Davos 2020: M&M’s Anish Shah Likens Company To Berkshire Hathaway, Says Spinoffs ‘Artificial Step’
Mahindra & Mahindra Ltd. likens its structure to Berkshire Hathaway Inc.- it is more a federation model than a conglomerate, said Managing Director and Chief Executive Officer-designate Anish Shah.
“We are a federation and not a conglomerate and that’s a very important distinction,” Shah told BloombergQuint on the sidelines of the World Economic Forum 2020 in Davos, Switzerland. “As a federation, we don’t get into the details for operating companies as they are listed. From a governance standpoint, their boards run them.” The model is similar to Warren Buffett’s firm Berkshire Hathaway from a governance point of view, he said.
The difference though is, there are significant synergies across these companies.Anish Shah, CEO-Designate, M&M
On Hiving Off Businesses
When asked if M&M would consider separating its auto and tractor business from the investments in group companies, to protect the mobility business from a holding company discount, Shah said that would be an “artificial step” to create value.
The basic question is to create value, and the reason it is together is because there is a greater value that gets created.Anish Shah, CEO-Designate, M&M
That comes as M&M announced a series of top-level changes under its succession plan last month. Shah, as part of the plan, will be elevated as deputy managing director and chief financial officer in April 2020 and will succeed Pawan Goenka as managing director and chief executive officer a year later.
Watch | CEO-Designate Anish Shah on M&M’s federation structure, holding company discount, CFO hunt and more.
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Here are the edited excerpts from the interview:
Let me start by asking you what was the first thought that occurred to you when they said that you’d been picked by the Nomination and Remuneration Committee to lead this group next?
I was absolutely thrilled. The Mahindra group is a fantastic group and one that I felt so comfortable with despite having been there for a short time. It really resonates in terms of what it does with communities, credo of rise enabling communities and customers to rise. It just felt a huge responsibility and at the same time, I was humbled and honoured that, the responsibility was put on me.
Not nervous at all. Having been here for five years, I have a good sense of the group and what we can do. So that made it much easier for me.
Before I get to that, one of the things that struck me is I was looking through your succession planning is that Dr. Goenka brings with him like over a decade of R&D experience at a global automaker. He came to Mahindra & Mahindra, worked and helping develop the Scorpio. Your skill set, your areas of expertise are very different - even though you’ve worked for five years in an auto company. So, I imagine that in any company’s progress a new leader shapes that company in his or her own vision. What do you expect will be that vision once you take over in the next two years?
Let’s start with first who we are today and what we have. Mahindra is a brand that stands for values, for governance. It’s a brand that creates trust in people, that has a huge amount of responsibility to its customers and its communities. All of that is something we need to sustain. So, I essentially first look at myself as a custodian for our brand values and want to be able to take that brand forward.
The second part is, we embarked on a journey of technology with a lot of efforts and digital and AI and IoT and data sciences and that’s something we need to continue accelerating. We need to accelerate that to be able to change or deliver to customers what I call a magical experience. We do that in some pockets today, but we need to do that consistently across, and technology enables that. That would be a key differentiation for us.
The third part is, we have maintained over time a very strong financial discipline. Yes, there are a number of folks that will say you are in multiple businesses, and that some may not have worked. But if you look at the value creation over time, it has been quite significant. Our board, even over the last two or three years has even further ratcheted up the financial discipline. We have something called a challenge round process for every proposal that goes to the board and over the last couple of years the board asked me to lead it and the rigour that we put companies through, it is very significant. So, a lot of this is not seen outside. Some of it may be seen more over time but that again is something I would say we continue to maintain and enhance to some extent to give a little more comfort that we are focusing on, areas where we can win - where we have a clear right to win - and where we can execute it.
That’s essentially the framework which we should look at. So, in terms of the overall vision, I would continue to look at the Mahindra Group as one that enables our communities and continues to rise to deliver magical customer experiences and we will play in a number of different industries where we feel that we have a right to win and enhance the synergies across the industry as we go forward.
You have conviction in the conglomerate model? I’m not asking specifically only from the M&M point of view, but I think over the last two decades, we’ve seen much debate around the kind of value creation that conglomerates can make and in fact we often see that for companies like M&M, one of the things is the holding company discount as they call it, right? So, you’re convinced that the conglomerate way is the way to go for the next several years?
I would first say that we are a federation and not a conglomerate. It’s a very important distinction and yes, I’m convinced on that and part of my job will be to convince others why this is such a good model.
