Apollo Tyres CFO reveals real story on failure of Cooper deal

By Ashish K Mishra

In an explosive interview with Forbes India, Sunam Sarkar, chief financial officer of Apollo Tyres, says that the proposed $2.5 billion merger didn’t fail because of lack of due diligence but because Apollo took people at face value.

Q: What was the idea behind the merger?

Sarkar: Our industry is increasingly getting squeezed between the customers who are getting larger and larger, the global automotive guys so groups like Volkswagen and Toyota or General Motors, they have significant purchasing power. On the suppliers side too there has been consolidation. Other than natural rubber, all the other suppliers whether it is Exxon or Lanxess, they have all been consolidating. In the tyre industry, players between rank 4-20 would be in an increasing squeeze as we face pressures from both sides. Staying in the same place is really not an option because some of the players like Chinese players are growing very, very quickly. Based on a strong, protected home market, the number of Chinese players who have come up, they still haven’t broken in the top 10, but in the rank 10-20, ten years back there was nobody and now there are at least four or five in this particular ranking. Players like Hancook from Korea have done very well and broken in the top 10. We have managed to do well with both organic and inorganic growth but clearly it would have been more and more difficult being in the same place. So we needed to grow ahead of the rest of the industry. Inorganic growth helps you cut the curve (time and cost) very, very significantly. Plus an inorganic growth also gets you readymade pool of people who help you grow faster.

So with Cooper, it was a perfect fit. Across geographies, product, technology, it was the ideal tyre company that you want to see.

[caption id=“attachment_1159183” align=“alignleft” width=“380”]  Reuters[/caption]

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Q: Considering the issues that came up after the merger announcement, how was the process of due diligence and did you know what you were getting into?

Sarkar: I know there is a perception that Apollo has been hasty or inadequate in its due diligence. Let’s get it on record that in a US publicly listed transaction, the amount of diligence one can do has its limitations. We have done the South African transaction and the European transaction, both under different circumstances but neither was a listed company and we had a great deal of freedom in what kind of diligence could be done. What is the purpose of due diligence? It is to identify potential liabilities and then factor those in the price. Events subsequently have shown that we did not paper over any significant liabilities. There was nothing on the environment side, legal, tax, accounting. Nothing. What caused this deal to fail eventually was the intransigence of one partner in China. And no amount of diligence would have impacted or changed your view on that until you knew what the real story was.

Q: What was the real story?

Sarkar: This is what we discovered subsequently and is now part of the court filings that Cooper was trying to sell itself to this guy (Zhe Hongzhi, Chairman of Chengshan Cooper Tires in China) even the day after they signed the agreement with us. On the 12th of June, they signed with us. On the 15th of June, this guy was in the US at their invitation to see if he would bid higher. He did bid higher. He bid $ 38 per share but Cooper believed his financing was not as committed as Apollo’s and chose to go ahead with Apollo. That’s really the underlining factor behind this whole thing.

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Q: Tell me something, right from the start, were you guys comfortable with the people you were doing business with?

Sarkar: With the vast majority of people we interacted with which is the Cooper management team, we had a great deal of comfort. Because we had such a degree of comfort, we took them at face value when they said that in the Chinese joint venture things are going well with them and there is no problem and so on.

Q: Let’s get back to some background, Cooper Tire and Apollo Tyres have been talking to each other for quite some time now. About four years now?

Sarkar: Our first direct exposure to Cooper was when we made the acquisition in South Africa in 2006. Dunlop Tyres, we acquired, was distributing Cooper’s products in Africa. There had been some level of engagement even before that when Mr. Kanwar had visited them. In the 1990s, they were known as the company in the tyre world because they were hugely profitable. In fact when I joined the company, 14 years back, I was told specifically that you should be looking at the Cooper model because they do only non-truck and they are very profitable doing what they do. In 2006, we started looking at what other areas of cooperation could be possible - we identified things like common use of test track, manufacture tyres for them in India and some common sourcing of raw materials. These were projects that we worked on together but we never executed any for a variety of reasons.

The really major one that we were working on together was the East European Greenfield facility. This was going to be in Hungary where we identified a piece of land also. But we landed in a similar kind of Tata Motors Singur kind of issue. It was supposed to be a JV. But then Lehman Brothers happened and all talks of a Greenfield went on the back burner. At around the same time, the Vredestein opportunity came about so our immediate need of European presence got met. And then we got busy with the Vredestein integration.

In early 2011, we again brought back the thought of what could be done with Cooper. A trigger was also the fact that the US financial market had started stabilizing and the possibility of debt financing was there. Clearly we knew from the very beginning that this would have to be a leveraged buyout. So once again contact with management was established. Cooper was fairly open with sharing their plans with us, in terms of actually detailing out five year strategic plan and so on. So they made detailed management presentations and worked actively with us to increase the value that we were willing to pay for it.