1
A
Study on
MERGERS AND ACQUISITIONS:
Spearheading TATA’s Global Drive to Growth
Project Report submitted to
National Institute of Technology
In partial fulfillment for the award of the degree of
MASTER OF BUSINESS ADMINISTRATION (MBA)
By Souvik Dhar (MBA-12-01)
Anand Jyoti Deb (MBA-12-121)
Under the guidance of Prof. Naba Kumar Das
(Asst. Prof., DoMS)
NATIONAL INSTITUTE OF TECHNOLOGY 2012-2014
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DECLARATION
Thesis Title: A Study on MERGERS AND ACQUISITIONS: Spearheading TATA’s
Global Drive to Growth
Degree for which the Thesis is submitted: Master in Business Administration
We declare that the presented thesis represents largely our own ideas and work in our
own words. Where others ideas or words have been included, we have adequately cited and
listed in the reference materials. The thesis has been prepared without resorting to plagiarism.
We have adhered to all principles of academic honesty and integrity. No falsified or
fabricated data have been presented in the thesis. We understand that any violation of the
above will cause for disciplinary action by the Institute, including revoking the
conferred degree, if conferred, and can also evoke penal action from the sources which have
not been properly cited or from whom proper permission has not been taken.
---------------------------- ----------------------------
(Signature) (Signature)
Souvik Dhar Anand Jyoti Deb
Regn. No. :MBA-12-101 Regn. No. :MBA-12-121
Date: ______________
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CERTIFICATE
This is to certify that the work contained in the thesis entitled " A Study on
MERGERS AND ACQUISITIONS: Spearheading TATA’s Global Drive to Growth " is
a bonafide work of Souvik Dhar (MBA-12-101) & Anand Jyoti Deb (MBA-12-121) for
the award of Master of Business Administration, which has been carried out in the
Department of Management Studies, National Institute of Technology, Silchar under my
supervision and that this work has not been submitted elsewhere for a Degree.
Dated: Mr. Naba Kumar Das
Assistant Professor
Dept. of Management Studies,
NIT Silchar, India.
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Abstract :
Since 1991 Indian Industries have been increasingly exposed to both domestic and
international competition. This has forced Indian corporate sector to restructure, reengineer to
be competitive and deliver value to stakeholders The current scenario of the world is about
Globalizations where the companies have to explore the domestic market as well as the
International Markets. And thus Mergers and acquisitions have become one of the major
force in the changing environment. The policy of liberalization, decontrol and globalization
of the economy has exposed the corporate sector to domestic and global competition. It is
true that there is little scope for companies to learn from their past experience. Therefore, to
determine the success of a merger, it is to be ascertained if there is financial gain from
mergers. It is very important to study the liquidity performance of merged companies to test
whether those companies have sufficient liquid assets to meet its current obligations. One of
the critical factors which is affecting the Organization in International Market is Recession.
In the Competitive market for attaining the Success, one needs to be a global player. A
company can assess its potential only in the Global Environment, which provides prospects
for exploring new perspective and transforming entities.This paper covers the Strategy of
acquiring the Cross Border merger. In the Cross border Merger; the Acquirer has to facemany
problems such as Downsizing, Leveraged and change in Corporate Culture which affects the
whole business of that Organization.
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ACKNOWLEDGEMENT
We take this occasion to render my deep sense of gratitude and tribute to our
supervisor, Mr. Naba Kumar Das, Assistant Professor, Department of Management Studies,
NIT,Silchar for his constant and valuable guidance in the truest sense throughout the course
of the work. It was his encouragement and support from the initial to the final level enabled
me to develop an understanding of the subject. Every time we had a problem, we rushed to
him for advice, and he never ever let us down. His timely suggestions helped us circumvent
all sorts of hurdles that we had to face throughout our work. We are deeply indebted for his
inspiration, motivation and guidance.
We would like to say thanks to Mr. Ashim Kumar Das, H.O.D. Department of
Management studies, NIT Silchar for his constant support and valuable suggestion
throughout the course of our thesis.
We would also like to thanks all the faculty members to provide useful suggestions.
Thanks go out to all of our friends as they have always been around to provide useful
suggestions, companionship and created a peaceful research environment. We are also
indebted to our parents for everything they have done for us; nothing would have been
possible without them. And at last THE ALMIGHTY for keeping us in good health and
driving us through this journey.
Souvik Dhar
&
Anand Jyoti Deb
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EXECUTIVE OVERVIEW
The era of globalization which resulted in the increase of competitiveness has led to
the increase in mergers and acquisitions. Mergers and acquisitions have become a popular
means for major companies to rapidly access new markets, assets and capabilities. Indian
companies too have significantly increased their Mergers and Acquisition activities over
recent years. And Indian companies are using Mergers and acquisitions as a strategy to set up
global footprints all over the world. Mergers and acquisitions strategy used by Indian
companies are mainly driven by the desire for growth. Indian companies are leveraging their
low-cost advantage to create efficient global business models and they are seeking entry into
fast-growing emerging markets and market-share in profitable developed economies. Global
growth will continue to be a strategic focus for many Indian companies and M&A is a
legitimate strategy to achieve this. However, sustainable growth also requires an emphasis on
operational synergies. This requires adequate attention to organizational models that will
enable effective and integrated operations across merged entities and geographies. Thus
mergers and acquisitions has been an effective strategy used by Indian companies to enhance
their financial performance by achieving the post mergers operational synergy.
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INDEX
TABLE OF CONTENT Page No.
Chapter 1: Introduction to the project
1.1 Introduction 11
1.2 Need for the Study 12
1.3 Objectives 12
1.4 Statement of the problem 15
1.5 Findings 16
Chapter 2: Introduction to the concept
2.1 Merger 15
2.2 Types of Mergers 16
2.3 Amalgamation 18
2.4 Acquisitions 18
2.5 Reasons and Rationale for M&A 20
2.6 M&A Motives 22
2.7 Reasons for failures of M&A 23
Chapter 3: Research Methodology
3.1 Methodology of the study 27
3.2 Period of the study 27
3.3 Sources of data 27
3.4 Research Questions 27
3.5 Tools used 28
3.6 Limitations of the study 30
Chapter 4: Literature Review 32
Chapter 5: Tata Group: Global Growth Story 35
Chapter 6: Data Analysis 45
Chapter 7: Tata Corus Deal 52
Chapter 8: Tata Jaguar Deal 75
Chapter 9: Findings and Conclusions 95
Chapter 10: Appendices and Reference 97
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LIST OF TABLES Page No.
Table 2 Merger and Acquisition motives 12
Table 6.1 Total Turnover 45
Table 6.2 Sales Turnover 46
Table 6.3 Value of Assets 47
Table 6.4 Exports 48
Table 6.5 Financial Highlights 49
Table 6.6 Contribution to Exchequer 49
Table 6.7 Group’s Capital Market Performance 50
Table 6.8 Sector wise Human Resource Profile 50
Table 9.1 Table Showing JLR’s performance in FY11 & FY12 80
Table 9.2 Table showing sales of JLR after acquired by Ford 83
Table 9.3 Cost of production of JLR 84
Table 9.4 Funding 87
Table 10.1 Standalone Financial Performance of Tata Motors 92
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List of Figures Page No.
Fig 6.1 Total Turnover of Tata Group 45
Fig 6.2 Sales Turnover of Tata Group 46
Fig 6.3 Value of Assets 47
Fig 7.1 Deal Structure of Chorus Fund 59
Fig 7.2 Fiancial plan of Tata Steel Equity 61
Fig 7.3 Financing of Chorus Acquisition 62
Fig 7.4 Margin Comparison between Initial & Final financing structure 63
Fig 7.5 Global Ranking of production growth of various steel producers 64
Fig 7.6 Strategic fit of Tata-Corus deal 65
Fig 7.7 Combined producxt portfolio of Tata-Corus 65
Fig 7.9 Access New Markets 66
Fig 7.10 Share price of Tata Steel at the time of acquisition of Corus 67
Fig 9.1 Graphical representation of TAMO’s sale before and after deal 78
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Chapter 1
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1. Introduction to the Project
1.1 Introduction
As the business environment is rapidly changing with respect to competition,
products, people, process of manufacture, markets, customers and technology is embedded in
all these functions. It is not enough if companies keep pace with these changes but are
expected to beat competitors and innovate in order to continuously maximize shareholder
value. Inorganic growth strategies like mergers, acquisitions, takeovers and spinoffs are
regarded as important engines that help companies to enter new markets, expand customer
base, cut competition, consolidate and grow in size quickly, employ new technology with
respect to products, people and processes. Thus the inorganic strategies are regarded by
companies as fast track strategies for growth and unlocking of value to shareholders.
Post liberalization and reforms, the Indian corporate sector had to restructure,
reengineer, innovate to be competitive and to deliver value to stakeholder. This led to
increase in mergers and acquisitions in the Indian corporate sectors. The acquisitions of late
have been global in nature with big deals like Tata steel acquiring Corus, etc. and Indian
companies going global.
Mergers, acquisitions and corporate control have emerged as major forces in the
modern financial and economic environment. Mergers, as a source of corporate growth, have
been the subject of careful examination by scholars. The mergers and acquisitions in India
have changed dramatically after the liberalization of Indian economy. The policy of
liberalization, decontrol and globalization of the economy has exposed the corporate sector to
domestic and global competition. Low cost products, with good quality have become
essential for a company to survive in the competitive market. Factors like low interest rates,
cheap labour, and liberal government policy, have helped the Indian corporate sector to
reduce their cost. It is in this context that corporate sectors view mergers for further cost
reduction through technology advancement or to make their presence felt in the market.
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1.2 Need for the Study
Merger is a routine event in the changed economic environment. Post‐ merger
financial gain will be generated only when the two companies are worth more together than
apart. Therefore, there is a need to study the wealth enhancement with respect to mergers,
which can be helpful in assessing the success of merger. Many studies have been conducted
to analyze both acquiring and target companies in the pre‐merger period and more
specifically, acquirer companies in the pre‐ and post‐merger periods. It is equally important
to analyze from the view point of the acquirer and target companies in the pre‐ and
post‐merger periods also. The companies’ financial position is bounded with their solvency
positions. A company is financially sound if it is in a position to carry its business smoothly
and meet its current obligations. Hence an attempt has been made to study the short term
solvency position i.e. liquidity position of both acquirer and target companies in the pre‐ and
post‐merger period.
