ANALYSIS OF M & A OF COOPER

TIRES & RUBBER BY APOLLO

TYRES
MACR PROJECT REPORT, GROUP# 10

EXECUTIVE SUMMARY:
The paper studies the mergers and acquisition of Cooper tires by Apollo Tyres. The deal was made
official on June 2013. Both the companies, Apollo & Cooper, publicly announced about the merger
and acquisition with a deal value of $2.5 bn. But to the labour issue in china and equity holders
Members:
obstruction, there is a doubt about the true value of the deal from Apollo prospective. Currently,
Alok Kumar Singh (244)
Apollo is trying to bring the share value to $27 from previous $35 per share. We tried to find the
Pankaj Kumar
true value of the deal by considering various factors like: strategic analysis, pre-merger
HHI,(274)
postPratik
Chaudhury
(278)
merger HHI, anti-trust action, intangible valuation, accretion dilution, brand value etc. Finally,
we
Umakanta
Sahuacross
(294)
tried to see the current issues going on with the deal and the current events
happening

INTRODUCTION
On June 12, 2013, an Agreement and Plan of
Merger was reached between Cooper and Apollo
after a long period of negotiation. iUnder the terms
of

the

agreement,

Apollo,

the

largest

tire

manufacturer of India agreed to acquire Cooper for

$35 in cash for each share of the common stock
of Cooper. The deal was around 2.5 billion US
dollars. iiIt would represent a premium of 40% to

Thus, Apollo is aiming to have a horizontal business

the 30-day volume-weighted average share price of

expansion with increased product portfolio, having

Cooper Tyres till June 12 making Cooper, from 11

th

the main aim to tap new geographies.

th

largest to the 7 largest tire company in the world.

STRATEGIC

RATIONALE

BEHIND

THE
2. Product portfolio

DEAL

Currently Apollo Tyres has 3 broad product

1. Geographic expansion

category, namely: Passenger tires, commercial tires

Apollo Tyres wants to become a global leader in tire

& firm vehicle tires. With the acquisition of Cooper

manufacturing and distribution. Currently Apollo

Tires, Apollo will be able to enter the business of

has presence mainly in Indian sub-continent and in

light vehicle tire segment. Both the companies

some parts of Africa and Europe. To have a global

primarily focus on the replacement tire business.

foothold, it needed to have a cross-border

Apollo will get the benefit of more than 9 strong

integration. Cooper Tires have a strong presence in

brands of tires being produced by Copper Tires. See

North America and some part of Europe and China.

Appendix 1.

SO the deal will certainly provide a gateway to new

geographies to expand for Apollo Tyres.

3. Client Base
Cooper Tyres has big clients like Ford, Great Wall.
So Apollo can extend its client list to these
companies along with its existing clients like Audi,
GM, Fiat, and Hyundai.
4. The Synergy Effect

Alok Singh
IIM Kozhikode

Pratik Chaudhuri
IIM Kozhikode

Umakanta Sahu
IIM Kozhikode

Pankaj Kumar
IIM Kozhikode

With this related diversification, Apollo will derive

iv

a better synergetic effect for the company in terms

the labour unions of Cooper Tyres and its joint

of hard and soft values. Apollo will gain Strategic

venture partners would not react favourably to the

value as a long term goal to be a global player in

merger announcement. But as Apollo agreed that the

tire industry. This deal will provide a base by

clause of Material Adverse Effect in the agreement

making it 7th largest player in the world. This

would not constitute any event which was due to the

transformational

an

announced merger which included the effect it could

unprecedented opportunity to serve customers

have on the labour unions and JV partners of

across a host of geographies in both developed and

Cooper.

transaction

provides

fast-growing emerging markets around the world.

The combined company will be in a strong position
to address large, established markets, such as US
and Europe, as well as the fast-growing emerging
markets of China, India, Africa, and Latin America
where there is high potential for future growth.
Apollo will allow the structure & systems of the
acquired company intact. We expect that Cooper

It was contemplated by Cooper and Apollo that

Regarding the closing of the deal, both Apollo and

Cooper

had

to

put

in

their

best

possible

(reasonable best) efforts and carry out the

Merger with speed and efficiency (expeditious
manner). This needed Apollo and Cooper to take
necessary actions to obtain the approval of any third
party involved.

will continue to be led by members of its existing

VALUATION OF TARGET: COOPER TIRE

leadership team and will continue to operate out of

AND RUBBER

its facilities globally. Cooper will continue to

recognize the labour unions and honour the terms of
collective bargaining agreements presently in effect
while generally maintaining compensation and
benefit levels for non-union employees. In terms of

Different methods of valuation is used for valuing

the target company. The target is first valued with
trading multiples. The multiples which is used are
P/E, EV/Sales, and EV/EBITDA.

Shared Values, both companies commit equally to

employee safety and development as well as
sustainability & giving back to the community.
INITIAL AGREEMENT BETWEEN APOLLO
AND COOPER TYRES

The table above suggested the minimum and

maximum value of the firm according to three
multiples used. The range is in between $1.4 billion

It was decided on 12th June, 2013 that Apollo

to $3.55 billion. After getting a ball parking figure,

would acquire Cooper for $2.5 billion (40%

discounted cash flow method is used to narrow

premium

down the range. Upon considering Risk free rate of

iii

over

30-day-volume-weighted

share

4.3 %, levered beta of 1.5, and market risk premium

price).
Alok Singh
IIM Kozhikode

Pratik Chaudhuri
IIM Kozhikode

Umakanta Sahu
IIM Kozhikode

Pankaj Kumar
IIM Kozhikode

of 5.4 % (United States), cost of equity of 12.94%

was also overpaying in order to acquire Cooper.

has been determined. Using after-tax cost of debt of

This gave Apollo an incentive to escape from the

6% yields a WACC of 7.9%. The terminal growth

deal.

rate of 1% on forecasted cash flows through 2021,

Cooper Tire factory in China where workers

firm value is around 2.7 $ billion. Expected synergy

protested against the acquisition by going on strike.

which were to achieve through this deal is variable.

