Mahindra & Mahindra Limited (M&M) is an Indian multinational automobile manufacturing corporation headquartered in Mumbai, Maharashtra, India.

It is one of the largest vehicle manufacturers by production in the Republic of India. It is a part of Mahindra Group, an Indian conglomerate. The company was founded in 1945 in Ludhiana as Mahindra & Mohammed by brothers K.C. Mahindra and J.C. [3] Mahindra and Malik Ghulam Mohammed. After India gained independenceand Pakistan was formed, [4] Mohammed emigrated to Pakistan. The company changed its name to Mahindra & Mahindra in 1948. It [5] is ranked #21 in the list of top companies of India in Fortune India 500 in 2011. Major competitors in the Indian market include Maruti Motors (a 60% owned subsidiary of Suzuki Motors from Japan), Tata Motors (fully owned by Tata Sons; Owner of Indian-British Jaguar Land Rover), Toyota, Mercedes-Benz (Merc) (Based in Poona, Maharastra in India; A subsidiary of Daimler AG from Germany) and others

History
Mahindra & Mahindra was set up as a steel trading company in 1955. It eventually saw business opportunity in expanding into manufacturing and selling larger MUVs, starting with assembly under licence of the Willys Jeep in India. Soon established as the Jeep manufacturers of India, the company later commenced upon the task of expanding itself, choosing to utillise the manufacturing industry of light commercial vehicles (LCVs) and agricultural tractors. Today, Mahindra & Mahindra is a key game player in the utility vehicle manufacturing and branding sectors in the Indian automobile industry with its flagship UV Scorpio and swiftly exploits India's growing global market presence in both the automotive and farming industries to push its products in other countries. Over the past few years, the company has taken interest in new industries and in foreign markets. They [6] entered the two-wheeler industry by taking over Kinetic Motors in India. M&M also has controlling stake [7] [8] in REVA Electric Car Company and acquired South Korea's SsangYong Motor Company in 2011. The US based Reputation Institute once ranked Mahindra amongst the top 10 Indian companies in its [9] 'Global 200: The World's Best Corporate Reputations' list. The current company catchphrase (tagline to attract business) is Rise.

Automotive Mahindra & Mahindra Limited

Mahindra Scorpio

Mahindra Pick-Up in Italy

Mahindra Jeep CJ 340.

Mahindra Bolero

Ssangyong
Country Parent Subsidiaries Brands Location Sales figures
South Korea Mahindra (India) - 70.03%

Ssangyong

Headquarters and main plant: Pyungtaek

2008: 92,665 units 2007: 136,000 units 2006: 121,196 units 2005: 141,306 units 2004: 135,600 units

Introduction

Ssangyong is Koreas smallest car maker and a specialist of off-roaders. Thanks to the technolog Mercedes-Benz, it developed some good off-roaders from zero within a few years. Also dont forg luxurious sedan, Koreas first decent luxurious car.

Previously owned by Daewoo from 1998 and then SAIC of China from 2004, Ssangyong went int early 2009.

Brief History

The history of Ssangyong started in 1954 when Hadongwahn Motor was founded. It was later ren The company became a manufacturer of commercial trucks, fire engines and other special purpo 1970s.

In the early '80s, Dong-A acquired SUV maker Keowha, which made 4WD offroaders licensed fro company was renamed to Ssangyong in 1986, since then it concentrated on SUVs.

1993 Musso

The turning point was in 1991, when it signed a technical cooperation agreement with Mercedesengine technology and helped it to develop light commercial vehicles. This resulted in many Ssan powered by Mercedes straight-six. The Musso of 1993 and Korando of 1996 successfully opened Later, Mercedes even helped Ssangyong to develop its first passenger car - the Chairman luxurio its E-class.

To produce the Mercedes engines, Ssangyong built its second plant in Changwon. Aggressive ex substantial debt and its eventual bankruptcy during the 1998 Asian financial crisis. Then it was re However, in 2000 Daewoo itself also went into receivership. Ssangyong, benefited by its strong b and the better prospect of global SUV market, received support from its creditors and spun off fro

1997 Chairman

In 2004, Chinese car maker SAIC acquired controlling stakes in Ssangyong and became its new financial condition did not improve. Having lost US$500 million in 2008, SAIC called for surrender strapped Korean subsidiary to bankruptcy protection. In 2010, it was acquired by Indian truck ma

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.

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 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, cost-cutting 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.

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.

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 full-range player with a presence in almost every segment of the automobile industry, from two-wheelers 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 organization holding the largest database of primary corporate climate change information in the world.

Post-Merger Analysis
Deal Value and Structure

Deal Structure
M&M gets US$ 378 Mn in share: New shares were issued, diluting other shareholders: M&M gets 70% stake M&M to pay US$ 463 Mn, money used to repay debt M&M assumed US$ 85 Mn debt on its balance sheet Ssanyong now debt free

Ssangyong under debt of US$ 400 Mn in 2010

The deal was valued at US$ 463 mn (INR 2,105 crores)1. This deal was a sort of debt relief program for SsangYong which became debt free post transaction.Mahindra got 70% of newly issued shares and others shareholding was diluted.SsangYong 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.

Valuation
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 Ssangyong 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 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 veEbitda. Also, Cashflow based analysis is difficult due to weak financial condition of the company.

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 2019 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. 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 Ssangyong Motors post deal

D e a l

Ssangyong Motor Stock since the deal (Source: Financial Times)2 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.

