Amtek Auto - the Pacman way

Admittedly, it was SHAPING to be a humdinger. After several rounds of bidding, two companies remained in the fray for the €500 million (Rs 3,822 crore) German component maker Neumayer Tekfor—India’s Amtek Auto, and American Securities, a U.S.-based private equity firm. The Yanks had bested the Indians in a similar face-off a year earlier, in the final bids for a similar-sized company. Outsiders would naturally have bet on the PE firm, but those who knew Amtek’s feisty founder-chairman, Arvind Dham, would have put their money on him.

Dham wanted Neumayer Tekfor for many reasons. It had been Amtek’s trading partner for seven years, and Dham knew exactly how it could add heft to his $2 billion outfit. More important, Dham intended this acquisition to be a stepping stone to making Amtek into a $10 billion company in five years.

Neumayer Tekfor, along with several other global auto component manufacturers, had been knocked down by the financial crisis of 2008. Dham had to convince the distressed company’s shareholders and bankers that he could revive it. To ensure that he was taken seriously, he flew in his banker, Mandeep Rathi, managing director, corporate and institutional clients at Standard Chartered Bank, India, to talk with Neumayer Tekfor’s stakeholders. “I remember getting a call during Christmas [2012, during the final bidding stage], asking for a quick turnaround in transaction,” recalls Rathi. “We flew into Germany, met the court administrator and the bankers, which gave the equity-holders a lot of confidence.”

While this definitely helped, what ultimately swung the deal was Dham’s ability to deposit the asking price of €130 million in the company’s account in less than a week. Dham says that “the Standard Chartered guys [in Singapore, his banking base] worked through the weekend” to ensure that the money was in the Neumayer account by that Monday.

The buyout gave Dham serious bragging rights, but what really makes him happy is the fact that his bank not just stood by him, it actually helped him raise the bid; this, at a time when most global banks were pulling out and asking to be paid back. “We had a long-term relationship with [Amtek]. We needed to stand by it,” explains Rathi.

It's a story with a happy ending (Neumayer Tekfor is today Amtek Tekfor, and accounts for 25% of the group’s revenue). But it’s not happily-ever-afters that Dham is seeking. He is gunning to become a global leader in auto components; first a $5 billion company and then hit $10 billion, 75% of its business coming from overseas.

Though these goals have Dham’s searing ambition written all over them, he concedes achieving them will be a “hugely challenging task”. Dham’s track record, and his ability to think big and spot opportunities suggest that he might just be able to get there. Randhir Kochhar, a partner with global consulting firm EY, who has worked with Dham for the past 11 years on virtually every deal, says: “Dham’s biggest plus point is that he is not worried by the size and complexity of the deal.” Once he is convinced, it is all about making it happen.

Dham says he is betting on Southeast Asia, China, and Japan. “I can’t call myself a global player if I am not present where 40% of the market is,” he says. His math explains how he is thinking of the global auto market. He is bearish on India and believes that the auto industry’s current growth rate of 5% to 7% annually leaves few opportunities for a player like him.

For him, the local game gets interesting at a 20% annualised growth rate. But for that to happen, the economy needs to grow at 7% to 8%. That’s why, to get to the $5 billion milestone, 75% of sales need to come from abroad. And, of the remaining, at least 5% will be exports. He emphasises that his will not be an export-led story, but that his manufacturing outposts overseas will actually sell all over the world (like supplying to China from Germany).

He is planning to delist three of Amtek’s four listed companies and merge them into Amtek Auto, to consolidate his India operations. “Having too many listed vehicles creates confusion among investors and results in a holding company discount. So it is better to have a single listed company,” he explains. He has already done this for Amtek’s global ventures, all of which exist as Amtek Global Technologies in Singapore.