As a federation, we don’t get into the details for operating companies as they are listed. From a governance standpoint, their boards run them. So, in some ways, we’re more like a Berkshire Hathaway from that perspective. The difference though is, there are significant synergies across these companies.
When we look at sourcing, which is a big part of the cost for auto and for power, if that is done together, that helps them reduce cost quite significantly. If you look at the customer, for example the consumer coming in to buy a car, in many cases a consumer would go to a dealership, look at a car, select a car, and then apply for financing somewhere, apply for insurance somewhere else and then once they have a car, they may need some other service from a maintenance standpoint. If they have to sell a car, they will have to go somewhere else to sell it.
What we’re looking at is to find synergies and offer the customer seamless service across all our companies.
But that’s still the car universe, right? What’s the connection to holidays? Or what’s the connection to real estate or affordable housing or logistics? Those are all group businesses. So, there is no apparent tangible connection within the various businesses. I understand you’re styling yourself like a large private equity fund or like a Berkshire, but do you see big value in that in the decades to come?
So, let me give examples of that because that’s the right set of questions. You are right that there were some synergies that will be apparent for the consumer in a certain set of industries but let’s look at your question around holidays and auto.
We were piloting an AI technology and we started with Club Mahindra Holidays for that. We were looking at AI to do digital marketing, I won’t go into details of that in our conversation today, but the technology can really transform the way we deliver value to customers.
Once I saw the results from holidays, the auto business took the technology and deployed that. So, in today’s world, we’re going to see a lot of change happening very quickly. So, our challenge is how do we find best practices across our portfolio, be able to transfer them quickly. They will be learnings, there will be things that will work, there’ll be things that won’t work. But it comes back to the questions: Can we deliver value? Can we win the areas we play in?
That’s how we would do it and as you rightly said, those questions do exist outside.
Part of my job is to be able to show real examples of where real value was added to enhance value for investors and hopefully at some point, we can move from a discount on a conglomerate model to a premium on a federation model.
So, one of maybe one of two ways that I can think that might happen is that if you separate out your auto business from the main parent company right now - however and whatever the nomenclature be etcetera. Will the auto business then demand a valuation that’s suitable to the auto business and not be suppressed in any way or boosted in any way by the valuations of the other business? And then, you just have a holding company or an investment company that owns the stakes in all of this. So, that’s one way to do it. The other is to see if you want to narrow your portfolio. The flip side to that would be the question would you look to expand your portfolio either. So, all of these questions to you.
So, for us it’s more around the basic question: can we create value? If we can create value, it’s about how can we communicate it in a way that people understand that?
Spinning out a company or not, in some ways is an artificial step. It essentially tells us that we have not been able to communicate that value clearly. The reason it’s together is because there is greater value that is created.
So, that’s part of our challenge. You asked about whether we will get into new areas; I think the first question will be, can we become much bigger in the areas we are in today? We are in a vast variety of areas.
Yes, there may be one or two things we would look at, but at this point, I wouldn’t say that we’re going to go out and look at a lot of new things. I think it’s more about driving scale - in businesses that we are in, and as we do that, it will enhance value for shareholders.
Data sciences, digitisation, all of those are areas that you’re an expert in. How do you expect that will shape your vision of M&M? What can we expect M&M to look like five years from now?
What we can expect is a company that across with these businesses delivers what I call magical experiences to customers. That’s where you can really leverage technology. I would want customers to go and say ‘wow I transacted with M&M. I bought a car, I bought a tractor, I went for holidays with Club Mahindra, I bought a house with LifeSpaces and the experience was fantastic’. The company was fantastic, they took care of me, they knew what I wanted, and they delivered exactly what I wanted in a way that was seamless.
You are not answering my question. Of course, you want to deliver magical experiences today, and day before yesterday as well. Its not like you did not want to deliver magical experiences.
The difference today is that technology makes it possible and it’s about how you bring in technology from various sources and be able to do that for a customer. This was not possible five years ago. Today, it’s possible in certain pockets but it’s about how do we take that forward.
One operational question, Parthasarathy steps down and you’re going to handle the finance portfolio for a year. In this succession plan, they did not name a CFO thereafter. Is that something that the board will consider closer to 2021?
We have started a search for a CFO already and that gives us time to be able to look both internally and externally and find the right CFO.
So, this was a very detailed thought through the transition plan. As you’re aware, the board took a lot of time, looked at various different options and then beyond the options also thought through what was the transition that needed to be done. So, in many ways it makes me feel a lot more comfortable and a lot easier in terms of how this plan is working out.