Mergers & Acquisitions: Indian Automobile Sector

Study of Past and Potential future acquisitions

By: AnkitMangla Archit Goyal PhirozPattanayak Utkarsh Singh VarunGarg Vishal Gupta 11P123 11P129 11P153 11P176 11P179 11P180

Table of Contents
MERGERS AND ACQUISITIONS ...................................................................................................................... 3 What are Mergers & Acquisitions ............................................................................................................. 3 Process ...................................................................................................................................................... 4 Motives behind M&A ................................................................................................................................ 6 Mergers and Acquisitions in India............................................................................................................. 7 Mergers and Acquisitions in Auto Sector (globally).................................................................................. 8 INDIAN AUTO SECTOR................................................................................................................................... 9 Growth Drivers for the Indian Automobile Industry ............................................................................. 9 Prospects of Indian Automobile Industry ........................................................................................... 10 Major Global and Indian players in the Indian Automobile Industry ................................................. 11 INDIAN AUTO INDUSTRY - JOINT VENTURES AND ACQUISITIONS.............................................................. 13 EXAMPLES FROM THE INDIAN SPACE ......................................................................................................... 14 Tata acquires Jaguar and Land Rover ..................................................................................................... 14 Rationale of the Acquisition ................................................................................................................ 14 Target Selection .................................................................................................................................. 16 ProblemsDuring Acquisition ............................................................................................................... 17 Post Merger Analysis........................................................................................................................... 18 Our Verdict onthe Acquisition ............................................................................................................ 20 Mahindra acquisition of Kinetic Motor cycles ........................................................................................ 22 MDs views on acquisition .................................................................................................................. 22 Rationale ............................................................................................................................................. 23 Our learning from studying this deal .................................................................................................. 25 FUTURE DEAL .............................................................................................................................................. 26 Acquisition and Selling History of Harley-Davidson ............................................................................ 28 New Harley-Davidson Motorcycle Registration Added Each Year Since 2007 ................................... 29 Enterprise Value .................................................................................................................................. 29 Financial Performance ........................................................................................................................ 30 Valuation Drivers................................................................................................................................. 30 Rationale for acquisition for Harley Davidson by Mahindra Group.................................................... 32 Valuation of Harley Davidson ............................................................................................................. 34

REFERENCES ................................................................................................................................................ 35

MERGERS AND ACQUISITIONS

What are Mergers & Acquisitions
Mergers A merger is a combination of two or more distinct entities into one for not only to accumulate assets and liabilities but for other benefits also like, economies of scale, acquisition of new technologies, obtaining access into sectors / markets with established players etc. Generally, in a merger, the merging entities would cease to be in existence and merge into a single surviving entity. Mergers may be of several types on the basis of the requirements: Horizontal Mergers: It takes place between entities engaged in competing businesses which are at the same stage of the industrial process. Vertical Mergers: It is the combination of two entities at different stages of the industrial or production process. Congeneric Mergers: These are mergers between entities engaged in the same general industry and somewhat interrelated, but having no common customer-supplier relationship. Conglomerate Mergers: It is a merger between two entities in unrelated industries. Cash Merger:The merged entity combines the assets of the two companies and grants theshareholders of each original company shares in the new company based on the relative valuations of the twooriginal companies. However, in the case of a cash merger, also known as a cash-out merger, theshareholders of one entity receive cash in place of shares in the merged entity. Triangular Merger:It is often resorted to for regulatory and tax reasons. It is a tripartite arrangement in which the target merges with a subsidiary of the acquirer.

Acquisitions An acquisition or takeover is the purchase by one company of controlling interest in the share capital, or all orsubstantially all of the assets and/or liabilities, of another company. It can be both friendly or hostile,depending on the acquiring companys approach. Friendly takeover: It is a takeover involving anacquisition of the target company through negotiations between the existing promoters and prospectiveinvestors. Hostile Takeover: A hostile takeover can happen by way of any of the following actions: if the board rejects theoffer, but the bidder continues to pursue it or the bidder makes the offer without informing the boardbeforehand. Leveraged Buyouts: These are a form of takeovers where the acquisition is funded by borrowed money. Generally the assets of the target company are used as collateral for the loan. Bailout Takeovers:In this takeover a profit making company acquires a sick company. This kind of takeover is usually pursuant to a scheme of reconstruction/rehabilitation with theapproval of lender banks/financial institutions.

