Shares in Indian top utility vehicles maker Mahindra & Mahindra fell more than 1 per cent on Thursday after South Korea's troubled Ssangyong Motor named it as the preferred bidder.
"It is not making economic sense and that is why the stock has reacted negatively," said Rakesh Rawal, head of private wealth management at Anand Rathi, who manages $1 billion of funds for his clients.
Ssangyong, which holds only 2 per cent of the Korean market, is under court-led restructuring and faces a debt pile of about $634 million. It also has a history of labour disputes.
Mahindra, which makes sport utility vehicles such as its flagship Scorpio and popular Xylo, aims to be a global player in the segment. Its bid for Ssangyong came in at $400 million, sources previously told Reuters.
The acquisition could be slightly negative for Mahindra in the near term because Ssangyong is a small player and scalability is limited. So Mahindra will have to make some investments," said Surjit Arora, auto analyst with brokerage Prabhudas Lilladher.
"I am guessing it would take two to three years for Mahindra to turn around the company. That is when we expect the benefits to kick in," he added.
The potential deal would give Mahindra access to the so south-east Asian market, where it does not have a presence. It would also give it access to new technologies, particularly in diesel engines, which could be used for Mahindra's existing vehicle range.
An investment banker who has been involved with the Mahindra group in the past said that while labour problems have troubled the Korean firm in the past, "Mahindra may be able to deal with it as they have a record of good industrial relations. I think they can sort it out," he added.
Mahindra is likely to hold a press briefing later in the day to talk about the fresh development.
At 9:45 am, Mahindra shares were down 0.58 per cent at Rs 624, after hitting a low of Rs 619 while the main index was down 0.55 per cent.
Mahindra was one of the bidders to buy cash-strapped Ssangyong, along with South Korea's Young An and India's Ruia Group, which was named a reserve bidder.
Ssangyoung said the final acquisition price would be decided in October, after due diligence, and the deal would be closed in November.