Tafe and Agco: How did the tractor partners fall out of love?

Growing anxiety over Tractors and Farm Equipment Ltd’s (Tafe) growing ownership in Agco Corp., plus its demand for board-level changes at the US-based tractor maker, led the latter to break its deal trademark with the Chennai-based company, according to Tafe’s court filings, as well as a senior company executive.

After cutting off some business ties with Tafe earlier this year, Agco on Sept. 30 terminated its agreement that allowed Tafe to sell tractors under the Massey Ferguson brand, accusing the Indian company of what it called inappropriate and unauthorized actions. The developments emerge as a possible case of shareholder activism by a local entity shaking up a large foreign company.

Two reasons

“The Tafe-Agco affair has been triggered for two fundamental reasons. One, as you said citing legal documents, is perhaps because the executive (Agco CEO EricHansotia) was concerned about Tafe’s increasing ownership in Agco,” said TR Kesavan, president of Tafe’s corporate relations and alliances group. .

Tafe first acquired a 12.5% ​​stake in Agco in 2012, a year after Tafe chairman and CEO Mallika Srinivasan joined the US company’s board. Tafe has since increased his stake in Agco, reaching 16.31% at the end of September 2024, making him the largest shareholder in the world’s third-largest tractor manufacturer.

Tafe’s filing before a Chennai court on August 8 said: “Between 2014 and 2024, the share of the first plaintiff (Tafe) in the second defendant (Agco Corp) had increased to 16.3% and since the first plaintiff had become the largest shareholder, the same had inconvenienced the second accused. Therefore, in order to force the plaintiff into a standstill agreement and reduce its share in the second defendant, without any justification, the defendants issued a letter, dated 26.04.2024, unilaterally terminating the agreement between the parties regarding Turkey.”

another angle

Kesavan brought another angle to the issue.

“But the other equally important reason is that the largest shareholder, Tafe, has been urging Agco for some years now that Agco should split the role of chairman and CEO. “Tafe is the largest shareholder, a long-term strategic shareholder, a patient investor whose interests are completely aligned with those of other shareholders,” Kesavan said.

On the question of whether Tafe would like to increase his stake in Agco, which had a market capitalization of $7.3 billion as of Oct. 4, Kesavan said Tafe had written to all shareholders, highlighting his concerns. However, he reiterated that a standstill agreement limits Tafe from owning more shares in Agco. “Please remember that Tafe has not sold a single share since we invested in Agco in 2012. Commercial matters are subjudice as they are in the courts, and I am afraid I cannot comment on them,” he said.

An email sent to Agco on October 1 went unanswered.

The roots of the dispute date back to 2022, a year after Hansotia became president and CEO of Agco in January 2021. Citing Hansotia’s lack of experience in managing a large company, Srinivasan suggested to the board Agco leadership that the roles of president and CEO should be split up a bit. once in early 2022, a Tafe executive aware of the development said on condition of anonymity.

In April of this year, Agco ended some business relationships with Tafe, citing the company’s “continued poor operational performance as a supplier, brand licensee and distributor of Agco” and Agco’s “continued lack of focus on customers in several key markets. Finally, on September 30, Agco announced that it would end, with immediate effect, its agreement with Tafe that allowed the local company to sell tractors under the Massey Ferguson brand.

This prompted a Tafe executive to write to Agco shareholders, highlighting what he said were strategic mistakes, poor execution and poor performance by the US company. Tafe also got a reprieve from a Chennai court, which stayed the dissolution of the agreement between the two companies.

Call for changes

“Tafe is calling for shareholder-driven board changes, citing issues such as missed market opportunities, failed acquisitions and rising costs,” P. Krishnamurthy, Tafe’s corporate counsel, said in a letter dated Sept. 30.

“Rather than constructively engaging with Tafe, the board has taken steps to disenfranchise Tafe and isolate his representative from meaningful participation on the board,” the letter said.

Founded in 1990, Agco has no promoter and has fund managers Vanguard and Blackrock as its second and third largest shareholders, with 10.5% and 7.1% respectively, as of June 30. Its revenue improved 13.9% from the same period a year earlier to $14.41 billion in the year ending December 2023, while profits rose 34.4% to $1.7 billion.

For now, Srinivasan’s core demand to split the CEO and chairman roles at Agco does not appear to have found much support from other shareholders. In April this year, 15 of the 20 largest public shareholders, who own 56% of Agco, voted to reappoint Hansotia as a director.

sole dissident

The only dissenter was Norway’s Norges Bank Investment Management, the world’s largest sovereign wealth fund, which owns 0.91% of Agco, according to documents reviewed by Mint.

“The board must exercise objective judgment on corporate matters and be able to make decisions independently of management. The roles of chairman and CEO should not fall to the same person,” Norges reasoned, rejecting Hansotia’s re-election. “When the founder of a company combines both roles, we can support this for a limited period, as long as the board has put measures implemented to mitigate any conflict of interest.”

Tafe was founded in 1961 by Srinivasan’s grandfather Sivasailam Anantharamakrishnan, the founder of Amalgamations Group. Privately held Tafe is the country’s second-largest tractor maker, behind leader Mahindra and Mahindra. In the year ending March 2023, there were $12,619 crore in revenue and $1,278 crore profit.

Agco owns 20.7% of Tafe, while Simpson & Co Ltd, the holding company of the Amalgamations group, owns the remaining 79.3% of the shares. An Agco executive, Robert Crain, also sits on Tafe’s board of directors.