Post merger analysis of TATA and JLR

TATA motors acquired JAGUAR and lANDROVER from its former owner FORD MOTORS an 2nd of june 2008, the world economic scenario was on a downturn during this time and its impact was clearly visible in the automobile sector. Moreover JAGUAR as well as LANDROVER had been making losses under their former owner for many years before being acquired by TATA MOTORS, however Ratan Tata was of the belief that acquiring JAGUAR AND LANROVER may not result in an instant success but will surely be fruitful in the long run. The management of TATA MOTORS visualized the valuable intangible assets like the research and development as well as the brand value hidden behind JAGUAR AND LANDROVER which would bring in handsome results for them in the long run.

Some of the factors on basis of which the post acquisition performance can be analysed are discussed below:

MARKET CAPITILISATIONTwo months before it acquired JAGUAR AND LANDROVER (JLR) in March 2008, TATA MOTORS had a market capitalisation of Rs 24,000 crore. Five months after the deal, it had plunged to Rs 6,500 crore. The market as whole during that time negated the acquisition as both the companies JAGUAR AND LANDROVER had been making losses under their former owner ford motors, however there was an opportunity hidden in exploring the strong brand value and research and development hidden behind both the companies and eventually this opportunity was utilized to the fullest extent by tata motors and its market capitilasation now stands at 71500 crore which is more than a tenfold rise from the initial post acquisition low.

BRAND VALUERescently TATA MOTORS drove past Reliance Industries to top the 2010 edition of India’s Most Valuable Brands survey with a valuation of $8.45 billion. A major part of this success can be attributed to the JAGUAR AND LANDROVER brands. Jaguar and land rover both have been part of a larger conglomerate for a long time, however their potential was not unlocked then, TATA MOTORS succeded in doing that. Jaguar and landrover steadily started regaining their rhythm in the market and contributed towards creating a good brand value for TATA MOTORS. TATA MOTORS-JLR brand soared 172% in one year to $8.45 billion from only $3.1 billion in 2008-09.

CASH FLOWS AND BOTTOMLINEDuring the quarter ended june 2010 JAGUARLANDROVEr has generated a positive cash flow of £23 million, post capital and product development expenses the first such instance since the deal. Moreover It posted a profit of £221 million (Rs 1,613 crore) for the quarter ended June against a loss of £64 million in the corresponding quarter. The margin expansion was driven by

cost cutting measures and currency tailwinds as well as sales of higher variants of landrover and increasing sales in china and usa

TOPLINEJAGUAR LANDROVER global sales in July 2010 were 19,386 vehicles, higher by 30%. Jaguar sales for the month were 5,676, higher by 26%, while Land Rover sales were 13,710, higher by 31%. Cumulative sales of Jaguar Land Rover for the fiscal are 76,539 nos., higher by 50%. Cumulative sales of Jaguar are 21,131 nos., higher by 31%, while cumulative sales of Land Rover are 55,408 nos., higher by 59%.

RATIONALE FOR THE ACQUISITION

The sale of jaguar and landrover was initiated by their former owner ford. Ford acquired jaguar for $2.5 billion in 1989 and it acquired landrover from bmw in 2000 for $2.7 billion, the us auto major put both of them on sale in june 2008 . various factors ignited the sale of jaguar and landrover by ford and bidding for its purchase by tata, some of them are discussed below:

CUMULATIVE LOSSES FOR MANY YEARS

Ford made losses of 12.6 billlion in the year 2006, the biggest ever in its 103 year history, most of it was a result of bad performance of jaguar, landrover however was performing steadily though not at its best, landrover was driven by a record sale of 2.26 lakh vehicles in the year 2007,ford announced for a combined sale of both jaguar and landrover. The reason which could be best associated with this strategy is that ford wanted to get rid of jaguar on one hand which had been making losses and realize a good amount by offering landrover for sale also which would not have been possible by offering jaguar alone, moreover jaguar and landrover being two unique brands with distinctive features would attract more bidders.

GOODTIME TO GET HOLD OF TWO UNIQUE BRANDS FOR TATA MOTORS

Automobile industry was well affected by the economic downturn, the market was not on its flow hence it was a good time for tata motors to get hold of jaguar and landrover at a reasonable price. Tata motors acquired both jaguar and landrover for an amount of 2.3 billion whereas ford acquired them for a total sum of 5.2billion, tata did not pay even half of that amount. This would not have been possible had the market been steady.

