CASE STUDY

We are long past the time when Indian businesses primarily focused on growth on their home turfs alone. The last decade has seen multiple Indian companies establishing a footprint across the globe. Taking on the emerging industry globally is a dynamic process. But if well planned and executed, it can take the business to scale newer heights.

Hitech Motors is an established domestic player in the automobile market in India. They are mainly into the manufacture of commercial vehicles and passenger vehicles in the budget and subprime segments. They have been planning to expand overseas for more than a year.

Essence is a world-renowned luxury car brand owned by Sigma Motors, which decided to sell it off as part of a corporate restructuring exercise. It is a very palatable opportunity for Hitech Motors to venture into the international market using Essence’s brand, infrastructure, and technology. However, owing to failure in their current product, it is going through a financial crunch.

On a Monday morning, over tea in his 31st-floor cabin, that overlooked the entire city, Rajesh Dutta asked Sameer Sethi, his Mergers and Acquisitions Director, “Do you think it will work for us?”

Rajesh Dutta is the CEO of Hitech Motors that dominates the budget and sub-prime segment of passenger cars and the largest commercial vehicle manufacturer in India. Almost 75 years into the business, Hitech has leveraged its competencies to become the country’s sole indigenous auto-maker. While it also has manufacturing units in low-cost countries like Bolivia, Brazil, and Mexico, it targets the Indian markets for over 90% of its revenues.

With innovation and customer service driving its core values, it has not always been smooth sailing for the company. The latest product launched by Hitech Motors has placed it in a spot. With perpetual growth and improvement in living standards over the last five years, the company identified a market section that was willing to switch over from two-wheelers to a budget passenger car. This scenario presented Hitech with an opportunity to increase the size of the market by designing a product that can be priced predatorily and be marketed as the common man’s vehicle. This would enable them to ensure that a broader perspective and aspiring customers get converted into sales.

It was at this point that Venus was perceived. It was Hitech’s most ambitious project, in that it entailed a plethora of challenges. Hitech had to borrow heavily from the market, shift its manufacturing base from one state to another due to an altercation with the former’s ruling party, and faced other political challenges because it could not provide an optimal price for Venus. The major challenge for Hitech concerning Venus was product positioning. It had positioned Venus, not as an aspirational product, but as an upgrade. This led to an inadvertent build-up of consumer perception of the work being substandard in the passenger car industry, and this is where Venus failed. The sales responsible for the car have been immensely cold, and Venus is now a loss-making business.

Amidst the background of a global economic meltdown, Sigma Motors, a leading multinational automaker based out of the USA, bore the financial brunt. With worldwide growth rates plunging to record lows and consumer demand taking a hit, the automobile industry is now among the worst affected.

During the financial crisis, Sigma Motors is looking to uphold its sustainability by cutting down on costs and shedding its workforce. As part of a corporate restructuring exercise, it plans to sell off its noncore assets, including Essence, which is its marquee luxury car brand operating in the executive, sports, and SUV segments.

Contemporaneously, Hitech Motors has been planning to expand its operations geographically and venture into new markets. However, due to intense competition in the international automobile market in terms of technology, brand value, and price optimisation, Hitech is hesitant to enter the global market with a new brand.

Also, the word in the market is that Sigma Motors is planning Essence’s selloff. Sameer, the M&A director, comes to Rajesh with this information. “This is a very palatable opportunity for us to venture into the international market. All the odds are in our favour. Hitech can arrange for the finances, and in return, we get a world-class brand with its stateof-the-art technologies and manufacturing assets. If we work this right, we could establish a strong foothold in the global market in a matter of two years. This is the perfect amalgamation of two very trusted entities that could come together to deliver exceptional customer value. Not to mention, a tailor-made opportunity to enter the global market and work towards multiplying the business manifolds!” said Sameer to the CEO, proposing an acquisition of Essence.

Post this pitch, Rajesh being the astute businessman that he is, does a quick mental calculation. “With Venus failing in the local market, we already have a substantial debt burden upon us, and due to this our credit ratings have come down dramatically. We can channel funds from the business’s reserves towards this deal, but would it be worth considering the volatility in the global automobile industry? Factoring in the economic crisis, is this the appropriate moment to invest in a luxury car business when there is a serious threat facing job and income security?” he asks Sameer.

Deepika Pandita, Ph.D. is an Assistant Professor in Symbiosis Institute of Business Management Pune at Symbiosis International University. She comes with an experience of 12 years and teaches post graduate and Executive MBA courses in the area of human resources, organisational behaviour, leadership and talent management. Dr. Pandita has a graduate degree in Management and post graduate degree in Management and Human Resources.

Rajesh and Sameer should go back in time to June 2008, when Ratan Tata, the Chairman of Tata Motors acquired Jaguar and Land Rover from Ford Motors. The deal was very complex since Ford motors had put forth a clause that both the brands shall be sold together, and Jaguar was going through Rajesh and Sameer should go back in time to June 2008, R when Ratan Tata, the Chairman continuous losses. It was also the time when the automobile sector was going through one among the worst recessions, and Ford, a member of auto giants club - popularly termed the ‘Big Three’ - was bleeding, and had decided to exit from both the brands which had originally been acquired from the British manufacturer.

