Mergers and Acquisitions

Vishwas Deshpande
PGID - 81100506

ISB PGPMAX 2012 FINAL EXAM CASE STUDY TATA MOTORS: 2008 ACQUISITION OF JLR

Mergers and Acquisitions - Case Study submission Tata Motors: Acquisition of Jaguar and Land Rover in 2008
Vishwas Deshpande, PGID: 81100506 Case key facts: Ford Motor Company is the third largest global automotive producer known for low cost production techniques with standard interchangeable parts, safety focus and low fuel consumption cars. Ford acquired JLR into PAG group of brands comprised of several other brands including Aston Martin, Volvo and Lincoln. In September 2006, as part of restructuring exercise called Way Forward to become more competitive, Ford decided on sale of brands within PAG. The decision highlighted the fact that Ford had not accomplished its goal of penetrating into luxury brands. India-based Tata Motors, in June 2008, acquired Fords two British auto brands : Jaguar and Land Rover (JLR), from Ford Motors for $2.3B. Jun/2007 - Ford announced intentions to sell JLR a. Likely Bidders: Tata Motors, M&M, Ceribus Capital, TPG Capital, Apollo. b. Final Top: Tata Motors ($2.05B) and M&M ($1.9B) Jan/2008 - Ford announces Tatas as preferred bidders Mar/2008 - Ford agreed to sell Jaguar Land Rover to Tata Motors. Jun/2008 TATAs completed acquisition Tata Motors gained 100% stake in JLR, 3 UK plants, 2 advanced design and engineering centers, 26 national sales companies, IP rights, $1.1B in capital allowances for taxes, and $600M in pension contributions. To facilitate the deal, Tata Motors raised $3B through bridge loans through a number of banks, including JP Morgan, Citigroup and State Bank of India. Analysts were skeptical about the deal due to looming economic slowdown in Europe and North America, Tata had strong cash reserves (D/E ratio of 0.56) to raise the required funds without endangering its own finances. Q1. Assess the pros and cons of Tata Motors acquisition of Jaguar and Land Rover. How does the acquisition compare to other options the company could have pursued in terms of growth? Tata Motors main interest for the acquisition was to establish a global presence within the automotive sector and remove its dependency on the Indian market, which was facing greater competition from other foreign brands. TML shareholders had a different perspective as they felt it was as over-priced bidding game and were not confident that Tatas balance sheet could handle this new debt. However, considering that the automotive market would eventually recover. TATA group also leveraged its M&A knowledge, and paid Ford slightly more than half of what Ford had paid for the two brands. Based on this we can say that Tata Motors made a sound acquisition decision. Potential Advantages for TATA Motors: a. Reduce its high dependence on Indian market, (90% revenue base). Such an acquisition signaled its long-term commitment to global automotive business.

Mergers and Acquisitions - Case Study submission Tata Motors: Acquisition of Jaguar and Land Rover in 2008
Vishwas Deshpande, PGID: 81100506 b. JLR acquisition would broaden TMLs brand portfolio, establish a global footprint, and entry to high-end premium autos segment. c. For JLR: Improved diversification across newer markets (SE Asia) and reduced dependency on US and European markets. d. The two advanced design technology centers provide access to advanced technology and facilitate growth of Tata Motors SUV market segment in India. e. Potential cost synergies and supply base cost advantage Ex. Corus Steel owned by TATAs is key supplier of high-grade steel to automotive industry. Potential disadvantages for TATA Motors: a. Global economic downturn and higher gas prices resulted in a 5% shrinkage of worldwide automotive market, particularly SUV and luxury brands hardest hit. b. Competitors like Mercedes, BMW, Lexus and Infinity, already having established presence in these markets. c. Increase in debt ratio of TATA Motors from 1X to 2.5X, especially with planned capital expenditure for Nano launch. d. Loan payment of $3 B for the acquisition, and subsequent rollover of this loan. Additional loss of $510 M of JLR during 1st ten months of the acquisition.