Dham is an elemental spirit, stomping all over the world. He looks for companies that have a troubled past because it allows him to buy cheap, and turn them around. “I like to buy companies which have issues, have no orders, where the senior management is lethargic or lives in cloud cuckoo land.” He doesn’t give a damn about the opinion of a target’s senior management (they are mostly sacked soon after he takes over), but listens to what the middle management and the shop floor has to say. He once walked away from a deal in China because the company’s workers weren’t too excited about its prospects, something he figured the senior management had air-brushed. (China continues to vex him: He says cultural and regulatory issues have come in the way of a buyout there.)

He believes his managers need to be acquainted with alcohol since deals often happen over drinks, and be ruthless. After buying Küpper Gruppe (2013), “I sold the corporate jet, and sacked the pilot,” says Dham. At Tekfor, he shuttered the head office at Offenburg and laid off some 600 people (60 from the headquarters), resulting in annual savings of €12 million.

But in all this, he is acutely aware of the pieces of the business that need to be kept intact. When he was negotiating with Küpper, the patriarch wanted his son to continue as the company’s managing director. Dham said that would be a deal breaker. Küpper Sr. agreed. But senior Küpper’s office was kept intact, where he would often come and sit. He ultimately became a goodwill ambassador for Amtek. The average age of the companies that Dham has bought is 60; a few are over 100 years old. And even if they have fallen on bad times, they still retain deep relationships, which come particularly handy during turnarounds.

Dham’s career took off in 1987 when Maruti Suzuki selected him as a supplier. As Maruti’s business grew, so did Dham’s fortunes, and by the early 2000s, he was big enough to sniff around for acquisitions. “When we do acquisitions we look for backward and forward integrations in the company, and make sure they all come together,” explains John Flintham, senior managing director, Amtek Auto.

The first global buyout was of Smith Jones, a loss-making Iowa-based supplier of flywheel ring gears and flex assemblies. Dham says that when he heard of the company, he wasn’t sure if he wanted it. “For me, Iowa was no different from Brunei. I had never heard about that place, had no idea about the company, and it took 36 hours to reach there.” But the price—$2.5 million—was attractive, and despite the $3 million in liabilities, the company, which produced around six million ring gears—a small component that is attached to the flywheel of an internal combustion engine—a year, seemed like a good prospect. “I went, stayed for over four months, and bought the company,” Dham says, making the process seem boringly routine.

On his way back to India, Dham stopped at London, and from Heathrow airport called his old friend, John Flintham, then director of Lloyds (Brierley Hill), a company that made engine ring gears, timing rings, and inertia rings. Lloyds was in trouble, waiting for a buyer. Dham had called Flintham to check if the company was still on the block. It was, and Dham’s stopover became a two-month stay. At the end of the two months, Dham had closed a deal to buy Lloyds (Brierley Hill) for €2.2 million, almost entirely funded by Indian banks. And Flintham joined his friend’s company. From two million, Dham now owned 10 million in ring gear capacity, or 20% of global capacity.

Around the same time (2002), Dham made one of Amtek’s earliest domestic acquisitions: Pune-based Ahmednagar Forgings (AFL) for nearly Rs 50 crore. This pushed up Amtek’s forging capacity to 73,000 tonnes a year, with 37,000 tonnes coming from AFL. As part of the deal, Amtek also got the fastener division of AFL with a plant in Ahmednagar in Maharashtra. The deal also gave Amtek a toehold in commercial vehicles and the defence market. It was now no longer limited to passenger cars, two-wheelers, and light commercial vehicles.

Soon after, in 2003, he bought the British company GWK Group, which made complex machining and high-level module assemblies. The asking price then was £30 million, but Dham swung the deal for a mere £5 million since GWK was a distressed asset despite sales worth £100 million a year.

From then, there was no looking back. Dham led Amtek through a series of takeovers and buyouts, growing the company from Rs 1,700 crore in revenue in 2005 to Rs 16,000 crore in 2014. Without a trace of arrogance, Dham declares that he has “never yet found a lemon”.

