Tata’s acquisition of JLR An analysis

Abhishek Jamwal Apoorva Chawla Arun Chikara Kratika Agarwal Shadab Wajid Khan Sonal Bhatia Tom George Toolika Kumar

THE PLAYERS TATA MOTORS Tata Motors Limited is an automobile company. Through its subsidiaries, the Company is engaged in engineering and automotive solutions, construction equipment manufacturing, automotive vehicle components manufacturing and supply chain activities, machine tools and factory automation solutions, high-precision tooling and plastic and electronic components for automotive and computer applications, and automotive retailing and service operations. The Company operates in two segments: automotive operations and all other operations. Its automotive operations include all activities relating to development, design, manufacture, assembly and sale of vehicles including financing thereof, as well as sale of related parts and accessories. The Company’s other operations business segment includes information technology (IT) services, machine tools and factory automation solutions and investment business. JAGUAR LAND ROVER Jaguar Land Rover is a business built around two great British car brands with exceptional design and engineering capabilities. Jaguar Land Rover’s manufacturing facilities are in the UK. Areas of business Jaguar Cars, founded in 1922, is one of the world’s premier manufacturers of luxury saloons and sports cars. Land Rover has been manufacturing 4x4s since 1948. Its products have defined the segments in which they operate. Jaguar Land Rover’s manufacturing facilities are in the UK. The Jaguar Land Rover business employs over 16,000 people, predominantly in the UK, including some 3,500 engineers at two product development centres, in Whitley in Coventry and Gaydon in Warwickshire. The Jaguar XF, XJ and XK models are manufactured at the company's Castle Bromwich plant in Birmingham, UK, while the Jaguar X-TYPE is produced alongside the Land Rover Freelander 2 at the Halewood plant in Liverpool, UK. Land Rover's Defender, Discovery 3, Range Rover Sport and Range Rover models are all built at Solihull, UK. The business is a major wealth generator for the UK, with 78 per cent of Land Rovers exported to 169 countries and 70 per cent of Jaguars exported to 63 countries. Sales to customers are conducted principally through franchised dealers and importers. Location Jaguar Land Rover is based in the UK.

Why couldn’t Ford give life to land rover?? 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.

THE DEAL 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. The all-cash deal, which was agreed in March, includes all necessary intellectual property rights, manufacturing plants, two advanced design centers in the UK and a worldwide network of sales companies, Tata Motors said in a statement. 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. Tata Motors raised $3 billion (about Rs 12,000 crore) through bridge loans for 15 months from a clutch of banks, including JP Morgan, Citigroup, and State Bank of India. Tata came under cash crisis because of the Corus deal and the huge investments in the TATA Nano project which itself was surrounded in a lot of uncertainties. The credit rating companies also took a negative outlook toward this deal because of the huge debt requirement to complete the deal. Analysts were of the view that the acquisition of Jaguar and Land Rover, which had a global presence and a repertoire of well established brands, would help Tata Motors become one of the major players in the global automobile industry. On acquiring JLR, Rattan Tata, Chairman, Tata Group, said, “We are very pleased at the prospect of Jaguar and Land Rover being a significant part of our automotive business. We have enormous respect for the two brands and will endeavor to preserve and build on their heritage and competitiveness, keeping their identities intact. We aim to support their growth, while holding true to our principles of allowing the management and employees to bring their experience and expertise to bear on the growth of the business.” Ford had bought Jaguar for US$ 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.

Why did TATA go for JLR? 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. 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." 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. 1. 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 e.g., Indica and Safari suffered from internal noise and vibration problems. 2. This deal provided Tata an instant recognition and credibility across globe which would otherwise would have taken years. 3. 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 diagram that follows. 4. 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).

TACO
• TAMO's flagship ancillary biz. • Customers inc. Ford, Daimler, FIAT etc.

TCS
• Provides engineering design, manufacturing solutions and sourcing services. • Major customer include Chrysler, Ford , GM etc.

TATA Corus
• Leader in the automative grade steel. • 16% of revenue from auto steel division.

INCAT
• Provides services like supplier programs, consulting services and global outsourcing. • Customers include Chrysler, Ford, GM etc.

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. Is deal really worth it? 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.

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. 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. 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. 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 $510 million in the 10 months Tata owned it until March 2009. In January 2009, Tata Motors announced that due to lack of funds it may be forced to roll over a part of the US$ 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.

So what difference did it make to TATA? 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.

TOWS Matrix Analysis Threats • Volatility in market driven by new products • Strong presence of competitors like Mercedes, BMW, Lexus and Infinity • Receding sales and brand image • Downturn making Investment riskier and costlier • 90% of TAMO revenues comes from one market alone-India Opportunities: Weaknesses: • Rising appetite for luxury • Inexperience in Handling automobiles in growing luxury automobile brand • Inexperience in turning markets like India and China around loss making • Established European company • R & D and designing brands available at affordable investment capabilities • Support from Jaguar in Technology, Engine, IT, Accounting • Complete product line with addition of luxury brands • Access to European and American Market

Strengths: • Tata’s strong management capability • Strong monetary base to invest • Synergy due to Corus, TACO and TCS • Experience in growing market like India • New product development and brand building experience • JLR 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 markets • Keeping the existing management team of JLR make turning around easier • Leverage experience gained with Tetley and Corus in allaying market apprehensions about acquisition • Make Jaguar design center as their global design HQ • Use Jaguar channel to distribute TAMO brands without merging the brands • Acquisitions like JLR will help TAMO in competing with brands like Mercedes etc. • Proven Management and brand building capabilities would facilitate faster JLR turnaround • Strong financial muscle will help TAMO to invest in R&D and produce new better products • Improve risk profile of TAMO with diversification in different markets • JLR would give TAMO an in-house R&D and designing capabilities • Better utilization of cash reserves available with TAMO • Reduce production cost of JLR by utilizing resources of other TATA companies like Corus

Has the deal made JLR profitable? This question is answered by the latest financial results of JLR. The key financial metrics from their statements show a rosy picture. The acquisition had really paid off in terms of financial stability of JLR.

Strong financial performance improvement

JLR witnessing a Turnaround

A summary of JLR’s strong financial performance in 2010/11

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.

References 1. JLR financials --- http://www.jaguarlandrover.com/pdf/ Investor_Presentation_FY2011.pdf 2. Deal details-- http://www.hindu.com/2008/03/27/stories/2008032750100100.htm AND http://www.reuters.com/article/2008/06/02/us-tata-jaguar-idUSBMA00084220080602 3. TATA MOTORS PROFILE-- http://www.reuters.com/finance/stocks/overview? symbol=TAMO.NS 4. JLR PROFILE-- http://www.tata.com/company/profile.aspx?sectid=ZhDd6fXWtEY=

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