Apollo buyout effort of Cooper Tires
The Deal Gone Sour
Dr.A.Sridhar Raj*
Assistant Professor
Institute of Public Enterprise
Hyderabad
Mobile: +91 9246294086
M.Sathish
Assistant Professor (Senior)
PSG Institute of Management
(PSG College of Technology)
Coimbatore
Mobile: +91 9003390946
Dr.S.Kumar Chandar
Management Consultant
Sandhata Technologies
Hyderabad
Mobile: +91 9443059554
* Corresponding Author
Introduction
The treasure pot turned out to be an albatross neck for Apollo tyres as the senior management team seems to have hurried itself towards the decision to buy US-based Cooper Tire & Rubber Company by overvaluing the latter’s potential. The attempts by Apollo to get the deal revised hit a dead lock as Cooper tires remained adamant and also filed a complaint in a Delaware Court against Apollo for enforcing the buyout at the earliest. With the Delaware court not heeding to the request from Apollo tyres to throw out the deal on the pretext that Cooper tires did not stick to its commitment, the hearing and the deal are watched closely by the investors and the management from both the sides. With the court ruling by its side, Cooper is awaiting the next move from Apollo tyres. With an unfavorable decision stacked against him, the Chairman of Apollo tyres, Onkar Kanwar was sitting tight, not able to decide as what should be done next.
The Global Tyre Industry
Tyre industry poses its own challenges to the manufacturers although with increasing sales of automobiles across the world, the sales of tyres are also in demand. The automobile industry across the world is growing at a brisk pace after the slowdown. According to a McKinsey Survey, the future growth in automotive sector will be in emerging economies. The report further states that emerging markets’ share of global sales will rise from 50 percent in 2012 to 60 percent by 2020, while their share of global profits is also set to rise by 10 percentage points. Therefore, the corollary expectation is that the demand on tyre industry will also increase and the need for ramping up production is in the offing among tyre manufacturers.
Source: McKinsey Report
Indian Tyre Industry
The total turnover of tyre industry stands at Rs. 43,000 Crores and top ten tyre companies in India account for more than 95% of total production in India. Out of the total production of total units, it is found that majority of the tyres are produced for two wheelers like motor cycles and scooters followed by passenger cars during the year 2011-12. However, the trend is not that dissimilar during the earlier years.
The production of passenger car segment grew at 12% growth which is healthy for tyre manufacturers. With the increasing demand for cars and motor cycles, the tyre industry is expected to take boost in the near future. According to SIAM, it is expected that passenger vehicles will reach 5.1 million units by the year 2015 and similarly LCV are expected to grow reach 1.42 million units by the year 2015.
The major cost for tyre industry is the raw material which constitutes around 50-55% followed by labour (20-30%) and others (15-30%). The raw material breakup further provides a glimpse of the tyre manufactures of their dependence on rubber where natural and synthetic rubber again constitutes 50-55% and is followed by carbon black, steel, fabrics, etc.
Due to high entry barriers, there are a few major players like MRF, Apollo, JK and Ceat who command more than 70% of the tyre market in India. Therefore, there is an intense competition among these players. MRF is the market leader (27%), followed by Apollo (19%), JK (16%) Ceat (12%), Birla (11%) and the rest is shared by other manufacturers.
There are different types of tyre dealers in India who include Multi Brand , Single Brand; Company owned exclusive showrooms as far as the brands are concerned. Coming to the types, again, there are different types of dealers but one finds that there is overlapping as well in some type of tyres. Dealers play an important role in the entire supply chain as they are the ones who come into contact with the customers and act as ambassadors of the tyre companies.
Cooper Tire
Cooper Tires has a history of one hundred years when John F. Schaefer and Claude E. Hart purchased a company which was into tire repair kits in the year 1914 and in the year 1915; they brought Giant Tire & Rubber Company. The company grew during and after the World War I and changed its name to Cooper Tire and Rubber Company in the year 1946. The company became a listed company in the yaer 1960 and expanded its reach and made it into the league of fortune 500 companies. In the year 1991, the net sales of the company reached $1 billion and this was possible due to its expansion to 50 manufacturing facilities in nine countries. The company grew due to its acquisitions and over a period of time branded itself as a leader in the high performance tyres.
