<div>It was a shocker for both the company as well as its shareholders. The day after Apollo Tyres announced it will take over US-based Cooper Tire & Rubber Company for Rs 14,500 crore, Apollo shareholders scurried to sell the stock, shaving off a quarter of the company’s valuation in a day’s trading to Rs 3,457 crore. The company’s shares fell 25.43 per cent to a 52-week low of Rs 67.75 on BSE on Thursday (June 13). The stock, which closed Wednesday at Rs 92, opened at Rs 86 and fell sharply before closing at Rs 68.60.<br /><br />So why did Apollo shareholders panic at the announcement of one of the most audacious attempts at a corporate takeover by an Indian company abroad? The answer lies in some really patchy performance of most global acquisitions by Indian companies.<br /><br />Around 2007, Indian companies had shown unusual aggression — finding new export markets, building greenfield plants and acquiring companies overseas. But the scene turned gloomy with the fall of subprime mortgage market in the US and the chain of crises in Eurozone. But the Kanwar family led Apollo Tyres took the risk of buying a company of double its revenue (Apollo’s Rs 12,800 crore and Cooper’s Rs 24,350 crore) at Rs 14,500 crore. That too, in the matured and saturated US market.<br /><br /><span style="color: rgb(255, 0, 0);"><strong>Read Also</strong></span><strong>: <a href="http://www.businessworld.in/en/storypage/-/bw/apollo-tyres-to-buy-cooper-tire-for-2-5-bn/r936838.37495/page/0">Apollo Tyres To Buy Cooper Tire for $2.5 Bn</a></strong><br /><br />Cooper Tire & Rubber Company is a home grown tyre company focused on North America, from where its $3.1-billion of the consolidated revenue of $4.2 billion came in 2012. Indian companies have strong presence in the region where Cooper operates. Tata group has brands like Tetley, Good Earth, Eight O’Clock Coffee, The Pierre New York and the Campton Place Hotel (in San Francisco) in North America. Essar group operates steel mills like Algoma and Minnesota and the BPO service. The group has 5000 employees there. Wipro is a major IT service provider in the region.<br /><br />In a sense, Apollo is venturing into a proven fertile land for Indian companies. But most Indian companies are struggling. Tata Steel is still struggling with the high net debt of over $10.5 billion because of the acquisition of Corus. AV Birla group’s Hindalco struggled during downturn, writing off $1.5 billion goodwill value of acquired entity Novelis. Bharti, which acquired Zain in Africa for $9 billion, is yet to make a mark in the continent. <br /><br />Apollo’s acquisition would form the world's seventh largest tire company. The major positive factor is that Cooper had a record $397-million operating profit in 2012, which is 9.5 per cent of net sales. The company still dominates the replacement tyre industry, which is highly fragmented in the US. The economic slowdown has led to a slump in the tyre sales but it recovered in 2010 with the stabilization of passer vehicle industry and the overall US economy.<br /><br />In the present scenario, the surging fuel prices are encouraging the consumers to move towards fuel efficient tires. Apollo needs to enquire about Cooper’s innovations in the category before closing the deal. Managing the debt will be another concern. Apollo needs to ensure consistent cash flow from Cooper to repay the debt. For instance, even Tata Motors had struggled with debt at one point because of the acquisition of Jaguar and Land Rover, though the cost was lesser at $2.3 billion.<br /><br />"This (acquisition) will result in an increase in the consolidated debt:equity for Apollo from 0.75x to 1.35x and the net debt:EBITDA from 1.7x to 3.8x. The sharp increase in debt we reckon will be an area of concern for investors who were expecting balance sheet deleveraging in the next two years," Credit Suisse analysts said in a report. Goldman Sachs analysts feel that Apollo's net debt to equity will rise even though Cooper will service a significant portion of the additional debt. <br />Kotak Institutional Equities says, since the size of the transaction is very large, compared with the current operations, it could swing either way for Apollo. Ambit Capital says Apollo's acquisition is aggressive and has downgraded the stock to "sell" from "buy."<br /> </div>