UNAVAILABILITY OF OTHER OPTIONS

No other brands with so good research and development facilities was available for tata motors to get hold of at such a reasonable price

TARGET SELECTION

There are various reasons to justify the strategy of tata acquiring jlr, some of those are discussed below:

GLOBAL FOOTPRINT

Acquiring jaguar and landrover would give tata an enormous opportunity to penetrate global market, which in the long run would act as a catalyst to boost revenues and create brand value. Tata motors generated 90% of its revenue from the Indian market acuring jlr would help in diversifying its revenue generating sources.

LONG TERM ECONOMIES OF SCALE

Acquiring jlr would help tata for component sourcing, design services and low cost engeenering which would in the long run reduce the cost of production and and facilitate in increasing the bottomline

BROADEN THE BRAND PORTFOLIO

Jaguar and landrover would broaden the brand portfolio of tata motors with a variety of performance and luxury vehicles, landrover being a natural fit for tml’s suv segment.

Exploring intangible opportunities

Jaguar and landrover are distinguished brands with good research and development behind them, acquiring jlr would give tata an opportunity to explore and utilize the r&d to generate greater revenues in the long run. Moreover tata gor two advance design studios and technology which would help them to improve their core products in india like indica and safari had problems of internal noise and vibration.

LONG TERM COMMITMENT TO AUTOMOBILE SECTOR

Tata motors is engaged in production of various range of vehicles for different customers, acquiring jlr would give a chance to further explore the automobile industry and hence would be a step further towards its long term commitment to automobile sector.

RECOGNITION TO OWN THE CHEAPEST CAR AS WELL AS MOST LUXURIOUS CARS

Acquiring jlr would give tata a recognition in the market of being the owner of the cheapest car nano as well as premium cars like jaguar svx

COST COMPETITIVE ADVANTAGE

Corus being the major supplier of automotive high grade steel to jlr and other automobile industries in usa and Europe, acquiring jlr would result in a cost synergy for tata motors

PROBLEMS DURING ACQUISITION

Tata motors acquired jlr when the world automobile industry was rationalizing its products and deffering the research and development works, the impact of downturn was clearly visible in the automobile sector with a decrease in world revenue of around 10%, tata’s decision to acquire jlr at this point of time was not accepted positively, it was negated at many stages. Tata motors faced a lot of problems while acquiring jlr starting from funds to investor’s unacceptance, some of the major problems are discussed below

PRE ACQUISITION PROBLEMS:

FINANCING THE DEAL

Just before acquiring jlr, tata had acquired corus and moreover tata motors had undergone huge capital expenditure to bring nano into the market and hence financing the acquisition was a major concern for tata motors

INVESTOR DISAGREEMENT

Investors were not in favour of the decision of acquiring jlr at that time , both jaguar and landrover were loss making units and automobile industry at that point of time was under pressure of downturn, infact tata motors itself had gone in for rationalization and retrenchment stratigies. Investors believed that the balance sheet of tata motors was not strong enough to absorb more loans

UNFAVOURABLE ECONOMIC CONDITIONS ESPECIALLY IN THE TARGET MARKET

During the acquisition the worldwide car sales were down by 5%, the automobile industries over the world were rationalizing to conserve funds, moreover difficult economic conditions prevailed in the key markets comprising usa and Europe, which were the major factors influencing the earnings volatility.

POST ACQUISITION PROBLEMS:

DEBT BURDEN

To finance the acquisition tata motors raised a bridge loan of 3 billion through consortium of banks by the end of 2009. Tata motors had yet to pay 2 billion towards the bridge loan , moreover it required additional funds and that too quickly to keep the operations running.

FALL IN SHARE PRICE

Tata motor’s share prices dropped in the market after acquisition of jlr because of the investor perception that it was not the right time to invest in that acquisition, when tata had recently undergone huge capital expenditure for the nanao project, especially in singur and the results were still unrevealed, moreover the investor thought that it was the time to be conservative and stabilize reserves rather than insourcing more debt burden.