Chengshan Group Company, the JV partner of

However, maximum synergy which can be obtained

Cooper in China also expressed its objection to the

is $1.158billion. At best Cost of the good sold can

deal.

be reduced to industry average and hence therefore,

an improvement of 3 % is possible. Similarly selling

vii

The deal was also not well received by the

CASE IN COURT

and administrative expenses can be trimmed down

viii

to industry average i.e. an improvement of 2 % over

its contractual obligations to use reasonable best

the current levels. The deal would be highly dilutive

efforts to close the deal with Cooper in the most

for Apollo Tyres. Since its a cross border deal

expeditious manner possible and to cooperate with

therefore it is advisable to pay by all cash .The

Cooper in obtaining any consent necessary to

value of intangible i.e brand and human capital is

consummate the merger. Specifically, there should

around $0.18 billion. (Please Refer Spreadsheet for

be a new agreement between Apollo and the United

calculations).

Steelworkers and its Local unions so as to finalize

Since the stocks of the cooper Tire and Rubber is

undervalued, therefore even after paying 40 %
premium over the market value to the existing
shareholder, it is a good deal for Apollo tyres.
Apollo is paying almost nothing for the expected
synergy, and other intangibles such a brand,
expertise , market entry options etc.

Cooper seeks Apollo to specific performance of

the merger.

ix

According to Cooper, Apollo was

deliberately trying to back out of the deal or to

force Cooper to agree to a price reduction (from
$35 to $27/share) thereby violating the merger
agreement.
COURT RULING
x

On 9th November 2013, the Delaware Court ruled

EVENTS AFTER THE ANNOUNCEMENT

that Apollo has not violated merger agreement

LEADING TO THE DISPUTE

with Cooper Tire. The court also found that Apollo

vi

After the deal was announced, the share price of

Apollo declined by 39%. We feel that this was

because of the perception that Apollo, an Indian

has used 'reasonable best efforts' to obtain the

consent of USW and had not shown signs of
buyers remorse.

company, was taking on too much debt to finance

an all-cash acquisition of a large company. Apollo
Alok Singh
IIM Kozhikode

Pratik Chaudhuri
IIM Kozhikode

Umakanta Sahu
IIM Kozhikode

Pankaj Kumar
IIM Kozhikode

Brand portfolio of Cooper Tire

ANTI-TRUST ISSUES
As per our calculations (excel attached)-

Now as Pre-Merger HHI is between 1000 and 1800,

the industry is moderately concentrated. But the
change in HHI after the merger is only 1.875 which
is much less than 100.

xi

Thus there is little

possibility of anti-trust challenge.

Valuation Excel

Appendix

Alok Singh
IIM Kozhikode

Pratik Chaudhuri
IIM Kozhikode

Umakanta Sahu
IIM Kozhikode

Pankaj Kumar
IIM Kozhikode

i Section 2.1 of the Agreement and Plan of Merger between Apollo and Cooper
Tyres(http://www.sec.gov/Archives/edgar/data/24491/000119312513256252/d555217dex21.htm)

iiPoint 2 of the Nature of Action section in Cooper Tyre(plaintiff) vs Apollo(defendant) case in the
Court
of
Chancery
in
the
State
of
Delaware(http://www.sec.gov/Archives/edgar/data/24491/000119312513392113/d609257dex991.
htm)

iii Point 2 of the Nature of Action section in Cooper Tyre(plaintiff) vs Apollo(defendant) case in the
Court of Chancery in the State of
Delaware(http://www.sec.gov/Archives/edgar/data/24491/000119312513392113/d609257dex991.
htm)

iv Point 5 of the Nature of Action section in Cooper Tyre(plaintiff) vs Apollo(defendant) case in the
Court
of
Chancery
in
the
State
of
Delaware(http://www.sec.gov/Archives/edgar/data/24491/000119312513392113/d609257dex991.
htm)

v
Section
6.3(a)
of
the
Merger
Agreement
between
Apollo
and
Cooper
Tyres(http://www.sec.gov/Archives/edgar/data/24491/000119312513256252/d555217dex21.htm)

vi Point 7 of the Nature of Action section in Cooper Tyre(plaintiff) vs Apollo(defendant) case in the
Court
of
Chancery
in
the
State
of
Delaware(http://www.sec.gov/Archives/edgar/data/24491/000119312513392113/d609257dex991.
htm)

vii Point 8 of the Nature of Action section in Cooper Tyre(plaintiff) vs Apollo(defendant) case in the
Court
of
Chancery
in
the
State
of
Delaware(http://www.sec.gov/Archives/edgar/data/24491/000119312513392113/d609257dex991.
htm)

viii Point 1 of the Nature of Action section in the Cooper Tyre (plaintiff) vs Apollo (defendant) case
in
the
Court
of
Chancery
in
the
State
of
Delaware(http://www.sec.gov/Archives/edgar/data/24491/000119312513392113/d609257dex991.
htm)

ixNews
Article-Despite
Bumps,
Tire
Deal
Still
Makes
Sense(Paragraph
(http://dealbook.nytimes.com/2013/11/12/despite-bumps-tire-deal-still-makes-sense)

2)

x News Article-US court gives clean chit to Apollo in merger deal with Cooper
Tire(http://articles.economictimes.indiatimes.com/2013-11-11/news/43930168_1_apollo-tyrescooper-tire-rubber-company-merger-agreement)

xi Schweser CFA Level 2 Book 2; 2013 Edition; Page 351