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7/29/2019 Merger Rilrpl 2

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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 Companys other operations business

segment includes information technology (IT) services, machine tools and factory

automation solutions and investment business.

JAGUAR LAND ROVER

J aguar Land Rover is a business built around two great British car brands with

exceptional design and engineering capabilities. J aguar Land Rovers manufacturing

facilities are in the UK.

Areas of bus iness

J aguar Cars, founded in 1922, is one of the worlds 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. J aguar Land Rovers

manufacturing facilities are in the UK. The J aguar Land Rover business employs

over 16,000 people, predominantly in the UK, including some 3,500 engineers at two

product development centers, in Whitley in Coventry and Gaydon in Warwickshire.


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The J aguar XF, XJ and XK models are manufactured at the company's Castle

Bromwich plant in Birmingham, UK, while the J aguar 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 J aguars exported to 63

countries. Sales to customers are conducted principally through franchised dealers

and importers.

Location

J aguar 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 J aguar

from British Leyland Limited in 1989 for US$ 2.5 billion. After Ford acquired J aguar,

adverse economic conditions worldwide in the 1990s led to tough market conditions

and a decrease in the demand for luxury cars. The sales of J aguar in many markets

declined, but in some markets like J apan, Germany, and Italy, it still recorded high

sales. In March 1999, Ford established the PAG with Aston Martin, J aguar, andLincoln. During the year, Volvo was acquired for US$ 6.45 billion, and it also became

a part of the PAG.

THE DEAL

On J une 02, 2008, India-based Tata Motors completed the acquisition of the J aguar

and Land Rover (J LR) units from the US-based auto manufacturer Ford Motor

Company (Ford) for US$ 2.3 billion, on a cash free-debt free basis. J LR was a part of

Fords Premier Automotive Group (PAG) and were considered to be British icons.

J aguar was involved in the manufacture of high-end luxury cars, while Land Rover

manufactured high-end SUVs.


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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 J LR as it will reduce the companys

dependence on the Indian market, which accounted for 90% of its sales. Morgan

Stanley reported that J LRs acquisition appeared negative for Tata Motors, as it had

increased the earnings volatility, given the difficult economic conditions in the key

markets of J LR including the US and Europe.

Tata Motors raised $3 billion (about Rs 12,000 crores) through bridge loans for 15

months from a clutch of banks, including J P 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 J aguar 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.


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On acquiring J LR, Rattan Tata, Chairman, Tata Group, said, We are very pleased at

the prospect of J aguar 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 J aguar 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 d id 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.

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 theworld's cheapest car - the US$ 2,500 Nano, and luxury marquees like the J aguar

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 whichwould otherwise would have taken years.

3. The cost competitive advantage as Corus was the main supplier of automotive

high grade steel to J LR 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.


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4. In the long run TATA Motors will surely diversify its present dependence on Indian

markets (which contributed to 90% of TATAs revenue). Along with it due to TATAs

footprints in South East Asia will help J LR do diversify its geographic dependence

from US (30% of volumes) and Western Europe (55% of volumes).

Is deal really worth it?

Morgan Stanley reported that J LRs acquisition appeared negative for Tata Motors,

as it had increased the earnings volatility, given the difficult economic conditions in

the key markets of J LR 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 J LR.

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

companys 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.


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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 J aguar/ 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 badtiming 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. J aguar and Land Rover lost an additional $510 million in the 10 months

Tata owned it until March 2009.

In J anuary 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 J LR 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 J LR at $5 billion 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 J LR 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.


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Above all, at that time no other major automobile brand was available for acquisition

with such designing and R&D capabilities.

Has the deal made JLR profitable?

This question is answered by the latest financial results of J LR. The key financial

metrics from their statements show a rosy picture. The acquisition had really paid off

in terms of financial stability of J LR.


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Strong financial performance improvement

JLR witnessing a Turnaround


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A summary of JLRs st rong financial performance in 2010/11

The Road Ahead

Tata Motors had formed an integration committee with senior executives from the

J LR 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.


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CASE SUMMARY

In J une 2008, India-based Tata Motors Ltd. announced that it had completed the

acquisition of the two iconic British brands - J aguar and Land Rover (J LR) from the

US-based Ford Motors for US$ 2.3 billion. Forming a part of the purchase

consideration were J LR's manufacturing plants, two advanced design centers in the

UK, national sales companies spanning across the world, and also licenses of all

necessary intellectual property rights.

TATA - JLR deal

Tata Motors was interested in acquiring J LR as it will reduce the companys

dependence on the Indian market, which accounted for 90% of its sales. Morgan

Stanley reported that J LRs acquisition appeared negative for Tata Motors, as it had

increased the earnings volatility, given the difficult economic conditions in the key

markets of J LR 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 J P 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 thisdeal because of the huge debt requirement to complete the deal.

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.

After the acquisition, Tata Motors would own the world's cheapest car - the US$

2,500 Nano, and luxury marquees like the J aguar and Land Rover.


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Is deal really worth i t?

Morgan Stanley reported that J LRs acquisition appeared negative for Tata Motors,

as it had increased the earnings volatility, given the difficult economic conditions in

the key markets of J LR including the US and Europe. Moreover, Tata Motors had toincur a huge capital expenditure as it planned to invest another US$ 1 billion in J LR.

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

companys 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.

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 J aguar/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. J aguar and Land Rover lost an additional $510 million in the 10 months

Tata owned it until March 2009.

In J anuary 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 J LR coming up for evaluation in April 2009.


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Disadvantages by not go ing for this acquisition

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 J LR 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 J LR 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.

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