Anand Mahindra, adventure capitalist

WHAT DOES ANAND G. MAHINDRA DO? The title on his simple white 2.5 inch by 3.5 inch business card reads “vice chairman and managing director, Mahindra & Mahindra”. That would put him down as one of India’s foremost industrialists, as most of the country’s business magnates are referred to. But Mahindra likes tagging differently what he and his managers do. “We are in the business of entrepreneurship,” he says over an afternoon’s conversation with Fortune India. “Down the road we became enlightened venture capitalists and then aggressive private equity players.”

Few heads of Rs 32,066 crore groups define their jobs like this, and this isn’t just spin. This Harvard Business School alum with an undergrad degree in visual studies, who was recently called a “Renaissance Manager” by his alma mater’s management journal, has been thinking about this defining aspect of his role from 1994, three years after he was named deputy CEO of Mahindra & Mahindra (M&M), ranked 19 on the Fortune India 500. That year he refashioned a group that was structured around functions into six sectors—automotive, automotive components, farm equipment, financial services, infrastructure, and software.

Since then, M&M has invested in businesses such as hospitality, defence, information technology, and electric vehicles, while exiting others (oil drilling and instrumentation), though it’s only in the last five years that the venture capitalist-type bets have gained momentum. Mahindra believes that for a traditional Indian business family, this represents evolution. “For now, the PE model is state of the art where the group stands.”

M&M isn’t the only one shopping around or betting on new ideas. Most of the top 100 outfits in the Fortune India 500 list see buyouts as a legitimate way to scale up, given the readiness of banks to fund deals. Two patterns are visible in the approach of others. One is pure portfolio plays, such as Analjit Singh’s bet on the telecom sector through Hutchison Max Telecom. And the second is big acquisitions, such as Tata Steel’s buyout of Corus or Hindalco buying Novelis.

Apart from the way he sees his role, Mahindra’s model is different on other counts. There’s the diversity of bets—a smorgasbord of outfits of values ranging from Rs 3 crore for iPolicy Networks (a software security firm) and Rs 8 crore for Aerostaff Australia (component maker for planes) to Rs 1,408 crore for Punjab Tractors (see graphic). If there is a common thread running through the 20 companies he has bought in the past five years, it’s the potential upside he sees in each company. But again, there are exceptions. When a business catches his fancy, in the absence of a ready buyout, he plays angel investor in a startup. Last year, he figured rising incomes would make boats a thing for the well-heeled. So he started Mahindra Odyssea to make powerboats. Many of these deals have also promoted different technologies—40, over the past five years, ranging from automatic transmissions for SUVs to alternative fuel technologies to new suspension systems. M.M. Murugappan, M&M board member and vice chairman of the Chennai-based Murugappa Group, says Mahindra has a visionary ability to take bets that’ll pay.

As with any other skilled investor, you can tell a lot about Mahindra by what he avoids. In 2008, he went up against Tata Motors to buy Jaguar Land Rover. When he realised the marquee label wouldn’t do much for his portfolio and would blow a hole in his funds, he withdrew from a seemingly tantalising opportunity. Similarly, he has stayed away from cash-guzzling industries such as telecom services (though through Tech Mahindra, he is present in telecom solutions) and is testing retail in a measured way. “I am wary of a big bang approach,” Mahindra says.

More than the size of the deal (M&M usually settles for a stake of 50% or more) he focusses on each as if it’s the next big thing. Naina Lal Kidwai, HSBC’s country head, and Mahindra’s junior at Harvard, says: “I haven’t seen anyone build a business the way Anand is going about it.”

Mahindra isn’t India’s highest paid CEO. Last year he made Rs 2.65 crore, mostly in salaries, perks and commissions. In keeping with his inclination to avoid the beaten path, he drives a Scorpio, never a Bimmer or a Merc.

Much of it has to do with the way Mahindra sees himself—as a bit of a philosopher in the boardroom, a thinker first and a businessman next. At gatherings, he often refers to ancient Hindu texts. Last January, at the Xylo SUV launch in Nashik, Maharashtra, he spoke of Garuda’s role in the birth of Nashik and what that signifies. In a 2008 interaction with management students at Gurgaon’s Management Development Institute, he discussed what the Mahabharata’s Dronacharya could teach about out-of-the-box thinking.