Process
The board of a company feels the need to go for M&A (different reasons possible) Company decides the following: o Sector in which M&A has to take place (if company operates in many sectors) o Country in which M&A has to take place Detailed process: o Once the sector is decided, the acquirer itself or with the help of an investment bank scans all possible companies which can be prospective targets o Shortlist a small number (depending upon the acquirers requirements) of companies out of the whole gamut of companies in the required sector

o Analysis of all these shortlisted companies by the companys board to decide which of them, if acquired would suit the strategy of the acquirer. It depends on the strategy of the acquiring company and its long term goals for itself. o After analysis, the acquirer brings down the number of shortlisted companies to say 2 or 3 for a deep dive o In depth analysis of the shortlisted companies: At this point, all the minute details about the target are taken into consideration like location of its assets, possible reaction of the top management to an acquisition bid, etc. o Valuation of the shortlisted companies using different valuation techniques o Rating the shortlisted companies on various parameters depending upon the sector in which the acquisition is taking place o Using the ratings given to decide the most appropriate target o Decide the best possible way to finance the deal Debt transaction Stock Transaction A combination of the two

It depends on the current condition of the acquirer, its recent stock price performance and the market sentiments about the company. o Going ahead with the actual acquisition o Post Merger integration We talk about various aspects of an acquisition as we move ahead in this article. In analyzing past deals and predicting a future deal, we would talk about the points mentioned above at different places.

Motives behind M&A

Economies of Scale It gives the acquiring company access to the facilities of the target. Since it has now access to greater resources and can target a larger market, it can utilize the benefits of economies of scale that come with these benefits Increased revenue/ market share Due to getting the targets customers and sales revenue Cross selling As a result of getting access to the targets markets, the acquirer can sell to the established clients, markets, traders, et of the acquired company Corporate synergy By closing down redundant facilities and utilizing the facilities of target which may be better equipped to handle the same job. Also, many times it is possible that the location or scale of operations of the target provides synergies to the acquirer Tax right-offs Certain exchanges of stock are considered tax free, which permit owners of one company to exchange their shares for the stock of the acquirer without paying taxes Geographical diversification if the acquirer has operations in locations where the target does not operate.

Mergers and Acquisitions in India

The year 2007-08 saw substantial activity in this sector. Unlike in the past, such activity was not limited to acquisitions within India or of Indian companies. Of all sectors, steel was the most dominant in terms of stake sales as deals valuing $ 3.862 billion took place in Q1 of 2007-08 by the Indian companies in the global arena. Energy ranked second, with automotive and auto components close on its heels. In the domestic segment, iron ore, aviation and steel were the most prolific in terms of mergers and acquisitions. With the growth in the Indian economy, many have shown an interest in growing globally by choosing to acquire or merge with other companies outside India. E.g. acquisition of Britains Corus by Tata an Indian conglomerate by way of a leveraged buy-out, Tata acquiring Jaguar and Land Rover

Source: Institute of Mergers, Acquisitions and alliances website

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Mergers and Acquisitions in Auto Sector (globally)

Automotive mergers and acquisitions act as a means of increasing market share and improving global reach. Other related reasons include attaining economies of scale and augmenting product ranges. Automotive mergers are a strategic option for companies looking to accelerate growth. In addition to corporate-level alliances, functional collaborations are also increasing all over the globe. Several technology and platform sharing agreements have been forged in the past, enabling companies to reduce product development times and costs. The automotive industry witnessed a host of major deals during the mid to late 1990s and the turn of the Millennium. Some countries in the emerging markets like India and China are growing at a spectacular rate. These rates are attracting global automotive majors to these markets in increasing numbers. The following figure shows the activity in this sector throughout the world.

Source: Institute of Mergers, Acquisitions and alliances website

INDIAN AUTO SECTOR

The cumulative production data for April-July 2012 shows production growth of 7.10 % over same period last year. The industry produced 1,746,840 vehicles in July 2012 as against 1,656,014 in July 2011. The overall growth in domestic sales during April-July 2012 was 9.34 % over same period last year. Passenger Vehicles segment grew at 10.20 % during April-July 2012 over same period last year. Passenger Cars grew by 5.55 %, Utility Vehicles grew by 53.66 % and Vans grew by (-12.73) % during April-July 2012 as compared to same period last year. The overall Commercial Vehicles segment registered growth of 4.74 % in April-July 2012 as compared to the same period last year. While Medium & Heavy Commercial Vehicles (M&HCVs) registered negative growth at (-12.75) %, Light Commercial Vehicles grew at 18.02 %. During April-July 2012 overall automobile exports registered negative growth at (-4.03) %. While Passenger Vehicles and Commercial Vehicles both grew by 9.14 %. Two& Three wheelers declined by (1.00)% and (-39.23) % respectively in AprilJuly 2012 compared to the same period last year. Indian automobile sector has a lot of scope for both two wheelers and four wheelers due to infrastructure development in the country. According to Indian Statistical Organization, the per capita income is increasing and so is the national income. Indian auto market is still untapped and there is huge scope for the existing players to expand their markets. There is a huge scope for growth.

