Tata JLR acquisition case study


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Tata JLR acquisition case study

  1. 1. Case StudyStrategic Management 10th August 2010Submitted to:Dr. S. Bajaj FORE School of ManagementSubmitted by:Ashutosha Kumar Jha -91011Mohd. Faraz Khan - 91033Nishant Singh - 91039Roshan Sonthalia - 91045Smriti Gupta -91054Stuti Gupta - 91056<br />Introduction<br />In June 2008, India-based Tata Motors Ltd. announced that it had completed the acquisition of the two iconic British brands - Jaguar and Land Rover (JLR) from the US-based Ford Motors for US$ 2.3 billion. Forming a part of the purchase consideration were JLR's manufacturing plants, two advanced design centers in the UK, national sales companies spanning across the world, and also licenses of all necessary intellectual property rights.<br />There was widespread skepticism in market over an Indian company owning the luxury brands. According to industry analysts, some of the issues that could trouble Tata Motors were economic slowdown in European and American markets, funding risks, currency risks etc. Market conditions were extremely tough, especially in the key US market. Tatas needed to invest a lot in brand building to make JLR profitable. Onset of recession not only made investment look mistimed, but also started wiping out the JLR market.<br />TATA - JLR deal<br />Tata had completed this biggest buy-out in the automobile space by an Indian company on June 2, 2008 as it bought the ownership of luxury brands - Jaguar and Land Rover. The deal included the purchase of JLR's manufacturing plants, two advanced design centers in the UK, national sales companies spanning across the world and also licenses of all necessary intellectual property rights.<br />Tata Motors was interested in acquiring JLR as it will reduce the company’s dependence on the Indian market, which accounted for 90% of its sales. Morgan Stanley reported that JLR’s acquisition appeared negative for Tata Motors, as it had increased the earnings volatility, given the difficult economic conditions in the key markets of JLR including the US and Europe. <br />Tata Motors raised $3 billion (about Rs 12,000 crore) through bridge loans for 15 months from a clutch of banks, including JP Morgan, Citigroup, and State Bank of India. Tata came under cash crisis because of the Corus deal and the huge investments in the TATA Nano project which itself was surrounded in a lot of uncertainties. The credit rating companies also took a negative outlook toward this deal because of the huge debt requirement to complete the deal.<br />Ford Motors Company (Ford) is a leading automaker and the third largest multinational corporation in the automobile industry. The company acquired Jaguar from British Leyland Limited in 1989 for US$ 2.5 billion. After Ford acquired Jaguar, adverse economic conditions worldwide in the 1990s led to tough market conditions and a decrease in the demand for luxury cars. The sales of Jaguar in many markets declined, but in some markets like Japan, Germany, and Italy, it still recorded high sales. In March 1999, Ford established the PAG with Aston Martin, Jaguar, and Lincoln. During the year, Volvo was acquired for US$ 6.45 billion, and it also became a part of the PAG.<br />In September 2006, Allan Mulally (Mulally), President and CEO of Ford, as part of the restructuring exercise called the ‘Way Forward' plan decided to dismantle the PAG. In March 2007, Ford sold the Aston Martin sports car unit for US$ 931 million. In June 2007, Ford announced that it was considering selling JLR. After failing to re-brand and integrate these luxury brands with its product portfolio, Ford Motors felt that acquisition was not the right way of penetrating into the upscale segment.<br />Why did TATA go for JLR?<br />Tata Motors had several major international acquisitions to its credit. It had acquired Tetley, South Korea-based Daewoo's commercial vehicle unit, and Anglo-Dutch Steel maker Corus (Refer to Exhibit I for the details of the group's international acquisitions). Tata Motors' long-term strategy included consolidating its position in the domestic Indian market and expanding its international footprint by leveraging on in-house capabilities and products and also through acquisitions and strategic collaborations.<br />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 the management and employees to bring their experience and expertise to bear on the growth of the business." <br />Tata Motors stood to gain on several fronts from the deal. One, the acquisition would help the company acquire a global footprint and enter the high-end premier segment of the global automobile market. After the acquisition, Tata Motors would own the world's cheapest car - the US$ 2,500 Nano, and luxury marquees like the Jaguar and Land Rover. <br />Two, Tata also got two advance design studios and technology as part of the deal. This would provide Tata Motors access to latest technology which would also allow Tata to improve their core products in India, for eg, Indica and Safari suffered from internal noise and vibration problems. <br />Three, this deal provided Tata an instant recognition and credibility across globe which would otherwise would have taken years.<br />Four, the cost competitive advantage as Corus was the main supplier of automotive high grade steel to JLR and other automobile industry in US and Europe. This would have provided a synergy for TATA Group on a whole. The whole cost synergy that can be created can be seen in the following diagram.<br />Five, in the long run TATA Motors will surely diversify its present dependence on Indian markets (which contributed to 90% of TATA’s revenue). Along with it due to TATA’s footprints in South East Asia will help JLR do diversify its geographic dependence from US (30% of volumes) and Western Europe (55% of volumes).<br />Analysts were of the view that the acquisition of JLR, which had a global presence and a repertoire of well established brands, would help Tata Motors become one of the major players in the global automobile industry.