He also values conversations—with cab drivers in Patna (three years ago, to understand how Bihar is changing), global heavyweights at Davos (every year) and his colleagues and their spouses at Harvard (every year in May, at a week-long executive development programme). His tweets are followed by some 165,000 people. “It’s one of the most underutilised tools for a CEO today,” he says.

Stefan Thomke, William Barclay Harding Professor of Business Administration at Harvard Business School, puts it down to Mahindra’s liberal arts background. “I believe he has the ability to look at business problems or opportunities from multiple viewpoints, or through multiple lenses.”

According to Harsh Neotia, chairman, Ambuja Realty, and a fellow director on the Air India board, Mahindra brings a lot of clarity of thought and always has a “well-articulated viewpoint”. Indeed, Mahindra’s approach at M&M reflects his interpretation of management thought. He is indifferent towards the theory of core competency, which has regularly dictated strategy in India. “It (core competency) occasionally oversimplifies business. There has been no shortage of people who have followed this tenet like a religion, and pursued some mythical core competence that they have and then asked themselves, ‘I had this but am not succeeding like I should have.’ Just doing one thing doesn’t make you succeed,” he says. “I’m a great supporter of Michael Porter’s theory of a strategic advantage of a network of activities that gives you an edge.”

As Mahindra loves telling analysts, M&M is a farm equipment and automobiles company with a very valuable portfolio of investments.

INSIDERS SAY THAT the different venture capital-type plays that M&M has been making will ultimately mould it into a giant federation rather than a conglomerate. For the Renaissance Manager, a conglomerate is a gigantic company that has different business divisions and the stock price reflects the value of those divisions. “A federation, on the other hand, is a group of independent companies, each focussing on one area, all tied together by a common owner,” Mahindra says.

Such talk predictably draws comparisons with the Tata group, India Inc.’s best-known federation. But as M&M board member and former ICICI Bank chairman Narayanan Vaghul argues, while the comparisons may be valid, the Tatas built their business over a century, while M&M is trying to pull this off in a shorter span of time and a different environment.

So far, most of the bets have been made by M&M, except Satyam Computers, which was snagged by Tech Mahindra last year. This means all the companies acquired exist as divisions or subsidiaries within M&M. But once some of them gain critical mass, they will be spun off and listed. Read that as M&M’s equivalent of a venture capitalist’s exit option—one that will lead to the creation of the Mahindra federation.

Some parts of it are in place, an outcome of Mahindra’s early days as venture capitalist. Take Mahindra Finance. Bharat Doshi, the group’s chief finance officer, thought of it in 1992 to finance automobiles and, later, farm equipment in rural India. “I asked for Rs 2 crore,” says Doshi. “The year 1992 was a bad time to ask for cash, with the after-effects of the Gulf war and the petrol crisis.” Nonetheless, he got his seed capital and Mahindra Finance started life as Maxi Motors Financial Services. Fifteen years later, this unlisted subsidiary was spun out and listed. Today, the company, with 45 rural branches, is valued at over Rs 4,700 crore.

Mahindra used a similar approach to rejig the hospitality business. In 1996, he seeded a timeshare business called Club Mahindra for Rs 18 crore. The following year, he sold 50% in Mahindra Guestline Hotels, which owned three properties in Mumbai, Bangalore, and Tirupati, and exited it by 2002. Mahindra backed a different (and, for those days, pioneering) hospitality format, knowing that conventional hotels would need large outlays to compete with large chains. Club Mahindra was listed in 2008 as Mahindra Holidays (Club Mahindra stays as the brand) and is today worth Rs 4,000 crore. “In the early ’90s Anand had the foresight to recognise the potential of services,” says Arun Nanda, non-executive director and the man who created Club Mahindra.

