Case study: Tata Motor’s Acquisition of Jaguar and Land Rover

Tata Motors is the largest multi-holding automobile company in India and it is the fourth largest truck producer in the world. In addition, Tata Motors is also the second largest bus producer in the world, with the revenues of US$ 8.8 billion in the financial year 2008. Since its establishment in 1945, Tata Motors has grown significantly in the past 60years with the strategies of joint venture, acquisition and launched new products in different market segments (i.e. passenger cars, commercial vehicles and utility vehicles). A significant breakthrough for Tata was the development and commercialization of the truly Indian cars and they are Tata Indica (1998) and Tata Indigo (2002). Tata Motors has experienced many joint ventures with Daimler Benz, Cummis Engine Co. Inc., and Fiat. In the year 2008, there were two most significant events which have had a momentous impact on the scale of the Company’s operations and its global image. The launching of Tata Nano, the world cheapest car and the acquisition of Jaguar and Land Rover, the two iconic British brand have made Tata Motors well known to the people in the world. Tata Motors has proven excellence over the years through continuous strong financial results, market expansion, acquisition, joint ventures and improvement and introduction of new products, it seems to have a promising future. But it failed the expectation as the company was in trouble right after the acquisition of Jaguar and Land Rover (JLR) in June 2008 due to the arrival of global financial crisis. The bridge loan of US$ 3 billion which used to fund the acquisition of JLR was due on June 2009 and yet at the end of the year 2008, Tata was only able to repay the US$ 1 billion. The declining revenues and a tight credit conditions was hurting the company’s cash flow. The questions arise is that whether Tata Motors able to repay the bridge loan? Will it be able to build up investors’ confidence and increase sales in the future? Could Tata Motors survive or going under bankruptcy?

Tata Motor’s Acquisition of Jaguar and Land Rover

On June 02, 2008, India-based Tata Motors completed the acquisition of the Jaguar and Land Rover (JLR) units from the US-based auto manufacturer Ford Motor Company (Ford) for US$ 2.3 billion, on a cash free-debt free basis. JLR was a part of Ford’s Premier Automotive Group (PAG) and were considered to be British icons. Jaguar was involved in the manufacture of high-end luxury cars, while Land Rover manufactured high-end SUVs.

Forming a part of the purchase consideration were JLR’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 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

Analysts were of the view that the acquisition of Jaguar 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.

On acquiring JLR, Rattan 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 the management and employees to bring their experience and expertise to bear on the growth of the business.” Ford had bought Jaguar 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.

Ford Motors Company (Ford) is a leading automaker and the third largest multinational corporation in the automobile industry. The company acquired Jaguar from British Leyland Limited in 1989 for US$ 2.5 billion. After Ford acquired Jaguar, adverse economic conditions worldwide in the 1990s led to tough market conditions and a decrease in the demand for luxury cars. The sales of Jaguar in many markets declined, but in some markets like Japan, Germany, and Italy, it still recorded high sales. In March 1999, Ford established the PAG with Aston Martin, Jaguar, and Lincoln. During the year, Volvo was acquired for US$ 6.45 billion, and it also became a part of the PAG.

History of Jaguar and Land Rover

Jaguar and Land Rover are two iconic British brands that were acquired by Ford Motor Corporation in 1989. Land Rover is a British car manufacturer that specializes in four wheel drive  vehicles. The name started from a single vehicle that was named by the Rover Company as Land Rover in the year 1948. After developments, this became a porch of a variety of four-wheel drive models such as Discovery, Defender, Range Rover and Freelander. In its history this company has had a number of ownership. In 1967 Leyland Motor Corporation absorbed the Rover Company. Leyland then formed a merger with the British Motor Holdings and formed British Leyland. The new company broke up in the 1980s but in 1988 the Land Rover (Rover Group) was purchased by British Aerospace. The Rover Group was acquired by BMW in the year 1994 but the merger broke down in 2000 where The Rover Group was taken up by Ford Motor Company. It was in the year 2008 that Land Rover was sold to Tata Motors together with Jaguar cars.

Jaguar Cars Ltd or Jaguar is a British luxury car manufacturer whose headquarters are located in Coventry UK. In 1922 the company was founded as Swallow Sidecar Company that used to make motorcycle sidecars and later passenger cars. After the Second World War, the SS connotations were unfavourable and then the name changed to Jaguar. The name changed to Leyland and eventually British Leyland in 1984 when it was listed in the London Stock Exchange.

Ford Sells Jaguar and Land Rover

In the year 2007, the Ford Motor Company, a widely respected company which also happened to be the world’s third largest automaker based on vehicle sales worldwide, reported the largest annual loss in the history of establishment of the company since 1903. The Company reported a loss of $12.8 billion. It also stated that it would not return to profitability until 2009.  In September 2006, after Allan Mulally (Mulally) assumed charge as the President and CEO of Ford, he decided to dismantle the PAG. In March 2007, Ford sold the Aston Martin sports car unit for US$ 931 million. In June 2007, Ford announced that it was considering selling JLR. Ford stated that weak economy is the primary reason to sell Jaguar and Land Rover. The two brands were however suffering losses often resulting in closure of few manufacturing plants and heavy cut in workforce

The Deal

On March 26, 2008, Tata Motors entered into an agreement with Ford for the purchase of Jaguar and Land Rover. Tata Motors agreed to pay US$ 2.3 billion in cash for a 100% acquisition of the businesses of JLR. As part of the acquisition, Tata Motors did not inherit any of the debt liabilities of JLR – the acquisition was totally debt free.

The Benefits

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. 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 the management and employees to bring their experience and expertise to bear on the growth of the business.”

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 the world’s cheapest car – the US$ 2,500 Nano, and luxury marquees like the Jaguar and Land Rover. Two, 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 eg, Indica and Safari suffered from internal noise and vibration problems. Three, this deal provided Tata an instant recognition and credibility across globe which would otherwise would have taken years. Four, the cost competitive advantage as Corus was the main supplier of automotive high grade steel to JLR 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 following diagram. Five, in the long run TATA Motors will surely diversify its present dependence on Indian markets (which contributed to 90% of TATA’s revenue). Along with it due to TATA’s footprints in South East Asia will help JLR do diversify its geographic dependence from US (30% of volumes) and Western Europe (55% of volumes).

Analysts were of the view that the acquisition of JLR, 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.

The Road Ahead

Morgan Stanley reported that JLR’s acquisition appeared negative for Tata Motors, as it had increased the earnings volatility, given the difficult economic conditions in the key markets of JLR 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 JLR. 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 company’s 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.

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 Jaguar/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. Jaguar and Land Rover lost an additional $510 million in the 10 months Tata owned it until March 2009. In January 2009, Tata Motors announced that due to lack of funds it may be forced to roll over a part of the US$ 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 JLR coming up for evaluation in April 2009.