1.3 Objective of the study:
The present research has been aimed at review growth of the companies under Tata
group going for expansion through acquisitions in Indian and overseas.
To study how Tata Group used Mergers and Acquisition as an effective tool to
set up global footprints.
To evaluate whether the Mergers and Acquisitions had a positive impact on
the financial performance of the Tata Group.
To evaluate the pre and post-merger Liquidity performances of the acquiring
companies.
To evaluate the pre and post- merger share price fluctuations of the acquiring
companies.
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1.4 Statement of Problem:
Recent Surveys have shown that many international Mergers & Acquisitions have
been failures. There are classic examples of large companies having failed due to the wrong
Mergers & Acquisitions strategy and profitable companies having got into rough weather
because they acquired a wrong company.
To check whether the strategy adopted by Indian biggest conglomerate group
i.e., Tata group of setting up global footprint all over the world with these
inorganic growth strategies was feasible or not.
Whether these mergers and acquisitions will help the Tata Group in improving
their financial returns and leverage on the huge investment that they had done
for acquiring those firms.
1.5 Findings:
Tata Group has a global presence in 150 countries with group revenue of 96.8 bn
USD out of which 63% of which are generated from international operations.
Market Capitalisation of 32 listed companies as on 30th
April 2014 was US$116.07 bn
which is about 9.2% of Bombay Stock Exchange's total market capitalisation.
There were 72 Mergers & Acquisitions done by the Tata Group from the time period
of 2000 to 2011 which effectively contributed to the International Revenue Growth of
Tata Group.
The cultural integration was one of the notable factors for the high success rate of
Mergers and Acquisitions in Tata Group
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Chapter 2
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2. Introduction to the Concept
The term ‘Merger’, ‘Amalgamation’, &‘Acquisition’, is often used interchangeably in
common parlance. However, there are differences.
2.1 Merger
According to Oxford Dictionary, the expression “Merger” or “Amalgamation” means
“combining of two commercial companies into one” or “merger of two or more business
concerns into one”. ‘Merger’ is a fusion between two or more enterprises, whereby the
identity of one or more is lost and the result is a single enterprise. We will use the terms
merger and amalgamation interchangeably.
Merger or Amalgamation may take two forms:
Absorption
Absorption is a combination of two or more companies into an existing company. All
companies except one lose their identity in a merger through absorption. An example of this
type of merger is the absorption of Tata Fertilisers Ltd. (TFL) by Tata Chemicals Ltd. (TCL).
TCL, an acquiring company (a buyer), survived after merger while TFL, an acquired
company (a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL.
Consolidation
A consolidation is a combination of two or more companies into a 'new company'. In
this form of merger, all companies are legally dissolved and a new entity is created. Here, the
acquired company transfers its assets, liabilities and shares to the acquiring company for cash
or exchange of shares. For example, merger of Hindustan Computers Ltd, Hindustan
Instruments Ltd, Indian Software Company Ltd and Indian Reprographics Ltd into an entirely
new company called HCL Ltd.
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2.2 Types of Merger
Merger or acquisition depends upon the purpose of the offeror company it wants to
achieve. Based on the offeror objectives profile, combinations could be vertical, horizontal,
circular and conglomeratic as precisely described below with reference to the purpose in view
of the offeror company.
It takes place when two merging companies manufacture similar goods and belong to
the same industry. For example, the combination of two book publishers or two luggage
manufacturing companies to gain dominant market share.
It is a combination of two or more firms involved in different stages of production or
distribution of the same product. For example, the joining of a TV manufacturing
(assembling) company and a TV marketing company or joining of a spinning company and a
weaving company. Vertical merger may take the form of forward or backward merger. When
a company combines with the supplier of material, it is called backward merger and when it
combines with the customer, it is known as forward merger. For example, ICICI Ltd with
ICICI Bank is an example of vertical merger with backward linkage as far as ICICI Bank is
concerned.
It occurs when the two merging companies belong to two different industrial sectors. For
example, the merging of different businesses like forinstance, manufacturing of cement
products, fertilizer products, electronic products, insurance investment and advertising
agencies. L&T and Voltas Ltd are examples of such mergers. Such kind of merger can be
broadly classified into:-
i. Product-extension merger - Conglomerate mergers which involves companies
selling different but related products in the same market or sells non-competing
products and use same marketing channels of production process.
E.g. Phillip Morris-Kraft, PepsiCo- Pizza Hut, Proctor and Gamble and Clorox
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ii. Market-extension merger - Conglomerate mergers wherein companies that sell the
same products in different markets/ geographic markets.
E.g. Morrison supermarkets and Safeway, Time Warner-TCI.
iii. Pure Conglomerate merger- The two companies which merge have no obvious
relationship of any kind.
E.g.Bank Corp of America- Hughes Electronics.
Congeneric merger
These are mergers between entities engaged in the same general industry and
somewhat interrelated, but having no common customer-supplier relationship. A company
uses this type of merger in order to use the resulting ability to use the same sales and
distribution channels to reach the customers of both businesses
In a typical merger, the merged entity combines the assets of the two companies and
grants the shareholders of each original company shares in the new company based on the
relative valuations of the two original companies. However, in the case of a ‘cash merger’,
also known as a‘cash-out merger’, the shareholders of one entity receives cash in place of
shares in the merged entity.
A triangular merger is often resorted to for regulatory and tax reasons. As the name
suggests, it is a tripartite arrangement in which the target merges with a subsidiary of the
acquirer. Based on which entity is the survivor after such merger, a triangular merger may be
forward (when the target merges into the subsidiary and the subsidiary survives), or reverse
(when the subsidiary merges into the target and the target survives).
A type of merger used by private companies to become publicly traded without
resorting to an initial public offering. It is also known as a "reverse merger" or "reverse IPO".
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Dilutive mergers take place when a company with a low price to earnings ratio
acquires a company with a high price to earnings ratio. This causes the purchasing company’s
earnings per share to decrease. This type of merger is the opposite of an accretive merger.
Accretive mergers occur when a company with a high price to earnings ratio purchases a
company with a low price to earnings ratio. This makes the purchasing company’s earnings
per share increase.
2.3 Amalgamation
‘Amalgamation’ signifies blending of two or more existing undertakings into one
undertaking, the blended companies losing their identities and forming themselves into a
separate legal identity. The term ‘amalgamation’, as perConcise Oxford Dictionary, Tenth
Edition, means, ‘to combine or unite to form one organization or structure’.
There may be amalgamation either by the transfer of two or more undertaking to a new
company, or by the transfer of one or more undertaking to an existing company.
Merger is also defined as amalgamation. Merger is the fusion of two or more existing
companies. All assets, liabilities and the stock of one company stand transferred to Transferee
Company in consideration of payment in the form of:-
i) Equity shares in the transferee company,
ii) Debentures in the transferee company,
iii) Cash, or
iv) A mix of the above mode
2.4 Acquisitions
Acquisitions in general sense are acquiring the ownership in the property. In the
context of business combinations, an acquisition is the purchase by one company of a
controlling interest in the share capital of another existing company. The term "acquisition"
refers to the acquisition of assets by one company from another company. In an acquisition,
both companies may continue to exist.
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It generally refers to the purchase of controlling interest by one company in the share
capital of an existing company. This may be by:
1. An agreement with majority holder of Interest.
2. Purchase of new shares by private agreement
3. Purchase of shares in open market (open offer)
4. Acquisition of share capital of a company by means of cash, issuance of shares
5. Making a buyout offer to general body of shareholders
Type of Acquisitions
In case of Hostile acquisitions, the company, which is to be bought, has no information about
the acquisition. The company, which would be sold, is taken by surprise.
In case of Friendly acquisition, the two companies cooperate with each other and settle
matters related to acquisitions
These are form of takeovers where the acquisition is funded by borrowed money. Often the
assets of the target company are used as collateral for the loan. This is a common structure
when acquirers wish to make large acquisitions without having to commit too much capital.
Another form of takeover is a ‘bail out takeover’ in which a profit making company acquires
a sick company to set off of the losses of the sick company against the profits of the acquirer,
thereby reducing the taxpayable by the acquirer. This kind of takeover is usually pursuant to a
scheme of reconstruction/rehabilitation with the approval of lender banks/financial
institutions. This would be true in the case of a merger between such companies as well.
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2.5 Reasons and Rationale for M&A
Ideally, mergers are executed with the expectation that the target will increase the
equity value of the acquirer. Below some common merger motivations are described.
Synergy may be defined as; VAB > VA + VB, In other words the combined value of
two firms or companies shall be more than their individual value. This may be result of
complimentary services economies of scale26 or both. On similar lines, economies of large
scale are also one of the reasons for synergy benefits. The difference between the combined
value and the sum of the values of individual companies is usually attributed to synergy
Value of acquirer + Stand alone value of target + Value of synergy = Combined Value
(Source: ICAI, 2005)
There is also a cost attached to acquisition. The cost of acquisition is the price
premium paid over the market value plus other costs of integration. Therefore, the net gain is
the value of synergy minus premium paid. VA = 100, VB = 50, VAB = 170, Synergy = VAB
– (VA + VB) = 25, If premium is 10 then, Net Gain = 25-10=15
Mergers have the potential to lower costs for the combined companies, either through
the elimination of redundant functions or by eliminating profits from “middle-man” points in
the value chain.
Mergers may provide the combined companies an opportunity to cross sell
complementary products.
Merger and Acquisition mode enables the firm to grow at a faster rate than other
mode e.g. Capital Budgeting because the merged and the acquiring company enters in the
market. It might provide a company with more rapid growth potential than organic growth
provided by reinvesting earnings.
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A horizontal merger can reduce competition and allow the acquirer to raise its prices. A
vertical merger can allow the acquirer to better control prices downstream or upstream in the
value chain. When a merger has the potential to provide an acquirer with too much market
power, government regulations may prevent the merger from taking place.