Mahindra says his version of a successful exit is no different from a fund’s. The only difference is “PEs turn companies around through financial reengineering, while we do it by hard work and operational transformation; it’s much easier to learn financial reengineering than management change.” There’s another difference: M&M takes a longer view of its investments. Mahindra argues that venture capitalists usually have a vesting period of seven years, which leads to redemption pressure in the seventh year. In his business, that could be a grave error. “In Club Mahindra, had we taken the classic PE approach in the seventh year (and sold out), we would have lost the opportunity to transform a $5 million (Rs 22.65 crore) investment into a $1 billion in market cap.”

It’s difficult to estimate the valuations the newer bets will generate. But given his track record, it’s no surprise that the markets have backed Mahindra’s approach. Adjusted for bonuses, the M&M scrip has risen 276% in the last five years (the Sensex has grown 132%) since the venture capital model came to be aggressively adopted within the company. That translates into Rs 33,040 crore of additional wealth. Of course, much of it is because of the company’s strong showing in its core business of farm equipment and automobiles.

An analyst from the Mumbai office of a foreign brokerage admits that while M&M is often a difficult company to track because of investments that are continuously being made (analysts prefer predictable earnings), “so far the interests of the investors and the company have been perfectly aligned. The challenge is for the group to know where to allocate capital next, and for the managers to run such a business”.

CHETAN MAINI, THE POSTER BOY for clean technology, provides a glimpse into how Mahindra works the deals. In 1994 Maini founded Reva Electric Vehicles, which built the Reva, India’s first electric car. This May, M&M snapped up 55% of the company. Maini met Mahindra twice, once at the beginning of the transaction and then when it concluded. Mahindra asked Maini if he was comfortable with the way the transaction had been handled, since he had put his life into Reva. “That was important because he had put himself in my shoes to see where I was coming from; for an entrepreneur, that meant a lot.” Maini was also struck by how quickly the M&M team, led by V. Parthasarathy, M&M’s group chief investment officer and executive vice president, finance, mergers and acquisitions, moved. “They were more efficient than many PE guys I’ve met.”

Usually, once a transaction is complete, like any venture capitalist, Mahindra sends in his people to work with the existing management, whom he often retains. Two years ago, M&M picked up 80% in Kinetic Motors for a little more than Rs 110 crore. It was the company’s first foray into the two-wheeler business. Once the deal was inked, Anup Mathur, then head of M&M’s Centre for Rural Information and Insights, was parachuted into Kinetic with four other executives. They increased dealers, upgraded existing products, used high-quality Italian vendors to improve the trimmings on the scooters, and launched a range of motorcycles called Stallio and Mojo. By last October, Kinetic (now M&M’s two-wheeler division) was selling 21,000 two-wheelers a month.

“You’re talking about the three Ts and the M approach; that’s classic venture capital stuff,” says Mohanjit Jolly, managing director of private equity fund Draper Fisher Jurvetson India. “The first T is for a strong team, the second T is for technology or the ability to use technology effectively, the third T is for traction or in business-speak—can you get the dogs to eat the dog food? The M is for a large existing or potential market for the vertical you want to make a play in.” Jolly adds that M&M’s approach is less conglomerate and more nimble and startup-like because of an achieved corporate mindset that avoids the “analysis paralysis syndrome”.

At the heart of M&M’s VC machinery lies Mahindra’s extraordinary willingness to delegate. “You’d be really surprised at how managing directors who run auto businesses question their senior vice presidents about the purchase of a small batch of nuts and bolts worth Rs 20,” says Wilfried Aulbur, managing director of Mercedes-Benz India from a foreigner’s perspective. “That sort of management bogs a group down and from what we hear is avoided at the Mahindra group.” Mention that to Mahindra and he nods.

“I don’t do the sniffing of the deals. I get involved when M&M is involved in funding it in some way,” says Mahindra. But often, he goes by instinct. “He’s got that combination of being able to look at the facts and operate on his gut,” says Vinay Sanghi, former CEO of Mahindra First Choice Wheels, a used-car venture that has 120 outlets in 80 cities nationwide. In 2008, Mahindra committed to partnering Sanghi after one meeting. “Like a VC, his top objective is in getting the right talent together,” says Sanghi.

It’s not just getting that talent on board that Mahindra puts on top of the list. It’s also about making sure they’re trained and groomed. “The human resources function is very strategic in terms of all operations,” says Rajeev Dubey, president for group human resources. “HR executives attend business strategy meetings and work very closely with top management to shape corporate behaviour.”

