizontal merger Ssangyong had premium SUVs and Sedans. M&M had entry level SUVs

and acquisition of Ssangyong completes M&M product range Gave M&M added benefits of network externalities Cost savings through economies of production, sales & distribution,

logistics etc

The Merger

Ssangyong under US $400 Mn debt in 2010 Mahindra emerged as the preferred bidder among 5

companies M&M, Ruia Group, SM Aluminium, Seoul Investments, Renault Samsung

The Merger : Deal Structure

Ssangyong under debt of US $ 400 Mn

(2010)

M&M pays US $ 463 Mn to repay

Ssangyong’s debt

M&M gets 70% stake (US $378 Mn in new

shares); M&M assumes US $ 85 Mn

debt in its B/S

The Merger : Deal Timeline

• M&M board approves Ssangyong Motor bid

7th Aug 2010

• Ssangyong picks M&M as preferred bidder

12th Aug 2010

• M&M named lead bidder

13th Aug 2010

• M&M signs MoU23rd Aug 2010

• Deal formally signed23rd Nov 2010

• Formal consent from creditors, suppliers etc

28th Jan 2011

• Court approval1st Feb 2011

• Formal allotment of shares9th Feb 2011

Joint production Have started joint development of smaller engines for use in both

companies Design work on Euro 6 engines in progress

Joint sourcing Have started joint sourcing of components for both companies

Current market, new product Mahindra has started offering the Ssangyong Rexton in the Indian market

as a premium offering

New markets, new products M&M readying new products for Brazil, Australia, US , European markets

Post Merger Development

M&M’s stock has appreciated on YoY basis post merger

etc

Post Deal Performance

Gains to the target and the acquirer Complementary Competencies leading to complementary benefits

Mahindra Sourcing, Marketing, Financially more stable, low-end SUV

Ssangyong Technology, exports to 35 countries, High-end SUV

Post-acquisition strategies

Joint R&D and production strategy: Began developing a family of six small engines—from 1 litre to 1.6

litres.

The three and four-cylinder engines will be used by both companies.

Joint Sourcing Strategy: Finding the right sources at an optimum cost, the right technology and

quality for our requirements

Benefits to shareholders post acquisition -Ssangyong

Cash crunch for Ssangyong was sorted out Complementary Competencies leading to complementary benefits Labor Problem was sorted out Realize long - term cost synergies Help Ssangyong to establish a market for its high end SUVs in India Ssangyong would receive support in setting up assembly bases across

BRIC nations Distribution network of Mahindra and Mahindra would help Ssangyong to

sell its products in South Africa Slowdown in the Korea and China can be overcome be sales of new

models in India

Benefits to shareholders post acquisition –M&M

Access to higher-end SUVs, R&D capabilities and a multination dealer network especially in European and South East Asian countries

M&M can now sell its product in Russia through Ssangyong's distribution network.

The joint sourcing and product development strategies.

Performance of Mahindra – Post Deal

Mahindra & Mahindra has appreciated 20.3% CAGR while the benchmark BSE Sensex has increased a mere 5.13%

Performance of Ssangyong – Post Deal

Stocks had Fallen by Half

M&M is finding it hard to turn the

company around.

Recent Happenings

India specific happenings Mahindra started reaping direct benefits from the deal in India

Rexton was launched with price of 17.7 Lacs for base version and Top model with 19.7 Lacs

Mahindra invested Rs 630 million at Chakan Plant to assemble Rexton

Recent Happenings (Contd)

Global Happening

M&M is planning to enter Brazil, Australia and Italy with the Ssangyong range

Mahindra’s main focus is to enter into Chinese market

Learnings

The way a financially unstable company can be acquired debt free, by using acquisition value to acquire majority stake– Bargain that is only possible when acquiring a distressed company

The steps taken by both parties i.e. formulating joint sourcing and product development strategies to actually materialize the synergies estimated.

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.

Learnings(Contd) Sometime it is better not to completely integrate companies from two

different cultures. Here, Ssanyong was allowed to operate as a separately listed company with Korean managers as M&M was interested mostly in product portfolios and R&D capabilities only. This approach has saved lot of integration issues.

The steps involved in the takeover, right from due diligence, board and shareholder approval to structuring the deal to suits all stakeholder needs.

The process of obtaining from the creditors, both secured and unsecured and in the case of a distressed company, from the bankruptcy courts as well.

http://economictimes.indiatimes.com/fullcover.cms?keyword=Mahindra-SsangYong%20Deal

http://en.wikipedia.org/wiki/Mahindra_%26_Mahindra_Limited http://en.wikipedia.org/wiki/SsangYong_Motor_Company http://www.mahindra.com/What-We-do/Automotive/Companies/Mahindra-a

nd-Mahindra-Automotive-Division http://markets.ft.com/research/Markets/Tearsheets/Financials?s=A003620:

KSC http://www.bloomberg.com/quote/003620:KS/chart NDTV Profit Google Finance http://www.smotor.com

References