Book review: How Maruti Udyog came close to acquiring Hyundai in 1999

BVR Subbu, former president of Hyundai Motor India, recalls how Maruti Udyog came close to buying Hyundai in this excerpt from Santro: The Car That Built a Company

Not more than a handful of people realized just how serious the financial situation at HMI [Hyundai Motors India] continued to be even after the loans came through….The first year of commercial operations, FY 1999, ended with a loss of Rs 50.44 crore. Though the loss was much lower than budgeted, and the sales operations were run on a proverbial shoestring budget with not a single day of channel credit to support even the introductory phase — undoubtedly a first in Hyundai’s global experience — the simple fact was that there was little support that could be expected or received from the parent company even as HMI entered the seventh month of commercial operations. 

Entering 1999, still desperately strapped for cash in the wake of the Korean meltdown, but needing significant investments to cover the planned introduction of the Accent in HMI, HMC [Hyundai Motor Corporation] had actually started looking at the possibility of a significant dilution of its equity holding in the Indian entity, even going to the extent of making specific applications to the Foreign Investment Promotion Board (FIPB) for offloading of 14.2 per cent of the Rs 812-crore equity. The investment bankers handling the proposed private placement transaction had managed to obtain a confirmed interest from the Unit Trust of India (UTI) and indicative interest from the global insurance giant American Insurance Group Inc. (AIG). While UTI had reportedly indicated an enterprise equity valuation of about Rs 1,625 crore, making for an effective premium of Rs 10 per share, AIG was rumoured to be willing to consider a marginally higher valuation of Rs 2,000 crore, yielding a premium of Rs 14 per share, subject to achieving certain profitability parameters. The investors also sought veto rights on further equity infusions and a commitment that an IPO would happen within five years…. But just as things appeared to be heading towards a resolution on the equity dilution issue, HMC’s Korean creditor banks, perceiving an undervaluation of the equity, refused permission for the deal…

Author: BVR Subbu | Publisher: Hachette | Pages: 316 | Price: Rs 599

By the middle of 1999, the story went, a global investment bank, rumoured to be Bank of America, apparently approached both GM and, hold your breath — MUL (Maruti Udyog Ltd) — ostensibly on behalf of Korean banks, to acquire the banks’ majority stakes in HMI that they held as collateral. While the proposal to GM apparently stayed stuck in its decision-making maze, an advisor to SMC [Suzuki Motor Corporation], a person I have always considered one of the foremost strategists in the Indian automotive industry, sensing an unbelievable opportunity, was rumoured to have moved with alacrity for the kill. SMC probably did not then have the liquidity for the acquisition and in any case would have had to contend with the government of India, the co-promoter in MUL, giving consent and approval…if they wanted another plant in India. But Suzuki’s advisor apparently figured the company could, instead, route the proposed share acquisition through MUL. However, access to MUL’s not inconsiderable cash hoard would require the approval of the government nominees on the board of MUL. That clearly could not have been taken for granted. But, according to investment bankers in the know, Suzuki’s advisor had apparently thought through that as well and had crafted a detailed note explaining how, in the event of a possible meltdown in Korea and the collapse of HMC, the acquisition of HMI equity was essential to protect 1,600 jobs in the then DMK-ruled Tamil Nadu, an argument they were absolutely certain the then union minister for commerce and industry, himself from Tamil Nadu, could never have ignored. In the informal negotiations that followed, confident that there was simply no other potential buyer in India, SMC’s advisor apparently did not budge beyond Rs 30 per share, offering, however, to put the MUL cheque on the table within a week of concluding the transaction. He had been following HMI closely, thanks to feedback from the SMC and MUL export teams, which consistently reported on Hyundai’s products and export pricing approach. The reports apparently noted that in European markets, the Korean company was rumoured to spend on marketing and promotion on every single car, an amount equal to the sale price of the car itself, all in an effort to gain market share. SMC’s advisor had apparently opined that despite the Korean market being both protected and oligopolistic, it would be difficult for HMC to sustain such pricing aggression in the export market without taking a debilitating hit on the bottom line. … The Korean bankers, it was then rumoured, might have settled for a number 50 per cent higher than what Suzuki’s advisor had informally offered, but when they realized their asking price was unachievable they decided not to monetize their security and opted to sit out the much-feared carnage. On the other hand, given Korean sensitivities about everything Japanese, they may well have baulked at the altar. But then the tide turned — and quite unexpectedly.

Meanwhile, the sales of the Santro, which had averaged a modest 2,800 units per month in the last quarter of 1998, stumbled by almost 15 per cent in January and February 1999 reeling under the onslaught of the just-launched Tata Indica (for which bookings had opened), but then picked up smartly in March as the astronomical number of bookings for the Tata Indica and the possible two-year-long waiting list scared away buyers. Then at the end of April 1999, came the Supreme Court ruling on emission norms, and the announcement that HMI would launch Euro 2 compliant vehicles by the end of May. The ‘Engineered for Euro 2’ gambit worked beyond our wildest dreams. Sales of the Santro in the second quarter of 1999 rose 38 per cent over that in the first quarter, and then rose a further 50 per cent in the third! By September 1999 the Santro’s sales were within touching distance of the Zen’s, after having been less than half of it in January. The monthly average of the third quarter was thus a phenomenal 108 per cent above the run rate of the first. Best of all, every single car sold added positively to the bottom line. In August 1999, if I recall correctly, HMI made its first cash profit — never to look back. Suddenly, the extreme financial pressures eased up without much dependence on the parent company, and, HMI had enough funds from customer advances to meet even its working capital requirements. With the extremely profitable Hyundai Accent joining the party in October 1999, in FY 2000 — only the first full year of commercial operations — ended with a profit after tax of Rs 59.34 crore — a feat no company entering the Indian market, before or since, has been able to match.
 

Reproduced with permission