Growth Drivers for the Indian Automobile Industry

Prospects of Indian Automobile Industry

The government spending on infrastructure in roads and airports and higher GDP growth in the future will benefit the auto sector in general. Launches in the Segment 'B' and Segment 'C' of passenger cars are expected. Utility vehicle segment is expected to grow at around 8% to 9% in the long-term. In the 2-wheeler segment, motorcycles are expected to witness a flurry of new model launches. Market size is expected to grow by 10% to 12%. Companies can benefit from higher demand for ungeared scooters in the urban and rural markets. The tractor industry registered good growth in FY10 as well as FY11. Good monsoon is a positive for the sector, given the fact that non-farm incomes have continued to climb up, volumes should still hold up pretty well despite a year or two of poor monsoons. The

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longer-term picture is impressive in light of poor mechanization levels in the countrys farm sector and the thrust of the government on improving rural infrastructure. With an estimated 40% of CVs plying on the roads being 10 years old, demand for HCVs is expected to grow by 7% to 8% over the long term.

Major Global and Indian players in the Indian Automobile Industry

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INDIAN AUTO INDUSTRY - JOINT VENTURES AND ACQUISITIONS

Mergers, acquisitions and joint ventures have continued to be the driving force in the Indian automobile industry in sync with the dynamics of an open market. Leading automobile companies have either set up their own manufacturing base in India or have tied up with Indian automotive firms to roll out new products. The list includes International, MAN, Daimler, Toyota, Nissan, Renault, Fiat, Honda, Kawasaki and Cummins, among others. Daimler AG bought a 26 per cent stake in Sutlej Motors in the first half of 2008. Indian companies have also been bullish in acquiring foreign automobile companies to reinforce their presence in the global market. The landmark deal in the first half of 2008 was Tata Motors acquisition of Jaguar-Land Rover from Ford for US$ 2.30 billion. During this period, Mahindra & Mahindra acquired three Italian companies -GR GraficaRicerca, Metalcastello and Engines Engineering.

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EXAMPLES FROM THE INDIAN SPACE

Tata acquires Jaguar and Land Rover
Deal Value Date Verdict $2.3 bn March 26, 2008 Successful

TATA motors acquired JAGUAR and LAND ROVER from its former owner FORD MOTORS on 2nd of June 2008, the world economic scenario was on a downturn during this time and its impact was clearly visible in the automobile sector. Moreover JAGUAR as well as LAND ROVER had been making losses under their former owner for many years before being acquired by TATA MOTORS, however Ratan Tata was of the belief that acquiring JAGUAR AND LANROVER may not result in an instant success but will surely be fruitful in the long run. The management of TATA MOTORS visualized the valuable intangible assets like the research and development as well as the brand value hidden behind JAGUAR AND LAND ROVER which would bring in handsome results for them in the long run. It happened amid talks in the industry that an Indian company best known for producing heavy trucks and the worlds cheapest car could hardly make a success of such a prestige brand in tough times. There were many issues at that time which made people to believe that the acquisition would be a complete failure.

Rationale of the Acquisition

The sale of Jaguar and Land Rover was initiated by their former owner ford. Ford acquired Jaguar for $2.5 billion in 1989 and it acquired Land Rover from BMW in 2000 for $2.7 billion, the

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US auto major put both of them on sale in June 2008. Various factors ignited the sale of Jaguar and Land Rover by ford and bidding for its purchase by Tata, some of them are discussed below: Cumulative Losses For Many Years: Ford made losses of 12.6 billion in the year 2006, the biggest ever in its 103 year history, most of it was a result of bad performance of Jaguar, Land Rover however was performing steadily though not at its best, Land Rover was driven by a record sale of 2.26 lakh vehicles in the year 2007, ford announced for a combined sale of both Jaguar and Land Rover. The reason which could be best associated with this strategy is that ford wanted to get rid of Jaguar on one hand which had been making losses and realize a good amount by offering Land Rover for sale also which would not have been possible by offering Jaguar alone, moreover Jaguar and Land Rover being two unique brands with distinctive features would attract more bidders. Goodtime to Get Hold of Two Unique Brands for Tata Motors: Automobile industry was well affected by the economic downturn; the market was not on its flow hence it was a good time for Tata motors to get hold of Jaguar and Land Rover at a reasonable price. Tata motors acquired both Jaguar and Land Rover for an amount of 2.3 billion whereas ford acquired them for a total sum of 5.2billion, Tata did not pay even half of that amount. This would not have been possible had the market been steady. Unavailability Of Other Options: No other brands with so good research and development facilities was available for Tata motors to get hold of at such a reasonable price. Reducing dependence on Indian market: Indian market accounted for 90% of the sales before the acquisition. To diversify its risks, it was important for TATA to make sure that they dont rely on one country for majority of their sales. Expanding international footprint: Acquiring global brands would give Tata an enormous opportunity to penetrate global market, which in the long run would act as a catalyst to boost revenues and create brand value. Recognition to Own the Cheapest Car As well As Most Luxurious Cars: Acquiring JLR would give Tata recognition in the market of being the owner of the cheapest car Nano as well as premium cars like Jaguar SVX.
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Enter high end premier segment by having cars like Jaguar and Land Rover in its product portfolio. Acquiring the high end technology to improve its products in India Recognition and credibility across the globe. By acquiring any world renowned brand, the respect that TATA could command on the world arena would be enormous. Becoming a major player in the world automotive industry

