HERO HONDA DEMERGER

BY: Antriksh Miya - 39 Arjun Khera - 70 Shreyansh Bhaskar- 175 Jatin Jain - XYZ Karan Chadha - 196

About The Company

Hero Honda Motors Limited, based in Delhi, is the

world's Largest manufacturer of motorcycles .

A joint venture that began in 1984 between

the Hero Group of India and Honda of Japan.

Hero Honda's Splendor is the world's largest

selling motorcycle.

 Type : Public company BSE:HEROHONDA

Founded: January 19, 1984

in Gurgaon,Haryana, India Headquarters : New Delhi, India Key people:

History
In the mid-1980s, Foreign companies permitted to

enter the Indian market through minority joint ventures.

Four

Indo-Japanese joint ventures: Hero Honda, TVS Suzuki, Bajaj Kawasaki and Kinetic Motor Company (Kinetic Honda)

The company thrived on the slogan fill it- shut it-

forget it

The 2006 Forbes 200 Most Respected companies

list has Hero Honda Motors ranked at 108.

Market Share

Hero Honda Bajaj TVS Yamaha LML Kinetic Royal Enfield Majetic

 Munjal family and Honda group both owned 26%

stake in the Company.

In 2010, it was reported that Honda planned to sell its

stake in the venture to the Munjal family.

The technology in the bikes of Hero Honda for almost

26 years (19842010) has come from the Japanese counterpart Honda

The decision of demerger came after a honda was

competing against the JV company in the same segment.

DEMERGER:THE UGLY DIVORCE

Differences in Approach

Differences in Approach
Honda's reluctance to fully and freely share

technology with Hero (despite a 10-year technology tie-up that expires in 2014) as well as Indian partner's uneasiness over high royalty payouts to the Japanese company.
Another major irritant for Honda was the refusal

of Hero Honda (mainly managed by the Munjal family) to merge the company's spare parts business with Honda's new fully owned subsidiary Honda Motorcycle and Scooter India (HMSI)

Honda s Rationale
Relaxed govt. norms(1999 India free trade

agreement allowed foreign players to own 100 % subsidiaries in India) Enough knowledge of Indian market for honda Indian 2 wheeler markets will grow in double digits hence 9.3-million two-wheeler (2008)market will grow to 16 million by 2015 A minority stake in Hero Honda also yields limited profits for Honda compared with a fully consolidated 100 percent unit. Use its full energy to develop HMSI (2001) in India.

HERO s Rationale
Exports to Boost volumes: When the buyout is

complete and agreement signed, Hero Honda will have access to export markets which it didnt have earlier. As earlier Hero Honda exports only to South Asia and some part of Latin America and not to markets where Honda had presence . Royalty :- When buyout will be complete in 2014 hero will not pay any further royalty to Honda. Technology :- With Hero Honda continuing to get products and technology from Honda as well as the clause that will allow Hero Honda to purchase technology form other technology suppliers also the option to set up its own R&D facility . Munjal Family will get overall autonomy of the company .

The Buy-out
Initially in Hero Honda both Munjal family (hero group)

and Honda group had 26% stake each. With market worth of Hondas stake being about $ 2 Billion ,it was offered for $1.2 billion (Rs 5,400 crore), at nearly 40 % discounting. In order to oblige Honda for this discounting Munjal family had to increase the royalty for Honda to double in between 5-7% of net sales. To buy out Hondas 26 per cent share, first Hero took bridge loans from bankers who financed this deal .

The Buy-out
Then it Created overseas-incorporated

special purpose vehicle (SPV), where 51% stakes where kept by munjal family and shares were sold to private investors, they will indirectly get dividends from Hero Motors, once it uses the funds to pay back the loans. These investors were given board seats in return. All the dividends will then be paid to these investors and will flow into the SPV.

Highlights of MoU Signed Between the Promoters

Existing Products to Continue: This means that the Hero

Group will continue to sell their blockbuster products like Passion and Splendor, which to date contribute about 70%-80% of the companys sales. Freedom To Export: Under the new understanding hero Honda will be able to export its products to other countries of interest. Independence to set Up Own R&D: Hero Honda will have the freedom to set up its own R&D facilities to develop new products. It will also be able to buy technology from others which it cannot right now. Brand Name to Change Over Time: According to the new MoU, Hero Honda will be branded by a separate by a different name in years to come. (hero mortocorp,2011). Royalty Payments to subside then end: Royalty payment to Honda will reduce from the coming quarter onwards. This was made clear after many had speculated that the royalty payments to Honda would increase to around 6%-8% from the current 2%3%. The management also stated that royalty payments will stop very soon without specifying any particular timeframe.

Impacts of Demerger on HeroHonda

This divorce would affect the HeroHonda Group at three different levels:

Customers: The name is what attracts people to Hero Honda because it is associated with trust and quality Communication: Fill it Shut it Forget it as well as Desh Ki Dhadkan Competitors: A decade of leadership hasnt really given the competitors an opportunity to do something special.

Impacts on Hero
Positive
There was out rightly no need to piggyback the brand

name Honda anymore which came with a huge royalty fee. New Markets : Able to export more motorcycles and scooters around the world. New segments: Premium Bikes
Negatives
There is a possibility Honda will reserve all the good ones

for HMSI. R&D spends for Hero Honda will riseBajaj spends about 1.5% of sales and TVSa bout 2% on this. Exports may not rise as fast as expected Capital expenditure for New Capacity

Impacts on Honda
Positive
Enough knowledge of Indian market for honda
Indian 2 wheeler market soon to grow in double digits minority stake in Hero Honda also yields limited profits

Negetive
Building Dealership and Network Honda Associated with Premium Segment Bikes

Financial Impact on Investors

The news of the split drove the stock price down to

Rs1,560 on 15th December 2010 from a high of Rs2,062 on 30th Novembera 24% fall in a fortnight. A deal at half the current market valuation Demoralized the Investors Rumors About Royalty Fees of 8%.