INEXPERIENCE IN HANDLING LUXURY BRANDS:

Tata motors had never ventured into luxury car segment before acquiring jlr, hence the inefficiency in handling such segment hampered tata motor’s operational efficiency for quite some time.

STRONG COMPETITION

Tata motor’s strategy to penetrate global market through acquisition of jlr faced hurdles in the form of strong competition from global automobile giants like Mercedes, bmw, lexus and infinity

EVALUATION OF THE ACQUISITION

Acquisition of JLR by TATA can be evaluated on the basis of various advantages and disadvantages associated with the project:

ADVANTAGES DISADVANTAGESAcquisition of two well known automobile brands that is JAGUAR and LANDROVER.

JAGUAR was a loss making unit at the time of being acquired from its former owner FORD, LANDROVER, however recorded growth in sales but in declining trend

TATA acquired both the brands at $2.3billion, which is less than half of the price that ford paid for acquiring both of them that is $5.7 billion

Due to stringent availability of funds and huge capital expenditure incurred in NANO project simultaneously, TATA had to face debt burden

RATAN TATA was of the view that it was the right time to invest as the price was cheap and there were lot of hidden opportunities to be explored in the strong r&d of jlr

Investors believed it was rather a time to conserve funds, moreover the balance sheet of TATA MOTORS was not in a position to absorb more loans

TATA got an opportunity to establish a global footprint

Increasing compettion from global giants like MERCEDES, BMW, LEXUS and INFINITY

Insourcing technical knowhow of JLR to achieve economies of scale and develop domestic brands

Benefits to be received in the long run without short term visibility , which in turn is subject to more volatility

Wide diversity from being the owner of the world’s cheapest car to owner of luxury brands like JLR

Inexperience in handling luxurious brands like JLR

FINANCING THE ACQUISITION

The biggest buyout in automobile space by an automobile company, tata motors was completed on june 3, 2008 as it bought the ownership of luxury brands, JAGUAR and LANDROVER for $2.3 billion on a cash free debt free basis

THE LEVERAGE BUYOUT SCENE

Tata motors raised $3 billion , about Rs. 12000 crore through bridge loans of fifteen months from a clutch of banks including JP MORGAN, CITIGROUP, and STATE BANK OF INDIACompany charted out plans to raise rs. 7200 crore via rights issue , proceeds of which were to be used to part finance the JLR deal of rs. 9228.75 crore

The rights issue raised the equity capital of TATA MOTORS by 30-35% by march 2009

TATA MOTOR’S STRATEGY TO FUND JLR DEAL:

Ordinary equity shares with full voting right (rs. 2200 crore)

A CLASS EQUITY SHARE WITH 1 VOTE FOR EVERY 10A SHARES WORTH RS. 2000 CRORE

5 YEAR .5% CONVERTIBLE PREFERANCE SHARES(OPTIONALLY CONVERTIBLE INTO A CLASS EQUITY SHARES AFTER 3 YEARS BUT BEFORE 5 YEARS FROM THE DATE OF ALLOTMENT)

CONSIDERATION RECEIVED

100% stake in Jaguar & land Rover Business

TAMO has acquired the business & initially they will be operated independently of the partner.

3 Plants in UK These are well invested plants

2 advanced design & engineering center

4-5000 engineers engaged in testing ,prototype design & powertrainEngineering , development & integration

26 National sales company

Both existing national sales companies of jaguar/land rover & also those that are carved out of current Ford operation

Intellectual property rights

This covers all key technologies to be transferred to JLR & perpetual royalty free license on technologies shared with Ford

Capital Allowance A minimum guaranteed amount of $1.1 bn which will help managing in Tax going forward

Support from Ford Motor Credit

Ford Motor Credit will continue to support the sales of JLR for around next 12 months

Pension Contributed by Ford

Ford will contribute $ 600 mn of the Pension Fund

http://www.slideshare.net/expkarma/tata-j-l-r-deal

http://economictimes.indiatimes.com/news/news-by-company/corporate-trends/Tata-Motors-ride-JLR-to-top-Most-Valuable-Brands/articleshow/6812200.cms

Two months before it acquired JaguarLandRover (JLR) in March 2008, Tata Motors had a market capitalisation of Rs 24,000 crore. Five months after the deal, it had plunged to Rs 6,500 crore. At that time, the markets didn’t see much value in the two marquee labels – both of which had been loss making for many years under the management of the former owner Ford Motor Company . But group chairman Ratan Tata saw an opportunity in JLR’s intangible assets. “The two are terrific brands. There is terrific R&D behind them. It is for us to put them into products,” he had remarked in August 2008.