The company is also reaping the benefits of the acquisitions made in the years following the crisis of 2007-08, when good but distressed companies were available at the right price. (It acquired three companies then—Tekfor, Küpper, and JMT).

“Opportunities for expansion and buying don’t wait for your strategy [to fall in place],” says Dham. Between 2010 and 2013, he made three of Amtek’s biggest acquisitions—JMT Holdings in India, and Neumayer Tekfor and the Küpper Group in Germany—for some Rs 3,500 crore. Clearly, inorganic growth is Dham’s preferred way of reaching the $10 billion target.

“People keep telling me, ‘Enough is enough, now you can rest easy.’ But I tell them that it [acquiring companies] is in our DNA and we like to buy companies. When opportunities come, you must be able to grab them,” says Dham.

I learn a lot about how Dham works in the course of my interaction with him and his family. He lives with his wife, their two children, his mother-in-law, his sister, and her two sons. A good part of the 10-member top team at Amtek is family. Gautam Malhotra, 35, Dham’s nephew and the man likely to take over as the company’s chief financial officer, says the company runs a very tight ship, particularly when it comes to overseas operations.
At less than four times the net debt to Ebitda of €33 million, Tekfor was a good bargain to start with. Malhotra ruthlessly cut costs and improved efficiency by implementing incremental changes, increasing the Ebitda margins from 6% to 14%, and improving operating profits to €75 million.

The big advantage is something Malhotra points out: that the company is ready and willing to walk away from a deal if it’s not going well. “What differentiates us from many other companies is the fact that we know and have the capability to walk out of a deal once we realise that it is not a right fit. We don’t get carried away by the zing of an M&A.”

That said, will Dham steer clear of acquisitions for a while, now that it’s telling on the finances? The buying spree so far has pushed up Amtek’s net debt to Ebitda in FY13 to nearly 6X—unsustainable in the long run. Both Dham and Flintham are quick to point out that this ratio was the result of an accounting anomaly; Dham explains: “The cost of acquisitions was in our books but not the sales from these companies.” This has since been set right; the ratio is already down to 4.69x and they want to bring this down to 3x in the next two years.

Clearly, Dham is not going to curtail the inorganic growth. But he has had to tighten his belt before, and seems ready to do so again if needed. He’s disarmingly frank when I ask him about the last time Amtek was in trouble, which was around 2007-08, during the financial crisis. “[From 2003 on] we expanded like crazy, and everybody praised us for our foresight and strategy. We really could do no wrong. Publications gave us awards... And then the crash happened. Everybody said what bloody idiots we were because we did not see it coming. And then we couldn’t do anything right.”

Amtek Auto, like many other auto component makers, was badly hit during the global financial crisis when most global automobile companies tanked. While GM was saved from bankruptcy by the U.S. government, Chrysler went down and other car companies faced huge challenges. There was no demand, and Amtek Auto, which had made heavy investments in increasing capacities, found its capacity utilisation dwindling and its overseas revenues crashing from 34% to 17%. “Lots of component suppliers went out of business, a huge number came under severe financial stress. And we were no different,” says Flintham.

Amtek was forced to restructure its overseas companies. It closed some, merged others, and took the excess machines and equipment to India. It also laid off a substantial portion of workers overseas. “The company has [since] brought down the fixed cost from 80% of total revenues to 60%,” says Malhotra.

But then, given the scale of his ambitions, Dham’s business can’t be fully risk free. Take Europe, where the majority of his assets is concentrated. If, for example, the European Union doesn’t stage a comeback, Dham’s prospects will be hurt. How does he deal with such uncertainty?

Ultimately, the answer lies in Dham’s optimism. When he picked up Ahmednagar Forgings in 2002, its owner, U.V. Patel, was predicting the collapse of the auto components business in India. But from the following year, the industry witnessed a spectacular boom. “I am betting that Europe will not disintegrate, regardless of Greece, Spain, or Portugal,” says Dham.