Wednesday, April 6, 2016

Apollo’s Acquisition of Cooper: Missed Opportunity or Disaster Averted

Currently the Apollo- Cooper merger is an incomplete saga and therefore fair game for speculations and conjectures of what could have been.

Theoretically this acquisition was nothing less than providential. The merger would have catapulted Apollo from 17th to the 7th largest tyre manufacturer in the world with revenues worth $6.6 billion. The deal had also passed the ‘coherence test’ as Apollo was essentially expanding on its core competence of tyres. The whole idea behind this acquisition, apart from economies of scale, was long-term growth opportunities by entering new markets of US and China. In addition Apollo was also conscious of the benefits arising from the synergies between the two companies. They wanted to maintain and exploit existing Cooper facilities and distribution networks to introduce products in both India and the US. Lastly Apollo was not a novice acquisitionist. They already had strong presence in both Africa and Europe resultant of their local mergers.

However in reality the above-mentioned favorable factors did not prove to be enough to change the market’s mind and eventually the situation fared quite differently from anticipated. The day after the buyout was announced Apollo’s stock price dropped by 25%. Later falling even further to a record low of Rs 56.40. It was suggested that this low stemmed from the market’s apprehension of Apollo taking on more debt than it could potentially handle. Under the deal Apollo had agreed to pay $2.5 billion based on the valuation of $35 per share. From the point of view of the financial gurus this was a premium price especially since cooper had technically reached its peak margin. Nevertheless Apollo’s management decided to not heed to this reaction and continued with the deal. The next blow to the merger was in two folds; 1) United Steel worker’s collective bargaining agreement, and 2) Worker strike at the Cooper Chengshan Tire plant.

In the case of United Steel worker’s collective bargaining issue, Apollo had agreed to re-negotiate the details and probably could have been successful had the mortal blow from the Chengshan Tyre plant not come. First the unreasonable buy out demand from the Chinese counter collaborator exasperated the situation. But the lack of full financial information due to worker strike in China resulted in the final fall out.

Interestingly the day after the cancellation of merger was announced Apollo’s stock started to rise indicating the return of market’s faith in the company

Although for obvious reasons it cannot be said with any certainty, in retrospect it seems like the fallout was the more beneficial conclusion. The strife amongst the workers and the management (even before the merger took place) had created an antagonistic environment that would have been further escalated due to the cultural gap between Chinese and Indian workers. Also Chengshan Tyre had a stronger political and judicial presence in China and therefore could have been an unnecessary and at the same time formidable foe for Apollo.

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