TAFE’s battle should serve as a wake-up call for India Inc

TAFE has been in alliance with the over $11 billion AGCO Corporation of the US and the Massey Ferguson brand for more than six decades

The escalating face-off between TAFE (Tractors and Farm Equipment), the flagship company of the Chennai-based Amalgamation group, and AGCO Corporation of the U.S. is turning out to be a challenging test for India Inc., which has developed a significant propensity to go multi-national. Significantly enough, the fight has erupted at a time when India is increasingly acclaimed as an emerging super power in the international economic sphere.

Sequence of events

 # The friction began in April when AGCO served a notice on TAFE to terminate the commercial relationships between the two, which have been in alliance for over six decades.

# Quick on its feet, TAFE got a status quo order from a commercial court in Chennai on the use of Massey Ferguson brand.

# The wrangle got accentuated on September 30 when AGCO confirmed the termination of the commercial agreements with TAFE. This prompted TAFE to move a contempt case against AGCO and three others, including its Chairman and CEO, for the “disobedience” the earlier status quo order of the commercial court.

#Separately, TAFE has also moved the Madras High Court asserting its ownership of the Massey Ferguson brand.

Backstory of the partnership

TAFE has been in alliance with the over $11 billion AGCO Corporation of the US and the Massey Ferguson brand for more than six decades.  The two even hold shares in each other. AGCO owns approximately 21 percent of the outstanding shares of TAFE. Similarly, TAFE and its affiliates own approximately 16 percent of the outstanding shares of AGCO.

Why is the marriage of over six decades coming apart now? Why is AGCO forcing a split sans putting in place a ready alternative?

Downsides of agency capitalism

Observers – who wish to remain in the realm of anonymity – see in the rising skirmish between the two long-standing partners an orchestrated attempt to push back the Indian investor and fortify the interest of the AGCO management and the board, which has become formidable thanks to the rise of agency capitalism in America.

There has been a fundamental change in the ownership of US public companies. The equity ownership has shifted from dispersed individual owners to concentrated institutional owners, specifically investment intermediaries such as pension funds, mutual funds and bank trust departments.

Agency capitalism is one in which record holding “agents” hold equity ownership of a large share of the economic base on behalf of beneficial owners. This has given rise to an ironic situation where there are funds representing and voting for the shareholders, on the one side. On the other side, there are CEOs - supposedly responsible to the same shareholders - managing the company on the vote of these funds!

In such a scenario, the beneficial shareholders are a marginalized lot in America Inc. In the case of AGCO, institutions together hold over 40 per cent of its outstanding shares. However, TAFE is the largest single shareholder with a little over 16 per cent stake. Its strategic stake must be read in the context of the fact that TAFE is a formidable name to reckon with in the Indian tractor market, in particular. In an institutions-driven and promoter-less AGCO, TAFE, the single largest shareholder, is sought to be pushed back. This has raised eyebrows especially since relationship between the two has spread across assorted areas such as marketing, technology, distribution, branding and what not.

Not surprisingly, TAFE has been able spot and articulate the drift caused by the policy fault, which is seriously hurting the long-term business prospects of AGCO.  In fact, TAFE flagged off its concern through an amended 13D filing with the SEC (Securities and Exchange Commission) of the US.

Tussle over a ‘standstill agreement’

The termination act of AGCO cannot also be viewed in isolation of the `standstill agreement’ (it sort of freezing TAFE’s stake in AGCO) that exists between them for years now. It was extended in April last for a year. Is AGCO using the commercial agreement to goad TAFE into signing a long ``standstill’’ agreement? The connection cannot be wished away at this point in time.

What if TAFE refuses to budge on this score? Experts point to ‘’poison pill’’ tool, which can make acquisition prohibitive.  This tool allows a company may make significant quantities of stock available for purchase to all other shareholders at a reduced price or even at no cost at all.

In its 13D filing with SEC, TAFE has alleged that the management is indulging in diversionary tactics when the focus should be on “stemming the slide in its competitive position caused primarily by short-sighted operational strategy” that does not address structural readiness for the down cycle. This indeed requires immediate course-correction. “The failure to effectively integrate and derive value from costly acquisitions has led to significant write-offs,” TAFE said in its filing. The slide in second quarter earnings and falling demand have all have been exposing the management faults.

Raising a host of issue in its filing with SEC, TAFE has also called for separating the roles of Chairman and CEO, adopting additional shareholder-friendly governance structures and undertaking a meaningful board refresh to restore a level of oversight and accountability.

The AGCO-TAFE imbroglio has gone beyond the relationship between two partners to become a test case for India and Indian companies to assert their rightful place in the international business world.