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.

Acquisition of Jaguar and Land Rover provides the company with a strategic opportunity to
acquire iconic brands with a great heritage and global presence, and increase the company’s
business diversity across markets and product segments.- Tata Motors, in April 2008.

“If they run the brands as a British company and invest properly in new product, it will be
successful because they are still attractive brands.”- Charles Hughes, Founder, Brand Rules
LLC, in 2008.

“Market conditions are now extremely tough, especially in the key US market, and the Tatas
will need to invest in a lot of brand building to make and keep JLR profitable.”-   Ian Gomes,
Global Head, Emerging Markets, KPMG, in 2008.

Acquisition of British Icons

On June 02, 2008, India-based Tata Motors completed the acquisition of the Jaguar and
Land Rover (JLR) units from the US-based auto manufacturer Ford Motor Company (Ford)
for US$ 2.3 billion, on a cash free-debt free basis. JLR was a part of Ford’s Premier
Automotive Group (PAG) and were considered to be British icons. Jaguar was involved in the
manufacture of high-end luxury cars, while Land Rover manufactured high-end SUVs.

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. 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. 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

Analysts were of the view that the acquisition of Jaguar and Land Rover, 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.

On acquiring JLR, Rattan 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.” Ford had
bought Jaguar for US$ 2.5 billion in 1989 and Land Rover for US$ 2.7 billion in 2000.
However, over the years, the company found that it was failing to derive the desired
benefits from these acquisitions.

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.

Ford Sells Jaguar and Land Rover

In September 2006, after Allan Mulally (Mulally) assumed charge as the President and CEO
of Ford, he 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.

The Deal

On March 26, 2008, Tata Motors entered into an agreement with Ford for the purchase of
Jaguar and Land Rover. Tata Motors agreed to pay US$ 2.3 billion in cash for a 100%
acquisition of the businesses of JLR. As part of the acquisition, Tata Motors did not inherit
any of the debt liabilities of JLR – the acquisition was totally debt free.

The Benefits

Tata Motors was interested in acquiring JLR as it would reduce the company’s dependence
on the Indian market, which accounted for 90% of its sales. The company was of the view
that the acquisition would provide it with the opportunity to spread its business across
different geographies and across different customer segments

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

The Road Ahead

Tata Motors had formed an integration committee with senior executives from the JLR and
Tata Motors, to set milestones and long-term goals for the acquired entities. One of the
major problems for Tata Motors could be the slowing down of the European and US
automobile markets. It was expected that the company would address this issue by
concentrating on countries like Russia, China, India, and the Middle East.

The Acquisition of JLR

Ford, a leading automaker and one of the largest multinational corporations in the global
automobile industry, acquired Jaguar from British Leyland Limited in 1989 for US$ 2.5 billion.
Ford bought Land Rover in 2000 for US$ 2.7 billion from BMW. Over the years, the operations
of both Jaguar and Land Rover were fully integrated...

Financing Issues

To finance the acquisition, Tata Motors raised a bridge loan of US$ 3 billion (the additional
amount was for engine and component supply, contingencies, and working capital) through a
syndicate of banks...

Problems with the JLR Deal

The initial response from the employees of JLR toward the Tata Motors-JLR deal was positive. An internal survey
carried out in early August 2008 showed that the employee satisfaction was at 78% as against 41% during the pre-
acquisition days. However, with the declining demand for luxury cars, JLR had to cut down production and redeploy
the workers at Solihull in late August 2008...

Problems in the Domestic Market

By the time Tata Motors announced its first quarter results for the year 2008-09 in July 2008, it was evident that the
company was in for trouble. The profits reported were at Rs. 3.26 billion, a drop of 30% compared to the first
quarter of 2007-08. Though sales had increased, the drop in the profits was the highest in the past five years...
Tata's Jaguar Deal Worries Analysts
What looks to be the biggest-ever deal by an Indian company, may not be the
smartest. Analysts point to low share prices and brand mismatch

Tata Motors' acquisition of the two iconic brands—Jaguar and Land Rover—without doubt ranks
among the high-profile global deals clinched by Indian firms so far. But if auto analysts are to be
believed, this may not be the best time to buy Tata Motors shares. At the time of going to press, Tata
Motors' ADRs were trading 2.30% lower on the NYSE Euronext at $16.96. It had hit a low of $14.71
on March 17, 2008. Meanwhile, Ford Motors was trading at $2.35, down 2.08%.

The overwhelming consensus is that the acquisition will strain the company's bottom line near term,
thus putting pressure on the stock price. According to Enam Securities' auto analyst Sahil Kedia,
"There is a likelihood that there will be pressure on the profit after tax in the short term" as it is still
"slightly unclear how Tata will fund the acquisition". He feels that the Indian company might also use
a "certain amount of loan receivables on its books" to fund the acquisition.

In a similar context, HDFC Securities' executive director and head (institutional business) Sanju
Verma says "The success of the deal rests on the Tatas' ability to effectively manage apparent
brand positioning mismatches". She also expects "EPS dilution could be around 10% plus though
earnings may be impacted by a sharper 40-45%, after taking into account the financing costs and
losses attributed to both brands". She is assuming that the JLR deal is pegged at $2 billion and Tata
Motors applies a funding mix of internal accruals, equity and debt.

Analysts also say much depends on how Tata Motors will be able to boost the flagging sales of both
loss-making brands. According to reports, Jaguar sales dropped 33% in the US and Europe in the
first two months of the current year. Land Rover sales fell 13% in the US and around 7.7% in Europe
during the same period.

Auto analyst Piyush Parag of Religare Enterprise has a "buy recommendation pre-deal" as the
"valuations seem extremely attractive at current levels". However, the brokerage will update its
recommendation post Tata-Jaguar Land Rover deal as "presently, it will be too early to comment on
the valuations, as the financial details of the deal are yet to come."

Interestingly, while analysts are expecting selling pressure on Tata Motors shares in the coming
days, fund managers started reducing their exposures around six months ago. Data clearly shows
that in the past six months, mutual funds have brought down their exposure by a little over 30%. In
September 2007, MFs were holding nearly 4.50 crore shares of Tata Motors, which has come down
to around three crore in February.

On Wednesday, the stock lost marginal ground to close at Rs 679.40. Since January 3, when news
of the deal first became public, the stock has lost more than 14%. However, the benchmark Sensex,
in the same period, has shed nearly 21%.

Meanwhile, ICICI Direct's senior analyst Pankaj Pandey feels that the "recent equity market turmoil
has already taken a toll on the stock and so further downside from current levels should not be
expected".