German firm hurls espionage charge at Hero Cycles

Munjal firm dismisses allegations, says it aborted deal as 'closing conditions' were not fulfilled

It was supposed to be Hero Cycles' first-ever foreign acquisition. But less than two months after signing a contract to buy a 60 per cent stake in German bicycle manufacturer MIFA for Rs 160 crore, the Munjal family-promoted firm is facing charges of industrial espionage - an allegation it has termed baseless.

Hero Cycles had entered into the contract on August 24 this year but pulled out of the deal as it "discovered MIFA did not meet the closing conditions mentioned in the contract".

MIFA has, however, alleged that Hero, which is building a new factory in India, violated the "duty of loyalty" mentioned in the contract by "knowledge gained from secret production-related documents" shared by MIFA during the process of due-diligence that extended for 14 months.

MIFA has also accused Hero of delaying the buyout process and, thereby, holding back its planned investments. According to a document from MIFA to its stakeholders, the company has alleged Hero acquired "MIFA's business secrets through culpable conduct during the negotiations. Particularly, competition-related economic interest in secrecy of MIFA were affected. Any violation of these civil law standards is sufficient for a violation of '17 Abs 2 Nr 2 UWG' and constitutes industrial espionage".

Hero Cycles has shot back at MIFA, with Co-chairman & Managing Director Pankaj Munjal writing a letter to Germany's Ambassador to New Delhi, Michael Steiner, drawing the latter's attention to the "baseless" allegations of MIFA made with "ulterior motives".

"Hero for the past 14 months worked with the MIFA operating team, along with the owners, and concluded a definitive agreement. Consequently, MIFA and its owners had to fulfil closing conditions. However, none of the closing conditions were even initiated and, thus, reached to a point that these could not be met in the agreed timelines," Munjal said.

Hero also accused the German company of keeping it in the dark over the appointment of a new chief executive, Thomas Mayer, who took charge from October 1. MIFA, with yearly revenues of ^100 million, filed for insolvency towards the end of last month.

"On an ad-hoc basis, the CEO is changed without any discussion with Hero, a breach not in line with the spirit of the agreements. With removal of key people, again a breach, the company was clueless on the way forward. Hero's opinion was not even considered for these key decisions, defying the basis of the agreement we arrived at," Munjal added.

At the time of the acquisition, Hero had admitted that the buyout would give the Indian company access to MIFA's German engineering expertise, allowing it to introduce 'high-quality bikes' in the Indian market. While the closing of the transaction was expected to be closed in about six months, the operational integration between the two companies was to commence immediately.

Hero, the world's largest bicycle manufacturer, also looked to gain from MIFA's critical Electronic Drive Unit technology, used in e-bikes. The Hero group is also involved in manufacturing of electric bikes and is the largest player in this segment.

Munjal had earlier said that the transaction was only a first step in Hero Cycle's ambition to become a leading global cycle manufacturer, not only by volume but by value.

SHARP TURNS

    Aug 2014: Hero agrees to acquire a 60% stake in MIFA for Euro 19 million
     
    Aug-Sep: Hero does not make any payment
     
    Sep: MIFA files for bankruptcy; appoints new CEO
     
    Oct: Hero pulls out of deal; MIFA accuses Hero of industrial espionage