Target Selection
There are various reasons to justify the strategy of Tata acquiring JLR; some of those are discussed below: Long Term Economies Of Scale: Acquiring JLR would help Tata for component sourcing, design services and low cost engineering which would in the long run reduce the cost of production and facilitate in increasing the bottom line. Broaden The Brand Portfolio: Jaguar and Land Rover would broaden the brand portfolio of Tata motors with a variety of performance and luxury vehicles, Land Rover being a natural fit for tmlssuv segment. Synergy to TATA group as a whole as Corus was the main supplier of automotive high grade steel to JLR Exploring intangible opportunities: Jaguar and Land Rover are distinguished brands with good research and development behind them, acquiring JLR would give Tata an opportunity to explore and utilize the R&D to generate greater revenues in the long run. Moreover Tata gor two advance design studios and technology which would help them to improve their core products in india like indica and safari had problems of internal noise and vibration. Long Term Commitment To Automobile Sector: Tata motors is engaged in production of various range of vehicles for different customers, acquiring JLR would give a chance

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to further explore the automobile industry and hence would be a step further towards its long term commitment to automobile sector. Cost Competitive Advantage: Corus being the major supplier of automotive high grade steel to JLR and other automobile industries in usa and Europe, acquiring JLR would result in a cost synergy for Tata motors

ProblemsDuring Acquisition
Tata motors acquired JLR when the world automobile industry was rationalizing its products and deferring the research and development works, the impact of downturn was clearly visible in the automobile sector with a decrease in world revenue of around 10%, Tatas decision to acquire JLR at this point of time was not accepted positively, it was negated at many stages. Some of the issues which had the potential to derail the acquisition at that time were:

Pre AcquisitionProblems Financing The Deal: Just before acquiring JLR, Tata had acquired corus and moreover Tata motors had undergone huge capital expenditure to bring Nano into the market and hence financing the acquisition was a major concern for Tata motors. Investor Disagreement: Investors were not in favor of the decision of acquiring JLR at that time. Both Jaguar and Land Rover were loss making units and automobile industry at that point of time was under pressure of downturn, in fact Tata motors itself had gone in for rationalization and retrenchment strategies. Investors believed that the balance sheet of Tata motors was not strong enough to absorb more loans. Unfavorable Economic Conditions (Slowdown in European and American markets): During the acquisition the worldwide car sales were down by 5%, the automobile industries over the world were rationalizing to conserve funds, moreover difficult economic conditions prevailed in the key markets comprising USA and Europe, which were the major factors influencing the earnings volatility.
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Mis-timing of the acquisition due to recession hitting in and wiping out JLR market

Post Acquisition Problems Debt Burden: To finance the acquisition Tata motors raised a bridge loan of 3 billion through consortium of banks by the end of 2009. Tata motors had yet to pay 2 billion towards the bridge loan, moreover it required additional funds and that too quickly to keep the operations running. Fall In Share Price: Tata motors share prices dropped in the market after acquisition of JLR because of the investor perception that it was not the right time to invest in that acquisition, when Tata had recently undergone huge capital expenditure for the Nano project, especially in Singur and the results were still unrevealed, moreover the investor thought that it was the time to be conservative and stabilize reserves rather than insourcing more debt burden. Inexperience in Handling Luxury Brands: Tata motors had never ventured into luxury car segment before acquiring JLR; hence the inefficiency in handling such segment hampered Tata motors operational efficiency for quite some time. Strong Competition: Tata motors strategy to penetrate global market through acquisition of JLR faced hurdles in the form of strong competition from global automobile giants like Mercedes, BMW, Lexus and Infinity.