As it turns out now, he was right and the markets were wrong.

Tata Motors’ market cap has now moved up to Rs 71,500 crore, more than a ten-fold rise from the post-acquisition low. (There have been equity infusions worth Rs 15,000 crore over the past two years.) And the company drove past Reliance Industries to top the 2010 edition of India’s Most Valuable Brands survey with a valuation of $8.45 billion.

But where did all this value that has been unlocked come from?

At least a part of the answer lies in the value of the Jaguar and Land Rover brands. “Jaguar and Land Rover were part of a larger conglomerate (Ford). So the market couldn’t value them (at the time of the deal),” says Carl-Peter Forster, CEO and MD of Tata Motors. “The minute you unlock some of that potential, immediately the understanding of what is possible with these brands is reflected in an increased value.”

Unni Krishnan, MD of BrandFinance India , which did the Most Valuable Brands study in exclusive partnership with The Economic Times, says that the markets did not understand the capability of JLR brands to drive future cash-flows when the deal was struck. But as JLR revenues started revving up post

acquisition, the markets began to assign them a fair value. That’s one big reason behind Tata Motor’s soaring market capitalisation. “Companies and investors need to come to grips with this new wealth creation algorithm,” Unni Krishnan adds.

According to the Most Valuable Brands report pegs, the value of the Tata Motors-JLR brand soared 172% in one year to $8.45 billion from only $3.1 billion in 2008-09. A large chunk of Tata Motors’s incremental brand value of $5.35 billion has been generated because the JLR brands are now demonstrating an ability to drive cash flows, says BrandFinance.

The JLR business is benefiting from a combined impact of robust demand, favourable response to new models and rapid progress with restructuring and cost reduction.

“Almost all the Land Rover models and the Jaguar XJ have a waiting period of 2-3 months, so we are confident of sustaining the current run rate,” says Mr Forster.

JaguarLandRover has generated a positive cash flow of £23 million, post capital and product development expenses during the June 2010 ended quarter – the first such instance since the deal. It posted a profit of £221 million (Rs 1,613 crore) for the quarter ended June against a loss of £64 million in the corresponding quarter.

Cost-cutting measures and currency tailwinds on its side helped JLR record a substantial profit margin of 15.5% as against the 10% recorded in the preceding January-March 2010 quarter.

C Ramakrishnan, chief financial officer of Tata Motors, says, “The margin expansion was driven primarily by currency benefits, improved product mix (sales of higher variants in Land Rover) and improved regional mix (higher sales from China and the US).”

A shift in product mix towards higher margin vehicles, higher prices of the new 2010 range of models and new product launches such as the Jaguar XJ had led to better top line of £2.3 billion and operating profit of £339 million for the quarter ended June 2010.

Jatin Chawla, analyst at India Infoline , says that JaguarLandRover’s average realisations rose 22% to £38,209 per vehicle.

“It could rise further if the production of the Jaguar XJ is scaled up,” he adds.

One reason for this success, according to Mr Forster, is the Tata Group’s relentless focus on long-term value. “This specific element of putting long-term brand values before short-term interest is important. The more you do that, the stronger a brand develops,” he says.

Agrees Mahantesh Sabarad, analyst at Fortune Financials: “JLR has managed a recovery in volumes commensurate with a global recovery. It didn’t cut back on capex even during the worst financial crisis.”

But the company still needs to address many issues including a meaningful integration of the Jaguar and LandRover brands into the Tata family. “JLR has been reluctant to adopt the Tata brand for fear that it will dilute their own, and on the whole Tata executives have shared this view and been content to maintain a longer distance,” writes Morgen Witzel in his latest book, Tata, The Evolution of a Corporate Brand.

“Lack of certainty about what the Tata brand means, fears over the consequences of foreign ownerships and in countries like Britain and the US, racism and xenophobia all constitute formidable barriers,” Mr Witzel adds.

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