<br />Is deal really worth it?<br />Morgan Stanley reported that JLR’s acquisition appeared negative for Tata Motors, as it had increased the earnings volatility, given the difficult economic conditions in the key markets of JLR including the US and Europe. Moreover, Tata Motors had to incur a huge capital expenditure as it planned to invest another US$ 1 billion in JLR. This was in addition to the US$ 2.3 billion it had spent on the acquisition. Tata Motors had also incurred huge capital expenditure on the development and launch of the small car Nano and on a joint venture with Fiat to manufacture some of the company’s vehicles in India and Thailand. This, coupled with the downturn in the global automobile industry, was expected to impact the profitability of the company in the near future.<br />Worldwide car sales are down 5% as compared to the previous year. The automobile industry the world over is rationalizing production facilities, reducing costs wherever possible, consolidating brands and dropping model lines and deferring R&D projects to conserve funds. <br />The Chinese and Indian domestic markets for cars have been exceptions. While China has witnessed a significant reduction in its automotive-related exports and supplies to automobile companies, the Chinese domestic car market has grown by 7%. In India the passenger car market has remained more or less flat compared to the previous year. <br />Since then, its fortunes have been unsure, as the slump in demand for automobiles has depressed its revenues at the same time Tata has invested nearly $400 million in the Nano launch and struggled to pay off the expensive $3 billion loans it racked up for the Jaguar/Land Rover shopping bill. Within the space of a year, Tata Motors has gone from being a developing-world success story to a cautionary tale of bad timing and overly ambitious expansion plans. <br />Tata Motors' standalone Indian operations' profits declined by 51% in 2008-09 over the previous year.All through the fiscal year ended March 2009 the company bled money, losing a record $517 million on $14.7 billion in revenues, just on its India operations. Jaguar and Land Rover lost an additional $510 million in the 10 months Tata owned it until March 2009.<br />In January 2009, Tata Motors announced that due to lack of funds it may be forced to roll over a part of the US$ 3 billion bridge loan after having repaid around US$ 1 billion. The financial burden on Tata Motors was expected to increase further with the pension liability of JLR coming up for evaluation in April 2009.<br />Disadvantages by not going for this acquisition?<br />There was immense pressure from the shareholders, analysts’ community etc. to abort the deal as they unanimously agreed that it was over priced and the balance sheet of TATA was not in a position to absorb more loan (as discussed in the previous section). Ford purchased JLR at $5 bn and sold at almost half the price to TATA after operating it for losses for few years. As the market would have recovered from recession the valuation would have increased since there would have been growth in the demand of JLR thus creating more problems for TAMO. Tata would not have been able enter into the premium segment (>10 lakhs) in India. TAMO would have lacked in robust designing capabilities. Above all, at that time no other major automobile brand was available for acquisition with such designing and R&D capabilities. <br />TOWS Matrix <br />Opportunities:Rising appetite for luxury automobiles in growing markets like India and ChinaEstablished European brands available at affordable investmentSupport from Jaguar in Technology, Engine, IT, AccountingComplete product line with addition of luxury brandsAccess to European and American Market ThreatsVolatility in market driven by new productsStrong presence of competitors like Mercedes, BMW, Lexus and Infinity Receding sales and brand imageDownturn making Investment riskier and costlier90% of TAMO revenues comes from one market alone-IndiaStrengths:Tata’s strong management capabilityStrong monetary base to investSynergy due to Corus, TACO and TCSExperience in growing market like IndiaNew product development and brand building experienceJLR would give TAMO an in-house R&D and designing capabilitiesBetter utilization of cash reserves available with TAMOReduce production cost of JLR by synergizing better with other TATA cos like Corus Acquisitions like JLR will help TAMO in competing with brands like Merc. etc.Proven Management and brand building capabilities would facilitate faster JLR turnaroundStrong financial muscle will help TAMO to invest in R&D and produce new better productsImprove risk profile of TAMO with diversification in different marketsWeaknesses:Inexperience in Handling luxury automobile brandInexperience in turning around loss making companyR & D and designing capabilitiesJLR experience and designing capability would help TAMO in improving their existing products in Indian markets.JLR’s strong brand image will ease acceptance of TAMO in international marketsKeeping the existing management team of JLR make turning around easier Leverage experience gained with Tetley and Corus in allaying market apprehensions about acquisitionMake Jaguar design center as their global design HQUse Jaguar channel to distribute TAMO brands without merging the brands<br />Questions<br />Will Jaguar and Land Rover drive Tata Motors off bumpy roads?<br />Was TATA – JLR deal a case of wrong timing/ price or wrong strategy or both or none?<br /><ul><li>Understand the role of acquisition as a growth strategy.
  2. 2. Examine Tata Motors' inorganic growth strategy.
  3. 3. Examine the rationale behind Tata Motors' acquisition of Jaguar and Land Rover.
  4. 4. Understand the advantages and disadvantages of cross-border acquisitions.
  5. 5. Understand the need for growth through acquisitions in foreign countries