Another piece of learning comes from the historical shift in October 2008, when Tata Motors decided to relocate the factory that produced Nano - conceptualised as a dream project and tagged the ‘people’s car’. Owing to political bias and agitation by the farmers, this project was shifted from Singur in West Bengal to Sanand in Gujarat, even before it could take off. Due to the time-lapse, followed by the long recession, increased cost due to the delay, this brand could not bring in the anticipated success in the market.

Hitech has been planning its overseas expansion since the last year. And today, Rajesh feels that he is very close to his dreams, and acquiring Essence as the right opportunity, and discusses it with Sameer, an expert in Merger and Acquisition (M&A).

The perpetual threats: -

♦ The slowdown in the auto sector

♦ Hitech’s financial position due to high debt

♦ The failure of Venus, an ambitious project

♦ Fear of accumulating losses if Essence fails to perform

♦ Intense competition in the international automobile market in terms of technology, brand value, and price optimisation, Hitech fears of entering the global market with a new brand.

The opportunities: -

♦ In the current geopolitical situation, it is very difficult to launch a greenfield project

♦ Business is always cyclic, and more so in the auto industry

♦ The cost of acquisition is very low since Sigma is keen to move out from this vertical

♦ The company can use the reserve fund very productively to exploit the situation

♦ Sigma motors is known for its technology and infrastructure and has established Essence in the luxury segment globally

♦ Normally during a slowdown, it is the mid-segment cars and not the luxurious cars that are impacted

♦ Over and above, Essence is known for its presence as a luxury car, hence it will be easier for Hitech to build it further as a big giant automobile company in the sector

♦ It will be a great opportunity to get the benefits of brand loyalty, which will help in expanding beyond the domestic market

♦ After the addition of Essence, Hitech will have the entire segment in the auto sector from budget to luxury car and the geographical reach from local to global

♦ Company will get readily available infrastructure and technology, which will help and add value to the other segments of passenger and commercial vehicles of Hitech

♦ The strength of its people’s power and the expertise of innovation and customer service will take Essence to another level and failure of Venus will be well compensated in capacity utilisation for Essence’s expansion in India.

Given the overwhelming opportunities for growth and prosperity to Hitech as compared to the threats, it must acquire Essence since it is the best way to enter the international market. Secondly, it is a golden opportunity for Hitech to use the reserve funds over Essence’s low valuation due to a near-distress sale by Sigma. Thirdly, given the slowdown in the auto industry, fewer companies may be interested in Essence, thereby posing no challenge or competition to Hitech. Rajesh and Sameer should therefore decide to acquire Essence and establish Hitech in the international market.

Analysis by Ravi Mishra, Senior Vice President-HR for Global Epoxy Business, Aditya Birla Group

Analysis by Rohit Hasteer is the Group CHRO for Housing.com, Prop Tiger.com and Makaan.com. He has an experience of more than 20

As the CEO of Hitech Motors, whose recent ambitious project was unsuccessful, one can understand Rajesh’s apprehensions in taking a plunge into the international market through an acquisition. And more so during a slowdown in the global economy and the debt that was undertaken by Hitech. However, as the M&A Director, Sameer should respond to Rajesh’s reservations by highlighting the brighter side of the proposed acquisition. The acquisition is the perfect vehicle for Hitech to enter a newer market segment, and it also offers a quick path to incremental growth. In fact, a recession can be the perfect time to find a bargain investment and the right deal can catapult Hitech to the next level. An analysis by Bain & Company of more than 24,000 transactions between 1996 and 2006 show that acquisitions completed soon after the recession of 2001-02 generated nearly thrice the returns as compared to the acquisitions in the preceding years. Hence, the odds are definitely in favour of the acquisition.

Given the prevalent business opportunities and challenges, one would always recommend the acquisition. While Hitech does have a failed launch on its back, as the country’s leading automaker, it is best positioned to take this risk. It has years of goodwill and expertise and a single unsuccessful project does not imply that Hitech cannot think big.

 It makes strategic sense to pursue this acquisition as it gives the following to Hitech Motors: -

♦ A broadened geographic footprint that it has been eyeing for some time now

♦ An increased market share

♦ Enhancement of its technological capabilities. Today, consumers are keen on buying cars with latest technologies and designs. The acquisition shall give Hitech Motors access to Essence’s technology and research

♦ Diversify its product portfolio. Its core brand products mostly consist of commercial vehicles and passenger vehicles in the budget and subprime segments

With the acquisition, Hitech will gain access to all vehicles from Essence which would primarily be the luxury cars operating in the executive, sports and SUV segments, thus ensuring that Hitech has covered all segments in the automobile market.

Some of the other ways through which Hitech can work around to expand business globally would be:-

♦ By going solo in the international market like it has in low-cost countries. This approach, however, requires a lot of investment and legal hassles. Also, it is not easy to find one’s feet in the new market as one has to start from scratch. However, once successful, the company gains access to new customers in a new market and the revenues surge

♦ Hitech Motors can also go for a merger with Essence. This would not burden Hitech financially, and at the same time, it gets an opportunity to enter the market globally. However, mergers often lead to diseconomies of scale where the company becomes so large that cost per unit increases. This also leads to increased prices which may not always find resonance with the customers.

A hasty acquisition or a wrong deal can cripple a company, and in the long run, even pull it out of business. However, if planned and executed well, an acquisition at the time of recession gives an organisation larger room for negotiation as the other organisation which is looking to uphold its sustainability may not be in a position to bargain. Hence, a wellthought acquisition can definitely lead a business scale to new heights.