An acquiring company may pursue a target for its in-house technical expertise.
Unlocking Value: An acquirer may view a target as underperforming financially and feel
confident that it can facilitate the realization of the target’s full potential after taking control.
Companies themselves are investors who seek to reduce risk and increase returns through the
successful deployment of capital.
Companies may engage in M&A beyond their domestic borders for multiple financial or
strategic reasons.
The provision of set off and carry forward of losses as per Income Tax Act may be another
strong reason for merger and acquisition. Thus, there will be Tax saving or reduction in tax
liability of the merged firm having substantial earning.
Due to reduction in competition market power increases and also the production capacities
are increased by combined of two or more plants. The following table shows the key rationale
for some of the well-known transactions which took place in India in the past.
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2.6 Mergers and Acquisition Motives
The literature on M&A has placed a significant amount of efforts on exploring the
motives of firms engaging in M&A transactions. On one hand, Trautwein (1990) and later
Cox (2006) provide a systematic summary of the motives, underlying which are different
theories. Of the motives suggested under various theories, Trautwein (1990) marks that M&A
makers frequently cite synergy and valuation objectives to justify their actions.
Unsurprisingly, there are neither claims that the motive is to achieve monopoly power nor
instances where managers refer their own benefits to justify an M&A deal. Trautwein (1990)
also note that there is little evidence in both practice and research on the motives implied by
the process and the raider theories. He discusses disturbance theory as well but it is not
considered in this section since M&A is then considered at the macro-economic level rather
than the micro-economic (i.e., firm) level.
Table 2: Mergers and Acquisition Motives (adapted from Trautwein1990& Cox 2006)
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On the other hand, Gaughan (2002) takes a more pragmatic view to identify M&A
motives by referring back to theories but heavily supporting with multiple empirical case
studies. According to this author, four main motives are:
(1) M&A is considered as a means for firms to grow quickly;
(2) M&A firms hope to experience economic gains as a result of economies of scale or scope;
(3) a larger firm as a result of M&A may have a better access to capital market, which later
leads to a lower cost of capital, i.e., financial benefits
(4) M&A is aimed at anticipated gains which a firm may experience when applying its
superior management skills to the target’s business.
All of the three authors concur that M&A is driven by many complex motives, which can
vary from deal to deal and cannot be fully justified by any single theory approach.
2.7 Reason for failures of Mergers & Acquisitions
It should be clear that it can be very difficult to say clearly whether a merger or
acquisition has been successful, either in the short term or in the long term. The degree of
success involved depends on the point of view of the observer, the timescale being
considered and determinants of success being used for evaluation. There are, however, key
issues frequently quoted in the literature upon which there is more or less common
agreement. The primary reasons for a relatively unsuccessful outcome appear to be those
listed below.
An inability to agree terms.
In same cases the proposed merger may never even be implemented because the
senior managers in the two companies are unable to agree terms for the merger. In such cases
the merger has to be classified as a failure because of the cost involved and time wasted.
There have been several examples in the UK between 1995 and 2002 of potentially very large
mergers that failed to materialise because the senior managers could not agree on the
management and organisational structures of the proposed new organisation. An example of
such a failure was the proposed UK merger between Abbey National and Bank of Scotland.
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Overestimation of the true value of the target.
Acquirers often pay more for the target than it is actually worth. In the short term this
could result from pre-merger target share price rises as discussed earlier. In the longer term
the problem could result from an inaccurate assessment of the value of the target, either
through poor valuation and due diligence or because the sector within which the company
operates is subject to potential large-scale changes.
The target being too large relative to the acquirer.
The literature suggests that the difficulties associated with a merger or acquisition
increase as a function of the relative size of the target. This tends to happen because the target
becomes more and more difficult to absorb as it becomes relatively larger. A target equal in
size to the acquirer can only be effectively absorbed in a merger of equals.
A failure to realise all identified potential synergies.
The underlying rationale behind mergers and acquisitions is often influenced by the
potential to generate and exploit synergies. These potential synergies may seem achievable
during the planning stage, but actually realising and exploiting them can be significantly
more difficult than anticipated.
External changes
Mergers and acquisition logic is sometimes superseded by events. Even the best
strategic planners can occasionally fail to see sudden and large scale changes in the external
market. Where such changes do occur, the whole rationale be- hind the merger or acquisition
can quickly dissipate, sometimes with disastrous results. Examples include companies that
acquired dot.com targets just before the relative global collapse in this sector in the late
1990s.
An inability to implement change.
A large-scale merger or acquisition generates a considerable amount of change. In a
merger of equals all sections of each organisation may be subjected to change of varying
degrees. Some companies are better than others at designing and implementing change. In
some cases there may be a basic inability to plan and manage change effectively. In other
cases there may be a deep-rooted cultural opposition to change.
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Shortcomings in the implementation and integration processes.
Poor implementation frequently shows up in the literature as a primary scenario for
failure. The most common reason for poor implementation is inadequate planning and
control. In mergers and acquisitions generally, the most common specific cause of poor
implementation is the lack of an implementation driver. Most implementation processes
appear to be car- ried out without an overriding driving force behind them. The result is that
they take longer than originally expected, and the opportunity for generating and exploiting
synergies may be lost as a result.
A failure to achieve technological fit.
Technological fit and the failure to achieve it are very common problem areas in
mergers and acquisitions. Companies tend to develop their own technologies and
technological approaches to production over a number of years, and each system tends to be
highly individualistic. It can be extremely difficult to merge two entirely different
technological systems. In some cases the costs of doing so fully would be prohibitively
expensive.
Conflicting cultures
The incompatibility of corporate cultures is another classical scenario for failure.
Cultures, like technologies, tend to evolve over a long period of time and are highly
individualistic. It is very common to observe the formation of conflict when two corporate
cultures are thrown together with inadequate preparation.
A weak central core in the target.
Targets may be unfocused or there may be problems with the central or core elements
in the company. In such cases the acquisition may turn out to be less valuable than was
originally thought. Typical examples were the acquisitions of the apparent high-growth
dot.com companies of the late 1990s.
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Chapter 3
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3 Research Methodology
3.1 Methodology of the study Sample Selections
There are several mergers within the TATA Group during the study period from
01.04.2000 to 31.03.2013. For the purpose of corporate analysis, it was decided to select two
of the highest deals which merged within under the TATA Group during the study period.
Hence, the sample size of this study is confined to 2. Besides, while selecting the
sample, following points were taken into account.
Acquirer and target companies should belong to the same industry.
Availability of merger date and industry information.
The details of sample companies, (Acquirer and Target),
The date of merger and name of the Industry concerned
3.2 Period of the study
Thus for the purpose of selecting sample companies, the present study covers a period
of one year from April 1, 2000 to March 31, 2013. But in order to evaluate the financial
performance of sample companies on a comparative basis, 15-20 days before merger and
after merger were considered.
3.3 Sources of data
The present study basically depends on secondary data. The required data on financial
performance before and after merger were collected and they were obtained from Prowess
software, Internet sources, Business Journals. The data were also collected from books,
journals, magazines and newspapers.
3.4 Research Questions:
Whether the strategy of mergers and acquisitions adopted by Tata Group had any
impact on the financial performance of it.
Did the synergy created by these mergers and acquisitions helped the Tata Group to
increase its overall operating profit.
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3.5 Tools used
In order to study the liquidity performance of acquirer and target companies, ratios Debt-
Equity Ratio, ROCE (%), P/E, EPS etc.
1) Profit After Tax (PAT)-PAT is a more accurate look at operating efficiency for
leveraged companies. It does not include the tax savings many companies get because
they have existing debt. It is defined as a company's potential cash earnings if its
capitalization were unleveraged (that is, if it had no debt). PAT is frequently used in
economic value added (EVA) calculations.
It is calculated as
PAT = Operating Income x (1 - Tax Rate)
2) Earning Per Share (EPS) - The portion of a company's profit allocated to each
outstanding share of common stock. Earnings per share serves as an indicator of a
company's profitability.
It is calculated as
EPS = Net Income – Dividend on Preferred Stocks
Average Outstanding Shares
3) Earning Before Interest, Tax, Depreciation and Amortization (EBITDA) -
EBITDA is essentially net income with interest, taxes, depreciation, and amortization
added back to it, and can be used to analyze and compare profitability between
companies and industries because it eliminates the effects of financing and accounting
decisions.
It is calculated as
EBITDA = Revenue – Expenses (including tax, depreciation, interest and
depreciation)
4) Current Ratio (CR) - A liquidity ratio that measures a company's ability to pay
short-term obligations. It is also known as "liquidity ratio", "cash asset ratio" and
"cash ratio". The ratio is mainly used to give an idea of the company's ability to pay
back its short-term liabilities (debt and payables) with its short-term assets (cash,
inventory, receivables). The higher the current ratio, the more capable the company is
of paying its obligations. A ratio under 1 suggests that the company would be unable
to pay off its obligations if they came due at that point.
It is calculated as
CR = Current Assets
Current Liability
29
5) Net Debt to Equity Ratio – It is a measure of a company's financial leverage
calculated by dividing its total liabilities by stockholders' equity. It indicates what
proportion of equity and debt the company is using to finance its assets.
It is calculated as
Net debt to Equity= Total liability
Shareholders Equity
6) Dividend Payout Ratio - The percentage of earnings paid to shareholders in
dividends. The payout ratio provides an idea of how well earnings support the
dividend payments. More mature companies tend to have a higher payout ratio.
It is calculated as
Dividend Payout Ratio = Yearly Dividend Per Share
Earnings Per Share
7) Price- Earning Ratio (PE Ratio) = A valuation ratio of a company's current share
price compared to its per-share earnings. A high P/E suggests that investors are
expecting higher earnings growth in the future compared to companies with a lower
P/E.
It is calculated as
PE Ratio = Market Value Per Share
Earnings Per Share(EPS)
8) Interest Coverage Ratio -A ratio used to determine how easily a company can pay
interest on outstanding debt. The interest coverage ratio is calculated by dividing a
company's earnings before interest and taxes (EBIT) of one period by the company's
interest expenses of the same period as :
Interest Coverage Ratio = EBIT
Interest Expense
9) Inventory Turnover - A ratio showing how many times a company's inventory is
sold and replaced over a period. The days in the period can then be divided by the
inventory turnover formula to calculate the days it takes to sell the inventory on hand
or "inventory turnover days."