Post Merger Analysis

Some of the factors on basis of which the post-acquisition performance can be analyzed are discussed below: Market Capitalization: Two months before it acquired JAGUAR AND LAND ROVER (JLR) in March 2008, TATA MOTORS had a market capitalization of Rs 24,000 crore. Five months after the deal, it had plunged to Rs 6,500 crore. The market as whole during that
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time negated the acquisition as both the companies JAGUAR AND LAND ROVER had been making losses under their former owner ford motors, however there was an opportunity hidden in exploring the strong brand value and research and development hidden behind both the companies and eventually this opportunity was utilized to the fullest extent by Tata motors and its market capitalization now stands at 71500 crore which is more than a tenfold rise from the initial post acquisition low. Brand Value: Recently TATA MOTORS drove past Reliance Industries to top the 2010 edition of Indias Most Valuable Brands survey with a valuation of $8.45 billion. A major part of this success can be attributed to the JAGUAR AND LAND ROVER brands. Jaguar and land rover both have been part of a larger conglomerate for a long time, however their potential was not unlocked then, TATA MOTORS succeeded in doing that. Jaguar and Land Rover steadily started regaining their rhythm in the market and contributed towards creating a good brand value for TATA MOTORS. TATA MOTORS-JLR brand soared 172% in one year to $8.45 billion from only $3.1 billion in 2008-09. Cash Flows and Bottom line: During the quarter ended June 2012 JAGUAR-LAND ROVER has generated a positive cash flow of 23 million, post capital and product development expenses the first such instance since the deal. Moreover it posted a profit of 221 million (Rs 1,613 crore) for the quarter ended June against a loss of 64 million in the corresponding quarter. The margin expansion was driven by cost cutting measures and currency tailwinds as well as sales of higher variants of Land Rover and increasing sales in china and USA. Topline: JAGUAR LAND ROVER global sales in July 2012 were 19,386 vehicles, higher by 30%. Jaguar sales for the month were 5,676, higher by 26%, while Land Rover sales were 13,710, higher by 31%. Cumulative sales of Jaguar Land Rover for the fiscal are 76,539 nos., higher by 50%. Cumulative sales of Jaguar are 21,131 nos., higher by 31%, while cumulative sales of Land Rover are 55,408 nos., higher by 59%.

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Our Verdict onthe Acquisition

Market opinion for the acquisition was negative due to above reasons couples with earnings volatility and huge capital expenditure. When Tata Motors acquired JLR, skeptics termed it a disaster for the Mumbai-based auto maker. In-spite of all the negative sentiments and unfavorable timing, the TATA group has been successful in making this acquisition a success. Generally any M&A activity is undertaken for one of the following two reasons: Boosting the current performance of the company Creating long term growth by reinventing or modifying the business model

This deal was done with the second intention i.e. to create long term growth for TATA. TATA was known for producing heavy trucks and small cars. By acquiring two luxury brands, it diversified its product base and increased its market reach both in terms of geography and the customer base. The success of the deal can be attributed to the following factors: Strong and committed management The Tata Group, led by Mr. Ratan Tata, was determined to make the deal work and put to use the group's management skills, financial resources and credibility. To staunch the hemorrhage at the British unit, Tata's management focused on reducing costs, improving efficiencies and managing cash flow - lessons that Tata Motors had learned during the downturn in 2001. Tata also infused $1 billion to fund operations and new product launches. When the market turned, the premier car maker was well poised to reap the benefits and turned profitable during the quarter ended Dec. 31, 2009, with a net profit of 55 million pounds ($90.6 million). Paying the right price Ford wanted to get rid of the two brands as it had other internal issues to focus on. Although TATA had to take huge debt to finance the deal, still, in the long run, it has been able to justify the sum that it had paid back in 2008.

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Successful post merger integration Tata gave the management of JLR the freedom to operate and trusted their capabilities. They were given a stable environment to work which was not the case while they were owned by Ford. TATAs did not dismantle the business model of the two brands. Rather they gave them the necessary freedom and backed them up to perform up to their potential.

As of the companys annual report 2011-12, Jaguar Land Rovers operations have shown impressive growth in sales and profitability. Sales have increased by 37% and 29% respectively in value and volume over the previous year. The Company has undertaken its most ambitious product development program in its history, and will be launching several new sports sedans and sports cars in the next two years in order to provide dealers with a more competitive and wider product range. The Company will also be offering cars with new higher-powered, more fuel-efficient engines to meet the customer preferences. Face-lifted and new models of the Range Rover as well as a competitively-priced new line of rugged, lifestyle vehicles under the Land Rover brand are also scheduled to be launched. New manufacturing facilities are being considered in China to better meet market demand for Jaguar and Range Rover in the region.Jaguar LandRoversold314,433 vehiclesinFY 2011-12, anincrease of 29.1% on the prior reporting period. At the brand level, wholesale volumes were 54,039 units for Jaguar and 260,394 unitsfor Land Rover, growing 2.0% and 36.6%, over the previous year, respectively.

Thus the acquisition, after all the skepticism at the time of its happening, has been a success for TATA.