Cooper Tire & Rubber Company specializes in manufacturing and marketing of tires for passenger cars and light trucks. With its headquarters in Findlay, Ohio, the company spread into eleven countries across the world. Cooper is also focusing on replacement tire market which has good potential in not only US but also in those countries where it is present. Cooper is the fourth largest tire manufacturer in North America and among top eleven global tire manufacturers ($4.2 billion) and is also a major player in radial tires in China. The company receives 70% of its revenues from North America and the remaining 30% from the rest of the world. One of the strengths of Cooper is its presence in North America and China, which have huge demand for car and truck tries. The company paid 164 quarterly dividends consecutive to the shareholders and is looking for increasing profitability.
The company has been moving strategically as its focus continues to be not only the existing North American market but also continue to invest in emerging and prominent economies like China, Mexico, Eastern Europe and Central Europe. Some of the strategic objectives of the Cooper tiers include the following:
- Create sustainable competitive cost position by reducing product cost to the tune of 10-15%
- Topline profitable growth of 6% CAGR
- Build organizational capabilities through ERP implementation and high performing culture
The recently launched Cooper Zeon RS3 and Discoverer AT3 got good appreciation from the customers In the US. With a flexible and cost effective manufacturing network, Cooper tires is well placed in moving ahead to meet the demands of North American Automobile industry and also the emerging regions of the world like China. They extended their manufacturing arms in countries like China and Europe where they have both technical centres and also manufacturing units. The sales breakup of Cooper tires presents an interesting scenario as in the year 2012 it sold 49 million tires across the world in which 47% are passenger car vehicles, 23% light trucks and 20% commercial trucks. (remaining is shared by other categories)
The Buyout Effort
Onkar Kanwar was a man of high ambitions as he was always on the drive towards becoming big by entering into the league of big players. However, with the 2008 recession, his hopes remained unfulfilled as his company became cautious of the acquisitions during that time. The things did not improve as the global economy was engulfed in slow down and Kanwar felt that the time was running out for Apollo tyres to make inroads into big league. But he did not lose hope as he was eying on the big ticket buyout. He was closely watching Cooper tires and established friendly relationship with the latter to understand how it functions in a country like US and other developing countries. Both the companies were interested in each other but none made efforts for an alliance in any form.
Onkar Kanwar studied in University of California and cherished the ambition of making it big once he came back to India. His father, Raunak Singh was a small business man selling steel tubes for bicycles. Once Onkar came back to India he sensed the opportunity of scaling up the operations of his father’s business and soon took a leading role in the affairs of the company in the year 1979. The aggressive style of Onkar was not liked by his father leading to family dispute about the ownership of the business. The fight with his father although left a deep scar on the relationship, nevertheless, put him in the driver’s seat of Apollo tyres.
Apollo tyres was making huge losses to the tune of Rs.300 million and anyone would have found the company unviable and left it, but for Onkar who was young. The tyres made by Apollo tyres were coming back fast from the market due to poor quality and workers stopped work in the company. There was no indigenous technology for Apollo tyres and they depended on an international company for the technology.
The conditions of his entry into the tyre business were highly unfavorable and he was caught in a dilemma of whether to quit or continue. But he persisted and continued to battle the odds within and outside the company. He had no idea of running the tyre business which in fact, proved beneficial as he could think clearly from a clean state and from the perspective of an outsider. He made a plan for the turnaround of the company and his plan was simple – transparency and communication with the workers. He called for the meeting of workers and told them, “Namaste my dear friends, as you know that we are struggling with the problems of production and marketing, we stand at the crossroads. Without your cooperation, it is not possible for me take the company further. I agree that I am a novice in this field, but I request you to extend support me in this herculean task of rebuilding our company. I promise you that good times are ahead, but I want your cooperation in doing so. We have two options, either shut down the factory or create a Rs. 1 Billion company. I leave the decision to you.”
The workers were shocked to hear what Onkar said. One middle aged man asked Onkar, “Do you have any knowledge about tyre industry?” Onkar said no. The meeting ended in exasperation for him and the workers. The workers did not find assurance from Onkar and half of them left and some stayed back as they did not find any alternative. However, he could lure some toward his vision and values. With the young team working hard for the company, his vision became reality in the year 1986, when Apollo tyres a Rs. 1 Billion company.