It is calculated as
Inventory Turnover = Sales
Turnover
30
10) Debtors Turnover Ratio = The debtors turnover ratio can be calculated by dividing
the total sales by the balance of debtors (inclusive of bills receivables) given. and
formula can be written as follows :
Debtors Turnover Ratio = Total Sales
Debtors
3.6 Limitations of the study
Another case study parallel to this report could be examined further to get a more
detailed result. More parameters could be used even in the same report to reach a different
more in-depth conclusion. However the study could not be done on all the cases of mergers
and acquisition for the selected time period, which would have given a more in-depth look on
the results.
Further studies may help to develop some alternate measures of merger-related gains
as financial measures have limitations to capture the full impact of merger on corporate
performance. However, a study providing detailed insights into the reasons and patterns of
post-merger corporate performance across the types of mergers and industry would be useful.
31
Chapter 4
32
4 Literature Review:
The following are the few existing studies reviewed which were conducted by
researchers in the view of analyzing the financial performance during merger activity in
different time periods. The study entitled, “Effect of Mergers on Corporate Performance in
India”, written by Vardhana Pawaskar (2001), studied the impact of mergers on corporate
performance. It compared the pre‐ and post‐ merger operating performance of the
corporations involved in merger between 1992 and 1995 to identify their financial
characteristics. The study identified the profile of the profits. The regression analysis
explained that there was no increase in the post‐ merger profits. The study of a sample of
firms, restructured through mergers, showed that the merging firms were at the lower end in
terms of growth, tax and liquidity of the industry.
A survey of the available literature on M&As and its impact on the different aspects
of corporate entities has been carried out. Further, research studies specific to India and their
limitations and research dimensions for the present study has been found out. Evaluating the
performance of corporations involved in M&As has been the subject of a great deal of
research. Khemani (1991) states that there are multiple reasons, motives, economic forces
and institutional factors that can be taken together or in isolation, which influence corporate
decisions to engage in M&As. It can be assumed that these reasons and motivations have
enhanced corporate profitability as the ultimate, long-term objective. It seems reasonable to
assume that, even if this is not always the case, the ultimate concern of corporate managers
who make acquisitions, regardless of their motives at the outset, is increasing long-term
profit. However, this is affected by so many other factors that it can become very difficult to
make isolated statistical measurements of the effect of M&As on profit. The "free cash flow"
theory developed by Jensen (1988) provides a good example of intermediate objectives that
can lead to greater profitability in the long run. This theory assumes that corporate
shareholders do not necessarily share the same objectives as the managers. The conflicts
between these differing objectives may well intensify when corporations are profitable
enough to generate "free cash flow," i.e., profit that cannot be profitably re-invested in the
corporations. Under these circumstances, the corporations may decide to make acquisitions in
order to use these liquidities. It is therefore higher debt levels that induce managers to take
new measures to increase the efficiency restructuring made necessary by takeovers.
33
Another set of studies evaluate the impact of M&As in various measures of
profitability before and after M&As. This type of industrial organization studies normally
considers longer time horizons than the share price studies. Most of the firms do not show
significant improvement in long term profitability after acquisition (Scherer, 1988). There are
some studies which have concluded that conglomerate M&As provide more favorable results
than horizontal and vertical M&As (Reid, 1968; Mueller, 1980). Many researchers have
investigated, whether related mergers in which the merging companies have potential
economy of scale perform better than unrelated conglomerate mergers. In terms of
accounting profitability, Hughes (1993) summarizes evidence from a number of empirical
studies to show that conglomerate mergers perform better than horizontal mergers. The study
concluded that control firm adjusted long-term operating performance following mergers in
case of Japanese firms was positive but insignificant and there was a high correlation between
pre and post-merger performance. Marina Martynova, Sjoerd Oosting and Luc Renneboog
(2007) investigated the long-term profitability of corporate takeovers in Europe, and found
that both acquiring and target companies significantly outperformed the median peers in their
industry prior to the takeovers, but the profitability of the combined firm decreased
significantly following the takeover. However, the decrease became insignificant after
controlling for the performance of the control sample of peer companies.
Due to the existence of strict government regulations, Indian companies were forced
to go to new areas where capabilities are difficult to develop in the short run. In pursuit of
this growth strategy, they often change their organization and basic operating characteristics
to meet the diversified businesses and management. In a study by Prahalad and others (1977),
it has been found that, Indian enterprises in both the private and public sectors are much
diversified. This diversification led to M&As.
34
Chapter 5
35
5.1 Case 1 - TATA GROUP: Global growth story through Mergers & Acquisitions
The definition of growth has changed quite dramatically from the days when organic
growth was considered the primary channel of progress. This is exemplified in the case of the
Tata where inorganic growth, through leveraged buyouts and sometimes audacious deals, has
driven expansion over the last decade. With accelerated growth comes the challenge of
integration and proper management of the portfolio of companies. The top management has
to often answer the question mark over the business houses role in keeping all these
companies under one roof. The following sections contain a look at Tata inorganic expansion,
a portfolio analysis for the group and an assessment of whether the newer companies should
be part of the Tata Group.
5.1.1 Tata Group- A Snapshot
The Tata Group is India largest business group accounting for 5.2% of India GDP and
operates in over 80 countries with group revenue amounting to a whopping USD 62.5 billion
in 2008.The group operates in seven broad sectors ranging from steel, automobiles, energy,
chemicals, hotels and consumer goods to communication systems with Tata Steel, Tata
Motors, Tata Consulting Services and Tata Power accounting for nearly 50% of the group
revenue. The group profit has grown at a CAGR of 19.4% over the last decade and a half and
the group revenue has grown at a CAGR of 16% over the same time period. Over the last
decade, the Tata Group has had a clear focus on internationalization with contribution of
international operations to the revenues having gone upto 61%. Today, the Tata Group
comprises of 96 companies, operates in 6 continents and employs approximately 350,000
people. Inorganic route has played a major role in this fast growth story.
The Tata group comprises over 100 operating companies in seven business sectors:
communications and information technology, engineering, materials, services, energy,
consumer products and chemicals. The group has operations in more than 100 countries
across six continents, and its companies export products and services to 150 countries.
The total revenue of Tata companies, taken together, was $96.79 billion (around Rs.
527,047 crore) in 2012-13, with 62.7 % of this coming from business outside India. Tata
36
companies employ over 540,000 people worldwide. Brand Finance, a UK-based consultancy
firm, valued the Tata brand at $18.16 billion and ranked it 39th among the top 500 most
valuable global brands in their Brand Finance® Global 500 - 2013 report.
The Tata name has been respected in India for more than 140 years for its adherence
to strong values and business ethics. The group has always believed in returning wealth to the
society they serve. Two-thirds of the equity of Tata Sons, the Tata promoter holding
company, is held by philanthropic trusts that have created national institutions for science and
technology, medical research, social studies and the performing arts.
5.1.2 TATA GROUP Milestones
The Tata group is one of India's oldest, largest and most respected business conglomerates.
The group's businesses are spread over seven business sectors.