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Mahindra acquisition of Kinetic Motor cycles

80% stake acquired for Rs110 crores

Mahindra launched its first SUV in 1947. It is currently present in cars, pickups & commercial vehicles. Has presence across globe. Kinetic motors company limited (KMCL) came into focus with launch of kinetic luna moped in 1972. Formed a JV with Honda Kinetic Honda Motors to manufacture advance scooters, bought in first gearless scooter in India In 2008-09 Mahindra saw a very strong growth potential in Indian two-wheeler market, the past year had not been good for two-wheeler segment the market shrunk by 5% in 2007-08 and grew by just mere 5 % next year. But years after the acquisition market grew by 25% in year 2009-10 and 27 % next year reaching 13.3 million units. So it can be seen as the farsightedness of Mahindra in this segment which prompted him to go for this acquisition and enter this segment. Mahindra had a policy of striving to be a key player in entire value chain so it had made its maiden foray in the 2 wheeler segment by acquiring the asset of Kinetic motors company limited (KMCL). As mentioned in company annual report it gave Mahindra an optimal strategic fit for quick and low cost market entry.

MDs views on acquisition

"The acquisition of business assets of KMCL is a defining moment in the history of Mahindra as it will give us an opportunity to emerge as a full range player with a presence in almost every segment of the automobile industry. KMCL is a strategic fit with our overall two-wheeler strategy. The strong in-house design and development competencies provided by Mahindra Engineering Services (MES) and the recent acquisition of Italy-based design house, Engines

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Engineering, coupled with KMCL's expertise will enable us to assume a significant position in the rapidly growing Indian and global two-wheeler market." Mr. Anand Mahindra, Vice Chairman and Managing Director, Mahindra Group

"KMCL is a company with a rich heritage spanning more than three decades. Over the years, we have introduced several new concepts such as the Luna and India's first gearless scooter which have revolutionized the two-wheeler industry. Hence, we are delighted to associate with Mahindra, another pioneering automobile company with a rich legacy which will add long term value to the business and take it to greater heights, Ms.SulajjaFirodiaMotwani, Managing Director, Kinetic Motor

Rationale
M & M will be able to design and market values engineered (low end) and high end

motor cycles for local and international market It wants to increase its customer base with this it will be able to reach out to younger

segment specially women, also rising demand of scooters in tier II cities Increasing focus on environmental concerns and customer attitude in west towards

green vehicles, two wheeler provides a good opportunity to enter overseas market From Kinetics point of view it would be able to repay its debt of Rs 60 crores and use

extra amount for further investment in business It was termed as win-win deal

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According to financial experts with market capitalization of 45 crores and negative net worth kinetic could never have managed the amount it got from Mahindra or through any other route of sale. Even for shareholders the deal was termed as beneficial in long term. The strategic synergy for Mahindra was already mentioned in rationale; in addition Mahindra performance in two wheeler segment post acquisition had some salient features as After the takeover the sales in the FY 09-10 was 23,761 lakhs which surged by over

100% in FY 10-11 to 51,711 lakhs, after that there was decline in FY 11-12 but for long term trend we need to wait for some time period. By end of financial year 2010-11 Mahindra has 7.6% market share in scooters market in

India compared just 4.8 % a year earlier i.e an exceptional market share growth of around 58% Mahindra 2 Wheelers is the first Indian company to take part in the MotoGP motorcycle

racing series and has enjoyed some success in the 125cc category with riders Marcel Schrotter and Danny Webb Another thing which was in consideration of Mahindra while entering into this deal was the future of Electric-two wheeler industry. With the hue and cry about petrol prices in combination with increasing environmental concerns the increase in Electric vehicle market is quiet evident in future. The Electric two wheeler (e2w) market in India stood at 1,10,000 units in 2008-09, or nearly Rs 350 crore in value as per data provided by Society of Manufacturers of Electric Vehicles. The current market share is mere 1.5 % but it is expected to grow at about 1015 % in current year with potential to grow at 35-40 % in near future. The plans of Mahindra in this segment can be watched by its action of announcing two electric two wheeler models just one year after the acquisition in September 2009. This segment is also attractive in terms of its rider does not require a driving licence so it will target a broader market segment. (http://nuvvo.com/lesson/15901-the-future-of-electric-two-wheeler-industry) In 2010, the Mahindra group has drawn up a 10-year plan for its two-wheeler business that will focus on forging new alliances and going global. For the same purpose we are suggesting a
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potential acquisition for Mahindra in international market, which will help it setup global footprint at faster pace. Mr. Anoopmathur, president Mahindra 2-wheeler has said they have a vision 2020 which is to become significant player in two wheeler markets. The objective is to become a full range manufacturer and offer scooters and bikes which make a difference. Talking about present India 2-wheeler business in India, the new motorcycle will be more in line with the Mahindra DNA in terms of being rugged, macho and all-terrain where the synergies in the market will become more pronounced. This was the reason Mahindra group choose to leverage its own brand straightaway rather than using kinetic name for a while. Even before the kinetic acquisition they took time to research the market and consumer and only after they realized there were vacant spaces and they could create unique proposition they entered the market. In a general study on long term success of M&A in the automotive supply industry (Laabs, JanPeer; Schiereck, Dirk 2010) it was observed that significant announcement positive returns to the acquiring company are observed which is the case here also but in the long term returns are not realized, which needs to be tested out in Mahindra-kinetic case. One of the reasons for this synergies not matching is cross border acquisition which is not applicable in case of Mahindrakinetic.

