Tata Jaguar Case Study

Acquisition: Tata Motors bought Jaguar-Land Rover for $2.5 billion in June 2008 from Ford Motor Co.

Why: Tata Motors wanted to expand its product portfolio and diversify its market base. The acquisition gave the company access to premium cars, a chance to add two iconic luxury brands to its stable and a global footprint. It gave struggling Ford a chance to rid itself of two loss-making vehicle units.

Impact: The deal was transformational. It catapulted Tata Motors from a commercial vehicle and small-car manufacturer to a global player with marquee brands in its portfolio. The scale of the acquisition also was large relative to the size of Tata Motors.

What they said then: The purchase, especially that of Jaguar, by an Indian company was viewed as toppling of the world order, and many critics expressed doubts about Tata's ability to retain the quality and standard of Jaguar Land Rover. Tata Group Chairman Ratan Tata assured the world that "we have enormous respect for the two brands and will endeavor to preserve and build on their heritage and competitiveness, keeping their identities intact.''

Where are they now: The turnaround of Jaguar Land Rover has become part of corporate lore and management textbooks. For the 12-month period ended Dec 31, 2010, the auto maker's revenue was in excess of 9.2 billion pounds ($15 billion), and net income for that period was $1.5 billion.

What went wrong: Tata's timing of the deal. The acquisition coincided with the global financial crisis that plunged Jaguar Land Rover's sales and put a huge strain on Tata Motors. In the 10 months post-acquisition, sales volumes plunged 32% and the unit recorded a loss of 281 million pounds ($461 million). Tata Motors also was saddled with a bridge loan of $3 billion to finance the deal, which was difficult to refinance given the turmoil in the global markets as no banker wanted to lend. Tata came out with a 42 billion-rupee ($937 million) rights issue to reduce the bridge loan to $2 billion. Despite this, as of March 2009, Tata's total debt in March 2009 rose to 435.8 billion rupees ($9.72 billion), nearly double what it owed in the previous fiscal.

What worked: The Tata Group, led by Mr. Ratan Tata, was determined to make the deal work and put to use the group's management skills, financial resources and credibility. To staunch the hemorrhage at the British unit, Tata's management focused on reducing costs, improving efficiencies and managing cash flow – lessons that Tata Motors had learned during the downturn in 2001. Tata also infused $1 billion to fund operations and new product launches. When the market turned, the premier car maker was well poised to reap the benefits and turned profitable during the quarter ended Dec. 31, 2009, with a net profit of 55 million pounds ($90.6 million).

The verdict: Pass. This is a case study of how a strong and committed management can make even a difficult acquisition work. While the acquisition itself was not expensive (Ford had acquired Jaguar and Land Rover separately for a total of $5.3 billion), the scale of the acquisition combined with bad timing could have easily derailed the deal. Recently, Jaguar Land Rover borrowed one billion pounds ($1.6 billion) on its name without the support of its parent's balance sheet, and expects to raise more to improve its financials and invest in new vehicles.

Stock market verdict: At its worst, Tata Motors' stock dropped to 126.45 rupees, decimating its market capitalization to 65 billion rupees ($1.45 billion), about a fraction of what it paid for Jaguar Land Rover. Before the deal, the stock had traded at 700 rupees per share. Currently, Tata Motors trades at 1,200 rupees, which values the company at 760 billion rupees ($16.96 billion).

Company's take: Tata Motors declined to comment.

—Samita Sawardekar writes a weekly column on deals and banking issues for Deals India. You can follow her on Twitter @ssawardekar


Abstract:

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. 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. Though there was initial skepticism over an Indian company owning the luxury brands, ownership was not considered a major issue at all.


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.

Issues:


» Understand the role of acquisition as a growth strategy.

» Examine Tata Motors' inorganic growth strategy.

» Examine the rationale behind Tata Motors' acquisition of Jaguar and Land Rover.

» Understand the advantages and disadvantages of cross-border acquisitions.

» Understand the need for growth through acquisitions in foreign countries.

Contents:

Keywords:

Tata Motors, Ford, Jaguar, Land Rover, JLR, Merger Synergies, Acquisition, Acquisition Structure, Global automobile market, Sub-prime crisis, Automobile Brands, Cross Border Acquisition, Special Purpose Vehicle, Merger Integration, New Products Pipeline

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