Posted by: Bruce Einhorn on August 22, 2010
Mahindra & Mahindra knows how to make tractors. It’s the biggest tractor maker in India. The company wants to join local rival Tata Motors - owner of Jaguar and Land Rover as well as the developer of the locally-made Nano, the world’s cheapest car - as a global player in the auto industry. Mahindra on Monday is signing a preliminary agreement to buy a stake in bankrupt South Korean automaker Ssangyong Motor, Bloomberg News reports. The move is the latest step by Mahindra to build its car business: In April Mahindra bought out local joint venture partner Renault and in May bought 55 percent of Bangalore-based green-car pioneer Reva Electric Car.
If Mahindra follows through on the preliminary deal and takes control of Ssangyong, the Indian company will have the opportunity to show it can succeed where a Chinese rival failed. As Chinese companies look to expand globally through M&A, Ssangyong is the prime example of what can go wrong. SAIC Auto, the Chinese automaker from Shanghai that is one of the most successful producers of cars in China, tried to make Ssangyong the center of an overseas push back in 2004, paying more than $500 million for a 51 percent stake in the Korean automaker. Things didn’t go well after that. “In Ssangyong, it was buying a smaller company. And the acquired company was located in South Korea—next door, both geographically as well as culturally,” Anil K. Gupta and Haiyan Wang wrote in this column on Businessweek.com last year. “Yet, look at the results: bitter disputes over Korean perceptions that SAIC was an exploitative owner, criminal investigations, very little value capture by SAIC, a collapse of Ssangyong into bankruptcy protection, and a complete wipeout of SAIC’s investment.”
SAIC is GM’s Chinese partner and today is the biggest automaker in the world’s biggest auto market - yet it still couldn’t make an investment in Ssangyong work. Who knows, maybe Mahindra will do things better. The Economic Times, for instance, quotes analyst Shishir Bajpai of IIFL Wealth Management saying Ssangyong is “definitely a strategic fit for Mahindra.” He adds, “Ssangyong buy makes a lot of sense for them. It is their step towards establishing a global footprint.” Another bullish analyst, Arun Kekriwal of KRIS, says “Mahindra has ventured in many areas and their track record so far shows they have been right with their decisions and timing.” SAIC had a good track record, too. A lot of good that did. As Mahindra now branches out from its home market, it will be interesting to see what the Indian company has learned from the Chinese company’s failure.