Source: Financial Times ( all figures in KRW)

A recovering Ssangyong

Gains to 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

Ratio Comparison
Profitability - Ssangyong Motor Co (003620) Return on Assets Industry Comparison Return on Equity Industry Comparison

-5.48%

-14.86%

Return on Capital Industry Comparison

-9.58%

Margin Analysis - Ssangyong Motor Co (003620)

Gross Margin Industry Comparison

Levered Free Cash Flow Margin Industry Comparison

11.58%

-4.56%

EBITDA Margin Industry Comparison

SG&A Margin Industry Comparison

-2.21%

16.54%

Asset Turnover - Ssangyong Motor Co (003620)

Total Assets Turnover Industry Comparison

Accounts Receivables Turnover Industry Comparison

1.6x

19.1x

Fixed Assets Turnover Industry Comparison

Inventory Turnover Industry Comparison

2.7x

10.2x

Credit Ratios - Ssangyong Motor Co (003620)

Current Ratio Industry Comparison

Quick Ratio Industry Comparison

1.3x

0.7x

Long-Term Solvency - Ssangyong Motor Co (003620)

Total Debt/Equity Industry Comparison

Total Liabilities/Total Assets Industry Comparison

15.0x

49.5x

Growth Over Prior Year - Ssangyong Motor Co (003620)

Total Revenue

Tangible Book Value

Industry Comparison

Industry Comparison

31.65%

48.42%

EBITDA Industry Comparison

Gross Profit Industry Comparison

98.31%

6.89%

Receivables Industry Comparison

Inventory Industry Comparison

-13.43%

19.21%

Diluted EPS Before Extra Industry Comparison

Capital Expenditures Industry Comparison

34.10%

-8.66%

Cash From Ops. Industry Comparison

Levered Free Cash Flow Industry Comparison

-263.12% 3,228.48%

Valuation of Approach for M &A

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.

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

How did the deal proceed?

The following steps outline how the deal unfolded: 1. Aug 7, 2010 - The board of directors of the company authorised submission of a binding bid to acquire majority stake in SsangYong Motor Co Ltd, South Korea. This happened after months of due diligence by the firm. The other Indian entity interested to acquire SM -- the P K Ruia group which had sought more time to complete the due diligence, also submitted a bid soon after, and ended up as the reserve bidder. 2. Aug 12, 2010- Mahindra & Mahindra has been named as the preferred bidder to buy SsangYongand emerge as one of the world's largest SUV makers with a combined turnover of over $4 billion. This meant M&M had the exclusive right for negotiations. SYMC would not involve any third party for takeover-related activities.SsangYong fell to a near three-month low on Thursday on the Seoul stock exchange as traders, disappointed over the exit of RenaultNissan, dumped the stock. 3. Aug 23, 2010 - Mahindra & Mahindra signed anMoU to acquire a majority stake in beleaguered South Korean auto manufacturer. The agreement was followed by a detailed due diligence process and finalisation of definitive agreements.

Aug 7 Mahindra board approves SsangYong Motor bid

Aug 23 Mahindra signs MoU

Jan 28 Formal consent from secured & unsecured creditors, 500 odd suppliers

Feb 9 Formal Allotment for shares

Aug 12 Mahindra named preferred bidder

Nov 23 Deal Formally Signed

Feb 1 Court approval

4. Nov 23, 2010 -Mahindra & Mahindra Ltd signed a deal to buy South Koreas money-losing Ssangyong Motor Co Ltd for 522.5 billion won ($464 million). Investors reacted cautiously about the signing and raised concerns sbout whether Mahindra would invest in Ssangyong and help the South Korean company launch successful new model line-ups. 5. Jan 28, 2011 - Large creditors of Ssangyong Motors, including Korean Development Bank, Barclays Bank, have approved the acquisition of the South Korean sports utility vehicle (SUV) maker by Mahindra & Mahindra, paving the way for a formal change of guard by the end of Feb. While Korean Development Bank was the main secured lender, Barclays Bank was among the large unsecured lenders.The deal cruised through after Ssangyong's creditors agreed to a haircut to clean up its books. Ssangyong's 613 billion won debt, nearly 100 billion won more than the total amount paid by M&M, was the biggest and most crucial factor in this deal.Ssangyong's "unsecured creditors" decided to take a 100 billion won haircut, allowing the M&M money to clean up the company's books. 6. Feb 1, 2011 The firm managed to convince the bankruptcy court about the feasibility of its plans for Ssanyong, and got an amended rehabilitation plan approved. 7. Feb 9, 2011 The firm was formally allotted 70% of the Korean company's total shareholding and this sealed the entire takeover process.After the transaction, Mahindra & Mahindra Limited and one other individual became the largest shareholder of the Company, replacing Peter Beck & partner.

Learnings from the project

Key learning from the case: 1) 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

2) The reaction of stock markets post the deal and how it affects the shareholders.However, the entire performance of Mahindra cant be attributed to the deal as the size of deal was INR 21 bn while the market cap of M&M is close to INR 575 bn. 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. 6) 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. 7) The steps involved in the takeover, right from due diligence, board and shareholder approval to structuring the deal to suits all stakeholder needs. 8) 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.

References
All links accessed on December 03, 2012: Financial Times, Database : Ssanyong Motors Economic Times In-depth Coverage of Mahindra-Ssanyong deal Google Finance Mahindras Press release on Nov 23, 2010 LiveMints News release: South Koreas watchdog nods Mahindra buy of Ssangyong WSJ article: Mahindra's SsangYong Unit Launches SUV in India ET Coverage: Mahindra may not retain Ssangyong staff NDTV Profit analysis: Mahindra & Mahindra taps Korean arm to crack China