Saturday, June 29, 2013

What drives auto acquisitions

Jaguar has helped Tata Motors grow during an Indian slowdown
Automakers seek access to technology, new markets or a longer line-up of products from the acquired companies.
Apollo Tyres’ recent buyout of US-based Cooper Tires was one of the biggest deals inked in the history of the Indian auto industry. The acquisition, pegged at Rs 14,500 crore, was worth about Rs 5,000 crore more than the landmark buy of the Jaguar Land Rover (JLR) brands by Tata Motors in 2008.
What drives auto and auto component makers towards such buyouts?
Access to markets
Be it Mahindra & Mahindra’s (M&M) acquisition of Punjab Tractors (2007), the JLR deal or Apollo’s acquisition of Dunlop Tyres (2006), Vredestein Banden (2009) and now, Cooper, a key reason for all these acquisitions has been geographic diversification — basically access to new markets.
Punjab Tractors, for example, was a timely buy for M&M when its market leadership position was threatened. Earlier in 2005, TAFE had bought out the tractors division of Eicher Motors to establish a hold over northern markets such as UP, Punjab and Himachal Pradesh. These States were known for their robust tractor demand.
Mahindra’s presence, however, was predominantly restricted to the West and South of India. Punjab Tractors, with its complementary presence in the North, fitted well into M&M’s strategy to improve its market share.
With more diversified presence, companies are able to ride over a slowdown in one region through better sales in another.
Nowhere is this demonstrated better than in the financials of Tata Motors. With the domestic commercial vehicle industry reeling under a cyclical slowdown, the India business of the company booked a loss of Rs 312 crore in the latest January-March 2013 quarter. It was the Jaguar Land Rover business that came to its rescue at the consolidated level.
A third advantage is the improved visibility and consequently the opportunity to cross-sell. With Cooper not having a strong presence in the truck-bus tyres segment, Apollo Tyres plans to introduce ‘Apollo’ brand truck tyres in China and North America through Cooper’s network.
After acquiring Ssangyong in 2010, M&M has already introduced Rexton, a utility vehicle from the former, in India.
With companies buying out players much bigger than themselves in the global markets, their Indian operations are being relegated to a comparatively small position.
Therefore, recent acquisitions have led to the emergence of global players in the Indian auto industry. For example, in the year ended March 2013, JLR contributed almost three-fourths of sales for Tata Motors. Apollo’s consolidated operations will now see 50-60 per cent of revenues coming from the US and Europe alone.
Access to technology
Consider M&M’s buyout of Bangalore-based Reva Electric Cars. With electric cars having negligible market presence in the country, this buy was certainly not targeted at market access. It was, instead, for access to the electric-vehicle technology. After the acquisition of Reva in 2010, M&M has launched the e20, a second electric vehicle from the Reva stable. It is beginning work on an electric power train for both its vehicles and vehicles from Ssangyong.
Tata Motors also has technological benefits from JLR. The latter is the global leader in the use of materials such as aluminium to reduce vehicle weight, thereby making it more fuel-efficient. Three of the products in its current portfolio — the Jaguar XJ, XK and the all-new Range Rover launched in December 2012 — use this technology.
Product line expansion
The desire to add to the product line is also another reason for acquisitions in the auto industry.
From a presence only in utility vehicles (Scorpio, Bolero, SUV 500, etc.), small commercial vehicles (Alpha, Gio, Genio, Maxximo) and tractors, M&M forayed into several other segments through joint ventures and acquisitions.
While it used the joint venture route to enter into passenger cars (Logan) and truck-bus (Navistar) segments, it debuted in the two-wheeler space with the acquisition of the ailing Kinetic Motors in 2008. It captured a spot in the premium utility vehicles space through the Ssangyong buy.
For Apollo Tyres, Cooper complements Vredestein in terms of product line. While the latter focuses on winter and speciality tyres, Cooper focuses on light vehicle (passenger vehicles and light trucks) tyres.
A presence across different auto segments helps make up for a slowdown in one of them. A component maker gains bargaining power relative to automakers when he expands his product portfolio.