Foundation
1868-1931
Consolidation
1932-1989
Expansion
1990 onwards
Foundation
(1868-1931)
The seeds of what would mature and become today's Tata group were laid long years before
India became independent
1868
Jamsetji Nusserwanji Tata starts a private trading firm, laying the foundation of the
Tata group
1874
The Central India Spinning, Weaving and Manufacturing Company is set up, marking
the group's entry into textiles and its first large-scale industrial venture
1902
The Indian Hotels Company is incorporated to set up the Taj Mahal Palace, India's first
luxury hotel, which opened in 1903
1907
The Tata Iron and Steel Company (now Tata Steel) is established to set up India's first
iron and steel plant in Jamshedpur. The plant started production in 1912
Sets up its first office overseas, Tata Limited in London
37
1910
The first of the three Tata Electric Companies, The Tata Hydro-Electric Power Supply
Company is set up. The second, Andhra Valley Power Supply Company was established in
1917 and Tata Power in 1919. The first two companies were merged with Tata Power in 2000
to form a single entity
1911
The Indian Institute of Science is established in Bangalore to serveas a centre for
advanced learning
1912
Tata Steel introduces eight-hour working days, well before such a system was
implemented by law in much of the West
1917
The Tatas enter the consumer goods industry, with the Tata Oil Mills Company being
established to make soaps, detergents and cooking oils. The company was sold to Hindustan
Lever (now Unilever) in 1984
38
Consolidation
(1932-1989)
The Tata group ventured into new areas and built on the foundations, in spite of the
restraints imposed by a controlled economy
1932
Tata Airlines, a division of Tata Sons, is established, opening up the aviation sector in
India. Air India was nationalised in 1953
1939
Tata Chemicals, now the largest producer of soda ash in the country, is established
1945
Tata Engineering and Locomotive Company (now known as Tata Motors) is
established to manufacture locomotive and engineering products
Tata Industries is created for the promotion and development of hi-tech industries
1952
Jawaharlal Nehru, India's first Prime Minister, requests the group to manufacture
cosmetics in India, leading to the setting up of Lakme. The company was sold to Hindustan
Lever (now Unilever) in 1997
1954
India's major marketing, engineering and manufacturing organisation, Voltas, is
established
1962
Tata Finlay (renamed to Tata Tea and then to Tata Global Beverages), one of the
largest tea producers, is established
Tata Exports is established. Today the company, renamed Tata International,
is one of the leading export houses in India
1968
39
Tata Consultancy Services (TCS), India's first software services company, is
established as a division of Tata Sons
1971
Tata Precision Industries, the first Tata company in Singapore, is founded to design
and manufacture precision engineering products
1984
The first 500 MW thermal power unit at the Trombay station of the Tata Electric
Companies is commissioned
Expansion (1900 onwards )
The liberalisation of the Indian economy unleashed a period of remarkable growth for the Tata group, in India and worldwide
1995
Tata Quality Management Services institutes the JRD QV Award, modelled on the
Malcolm Baldrige National Quality Value Award of the United States, laying the foundation
of the Tata Business Excellence Model
1996
Tata Teleservices (TTSL) is established to spearhead the group's foray into the
telecom sector
1998
Tata Indica — India's first indigenously designed and manufactured car — is
launched by Tata Motors, spearheading the group's entry into the passenger car segment
1999
The new Tata group corporate mark and logo are launched
2000
Tata Tea (now known as Tata Global Beverages) acquires the Tetley group, UK. This
is the first major acquisition of an international brand by an Indian business group
2001
Tata AIG — a joint venture between the Tata group and American International
Group Inc (AIG) — marks the Tata re-entry into insurance. (The group's insurance company,
40
New India Assurance, set up in 1919, was nationalised in 1956)TCS consolidates market
leadership through CMC acquisition
2002
Tata Sons acquires a controlling stake in VSNL (now known as Tata
Communications), India's leading international telecommunications service providerTitan
launches Edge, the slimmest watch in the world
2003
Tata Consultancy Services (TCS) becomes the first Indian software company to cross
one billion dollars in revenues. Tata Teleservices launches Tata Indicom mobile service
(consolidated with Tata DOCOMO in 2011) in Mumbai. The Taj Mahal Palace Hotel,
Mumbai, turns 100
2004
Tata Motors is listed on the world's largest bourse, the New York Stock Exchange, the
second group company to do so after VSNL (now known as Tata Communications)
Tata Motors acquires the heavy vehicles unit of Daewoo Motors, South Korea
TCS goes public in July 2004 in the largest private sector initial public offering (IPO)
in the Indian market, raising nearly $1.2 billlion
Indian Hotels unveils IndiOne (now known as Ginger hotels), a first-of-its-kind chain
of Smart Basics hotels
2005
Tata Steel acquires Singapore-based steel company NatSteel by subscribing to 100
per cent equity of its subsidiary, NatSteel Asia
VSNL (now known as Tata Communications) acquired Tyco Global Network,
making it one of the world's largest providers of submarine cable bandwidth
Taj group takes over management of The Pierre, NY
Taj group acquires a hotel run by Starwood, Sydney (now Blue)
Tata Motors creates a new mini-truck segment in India with the launch of Tata Ace
Trent acquires strategic interest in Landmark chain of bookstores
2006
Tata Sky satellite television service launched across the country
Taj group acquires the Ritz-Carlton, Boston (now known as Taj Boston)
Tata Chemicals acquires controlling stake in Brunner Mond Group, UK (now known
as Tata Chemicals Europe)
Infiniti Retail launches Croma, India's first national chain of multi brand outlets for
consumer electronics and durable products
2007
Tata Steel acquires the Anglo-Dutch company Corus (now known as Tata Steel
Europe), making it the world's fifth-largest steel producer
TCS inaugurates TCS China — a joint venture with the Chinese government and
other partners
Computational Research Laboratories, a division of Tata Sons, develops Eka, one of
the fastest supercomputers in the world and the fastest in Asia
41
The Taj group acquires Campton Place Hotel in San Francisco (now known as Taj
Campton Place)
Tata Steel celebrates its centenary on August 26, 2007
The Sir Dorabji Tata Trust, one of the oldest, non-sectarian philanthropic
organisations in India, celebrates 75 years of dedication to nation-building activities
Tata Capital established as a new Tata company in the financial sector
2008
Tata Motors unveils Tata Nano, the People’s Car, at the 9th Auto Expo in Delhi on
January 10, 2008
Tata Motors acquires the Jaguar and Land Rover brands from the Ford Motor
Company
Tata Chemicals acquires General Chemical Industrial Products Inc (now known as
Tata Chemicals North America)
2009
Tata Motors announces commercial launch of the Tata Nano; delivers first Tata Nano
in the country in Mumbai
Tata Teleservices announces pan-India GSM service with NTT DOCOMO
TRF acquires Dutch Lanka Trailer Manufacturers (DLT), Sri Lanka, a world-class
trailer manufacturing company
Jaguar Land Rover introduces its premium range of vehicles in India
Tata Chemicals launches Tata Swach — the world’s most cost-effective water purifier
Tata Housing makes waves with its launch of low cost housing in Mumbai
2010
TRF acquires UK-based Hewitt Robins International
New plant for Tata Nano at Sanand inaugurated
Advinus Therapeutics announces the discovery of a novel molecule — GKM-001 —
for the treatment of type II diabetes
Tata Tea announces joint venture with PepsiCo for health drinks
Tata Tea group rebrands itself as Tata Global Beverages, headquartered in London
Tata Chemicals acquires 100-per-cent stake in leading vacuum salt producer British
Salt, UK
Tata Chemicals launches i-Shakti dals, India's first national brand of pulses
2011
Tata Chemicals rebrands its global subsidiaries in the UK, the US and Kenya under
the Tata Chemicals corporate brand
The Tata brand soars into the top 50 club of global brands
Tata Medical Center, a comprehensive cancer care and treatment facility established
in Kolkata, was inaugurated by Tata Sons Chairman Ratan Tata
The Tata Nano begins international journey in Sri Lanka and Nepal
Jaguar celebrates 50 years of iconic E-Type car
Tata Steel completes centenary of its first blast furnace
Tata BP Solar becomes wholly owned Tata company (now known as Tata Power
Solar Systems)
2012
42
Tata Global Beverages and Starbucks form joint venture to open Starbucks cafés
across India. First outlet launched in October in Mumbai
Tata Communications completes world’s first wholly-owned cable network ring
around the world
India’s first iodine plus iron fortified salt launched by Tata Chemicals
Tata AIG Life Insurance Company to be now called Tata AIA Life Insurance
Company
Starbucks opens spectacular flagship store in Mumbai, honouring the dynamic culture
of India
Tetley Tea celebrates 175th anniversary
Tata Steel expands aerospace activities in China
Cyrus P Mistry takes over as Chairman, Tata Sons from Ratan N Tata
2013
Tata Motors’ Jamshedpur plant rolls out its two millionth truck
Tata Power synchronises fifth 800MW unit and makes its first UMPP of 4,000MW, at
Mundra, fully operational
Tata Sons announces formation of the Group Executive Council
Tata Technologies acquires Cambric, a premier US-based engineering services
company
TCS acquires IT services firm Alti to help drive long-term growth in France
Titan Industries is now Titan Company
Tata Sons and Singapore Airlines to establish new airline in India
Mount Everest Mineral Water (MEMW) to be merged with Tata Global Beverages
Jaguar Land Rover celebrates 1,000,000 vehicles built at Halewood operations
Tata Toyo and Air International enter into a joint venture
Titan Company celebrates retail milestone with 1,000 stores
43
5.1.3 TATA’s Global Footprint
The Tata group has been international in its approach to business from its inception.
The Founder, Jamsetji Nusserwanji Tata, began his business career in international trade in
China and England. The businesses he later established in India measured up to international
standards and used world-class technology. Tata Exports (now Tata International) was set up
in 1962 and currently Tata companies export their products and services to over 150
countries.
In 2012-13 the Tata group had international revenues of $60.7 billion, 62.7 percent of
its total revenues, with the UK and the US being the two main overseas revenue contributors.
Each operating company in the Tata group develops its own international strategy as
an integral part of its overall strategy, depending on the nature of the industry, opportunities
available and competitive dynamics of the global stage.
For some companies, focus on the domestic Indian market remains the priority. For
others, it is developing a presence in international markets in terms of trading and distribution
of their products. Then there are Tata companies, increasing in number, setting up greenfield
projects, making acquisitions and creating joint ventures in overseas geographies and
becoming an integral part of the development and economy of those geographies.
Beginning with Tata Tea’s acquisition of Tetley in 2000, Tata companies made
several significant overseas acquisitions including Corus by Tata Steel, Jaguar and Land
Rover by Tata Motors and Brunner Mond by Tata Chemicals – all in the UK; Daewoo
Commercial Vehicles by Tata Motors in South Korea; NatSteel in Singapore and Millennium
Steel in Thailand by Tata Steel; and General Chemical Industrial Products by Tata
Chemicals, Eight O’ Clock Coffee by Tata Tea and Tyco Global Network by Tata
Communications in the US.
In 2004, Ratan Tata, then Chairman of Tata Sons, summed up the Tata group’s efforts
to internationalise its operations thus: “I hope that a hundred years from now we will spread
our wings far beyond India, that we become a global group, operating in many countries, an
Indian business conglomerate that is at home in the world, carrying the same sense of trust
that we do today.”