Our learning from studying this deal

Indian firms focus more on long term objective rather than short term synergies and

gain while going for acquisitions Increasing global mindset of Indian business houses and increasing mergers and

acquisition as a route to growth Understanding of two-wheeler scooter segment in India and some of the future trends

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FUTURE DEAL
We are trying to find a target for Mahindra Group in two wheeler market. As desired by Mahindra Group to increase its footprint in global market, we have found some of the prospective deals in premium two wheeler market and have done the comparative study as given below.
Suzuki Motors

The company operates through four business segments such as automobile, motorcycle, marine and power products, and financial services The company has a strong geographical presence across the world including Asia, America, Europe etc. The company has a strong orientation towards R&D process, which is helping it to gain competitive advantage in the competitive market. The company has delivered a strong set of numbers this year with USD 31,994 Million revenue and net profit after tax of USD 686 Million. The group is listed on Japan, India, USA stock exchanges.
Harley Davidson

Harley-Davidson operates in two segments: Motorcycles & Related Products (parts, accessories, merchandise) and Financial Services. It conducts business on global basis, with sales in North America, Europe, Middle East, Africa, Asia Pacific and Latin America with over 50% sales coming from Latin America. The financial division provides wholesale & retail financing, insurance & related programs to dealers and their retail customers in US and Canada. The company is headquartered at Milwaukee, Wisconsin, United States. The company has a employee base of 6,600 people as on December 31, 2011. It is the market leader in USA with market share of 55.7% in US and 13.7% in Europe region in 2011

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It faces major competition from premium motorcycle manufacturer such as BMW, Honda, Suzuki, Polaris, Yamaha and Ducati etc.
Yamaha Motors

The company produces well diverse products such as motorcycles, marine products, power products, industrial machinery and robots etc. The company is well diversified across the markets with large presence in emerging markets such as India, China, Asia Pacific etc. as well as developed market. The strength of the company lies in the R&D focus. The group is aggressively investing in R&D activities in various technological fields to provide customers with high quality high performance products. The company is listed in Japan and USA.
Honda Motors

Honda Motors produces products such as is into motorcycles, automobiles, power products and financial service businesses. The company is showing growth in Asia and other regions where as sales in Europe are contracting but large volume comes from Asia. The companys strategy is to expand its footprint in emerging market as it perceives significant growth in consumption in future. The group is listed on USA and Japan.
Piaggio Motors

Piaggios strategy is in consistent with global market dynamics such as emerging market growth and it is trying to increase its sales in emerging market such as India where it entered in scooter segment. Solid performance in India and Asia pacific despite slower growth than expected

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Third consecutive year of market share gain in European scooters confirming Piaggios leadership The company is trying to decrease its debt and it has reduced its net debt for the fourth consecutive year. We have done a comparative study as given below of all the prospective targets.

Among the prospective deal suggested above, Harley Davidson seems to be the best fit towards the strategic objective of Mahindra Two Wheeler. The major force behind choosing Harley Davidson is the geographical advantage as Mahindra wishes to enter Latin America market. Since Harley Davidson is the leader in Latin America with 58% of its revenue coming from Latin America. Apart from these, there are many other advantages that are summarized below.

Acquisition and Selling History of Harley-Davidson

2009: Sold its Buell product line and ceased production of Buell motorcycles. 2008: Acquired the company acquired the privately-held Italian motorcycle maker, MV Agusta Group.
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2006: Partnered with Lehman Trikes of Spearfish, a three heeler producer, for the development of three-wheeled vehicles.

New Harley-Davidson Motorcycle Registration Added Each Year Since 2007

Enterprise Value
$ mm, except per share data Ticker Share Price as of 06/15/12 LTM High/Low % of LTM High FD Shares Outstanding (mm) Market Capitalization Plus: Net Debt/(Cash) Enterprise Value 2011E: EV/Revenue (x) 2.75
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HOG 49.01 54.32/31.50 90.22 229 11,222.70 5,722.60 16,945.30

EV/EBITDA (x) P/E (x) 2012E: EV/Revenue (x) EV/EBITDA (x) P/E (x)

17.62 15.12

2.83 18.73 18.14

Financial Performance
CY ($mm) Revenue Growth (%) EBITDA Margin (%) EBIT Margin (%) Net Income Margin (%) 2011A 5311.1 9.31% 820.2 15.44% 550.4 10.36% 599.1 11.28% 2012A 5627.4 5.94% 849.7 15.10% 551.2 9.79% 562 9.99% 2013E 6282.2 11.64% 932.5 14.84% 625.9 9.96% 620.4 9.88% 2014E 7032.5 11.94% 1128.9 16.05% 807.8 11.49% 758.9 10.79%

Valuation Drivers
Some of the parameters that drive Harley Davidson to be the best fit for Mahindra Group from a strategic perspective as well as suggest the valuation of Rs 44.46 per share are outlined below. Products and Innovations

Target women/Young adults: Company is now focusing its marketing activities towards attracting Young People/Women towards riding its bike, by promoting the experience of motorcycling.

