Most of TMLs expansion in its commercial line came from a series of mergers and acquisitions along with joint ventures. In 2004, it acquired South Korea’s second largest truck manufacturer Daewoo, a commercial vehicle company. This acquisition gave Tata Motors a significant presence in the Korean market. In 2006, the company entered into a joint venture with Thonburi Automotive thus giving it the ability to manufacture and market pick-up trucks in Thailand. A significant drawback was that TML was lacking presence in the luxury car market. In terms of its global presence, there was scope for increasing their market share in the passenger car business. It would be beneficial for TML to employ a similar M&A technique to expand its passenger car business.
Ford owned both Jaguar and Land Rover which they bought in 1989 and 2000 for $2.5 billion and $2.73 billion respectively. Jaguar was a premier manufacturer of luxury saloons and sports cars whereas Land Rover was a manufacturer of 4x4s. But the financial performance of Jauguar and Land Rover was not upto the mark. Ford’s balance sheet was faced immense pressure from the losses that Jaguar was incurring and the company was looking for a buyer for this part of their business. Hence in 2007, Ford proceeded by appointing Goldman Sachs and Morgan Stanley to arrange for the sale of Jaguar and Land Rover. One aspect both the companies had in common was that their manufacturing plants were in the UK and therefore they shared their production facilities. These two brands along with Volvo and Aston Martin were part of Fords premiere automotive group (PAG). The PAG group incurred losses to the tune of $2.32 billion in 2006, with Jaguar accounting for the maximum losses out of the four. Since Jaguar and Land Rover shared their production facilities Ford wanted to sell them as a joint package. The potential bidders for the acquisition were The TATA group , JP Morgan’s private equity arm, One Equity Partners and a consortium of Apollo Management and Mahindra & Mahindra .
In June 2008, TML acquired Jaguar Land Rover for $2.3 billion on a cash-free, debt-free basis. The purchase consideration included the ownership of Jaguar and Land Rover, perpetual royalty-free licenses of all necessary intellectual property rights, manufacturing plants, two advanced design centres in the UK and a worldwide network of national sales companies. TML entered into a Long-term agreement with Ford for supply of engines, stampings and other components to Jaguar Land Rover. Other areas of transition support from Ford included IT, accounting and access to test facilities. The two companies would continue to collaborate in areas such as design and development through sharing of platforms and joint development of hybrid technologies and powertrain engineering. The Ford Motor Credit Company would continue to provide financing for Jaguar Land Rover dealers and customers for a transition period. This acquisition would help TML in several ways, namely establishing an international footprint and entering the high-end premier segment of the automobile market.
However, as with a considerable number of mergers and acquisitions the synergies never immediately materialise. Plans did not go as expected in the 10 months post-acquisition, sales volumes plunged 32% and the unit recorded a loss of 281 million pounds ($461 million).
This was partially due to the rippling effect of the sub-prime crisis which affected all economies. A world wide recession had begun and customers began to cancel their orders for luxuary cars. This had a negative impact on Tata as its total debt in March 2009 rose to 435.8 billion rupees ($9.72 billion), nearly double what it owed in the previous fiscal year. In such a scenario, the question arises whether the acquisition of JLR was the right decision.
SYNERGIES FROM THE DEAL
Sharing of technology and expertise
The acquisition of JLR by Tata Motors gave them an advantage on several fronts. This deal gave Tata Motors instant brand recognition, credibility and entry into the high-end premier segment of the international automobile market. In addition to the deal, Tata Motors also acquired two advance design studios and a deal to share automotive technology with Ford. As Tata Motor cars suffered from defects and design issues, acquiring JLR gave them access to world-class engineering capabilities and this was another key driver of the deal. Tata Motors was already mindful that Ford had invested a lot of money in JLR to enhance quality and it was just a matter of time before the benefits were materialised JLR had very good automobile plants and world-class operations that Tata Motors could learn from. Post the deal, Tata Motors would own the intellectual property rights and this placed them in a superior technological position.
Raw materials procurement
Another synergy expected from this deal was the benefits, which would arise from Tata Steel having acquired Corus on April 2nd 2007. Corus was the main provider of automotive high-grade steel to JLR, giving Tata a supplier cost competitive advantage. Tata Motors long-term strategy was to reduce its complete dependence on the Indian market, which contributed to a significant share of its revenues. Additionally this deal indicated its long-term strategic commitment to the global automotive sector. Tata also had footprints in South East Asia with its commercial automotive sector and planned to use this to diversify JLR’s geographic dependence from US and Western Europe, which produced most of its volume.