44
CHAPTER 6
45
6.1.1 Data Analysis
1. Total Turnover
Table 6.1
Chart 6.1: Total Turnover of Tata Group from 2001-02 to 2012-13
From the above chart we can interpret that the total turnover of the Tata Group has
increased constantly right from the year 2001-02 till 2012-13
0
1,00,000
2,00,000
3,00,000
4,00,000
5,00,000
6,00,000
Total turnover
Year Total turnover
2012-13 5,27,047
2011-12 4,75,721
2010-11 3,79,675
2009-10 3,19,534
2008-09 3,25,334
2007-08 2,51,543
2006-07 1,29,994
2005-06 96,723
2004-05 79,913
2003-04 65,424
2002-03 54,227
2001-02 49,457
46
2. Sales Turnover
Year Sales turnover
2012-13 520469
2011-12 471045
2010-11 374687
2009-10 311129
2008-09 321849
2007-08 247416
2006-07 128377
2005-06 94714
2004-05 78275
2003-04 61434
2002-03 52134
2001-02 48000
Table 6.2
Chart 6.2: Sales Turnover of Tata Group from 2001-02 to 2012-13
From the above chart we can interpret that the sales turnover of the Tata Group has
increased constantly right from the year 2001-02 till 2012-13
0
100000
200000
300000
400000
500000
600000
Sales turnover, 48000
Sales turnover
47
3. Value of Assets
Year Value of assets
2012-13 5,83,554
2011-12 5,15,933
2010-11 3,13,960
2009-10 2,50,179
2008-09 2,37,247
2007-08 1,77,293
2006-07 1,13,573
2005-06 79,766
2004-05 68,018
2003-04 55,063
2002-03 50,927
2001-02 49,162
Table 6.3
Chart 6.3: Value of Assets of Tata Group from 2001-02 to 2012-13
From the above chart we can interpret that the Value of Assets of the Tata Group has
increased constantly right from the year 2001-02 till 2012-13
0
1,00,000
2,00,000
3,00,000
4,00,000
5,00,000
6,00,000
Value of assets
Value of assets
48
4. Exports
Year Exports
2012-13 57,292
2011-12 46,555
2010-11 37,852
2009-10 31,721
2008-09 33,987
2007-08 25,280
2006-07 23,635
2005-06 23,643
2004-05 20,587
2003-04 14,136
2002-03 13,076
2001-02 12,574
Table 6.4
Chart 6.4: Export of Tata Group from 2001-02 to 2012-13
From the above chart we can interpret that the Export of the Tata Group has increased
constantly right from the year 2001-02 till 2012-13
0
10,000
20,000
30,000
40,000
50,000
60,000
Exports
Exports
49
6.1.2. Data Record
Financial Highlights
Year 2012-13 2011-12 % change
(Rs crore) (Rs crore)
Total revenue 5,27,047 4,75,721 10.8
Sales 5,20,469 4,71,045 10.5
Total assets 5,83,554 5,15,933 13.1
International revenues 3,30,530 2,80,840 17.7
Net forex earnings 16,604 7,604 118.4
Table 6.5
Thus we can see from the above that Total revenue grew by 10.8 %from the year
2011-12 to the year 2012-13. Similarly sales and total assets too grew by 10.5 % and 13.1 %
respectively. The International Earnings and Net Forex Earnings too increased by 17.7 % and
118.4 % respectively
Contribution to the exchequer — 2012-13
Government
Tata group companies finances % share
(Rs crore) (Rs crore) of Tatas
Corporate tax 8,317 3,58,874 2.3
Excise# 11,935 2,54,055 4.7
Customs 2,989 1,64,853 1.8
Sales tax 7,915 4,03,400 2
Others 5,073 1,40,409 3.6
Total 36,229 13,21,591 2.7
Table 6.6
The contribution of Tata Group to the Indian Exchequer was around 2.7 % of
Government Finances.
50
Group's capital market performance
2011 (Rs crore) (Rs crore) 2014
(Rs crore) (End March) (End March) (Rs cr)
(End March)
TATA 469,964 4,41,576 5,18,716 7,00,340
Group ($105.4bn) ($89.88bn) ($95.56bn) ($116.07bn)
BSE 69,07,788 61,13,821 64,16,268 76,02,840
($1550.0bn) ($1189.46bn) ($1182bn) ($1,260bn)
Table 6.7
Shares of the Tata group companies have been among the star performers on the
Indian stock market over the last three years. Trends in the group's total market capitalisation
along with aggregate market capitalisation of Bombay Stock Exchange are provided below.
With the listing of TCS on August 25, 2004, the total market capitalisation of the
group's 32 listed companies crossed the Rs100,000 crore mark and the group acquired
the distinction of having the highest market capitalisation among all business houses in
the country, both in the public and private sectors. Tata group accounts for 9.2 percent of the total market capitalisation of BSE.
Tata group companies have contributed significantly to the spread of equity cult in the
country. They enjoy the trust of over 3.9 million investors.
Sector-wise human resources profile
Sectors 2012-13 % share
Materials 80,996 14.9
Engineering 83,612 15.4
Energy 8,467 1.6
Consumer products 20,011 3.7
Chemicals 6,101 1.1
Information technology and communications
3,06,453 56.3
Services 38,863 7.1
Total 5,44,502 100
Table 6.8
51
CHAPTER 7
52
7.1.1 TATA STEEL History:
Established in 1907, Tata Steel, the flagship company of the Tata group is the first
integrated steel plant in Asia and is now the world`s second most geographically diversified
steel producer and a Fortune 500 Company. Backed by 100 glorious years of experience in
steel making, Tata Steel is the world 6th largest steel company with an existing annual crude
steel production capacity of 30 Million Tonnes Per Annum (MTPA). Tata Steel has a
balanced global presence in over 50 developed European and fast growing Asian markets,
with manufacturing units in 26 countries.
It was the vision of the founder; Jamsetji Nusserwanji Tata, that on February 27,
1908, the first stake was driven into the soil of Sakchi. His vision helped Tata Steel
overcome several periods of adversity and strive to improve against all odds.
Tata Steel`s Jamshedpur (India) Works has a crude steel production capacity of 6.8
MTPA which is slated to increase to 10 MTPA by 2010. The Company also has proposed
three Greenfield steel projects in the states of Jharkhand, Orissa and Chhattisgarh in India
with additional capacity of 23 MTPA and a Greenfield project in Vietnam.
Through investments in Corus, Millennium Steel (renamed Tata Steel Thailand) and
NatSteel Holdings, Singapore, Tata Steel has created a manufacturing and marketing network
in Europe, South East Asia and the pacific-rim countries. Corus, which manufactured over 20
MTPA of steel in 2008, has operations in the UK, the Netherlands, Germany, France,
Norway and Belgium.
Tata Steel Thailand is the largest producer of long steel products in Thailand, with a
manufacturing capacity of 1.7 MTPA. Tata Steel has proposed a 0.5 MTPA mini blast
furnace project in Thailand. NatSteel Holdings produces about 2 MTPA of steel products
across its regional operations in seven countries.
Tata Steel, through its joint venture with Tata BlueScope Steel Limited, has also
entered the steel building and construction applications market.
53
The iron ore mines and collieries in India give the Company a distinct advantage in
raw material sourcing. Tata Steel is also striving towards raw materials security through joint
ventures in Thailand, Australia, Mozambique, Ivory Coast (West Africa) and Oman. Tata
Steel has signed an agreement with Steel Authority of India Limited to establish a 50:50 joint
venture company for coal mining in India. Also, Tata Steel has bought 19.9% stake in New
Millennium Capital Corporation, Canada for iron ore mining.
Exploration of opportunities in titanium dioxide business in Tamil Nadu, ferro-
chrome plant in South Africa and setting up of a deep-sea port in coastal Orissa are integral to
the Growth and Globalisation objective of Tata Steel.
Tata Steel India is the first integrated steel company in the world, outside Japan, to be
awarded the Deming Application Prize 2008 for excellence in Total Quality Management.
7.1.2 ACHIEVEMENTS/ RECOGNITION:
Tata Steel stall bags first prize in 'Heavy Industry' category at Udyog Mela-2011,
Ranchi Ranchi, March 17, 2011
Tata Steel has won `The Business world Most Respected Company Award 2011 in
the Metals category.
TATA Steel received two awards under the Rashtriya Khel Protsahan Puraskar for its
remarkable contribution spanning several decades in the field of sports in 2009.
Tata Steel India awarded the Deming Application Prize 2008 for excellence in Total
Quality Management. It is the first integrated steel company in the world, outside Japan to get
this award.
World Steel Dynamics has ranked Tata Steel as the world's best steel maker (for two
consecutive years) in its annual listing in February 2006.
Tata Steel has been conferred the Prime Minister of India's Trophy for the Best
Integrated Steel Plant five times. It has been awarded Asia's Most Admired Knowledge
Enterprise award five times in 2003, 2004, 2006, 2007 and 2008.
Tata Steel works has been conferred the prestigious social accountability (SA) 8000
certification by social. Accountability international (SAI), USA. It is the first steel company
in the world to receive this certificate.
54
7.2.1 CORUS History:
Corus is Europe’s second largest steel producer with annual revenues of Rs. 82,674
crores (£9.7 billion) and crude steel production of 18.3 million tonnes in 2006. Corus has a
presence in nearly 50 countries, including its global network of offices and service centres.
Corus’ shares were listed (de-listed post the acquisition) on the London, New York
and Amsterdam Stock Exchanges until the acquisition of Corus Group plc by Tata Steel in
April 2007.
Corus was formed on October 6, 1999 following the merger of Koninklijke
Hoogovens and British Steel. Philippe Varin who was appointed as Chief Executive of Corus
in May 2003 launched the “Restoring Success” programme, designed to deliver a Rs. 5,796
crores (£680 million) EBITDA improvement in Corus’ financial performance. This
programme, completed at the end of 2006, has underpinned the significant improvement in
Corus’ financial performance, delivering savings through cost reductions and improved
operational efficiency. It has also delivered significant improvements in safety performance
and customer service levels.
7.2.2 CORUS OPERATIONS:
Corus’ main steelmaking operations are located in the UK and the Netherlands with
other plants located in Germany, France, Norway and Belgium. Corus produces carbon steel
by the basic oxygen steelmaking method at three integrated steelworks in the UK at Port
Talbot, Scunthorpe and Teesside, and at one in the Netherlands at IJmuiden. Engineering
steels are produced in the UK at Rotherham using the electric arc furnace method. Corus
estimates that, as at 30 December 2006, it was the ninth largest steel producer in the world
and produced 18.3 mt of crude steel in 2006 (equivalent to 18.8 mt of liquid steel).
55
Corus has four main operating divisions; Strip Products, Long Products, Distribution
& Building Systems and Aluminium, each being the responsibility of an individual Executive
Committee member. The activities of each division are organised into individual business
profit centres, each of which has its own managing director who, with the respective
management team, has responsibility for the performance of that business.
Corus has sales offices, stockholders, service centres and joint venture or associate
arrangements in a number of markets for distribution and further processing of steel products.
These are supported by various agency agreements. There is an extensive network in the EU
while outside the EU Corus has sales offices in around 30 countries, supported by a
worldwide trading network.
MARKET FOCUS
Corus delivers innovative solutions, differentiated products, reliable service and
sound technical advice to its customers around the world. Principal end markets for Corus’
steel products are the construction, automotive, packaging, mechanical and electrical
engineering, metal goods, and oil and gas industries. Construction is the largest market sector
for Corus, with a strong position in commercial and industrial construction. New
opportunities are being explored in areas, which show growth potential such as residential,
health and education. Corus is a leading supplier to the automotive sector and is the third
largest supplier to this sector in Europe.
