CASE STUDY: Tata Motors Acquisition of Jaguar and Land Rover in 2008 -------------------------------------------------
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....