Diversifying to grow: The other M&M

By: | Updated: September 28, 2015 1:02 AM

With a big appetite for acquisitions, the Mahindra & Mahindra Group now boasts close to 125 subsidiary and associate firms

Management experts typically frown upon too much diversification; they prefer companies that stick to their knitting. But in India, most entrepreneurs build conglomerates comprising a dozen or more businesses; the idea, it would seem, has been to explore a promising space no matter how challenging it may seem.

The Mahindra and Mahindra(M&M) Group too has shown that eagerness to explore: from automobiles to technology and real estate to aerospace, the group does it all. And profitably too. Indeed the clutch of non-auto businesses is now making its presence felt. In 2014-15, the combined turnover of five listed non-auto companies was Rs 30,645 crore compared to M&M’s Rs 38,391.6 crore while their combined profits at Rs 3,890 crore were higher than M&M’s Rs 3,321.1 crore.

While some management gurus deride diversification, it does have its benefits. At a time when the slowdown in consumption demand, especially that from rural India, is weighing on the flagship automotive and farm equipment pieces, Tech Mahindra and Mahindra & Mahindra Financial Services have grown to compete with the core businesses. In 2014-15, the aggregate profit of TechM and M&M Financial Services at R3,540.6 crore has more than matched that of M&M.

Today’s youngsters would not believe M&M was a steel trading company set up in pre-independent India because the transformation, over the last seven years, has been so total.

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There’s a lot to be admired already, starting with the level of professionalisation, probably the highest across the country’s biggest business houses.

Kalpana Jain, senior director, Deloitte India points out there are increasing instances of promoters trying to run the businesses professionally and reducing the family’s involvement. “In some cases, the younger generation, many of whom have been educated overseas, believe that’s the right way to run the businesses. Some first generation promoters are also compelled to professionalise the management as part of the succession plan if the next generation of family members is not keen to join the family business,” Jain observes. In the case of the Mahindras, the second generation is yet to come in, so far it has been professionals who are running the show.

With an ever increasing acquisition appetite, M&M Group now boasts as many as 123 subsidiary and associate companies as against 90 in FY10. To be sure, there have been some hiccups on the way; the joint ventures with US based Ford Motors (1995) and the France- based Renault (2005) as also that with US company Navistar International (2005) didn’t deliver what they might have been expected to. Even as Ford increased its stake in the joint venture that made Ford Escort cars in India from 50% to 72% in 1998, M&M eventually exited the partnership by selling its holding in 2005. Its 51:49 partnership with Renault, through which it sold the Logan, ended within five years with Mahindra buying out Renault’s stake in 2010. Mahindra also bought out the stake of Navistar in the joint venture that helped it establish an entry into the heavy commercial vehicle space.

But it’s the acquisition of Satyam Computers, subsequently merged with Tech Mahindra in June 2013, that must go down as among the most successful in corporate India. Tech Mahindra added scale at a pace that might not have been possible without Satyam in its fold, becoming the fifth largest IT firm with an annual turnover of more than $3.5 billion and more than one lakh employees; more than that it got access to Satyam’s clients.

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Analysts point out that the strategies M&M has adopted to build the auto piece, including the majority stake in Reva Electric and merging the amalgamated automotive component companies of Mahindra Systech with CIE’s
European forging companies (Mahindra CIE) will allow diversification which could unlock value in the long run. It ensures M&M won’t be behind the technological curve. The group has readied itself for the future when the electric vehicle market opens up; the CIE merger has seen the European business starting to turn around. Currently, however, the performance of the automobile group continues to be driven by M&M’s core automotive and tractor businesses. To be sure there are stress points—Ssangyong Motor, acquired in 2011, for instance, is yet to turn the corner—it reported losses of 50 billion Korean won or $45 million in CY 2014— thanks to problems on the wages front in Russia and Korea that led to volume de-growth of about 3%. Analysts believe it could take a while before the two-wheeler business—Peugeot Scooters in which it acquired 51% stake in October 2014—turns around.
Although the holding company structure— M&M owns anywhere between 20% to 75% stake in its key listed businesses—gives it a conglomerate kind of identity, in his several interactions with media, chairman and managing director, Anand Mahindra has stressed that the group reflects a “Berkshire Hathaway” kind of model with more investment-driven expansion.

In an interview to Financial Times in May 2015, comparing the differences in the business models of GE, which he regarded as a conglomerate and Berkshire as a company with multiple investments, Mahindra pointed out that M&M would like to be identified as a federation. “We don’t call it a conglomerate, we call it a federation,” he told FT.
M&M’s structure—where investments are held via a holding company—is strictly not comparable with that of Warren Buffet’s Berkshire Hathaway which is a family trust. Sanjeev Krishan, leader-private equity with
PwC, says typically in India a holding company structure not only allows the family or promoter group to drive the subsidiaries but also allows them to bring in partners, joint venture entities in company operations.

Krishan points out that unlike private equity players that have pure investment interests in a company, in a holding company structure, the promoter entity is invariably in control of the subsidiaries, even if they are not the majority stakeholders in some cases.

“There are instances in which the board of directors of the subsidiary or associate companies primarily consists of members of the promoter family,” added Krishan. The promoters of the Mahindra Group maybe in control but that doesn’t prevent them from being professional. Perhaps that’s the strongest characteristic on the brand. And one that will make it among the 50 most admired global brands by 2021.

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