Europe, principally the EU, is the most important market for Corus, accounting for
80% of total turnover in 2006. Corus’ steel divisions accounted for 91% of total turnover in
this period.
INNOVATION AND EXPERTISE
Corus has a policy of collaborative product development with key customers in its
principle markets and works with research institutes around the world to develop cuttingedge,
innovative technologies. Breaking new ground and collaborating with customers to develop
new products and technologies is a field of proven expertise. The goal isto become the best
supplier to the best customers.
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7.3.1 TATA CORUS DEAL
The deal between Tata & Corus was officially announced on April 2nd, 2007 at a
price of 608 pence per ordinary share in cash. This deal is a 100% acquisition and the new
entity will be run by one of Tata’s steel subsidiaries. As stated by Tata, the initial motive
behind the completion of the deal was not Corus’ revenue size, but rather its market value.
Even though Corus is larger in size compared to Tata, the company was valued less than Tata
(at approximately $6 billion) at the time when the deal negotiations started. But from Corus’
point of view, as the management has stated that the basic reason for supporting this deal
were the expected synergies between the two entities. Corus has supported the Tata
acquisition due to different motives. However, with the Tata acquisition Corus has gained a
great and profitable opportunity to make an exit as the company has been looking out for a
potential buyer for quite some time.
The total value of this acquisition amounted to ₤6.2 billion (US$12 billion). Tata Steel
the winner of the auction for Corus declares a bid of 608 pence per share surpassed the final
bid from Brazilian Steel maker Companhia Siderurgica Nacional (CSN) of 603pence per
share. Prior to the beginning of the deal negotiations, both Tata Steel and Corus were
interested in entering into an M&A deal due to several reasons. The official press release
issued by both the company states that the combined entity will have a pro form a crude steel
production of 27 million tones in 2007, with 84,000 employees across fourcontinents and a
joint presence in 45 countries, which makes it a serious rival to othersteel giants. The official
declaration of the completed transaction between the two companies was announced to be
effective by Court of Justice in England and Wales and consistent with the Scheme of
Arrangement of the Tata Steel Scheme on April 2, 2007.
57
7.3.2 FINAL PRICE - THE BIDDING WAR
On 20th October 2006, the Boards of Tata Steel, Tata Steel UK and Corus reached an
agreement on the terms of a recommended acquisition of the entire issued and to be issued
share capital of Corus, at a price of 455p in cash for each Corus share. Subsequently, a
competitive situation emerged when CSN subsequently approached Corus with a proposal to
make a cash offer. While Tata Steel revised its offer to 500p per share, CSN made a binding
offer at 515p per share in December 2006. The Board of Corus recommended CNS‟s offer to
the shareholders. As the process got extended, the Panel on Takeovers and Mergers in the UK
set a deadline of 30th January, 2007 as the final date by which Tata Steel and CSN could
revise their offers for Corus Group plc. The Panel subsequently announced in January 2007
that in order to provide an orderly resolution to this competitive situation, an auction process
would be held on 30th January, 2007 to establish final bids from both Tata Steel and CSN.
This auction process began in the evening of 30th January and ended in the early hours of
31st January, 2007 when the Panel announced that Tata Steel has won the auction to acquire
Corus at a price of 608p per share. The Board of Corus subsequently recommended the Tata
Steel offer to its shareholders who voted to approve Tata Steel’s Scheme of Arrangement, at
an Extra-Ordinary General Meeting held on 7th March, 2007. Corus‟ shares were
subsequently suspended from trading on each of the London, New York and Amsterdam
Stock Exchanges and the Scheme became effective on 2nd April, 2007.
7.3.3 TERMS OF THE REVISED ACQUISITION
Thus under the terms of the Revised Acquisition, Corus shareholders will be entitled to
receive 608 pence in cash for each Corus share (Revised Price). This represents a price of
1216 pence in cash for each Corus ADS.
The terms of the Revised Acquisition value the entire existing issued and to be issued share
capital of Corus at approximately £6.2 billion and the Revised Price represents:
(i) an increase of approximately 33.6 per cent compared to 455 pence, being the price under
the original terms of the Acquisition;
(ii) on an enterprise value basis, a multiple of approximately 7.0 times EBITDA from
continuing operations for the year ended 31 December 2005 and a multiple of approximately
9.0 times EBITDA from continuing operations for the twelve months to 30 September 2006
(excluding the non-recurring pension credit of £96 million);
58
(iii) a premium of approximately 68.7 per cent. to the average closing mid-market price of
360.5 pence per Corus share for the twelve months ended 4 October 2006, being the last
business day prior to the announcement by Tata Steel that it was evaluating various
opportunities including Corus;
(iv) a premium of approximately 49.2 per cent to the closing mid-market price of 407.5 pence
per Corus share on 4 October 2006, being the last business day prior to the announcement by
Tata Steel that it was evaluating various opportunities including Corus; and
(v) a premium of approximately 21.6 per cent to the revised acquisition announced by Tata
Steel on 10 December 2006 at a price of 500 pence per Corus share.
7.3.4 TIMELINE OF TATA CORUS DEAL
September 20, 2006 : Corus Steel has decided to acquire a strategic partnership with a
Company that is a low cost producer
October 5, 2006 :The Indian steel giant, Tata Steel wants to fulfill its ambition to
Expand its business further.
October 6, 2006 :The initial offer from Tata Steel is considered to be too low both by
Corus and analysts.
October 17, 2006 :Tata Steel has kept its offer to 455p per share.
October 18, 2006 :Tata still doesn’t react to Corus and its bid price remains the same.
October 20, 2006 : Corus accepts terms of £ 4.3 billion takeover bid from Tata Steel
October 23, 2006 :The Brazilian Steel Group CSN recruits a leading investment bank
to offer advice on possible counter-offer to Tata Steel’s bid.
October 27, 2006 :Corus is criticized by the chairman of JCB, Sir Anthony Bamford,
for its decision to accept an offer from Tata.
November 3, 2006 : The Russian steel giant Severstal announces officially that it will
not make a bid for Corus
59
November 18, 2006 : The battle over Corus intensifies when Brazilian group CSN
approached the board of the company with a bid of 475p per share
December 18, 2006 :Within hours of Tata Steel increasing its original bid for Corus
to 500 pence per share, Brazil's CSN made its formal counter bid for Corus at 515
pence per share in cash, 3% more than Tata Steel'sOffer.
January 31, 2007 : Britain's Takeover Panel announces in an e-mailed statement that
after an auction Tata Steel had agreed to offer Corus investors 608 pence per share in
cash
April 2, 2007 : Tata Steel manages to win the acquisition to CSN and has the full
voting support from Corus’ shareholders
7.3.5 FUNDING OF CORUS TRANSACTION
The board approved the following sources of funding i.e., Tata Steel's investment of
$4.1 billion (about Rs17,750 crore) in its wholly owned subsidiary Tata Steel Asia Holdings
(Singapore), which would in turn invest the same in Tata Steel UK which has acquired Corus
plc UK.
Figure 7.1 Deal Structure of Corus Funding
1. As part of Tata Steel's contribution, the company has already invested the following
aspart of its equity commitment:
a)Internal generation — Rs3,000 crore ($600 million).
b) External commercial borrowings — Rs2,170 crore ($500 million).
c) Funds from the preferential issues of equity shares to Tata Sons (which were
60
approved earlier and have since been allotted) — comprising equity shares of the face
value of Rs56 crore at an average price of Rs499.7 per share, which has provided a
total amount of Rs2,770 crore ($640 million).
2. The following proposals have now been approved by the board:
A rights issue of equity shares to the shareholders in the ratio 1:5 at a price of Rs300
per share (of Rs10 each), which would involve issue of equity shares of the face value
of Rs122 crore and would provide an amount of Rs3655 crore ($862 million).
A simultaneous but un-linked rights issue of convertible preference shares in the ratio
of 1:7 having a coupon rate of 2 per cent with conversion into equity shares after two
years at a price in the range of Rs500 to Rs600 per share as may be determined at the
time of the issue. This issue would provide a total amount of about Rs4,350 crore
(about $1000 million).
Tata Sons would stand-by to take up the unsubscribed portion of both the above issues
in fulfilment of its support to Tata Steel for the Corus acquisition.
A foreign issue of an equity-related instrument up to an amount of $500 million
(about Rs2,100 crore, including the premium) in such form as may be considered
appropriate. This issue would be made on an ex-right basis and on terms as may be
determined at the time of the issue subject to approval of the shareholders.
7.3.6 FINANCING PLAN OF TATA STEEL EQUITY
The following important points of this total financing scheme of $4.1 billion (about Rs17,750
crore) may be noted:
a) For the acquisition, Tata Steel will be utilising additional debt of only $500 million (about
Rs2,170 crore) which represents only 12 per cent of the total amount required.
b) Apart from the preferential issues of equity shares of Rs56 crore allotted to Tata Sons (at
prices which were higher than the then prevailing market prices), Tata Steel would be raising
additional equity share capital of the face value in the range of about Rs250-280 crore
depending on the final pricing of the various issues. This increase in the equity capital will
come into effect only in stages during the three financial years 2007-08 to 2009-10 which
will therefore ease the burden of servicing.
61
c) The post-tax cost of this total financing package on completion is expected to be around
4.3 per cent per annum.
The above-mentioned issues and the details thereof would be subject to such approvals as
may be required and such modifications as may be considered necessary in the course of
implementation.
Figure 7.2 Financing Plan of TATA STEEL Equity
7.3.7 FINANCING OF CORUS ACQUISITION
The long term financing pattern for the net acquisition consideration of Corus would
be $12.9 billion and Tata Steel UK would be funded in the long term from the following
sources:
Equity capital from Tata Steel $4.10 billion
Long-term debt from consortium of banks $6.14 billion
Quasi-equity funding at Tata Steel Asia Singapore $1.25 billion
Long-term capital funding at Tata Steel Asia Singapore $1.41 billion
Total $12.90 billion
a) Tata Steel will provide $4.1 billion from the various sources indicated above and will
invest the above quantum through its wholly owned indirect subsidiary Tata Steel UK.
