India-based Tata Motors Ltd. successfully acquired two British automotive brands – Jaguar and Land Rover (JLR), in June 2008 from Ford Motors for $ 2. 3B. As part of the deal, Tata Motors gained 100% stake in companies, 3 UK plants, 2 advanced design and engineering centers, 26 national sales companies, IP rights, $1. 1B in capital allowances for taxes, and $600M in pension contributions.
In order to facilitate the deal, Tata Motors raised $3B through bridge loans through a number of banks, including JP Morgan, Citigroup and State Bank of India. Although analysts were skeptical about the deal mainly due to the economic slowdown in the major selling markets, Europe and North America, Tata Motors had accumulated immense cash reserves (D/E ratio of 0. 56) to raise the required funds without endangering its own finances. Ford Motor Company is the third largest automobile producer worldwide and ten times the size of Tata Motors.
The company is known for low-priced automobile with standard interchangeable parts, virtual manufacturing, safety focused and low fuel consumption. It acquired JLR into its new group PAG, which comprised of other brands including Aston Martin, Volvo and Lincoln. In September 2006, Allan Mulally cleared the sale of brands within PAG as part of restructuring exercise called “Way Forward” in order to become more competitive. The decision highlighted the fact that Ford had not accomplished its goal of penetrating into luxury brands.
Enclosed in the appendix is the timeline of major highlights for JLR and the deal process followed by Tata Motors. Assess the pros and cons of Tata Motors’ acquisition of Jaguar and Land Rover. How does the acquisition compare to other options the company could have pursued in terms of growth? Tata Motors main interest for the acquisition was not only to leverage past synergies and M&A knowledge, but also more importantly, establish a global presence within the automotive sector and remove its dependency on the Indian market, which was facing greater competition from other foreign brands.
The shareholder’s had a different perspective as they felt it was over priced and not confident that Tata’s balance sheet could handle this new debt. However, considering that the automotive market would eventually recover, and that it paid Ford slightly more than half of what it paid for the two brands, I believe that Tata Motors made a wise acquisition. Several pros can be identified: a. Reduce its dependence on the Indian market, which contributed to 90% of Tata’s revenue. Additionally, it indicated its long-term strategic commitment to the global automotive sector. b.
Establish a global footprint, and enter the high-end premier market segment. JLR would broaden the current brand portfolio. c. Improved business diversification for JLR products across newer markets (SE Asia), and removing its traditionally dependency on US and European markets. d. The two advanced design technology centers provide access to advanced technology and facilitate growth of Tata Motors’ SUV market segment in India. e. The synergistic presence of Corus Steel, which would provide a supplier cost competitive advantage. Corus Steel is the main supplier of high-grade steel to the automobile industry.
Several cons can be identified: a. Increase in debt ratio from 1X to 2. 5X, especially given that it had immense capital expenditure due to the launch of Nano. b. Downturn in the economy and higher gas prices resulted in a 5% decrease in worldwide automotive market, and in particular, SUV and luxury brands were the hardest hit. c. Loan payment of $3 B for the acquisition, and subsequent rollover of this loan. An additional loss of $510 M of JLR during the 1st ten months of the acquisition. d. Strong presence of competitors like Mercedes, BMW, Lexus and Infinity, all of who have an established presence within this market space.
Will Tata Motors be able to achieve its desired results for purchasing Jaguar and Land Rover? This acquisition highlights the underlying need for Tata Group’s global growth. Enclosed below is the Strengths and Weakness section of the SWOT analysis, which is used to determine whether the goals are achievable. STRENGTHS| WEAKNESS| * A strong reputation for successful acquisition and integration of other automotive companies. (Daewoo) * Experienced management capability and human resource capacity. * Strong balance sheets, due to diversified non-automotive product portfolio. * Established synergy of Corus, TACO and TCS. Developing and creating brand value and experienced new product development and deployment process. | * Inexperienced in luxury automobile branding. * Inexperienced in turning loss-making ventures; prior to the acquisition (except NELCO), Tata Group had acquired already successful brands. * Lack of global R&D and design capability, compared to its competitors. | What steps could it take to add value to the acquisition? 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 management and employees to bring their experience to bear on growth of the business. ” Enclosed below is the Opportunities section of the SWOT analysis, which is used to determine whether the goals are achievable. OPPORTUNITIES| * Improving capabilities of existing products by leveraging JLR’s experienced design capability. Maintaining the JLR’s current management team in order to facilitate the turn around as indicated by Ratan Tata. * Making JLR design and technology centers as Tata’s global design HQ. * Using existing JLR distribution channels to foster promoting of existing brands into the global market space. * Leveraging JLR’s brand image to gage acceptance of Tata as a global brand. * Reduce risk profile with diversification and entry into different markets. * Reduce production costs of JLR, by introducing/utilizing Indian facilities for production. |
Assess the merits of the approach Tata Motors planned to take with acquisition. What challenges might it have to overcome? Enclosed below is the Threats section of the SWOT analysis, which is used to determine whether the goals are achievable. THREATS| * Presence of well established competitors, who have already capacitized this market with their global brands. * JLR’s receding sales and brand image, and volatility for new automotive entry products. * Economic downturn, resulting in decreased sales for the identified market segment. * Ability of successful introduction into other SE Asia markets. Considering the SWOT analysis, Tata motors approach to pre- and post acquisition is sound. Having already established a global presence with other products (Tetley and Corus) and successful integration with the holding company, it is now only an exercise of realizing the threats and carefully defining a scope and plan to mitigate. Given that the threats are more to do with the automotive industry, rather than core competencies, I foresee a successful integration of the JLR brand with Tata Motors, albeit a longer road than first anticipated. Conclusion (Progress Report)
Land Rover has received a grant offer of Euro 27M to build small Range Rovers in the UK. Additionally, JLR has introduced new models (mid-size XF, revised Range Rovers and XJ Saloon), which are stylish, and being heavily marketed in the US. Although, these models were first conceived during Ford’s reign, the media blitz by Tata Motors has gathered much anticipation. Secondly, Tata Motors plans to put a “Made in India” tag on its freshly designed JLR models to be assembled in India. The assembly is to take place at the company’s Pimpri facility and to be rolled-out by July 2011.
Additionally, JLR has 3 showrooms in India, which are targeted to attract the rising affluent class in India. Ratan Tata is creating a glorious vision for the global automotive market. Having accomplished a brand and presence in both the cheapest and luxury brand categories, indicates that Tata Motors has considered the whole spectrum and has now become an indomitable force to reckon with.