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Opening of Harley-Davidson Museum in 2008: The Museum is a unique experience that the Company believes builds and strengthens bonds between riders and the Company and enhances the brand among the public at large.

New Marketing Strategy to tap new customers: The Company is currently executing a multi-generational and multi-cultural marketing strategy to tap new customers.

Operational Efficiency The company has shown improvement in operating margin in 2011. Apart from this, as stated by the management in its annual report, the company is currently going through restructuring activities which will enable the organization significant cost savings from 2013 onwards.
Operating Margin
16% Operating Margin 12%

8%

4%

0% 2007 2008 2009 2010 2011

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Cost-competitive and flexible labor agreements Cost Optimization

Ongoing restructuring of the Companys U.S. manufacturing plants

Embarked on its second CKD (Complete Knock Down) assembly plant in India , operational from 2011

Continues to establish and reinforce long-term, mutually beneficial relationships with its suppliers

Flexible manufacturing processes and flexible supply chains

Creating value to shareholders

ROE
40% 30% 20% 10% 0% 2007 -10% 2008 2009 2010 2011 March 31, 2012 ROE

Rationale for acquisition for Harley Davidson by Mahindra Group

Increased Product Portfolio more attuned to the cruiser market for Mahindra Group US Trend shows Younger People inclined towards Sports Bike Median Age of Harley-Davidson Customer is 49 Years Harley Davidson is the present market leader in US in Heavy Weight Motorcycle Segment

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Increase Global Footprint Increase Market Penetration for Mahindra Group Increase Geographical diversity

Widening of Distribution Network Leveraging the reach and depth of fully serviced distributors of Harley-Davidson world wide Number of Dealers will increase by 30-35% with this acquisition for Mahindra Group In future, relaxation of riding laws in Asia-Pacific can boost Heavy weight motorcycle sales if good distribution network is in place

Smoothening of Sales , less fluctuations With more market reach and more products to offer, market volatility can be reduced

Hedging of Currency fluctuation Diverse exposure to Global Markets reduces the dependency of any one major currency
900 800 700 600 500 400 300 200 100 0 North America Latin America Asia Pacific EMEA Latin America, 44 Asia Pacific, 274 EMEA, 370 North America, 780 Number of Dealers(Independent Full Service)

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Valuation of Harley Davidson

We valued Harley Davidson under various methodologies and arrived a firm value of USD 18,068 Million ($53.91 per share) at an EV/EBITDA 2012E multiple of 21.26x with premium of 10% on its share price. Details of valuations are attached in the form of excel sheet.

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REFERENCES
Mergers & Acquisitions in India:Nishith Desai Associates, February http://www.imaa-institute.org/statistics-mergersacquisitions.html#MergersAcquisitions_India Mergers and Acquisitions in India - A general Analysis: Attorney NavpreetPanjrath Society of Indian Automobile Manufacturers, website: http://www.siamindia.com/ http://www.hindu.com/2008/03/27/stories/2008032750100100.htm Pass or Fail: Tata Steers Jaguar Land Rover to Profit: Sawardekar, Samita. Wall Street Journal (Online) http://www.mahindra.com/News/Press-Releases/1294123574 http://articles.economictimes.indiatimes.com/2008-08-01/news/27723729_1_openoffer-wheeler-win-win-deal http://www.thehindubusinessline.com/todays-paper/article999005.ece The long-term success of M&A in the automotive supply industry: determinants of capital market performance. Laabs, Jan-Peer; Schiereck, Dirk. Journal of Economics and Finance 34. 1 (Jan 2010): 61-88. Indian Automotive survey 2011, A report by Mazars Company Annual Reports TWO-WHEELER INDUSTRY: GROWTH DRIVERS INTACT, report by ICRA http://www.thehindubusinessline.com/todays-paper/article999005.ece A used-car bargain? Tata, Jaguar and Land Rover: Economist.com Annual Report, TATA Motors, 2011-12 Automotive Industry, IBEF (Indian Brand Equity Foundation), September 2009 Bloomberg CNN Money Harley Davidson Annual Reports Mahindra Group websites Harley Davidson website
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