For 26 years, the partnership between the Indian and the Japanese giants was characterized by a 26% stake of each company on the joint venture. It also includes valuable technological assistance form Honda to Hero. Without a doubt, the joint venture definitely did wonders for the Hero Honda share price in previous years. It was considered as the undisputed dominant leader in motorcycle manufacturing in the Indian market, proved by comparatively high net profits.
Background of the Split
After at least 20 years of partnership, the two companies decided to split that took effect late 2010. One of the conditions of the split is that Honda will exit the joint venture through a series of off-market transactions. This will transfer its 26% company shares to the Manjul family, which is the holder of the 26% Hero shares. All in all, it was valued approximately $1 billion. This represented less than half of the stake current value in the stock market.
With the circumstances under way, the Hero Honda share price was greatly affected. The joint venture was once the dominant force in the motorcycle market in India, defeating Bajaj, Yamaha and even the independent fully owned subsidiary of the Japanese corporation – the Honda Motorcycle and Scooter India (HMSI). What was instrumental in the decrease in value of the Hero Honda shares is the high discount rate, ranging from 30 to 50 percent, on the buyout.
Reason for the Split
Both Hero and Honda have their own reasons for the split and are understandably contradicting with each other. But analysts consider this contradiction as a minor irritation between the two parties at first, until it turned into a major issue and misunderstanding between the two. The result of this is that the Hero Honda share price in the market became severely damaged.
Hero was disappointed that Honda obviously didn’t like to fully and freely share their motorcycle technology with its partner. Their contract was 10 years, which will end in 2014. Additionally, Here was also concerned about the high royalty payouts to Honda that affected the net margin. In order for Hero to compensate Hondo for the discounted price of its stake, it continues to pay the substantial royalties on the use of the Honda name. Because of this, the Hero Honda share price will be affected when the margin pressures and performance remain in unfavorable levels.
On the side of Honda, it’s major irritant is the refusal of Hero to merge its spare parts business with Honda Motors India, a new fully owned subsidiary of the Japanese company. The fact that HMSI, the fourth largest of its kind in the Indian market, was a direct competitor should also be considered.
There are many ways wherein Honda will be affected by the split. It may start a war in price where Hero may emerge a runner-up to its strong competitors. Because of this, HMSI can now take on Hero Honda in every aspect of the market. Its main strength is that it is the original owner of the world-famous name in automobiles and motorcycles.
Currently, the Hero Honda share price is still on a favorable trend. But only time and the market will determine whether it will continue this way or not.