Access to global distribution networks
By acquiring JLR, Tata Motors now had access to a wide range of distribution networks across the UK and the USA. This in turn, would help increase sales and boost revenues.
Financial benefits
Tata Motors would receive financial backing from Ford in the below two areas:
• Ford Motor credit scheme would support the sales of JLR for 12 months after the deal
• Additionally, Ford would contribute a sum of $600 million towards the Pension Fund for the workers in the UK.
WAS THE PRICE PAID A REFLECTION OF THE EXPECTED VALUE ARISING FROM THE DEAL?
In 2007, Ford suffered financial losses and hence decided to sell its overseas brands so as to enable them to focus their attention on the US business. Ford tried to sell JLR to established carmakers such as BMW but there was no favourable response. Tata paid Ford $2.3 billion for Jaguar and Land Rover, which was half the price Ford paid to buy them initially. The timing of the deal was problematic as with the financial crisis in 2008, the automotive industry was on a downward trend and no other carmaker wanted to acquire JLR. Ford strived very hard to make JLR profitable ploughing approximately $10 billion into the two brands but failed to get the vehicles or fundamentals quite right. The cars suffered from quality problems and lack of variety in different models. Tata acquired JLR for a very good price, however the only problem was the timi
ng was not quite right. There was a downturn in the
economy and higher fuel prices resulted in a 5% decrease in the worldwide automotive market as consumers were not willing to pay high prices for luxury cars. The situation was rather dreary and with a $3 billion debt, Tata Motors was forced to add more financial resources to ensure the business survives which further put pressure on the company.
CHALLENGES POST ACQUISITION
Challenge 1: Lack of access to sufficient credit to repay the bridge loan of US$3 billion
In order to finance the acquisition, Tata Motors utilised bridge loans, which are short-term borrowings that are used until a person/company secures permanent financing or completes an existing obligation. This allowed Tata Motors to meet current obligations by having instant cash flow. The loans are short-term (up to one year) backed by some form of collateral such as real estate or inventory with relatively high interest rates. Due to the tight liquidity conditions, depressed stock market and lack of investors’ confidence Tata Motors found it difficult to access credit and raise funds from the stock market. The financial situation was rather concerning at this time since there was lack of working capital to repay the bridge loan of US$ 3 billion which used to finance the acquisition of Jaguar and Land Rover. The bridge loan was due on June 2009 and yet at the end of the year 2008, the company was able to repay only US $ 1 billion.
Challenge 2: Global financial crisis
The financial crisis severely impacted the global automobile industry especially in the luxury cars segments. Subprime mortgage crisis was the major cause of the 2009 meltdown and was the reason behind the demise of Lehman brothers. This caused a chain reaction, which later lead to the collapse of the global financial sector and further deepened the financial crisis impacting all sectors of the economy in someway. The automobile industry was not far behind in being adversely impacted due to lack of demand for cars. Tata Motors share price steeply declined and the company reported its first loss in seven years. Tata motors at this point were bleeding money.
Challenge 3: Increase in fuel and material prices in 2008-09
Global fuel prices peaked to their all-time high in 2008-09 reaching a high of $160. High fuel prices result in higher cost of manufacturing and material cost. This caused major problems for Tata Motors as it was already facing falling sales in the luxury car segment and now the profit margin on each car was also decreasing due to high manufacturing costs. Decrease in sales volume, increase in costs as well as bearing the burden of short-term debt spelt doom for Tata Motors in the future.
Challenge 4: Raising funds for expansion
As the debt market was frozen Tata Motors had no other option but to turn to the equity market to raise funds. But then again the share price of Tata Motors had significantly decreased due to uncertainty of acquisition success and global crisis, which resulted in decrease in net profit earnings per share.
STRATEGIES FOR TURNING THE ACQUISITION AROUND
Using the CAGE Framework, one can understand the strategies used for international expansion and guidelines for a successful acquisition
Cultural factors – At the start of the integration the Managing Director openly declared, “Change of ownership has little to do with the changing of culture”.