Q2. Will Tata Motors be able to achieve its desired results for purchasing Jaguar and Land Rover? Acquisition of JLR highlights the underlying need for Tata Group to embark on global growth. Following are key Strengths and Weakness of this strategy, which explain whether the desired results can be achieved by TATA Motors. Key Strengths: - TATAs have a good reputation for successful acquisition and integration of other automotive companies.(Daewoo Trucks) - TATAs strategy so far has been to maintain local management in new acquisitions and transplant only a few senior managers from India. The benefit with this is that Tata has been able to exchange expertise. For example after Daewoo acquisition TATA Motors learned work discipline and how to get final product 'right the first time.' - Experienced management capability and human resource capacity. Strategy in place for the next stage of its expansion. Besides focus on new products and acquisitions, it also has intensive management development programs in place to develop leaders for tomorrow. - Strong balance sheets, due to diversified non-automotive product portfolio. Established synergy of Corus, TACO and TCS. - Developing and creating brand value and experienced new product development and deployment process compared to its competitors. - TMLs alliance with Fiat since 2006, has enhanced production and knowledge exchange. Ex. Fiat Palio Style was launched by Tata in 2007, and agreement in place to build TATA pick-ups targeted at Central and South America.

Mergers and Acquisitions - Case Study submission Tata Motors: Acquisition of Jaguar and Land Rover in 2008
Vishwas Deshpande, PGID: 81100506 Key Weakness: TATA Motors brand image is strongly associated with commercial vehicles and low-cost passenger cars to the extent that it has isolated itself from lucrative segments in a more aspiring India. Lack of global R&D and design capability. TMLs passenger cars are based on 3rd and 4th generation platforms, disadvantages TML with competing car manufacturers. Inexperienced in luxury automobile branding. Tata has not got a foothold in the luxury car segment in its domestic, Indian market, where 90% revenues depend. Inexperienced in turning loss-making ventures; prior to the acquisition (except NELCO), Tata Group had acquired already successful brands. In English the word 'tat' means rubbish. Would the brand sensitive British consumer ever buy into such a brand? Maybe not.

Q3. What steps could it take to add value to the acquisition? On acquiring JLR, Ratan Tata, Chairman, Tata Group, said, We are very pleased at the prospect of Jaguar and Land Rover being a significant part of our automotive business. We have enormous respect for the two brands and will endeavor to preserve and build on their heritage and competitiveness, keeping their identities intact. We aim to support their growth, while holding true to our principles of allowing management and employees to bring their experience to bear on growth of the business. Following are potential steps towards value addition: - Maintaining the JLRs current management team in order to facilitate the turn around as indicated by Ratan Tata. - Using existing JLR distribution channels to foster promoting of existing brands into the global market-space. Reduce risk profile with diversification and entry into different markets. - Reduce production costs of JLR, by supply base synergies Ex. Corus Steel and utilize lower cost Indian facilities for labor intensive components and assemblies. - Leveraging JLRs brand image to gage acceptance of Tata as a global brand. Improving capabilities of existing TATA products by leveraging JLRs experienced design capability.

Mergers and Acquisitions - Case Study submission Tata Motors: Acquisition of Jaguar and Land Rover in 2008
Vishwas Deshpande, PGID: 81100506 Q4. Assess the merits of the approach Tata Motors planned to take with acquisition. What challenges might it have to overcome? TATAs have already learned the key aspects of acquisition from other businesses (Tetley and Corus) as to how to establish and enhance global presence and successful integration with the holding company. TATAs can leverage this experience and knowledge for carefully defining a scope thereby realizing the opportunities with JLR, and plan to mitigate potential threats. Considering the overall case, Tata motors approach to pre- and post-acquisition processes is quite sound.

Following are few challenges for TATAs to overcome: - Strong presence of well-established competitors like Mercedes, BMW, Lexus, who have already have capacitated this market with their global brands. These car manufacturers have been in passenger car business for many more years. - TATA Motors has traditionally focused on commercial and small vehicle segments, it has left itself open to competition from overseas companies for the emerging Indian luxury segments and Tata Motors has to catch up with them in terms of quality and production techniques. - Managing JLR: Global economic downturn, resulting in decreased sales for the identified market segment. JLR is also experiencing receding sales and brand image, and volatility for new automotive entry products. Dependence in its ability of success in growing SE Asia markets. - Strengthening environmental issues mean extra costs for TATA Motors whos a low-cost producer, and which is its core competitive advantage. - Rising prices in the global economy could pose a threat to Tata Motors. The rising prices of steel and aluminum putting pressure on production costs. - Many of Tata's products run on Diesel fuel, which is becoming expensive globally and within its traditional home market.

End Of Case Analysis