The ongoing Ssangyong deal—this year M&M has emerged as the preferred bidder for the troubled South Korean auto major—is a good example of how they are working closely with other functions. Every time M&M president, automotive and farm equipment sector, Pawan Goenka, who has been leading the project, visits Seoul—he’s been there four times this year—he is accompanied by at least one HR executive. The objective: understand Ssangyong’s existing business and properly identify its culture, according to Goenka. “Once you build up management talent and experience, the more you can delegate,” says Mahindra.

The outcome of all this: commitment. Chief financial officer Doshi was once offered a job that would pay him 30 times his existing salary. He refused. The headhunters asked if the reason he didn’t want to leave was because he was “too close to the management”. His spontaneous reply: “I think I am the management.”

Of course, a venture capital model doesn’t run on people alone. Numbers are important, too. A sector president (like Goenka for auto) keeps an eye on smaller deals (less than Rs 100 crore) and works with the head of the business to ensure milestones are reached. For the bigger ones, a similar mechanism exists, but they get reviewed by a team of board members that includes chairman Keshub Mahindra, Doshi, Anand, Deepak Parekh, independent director and chairman of Housing Development Finance Corporation, and Nadir Godrej, managing director of Godrej Industries.

Another apparatus to keep tabs on the businesses is the “war room” simulations—borrowed from Dana Corporation, and to which some practices from GE were added—where executives debate and discuss projects.

There are also the two-day Blue Chip Annual meets. They started in 2002, when, as Doshi explains, M&M’s shares plunged to Rs 51, despite everything going right. “We made a call to recapture our blue chip value by focussing on innovation and being in the top three in whatever we did.” Though the first Blue Chip meet was perhaps a response to the falling share price, around 400 top managers have since attended the meet, which is now the group’s annual strategy retreat.

While a range of things is discussed here, there is always an underlying emphasis on profitability. In the 2002 Blue Chip Meet, Doshi had said that the group’s margin of safety ought to be at least 50% for businesses with wider operating margins. “If you made 100,000 cars and demand fell by half, we still had to make a profit: How do you structure your break-even point to 50% and have the room to meet fluctuations in international and business cycles? That was what we devised.” This paid off in 2008: When SUV demand fell by 50%, M&M didn’t break into the red.

Mahindra says so far there aren’t any acquisitions that he has regretted, though some (Punjab Tractors) have stabilised smoothly, while others (Bristlecone) have taken longer than expected. But if they all work out, it suggests M&M isn’t being adventurous enough. “The question is: Can you build against real disasters that threaten the group and can you find profitable exits from businesses that are not working out? That is the definition of a great PE approach; you mitigate risk through experience and knowledge of startups.”

But is the structure becoming too complex? As the group continues to grow—its topline grew at an annualised rate of around 19% in the last decade—and dabble in a range of businesses, can this model sustain itself?

It’s a question that M&M’s managers often ask themselves. “For now, the corporate centre manages complexity well. As the future becomes more complex, reinvention will be the key to sustainability,” says Goenka. For Mahindra, the solution lies in strengthening the corporate centre further.

The idea is appealing, the grand culmination of Mahindra’s strategic vision. The centre acts as the custodian of values, facilitates best practices across companies, ensures synergies are leveraged and so on. At the same time, it doesn’t micromanage and leaves the running of the businesses to line managers. But, as is plainly evident in conversations with M&M managers, the centre concept is still debated intensely within the company.

As observers point out, Mahindra is the centre, the glue that holds the group together. So, while he has shown a different way, has he made the organisation overly dependent on him? Does he have a second line of command?

These are questions that Mahindra is increasingly facing. He says his company can definitely function without him and he is consciously making sure that happens. “The TINA syndrome (There Is No Alternative) is a presumption that is flawed, as in business there will always be a leader.”

A structured succession plan is in place with the board, “just in case I’m hit by a bus,” he says. The details are under wraps, but it’s understood that Mahindra may not insist on a family member succeeding him. The chairperson has a sealed envelope that states Mahindra’s personal choice.

The burden of expectations for the name in the envelope will be substantial.