Onkar was cautious of his successor as he did not want to develop another scar in his family business. He appointed his younger son Neeraj Kanwar as Vice Chairman and Managing Director taking care of day to day operations of Apollo tyres. Neeraj joined as a Manager, Product and Strategic Planning in Apollo tyres and later on joined the board in the year 1998. In the year 2008, he became vice chairman and in the year 2009, he became the managing director. Under his able leadership Apollo acquired Dunlop Tyres International in South Africa and Zimbabwe in 2006, and Vredestein Banden B V in the Netherlands in 2009 thereby transforming itself into a multi-geography company with operations in 3 continents. (Source: Company)
Continuing the efforts of acquisitions, Apollo tyres eyed the US market which was much bigger than the Indian market and developed warm relationship with Cooper tires right from the year 2008. In fact, the saga of the relationship started in South Africa, when Apollo tyres sold Dunlop tyres to Sumitomo Rubber Industries Ltd. Dunlop at that time was selling Cooper tires and in South Africa and Kanwar and Cooper Tire chairman Roy Armes became friends. In fact, the personal friendship was the key for the attempt of the Apollo to buy Cooper.
Finding the potential of Cooper tires being the 11th largest tire company in US and its presence in Europe and China, Apollo tyres found it to be a good company to acquire. This acquisition would help Apollo not only to enter into US market but also Europe and China which are equally promising as well. The acquisition would have helped Cooper to fight slowdown in India and minimize its dependence on Indian market. The growing Chinese market was difficult to lose and Europe would have provided Apollo with some more new markets and facilitate its expansion. Keeping in view such strategic objectives, Kunwar decided to go for the buyout of Cooper tires.
The burning tire
Apollo tyres agreed to pay $35 per share which meant a premium of 43% of the market price before the deal was announced. The deal, $2.5 billion dollars was the biggest by an Indian company and was hailed as trend setter in the field of mergers and acquisitions. Things turned thorny when the market price of Apollo tyres slumped as the investors were worried about the move of Apollo tyres by 9% and similarly share price of Cooper tires also got thumbs down by the investors.
With further probe, Apollo found that the financial forecasts given by Cooper were not only misleading but also false, particularly their relationship with the Chinese JV was not clear. Making the things worse, the Chinese JV partners of Cooper tires did not like the deal and the workers of the JV went on strike from where Cooper tires got 25% of its revenues. This was a shock to Apollo as it was primarily banking on Chinese manufacturing plant to meet the demands of the Chinese passenger car market.
Further problems erupted in US for Apollo and Cooper. The workers in Findlay and Texarkana manufacturing plants filed a case which led the stalling of the entire process till the grievances of the workers are resolved through collective bargaining. This also led to stoppage of work leading to loss of production. In both the cases, the loss of production resulted in financial loss for Cooper and Apollo and both started accusing each other for hiding the truth about their structure, worker problems and financial forecasting.
Both Apollo and Cooper wanted to get out the problem at the earliest, but the objectives of both were squarely different. The time was running out for Cooper and to pressurize Apollo the former filed a suit against latter for the timely closure of the deal. Cooper was worried that if the deal is not close by 31st December, the Apollo would go scot-free and need not pay compensation to the tune of $112.5 million for the failure of the closure of the deal.
Apollo was ready to buy Cooper at a reduced price of $32.50 which was later increased to $8-$9 dollars per share and expectedly Cooper rejected the deal. Further, in its complaint to Securities Exchange Commission, Cooper criticized that Apollo has drawn out negotiations with the workers to delay the closure of the deal, the criticism rejected by Apollo.
Conclusion
Onkar Kunwar is confident that he would stem over the crisis, even though the Delaware court has posted the hearing on 5th November. He is sure that the entire process will end without hiccups as he is a firm believer of justice and fair play. He is not worried about the compensation that needs to be paid if things go wrong but he is more hurt by the attitude of his friend Roy Armes, CEO of Cooper Tires, the manner in which he misled him during the due diligence stage by hiding certain facts. In spite of his confidence levels high, his spirits are down a bit and he is worried about what would happen if the court adjudicates against Apollo.
The deadline for the deal passed off peacefully and although both Apollo and Cooper are yet to come close the deal formally in the form of termination charges and break-up fees. The mood seems to be upbeat as Apollo shares of Apollo Tyres touched a 52-week high of Rs 117, which was an indication of the fact that the deal did not go well with the investors and even for both the companies which fought with each other in the court.
Annexure I: The tire industry demand in US
Annexure II: The revenue mix of Cooper tires