Several challenges were experienced at Tata Motors and JLR and the management had concerns relating to the scope of integration. A unique integration concern arose as Tata motors had operations in mass manufacturing, whereas JLR operated in the niche segment. So, as to avoid a conflict of brand recognition and taking into account the volatility of the market at the time, Tata Motors decided to limit the integration to some of the functional areas but largely allowing Jaguar and Land Rover to work as an independent unit. This division was essential to avoid changing consumer perception about JLR being linked with Tata Motors, which would lose its appeal with the customers who perceive it to be a status symbol. Most of the integration prospects were implemented within a short span of time after the completion of acquisition formalities. Slow speed of integration, could have resulted in a loss of value during synergy realization.
The team managed to instil trust in JLR. Tata showed its confidence in JLR by leaving most of the personnel at their original roles, which meant that they trusted them to solve problems. Moreover, optimistic press statements from Managing Directors like, “it is Tata’s responsibility to take care of JLR and “Tata won’t shy away from investments, if it is required”. Such definite and clear statements inspired even more loyalty and collaboration between the two companies. Finally, open feedback policies were created so that feedback could be solicited from all employees. Tata’s top management often made trips to JLR’s factories and dealerships outside India and collected feedback from local staff members. These opinions were helpful in the developing company’s strategy.
Administrative factors – Ratan Tata, the person leading Tata group at the time was persistent to make the deal work and put to use the group’s management skills and financial resources to back Tata Motors. Tata Motors decided to leave the existing management structure intact and work with the local British managers. All key personnel were kept in their same position and there was no attempt to impose Indian managers at JLR.
Clear communication channels were developed and Tata did not leave the current managers on their own. The management managed to motivate their British counterparts through constantly challenging them and working with them. Existing practices remained in place and help was offered only when needed, but at the same time managers could not afford to be idle because they had goals to reach and plans to implement.
Geographic factors – In May 2011, Tata announced a £5billion investment programme in JLR focused on new product development and investment in new equipment. This plan also included investing in a manufacturing plant in China. As part of the plan Tata group linked JLR with Tata Steel to provide new lightweight steel alloys for their new car models. By 2012 the access to the Indian and Chinese market resulted in China overtaking the UK as JLR’s biggest market. Soaring sales of Jaguar and Land Rover cars resulted in an increased profit of 41% from 2010. This increase in demand from the Asian market prompted Tata motors to set up production facilities in China. Finally in March 2012 Tata Motors formed a joint venture with Chery Automobile to pave the way for production of JLR cars in China.
Economic factors – To stop the bleeding of the British unit, the management focused on improving efficiencies, managing cash flow and reducing costs. In addition Tata infused $1 billion to fund operations and new product launches for the luxury brands. When the market finally started recovering, Tata Motors was well poised to reap the benefits and turned profitable during the quarter ending Dec 31, 2009, with a net profit $90.6 million. One of they key drivers of profit for Tata Motors was the influx of cash from the Tata Group due to their expansion into the BRICs market.
CONCLUSION
Most mergers and acquisitions are challenging. Cross-border acquisitions that involve the acquirer from an emerging market country and the target company from a developed country face greater challenges. A successful acquisition over the long run depends on both internal and external factors. Internal factors that are under the control of the acquirer’s management and external environmental factors that need to be addressed. Most of the times patience and
luck are required ingredients for success in such contexts
.
Generally in any acquisition there is an attraction to extract synergies as quickly as possible, but the Tata Motors’ acquisition of JLR is an exception. Though initially due to unanticipated market conditions the deal suffered severe losses, Tata Motors carefully tackled short-term challenges while continuing to invest in the core competencies of JLR. This strategy finally reaped benefits for them over the long run. It was also fortunate for Tata Motors that a number of external environment factors such as the recovery of the markets and the booming Asian markets turned in their favour in the eight years since the deal took place.
Another factor of success for Tata was the generation of trust with the JLR management. Initially the JLR trade union leaders were not sure whether jobs in UK would remain secure. So to ensure the success of such a cross border acquisition interests of multiple stakeholders must be kept in mind and the leaders of the acquirer firm need to balance the short and long term goals.
The paper considers the Tata Motors’ acquisition of JLR. It is an example of a large, difficult cross-border acquisition by an emerging market based company. While the acquisition proved difficult in the short term, it has yielded excellent dividends to the parent company over the long term. This paper explores the reasons why this cross-border acquisition succeeded and recommends strategies using the CAGE framework that other companies considering cross-border acquisitions can consider improving their chances of success.