The sum of all parts

SMARTSHARE

One of the longest recessions on record started in 1990 and it's still underway in Japan. It's triggered unusual situations like zero interest rates.

Through this 15-year recession, select Japanese stocks have attracted investment. This is because transnationals like Sony, Toyota, Matshushita, Honda etc, earn most of their revenues overseas and even much of the manufacturing is located abroad.

The more ambitious Indian companies are emulating the Japanese and freeing themselves from the apron-strings of local markets. The IT and BPO industries have always earned an overwhelming revenue share abroad. Pharma, biotech, auto and auto-ancillaries all earn significant export revenues.

There is a point when organic export growth has to be sustained by inorganic growth. That's when takeovers and joint ventures become popular. Managements try to accelerate growth by taking control of extant entities with overseas presence.

In any takeover or JV, soft issues play a big part. Executives must reboot their mindsets. Two corporate cultures must mesh, synergies have to be strengthened and duplications eradicated to gain full value. This usually involves sacking or reassigning employees.

Creating a harmonious organisation can be difficult even for group companies. Old timers will recall the difficulties Lipton and Brooke Bond faced with evolving a new corporate culture when the parent, Levers decided to merge these two group companies. Those difficulties continued when BBIL was later merged into Hindustan Levers.

The cultural problems are worse when it's Chrysler marrying Daimler. There is a huge failure rate in transnational corporate mergers and cross-border JVs. The sum of businesses often adds up to less than the separate businesses.

But when the payoffs are positive, the deal rapidly adds value. A transnational deal is more likely to work when both sides bring complementary competencies to the table. This could be the case in several recent deals.

Mahindra & Mahindra is among the more aggressive seekers of inorganic growth. The auto and ancillary major signed a JV last week with the International Truck & Engine Corp (US) for establishing a $80 million (Rs 330 crore) manufacturing JV. M&M already has another JV with ITEC so, corporate fit should not be a problem.

M&M will use ITEC's knowhow to establish the capacity for 50,000 Medium and Heavy Commercial Vehicles. It's also transferred its own Light CV capacity to the JV, Mahindra International. M&M holds 51 per cent.

This gives the Indian corporate an instant widening of product range. The Indian truck market is growing at an incredible 30 per cent "" the NHAI road network upgradation has triggered off demand in the transport industry.

While it inducts HCV from ITEC, M&M also hopes to tie up a JV with Renault for a passenger car. And, it will use ITEC's marketing to take its tractor range overseas.

The JV will also provide ITEC with a source for some $125 million (Rs 550 crore) worth of spares by 2006-07. M&M hopes to sell over $1 billion (Rs 4,500 crore) of parts to ITEC over the next five years.

This is not the only overseas deal on the anvil for M&M. It's looking at organising three auto-component buyouts with a total turnover of $30-50 million (Rs 150-225 crore) by March 2006.

Apart from the auto businesses, M&M has the highly successful JV with British telecom, Mahindra BT. But even if we leave that out, growth in the auto business should be pretty strong for the auto-major.