HOUSE OF TATA,1995:The Next

Generation (A)
 Diversification: Emerging vs.
Advanced Economies
• In advanced economies, focussed approach towards
specific core businesses can lead to greater value addition
compared to diversified businesses.
• In emerging markets, focused companies may be unable
to raise adequate financing, and struggle to hire skilled
employees, owing to the under-developed capital, labour
and product markets.
• Consequently, in such emerging economies, companies
have to fill these institutional voids and perform basic
functions on their own, which necessitates diversification
into new businesses under a common brand
• Established brands wield tremendous power. A
conglomerate with a reputation for quality products can
use its group name to enter into new, completely unrelated
businesses.
Common Brand vs. Segregated Brands
• A comparison of the Sales and Assets of the major
companies of the TATA group with corresponding Industry
averages suggests the value addition provided by the TATA
brand name.
• The large premium over Industry averages is indicative of
the improved synergy amongst different businesses under a
common brand name.
Common Brand vs. Segregated Brands
• A comparison of the market value of the major TATA group
companies with Industry averages yields the following
observations:
1. TELCO and TISCO are major players in their respective
industries, and have achieved synergy
2. TATA Power, Tea and Chemicals are growing players in
their respective industries
3. ACC and IHC are the most unrelated businesses, having
least synergy. However, leveraging the TATA brand name
might allow them to make up their large difference from
industry averages
 Payment of Contribution Fees
• An analysis of the extent to which the TATA brand name
contributes to companies’ sales above Industry averages is
shown in the graph below.
• As is evident, IHC, the only company to not explicitly use
the TATA brand name, has minimum financial benefit from
the payment of contribution fee, indicating that it is
capable of surviving without the TATA brand name.
Consequently, it would be unfair to ask IHC for contribution
fee.
Corporate Parenting Fit
 Comparing the Two Stances

Venturing new growth Enhancing group

opportunities: control:
• From the case it is evident that
• The case articulates that companies within Tata began
Ratan had many projects competing against each other.
in mind that required a Tisco, Tata Chemicals and
hefty capital. ACC were heading in for a long
• Given the technological term brawl.
embrace happening after • Group Control would ensure
1993, venturing new
opportunities would have that these companies are
diversified the group released from the blinded
further. tangles and each is directed to
a different segment avoiding
• Moreover investing in
these technologies would competition.
have allowed the Tata • Moreover, Ratan found it
group to divest from its imporatant due to diverging
non-profit earning groups. divisions. He felt the need to
integrate values and create
one strong entity.
 Why did Ratan Tata require control?
• For startups to survive there needs to be a
giant backing, this backing can be Tata
and for Tata & Sons to look enormously Exhibit 8A
huge all the Tata entities should be roped Group
Company FY 95 FY 96
% Increase in
stakes
in as one. (given the many projects Ratan
Tisco 2.35% 8.46% 2.6
had in his mind)
• To build his own defense in order to avoid Telco 1.78% 2.67% 0.5

possible takeover or acquisition from Tata Power 5.63% 6.35% 0.127886323

foreign companies.
Tata Chemicals 7.91% 8.18% 0.034134008
• To be able to have an internal supply
within the diversified companies/Industries Tata tea 7.56% 8.58% 0.134920635

under Tata. (Ones waste material or by Indian Hotels 13.34% 13.34% 0

product may be another industry’s raw
material).
• Above all as the case aptly mentions, in
order to maintain stakes in various
companies, Ratan felt a dire need to
acquire group control.
 What do we suggest?
It is essential that Ratan Tata spends resources on
enhancing group control over companies rather
than using resources for new growth opportunities.

What does the pie look like when rights are issued?
Exhibit 8B
Sales
3%
18%
13%
66%

P.S.Mistry Tata Companies Charitable Trust

Other Minority holders
How to build shareholder value in a unrelated diversified
group?

Corporate level
Determining the right
managers should build Negotiating favorable
time to sell
financials > business acquisition prices
unprofitable business.
level managers

Decide on which Diversifying to new shifting resources from

business to get in which business to produce unprofitable to
business to obsolete good earnings and ROI profitable business

Allocating corporate
parent's financial High-caliber decision
Being the expert.
resources to optimize making
profits
• According to the case,
• “….even a 100% dividend declaration by Tata sons
would yield only Rs.30 million(for Rs.3 Billion Investment).”
• From above, we can say that minority shareholders are
unaware if the investment they are making today would
reap benefits or not in the future.
• But Ratan Tata argued that shares would appreciate
enormously with an IPO.
• Moreover minority shareholders were investing on a
group for companies with short term investment goals;
thereby one can say there was no immediate profit from
this investment.
Will sale to an outside group compromise the effort to
strengthen control?

- Hong Kong based Jardine Matheson group has already have

significant influence throughout most of Asia.
- Jardine was anxious to enter India, if TATA may not have sold
the stake and made it partner. Then, there was high chances
that it might have entered India in partnership with another
company.
- A great opportunity to raise capital for venture start-ups
promoted through TIL.
- Opportunity to avail the expertise of Jardine in many business
activities
- It would also help in exploring the potential synergy between
their financial businesses and in creating a major car
distribution network.
- The involvement of foreign firm will bring new perspective in
project planning.
 Tata Administrative Services
Value Addition Vs Enhanced Control ?
• Groups add value by developing promising managers. The cost
involved in developing human capital is spread over the business
in the group.
• Since 1950s, TAS had been recruiting talented individuals for
accelerated management careers within the Tata companies.
• The trainees recruited remain with TATAs over a long period of
time
• Information flow across TATA

o As TAS recruits, over the period of years, spread across various

industries, their network with their fellow recruits helps in
information flow across the entire TATA group.
o This occurs primarily because new recruits are organized in
cohorts according to the year they are recruited. The lasting
ties with their cohort group only helps in improving the
information flow.
• The TATA head office also often encourages its group companies to allow
their talented managers to be transferred from one company to another
company so that the TATA group as a whole can reap benefits from such
a move.

• Cross-Company teams
o Whenever difficult problems would arise within the TATA group in any
of its industries then teams consisting of managers from cross-
company were assembled to tackle the problem

o During the initial period of the program trainees worked in 3 different

industries over a period of 10 years. This cross-industry experience
helps them to gain a general management perspective.

• This talent fostered over the period of many years gives conglomerates a
head start in beginning new activities as the talented employees. Also as
these employees are trained and certified by a respected and trusted
institution, these employees add more value to organization.
THANK YOU