62
b) Non-recourse debt financing arranged by a consortium of banks of $6.14 billion directly at
Tata Steel UK.
c) The balance amount of $2.66 billion has presently been raised in the form of bridge
finance in Tata Steel Asia Singapore, and discussions are under way to raise these funds
through appropriate instruments.
Fig 7.3 Financing of Corus Acquisition
7.3.8 Financing Structure
Financing India's largest leveraged buyout comprised of a $3.88 billion
equitycontribution from Tata Steel, a fully underwritten non-recourse debt package of $5.63
billion, and arevolving credit facility of $669 million.As per the acquisition plan a special
purpose vehicle, a wholly owned subsidiary, called Tata Steel UKwould be set up by Tata
Steel. The acquisition was proposed to be effected under section 425 of theEnglish
Companies Act 1985 and upon approval from the Corus shareholders. Tata Steel UK
wouldoffer a price of 455 pence per Corus share valuing Corus at £4.3b ($8.04b). This price
represented amultiple of 7.9 times the EBITDA of Corus from continuing operations for the
twelve months to July 1,2006. The acquisition was to be structured as a 100 percent
leveraged buyout funded through cashresources and loans raised by Tata Steel and the SPV.
63
Under the plan Tata Steel UK would arrange aloan of £1.6 b ($3056m), a revolving credit
facility and a bridge loan and the rest would come from Tata.
Tata Steel appointed Credit Suisse, ABN Amro and Deutsche Bank to arrange
financing. Of the £3.3billion of financing being raised at the SPV level, Credit Suisse would
provide 45% and ABN AMRO and Deutsche 27.5% each. The $1.8 billion bridge debt being
raised at the Tata Steel level in Indiawould be shared between Standard Chartered and ABN
AMRO.Operational Structure One of the biggest concerns Tata executives had was whether
the inevitablecultural conflicts between the organizations would pose significant operating
problems. Integrating alarge company that operated on a different continent with diverse
cultures and operating environmentswas going to be no small task. Exacerbating this problem
was the fact that Corus itself was formed bythe merger of an English and a Dutch company
that had different cultures and profitability.In line with the Tata Group’s approach to
acquisitions, Tata Steel announced its intention to continuewith the senior management of
Corus. Appointments to the Tata Steel and Corus were to providecommon platform for
strategy and integration. According to the plan Ratan Tata would be the chairman of both
Tata Steel and Corus and Jim Leng would serve as deputy chairman of Tata Steel and Corus.
Fig 7.4 Margin Comparison between initial and final financing structure
Three board members (including the CEOs) of each company would serve on the other
company’s board. A strategic and integration committee comprising of Ratan Tata, the CEOs
and senior management professionals of both companies was formed to develop and execute
64
the integration plan and further growth plans. Appropriate cross functional teams were to be
formed to execute their integration plan. Strategy Muthuraman, the Managing Director of
7.4.1 Rationales, Synergies and Advantages of the Deal
After the acquisition, TATA-Corus combine became the 6th largest steel producer in the
world with an output around a quarter that of the largest, Arcelor Mittal.
Figure7.5 : Global Ranking of Production Capacity of various Steel producers
Before the deal, TATA Steel was not ranked among the top 50 global steel producers in
2005/06, producing just 5.3mn tonnes. Corus, by contrast was the 9th largest producer with
an output of 18.2mn tonnes. Economies of scale have a very significant impact on any steel
firm. This deal came at a time when consolidation in the steel industry was a necessity with
increase in demand from China A growing presence in Asia and the developed European
economies would surely leverage the economies of scale from Europe and harness growth
from Asia
65
Figure 7.6: Strategic Fit of the Tata Corus Deal
The two corporations made a formidable presence – a presence in 42 countries, a
combined capacity of 25mn tonnes and a collective sales turnover of Rs 1 lac cr (March 2008
estimates at the time of the deal) The deal came at a perfect time for TATA Steel after its
successful acquisitions of Singapore’s NatSteel in 2004 and Thailand’s Millennium Steel in
2005. Acquisition of Corus, a steel giant in the Western markets, gave TATA access to the
vast distribution network as well as the opportunity to become a global player.
TATA is a low cost producer of steel and Corus is famous for its value additions and
technology especially in manufacturing of steel used in high rise buildings.The acquisition
paved the way for TATA to access the R&D facilities of Corus as well as to introduce its low
cost production techniques in the Western markets. This can be considered as one of the most
important synergies in the entire deal.
Figure 7.7: Combined Product Portfolio of Tata-Corus
66
The deal helped the TATAs in getting 20mn tonnes of steel capacity at virtually half the price
as such a capacity would have required nothing less than $20bn - $25bn as per 2006/07
estimates.The synergies were divided into 3 levels as per the then MD of TATA Steel,
Mr.Muthuraman (who is currently the Vice Chairman of TATA Steel). At the first level,
there were consolidations on the procurement and logistics fronts. At the second level,
manufacturing processes of TATA Steel were replicated at Corus. Corus predominantly used
scrap to make steel while TATA used hot metal which was cheaper and consumed less
energy. Similar attempts were made to make the other processes more efficient at Corus.
At the third level, which was for the long term, capacity would increase to 40mn tonnes by
2011 with 16mn tonnes coming from India by 2012.Corus was been a bit stuck over recent
years because its balance sheet had not been steady and consistent. So with TATA buying it,
the employees can hope of something better.The consolidated company was to benefit from
TATA Steel’s iron ore and coal reserves and the specialized steel markets Corus enjoyed in
the West. Along with Corus, TATA planned to have a 40 million ton capacity in the next 5
years.
The deal is also a big milestone for Indian companies boosting India’s image worldwide. This
deal made the world sit up and take note of the prowess of Indian firms.Many believes that $
12.1 billion is a huge sum paid by Tata. At 608 pence per share, the enterprise value of Corus
comes out to be $ 710 per ton. To set up a new company like Corus from scratch, cost will go
to $ 1200-1300 per ton.
In addition to this, take over will immediately add 19 million tons of capacity to TATA Steel
and the synergies would add to $ 300-350 million per annum Thus, from the initial estimates,
we can say that the $12.1bn is not so huge after all.
Figure7.9: Access to new Market
67
7.4.2 SHARE PERFORMANCE OF TATA STEEL
Figure 7.10 : Share prices of Tata Steel at the time of acquisition of Corus
Stock market reacted negatively for this highly expensive deal. Stock investors were
neutral the day (05th October, 2006) Tata Steel announced its interest in buying Corus. The
stock investors view was neutral till Tata announced to buy Corus for $8 billion on 18th
October, 2006 and was approved by Corus’s board on 21st October, 2006. But, as the deal
started becoming expensive, the shareholders started behaving negatively towards the Tata
Steel stock. The stock went down significantly by 6.4% on (11th December, 2006) Tata
Steel’s announcement of raising the bid to $9.2 billion. The stock has seen some correction
and recovered by approximately 10% till the Tata Steel’s announced its final bid. On 31st
January, 2007 the stock crashed by 10.5% reacting towards the Tata Steel’s final bid of 608p
per share that valued Corus at above $12 billion. This is mainly because of the investor’s
concern about raising debt for the deal.
However, Tata Steel stock has gained very steeply when the company announced
about the debt being secured successfully. Stock chart below shows the stock price
performance before and after the Tata Steel’s integration with Corus. It was a different issue
that the stock like all other stocks has crashed during the year 2008-09 due to financial crisis
across the globe.
68
7.5.1 RATIO ANALYSIS
Chart 8.1
It is evident from Chart-7.1 that in 2006-07 i.e., before TATA acquired Corus, TATA’s PAT as a
percentage of Revenue was 16.28%. The same, after acquisition, came down to 9.36% in 2007-08 and
further to 3.35% in 2008-09. Further, the amount of PAT in 2006-07, 2007-08, 2008-09 were 4,222
crores, 12,321 crores and 4,849 crores respectively. As compared to 2006-07 the amount of PAT was
very high in 2007-08 i.e. in post acquisition. However, in spite of increasing revenue in 2008-09
which was 1,47,595 as compared to 1,32,110 in the year 2007-08, there was decline in PAT.
Chart 8.2
Chart-7.2 shows that the pre-Corus EPS of TATA i.e., in the year 2006-07 was 73.06 which turned
out to be 162.62 and 58.99 in 2007-08 and 2008-09 respectively i.e., in the post Corus years. This
means that after acquisition, TATA has shown an increase in the EPS the main reason would have
been increasing PAT as has already been reflected from Chart-1. And further this could have been
mainly due to substantial increase in revenue and sales. It shows a sign of encouragement for the
shareholders of both the companies. However, in 2008-09 EPS showed a as PAT slide down.
0
5000
10000
15000
2006-07 2007-08 2008-09
PROFIT AFTER TAX(Rs inCrores)
4222 12321 4849
Axi
s Ti
tle
PROFIT AFTER TAX(Rs in Crores)
0
50
100
150
200
2006-07 2007-08 2008-09
EPS 64 176 66
Axi
s Ti
tle
EPS
69
Chart 8.3
EBITDTA is a financial metric used to assess a company’s profitability by comparing its revenue with
earnings. More specifically, since EBITDA is derived from revenue, this metric would indicate the
percentage of a company’s earning remaining after operating expenses. Chart-3 depicts EBIDTA
margin. In 2006-07 the EBITDTA margin was 30.80%, which slipped to 14.08% in 2007-08 and
further to 13.00% in 2008-09.
Chart 8.4
Chart-7.4 shows the data for Asset Turnover for all the study years i.e., 2006-07, 2007-08 & 2008-09.
It was found to be 76.65%, 108.27% & 128.54% respectively in 2006-07, 2007-08 & 2008-09. This
increase in asset-turnover suggests that, after acquisition, capacity utilization of fixed assets has
increased in TATA bringing benefit of large scale of production to it.
0%
10%
20%
30%
2006-07 2007-08 2008-09
EBITDA Margin 30% 13% 12%
Axi
s Ti
tle
EBITDA Margin
0%
50%
100%
150%
2006-07 2007-08 2008-09
ASSET TURNOVER 76% 108% 128%
Axi
s Ti
tle
ASSET TURNOVER
70
Chart 8.5
The current ratio of the company, as shown in Chart-7.5, was 2.45 in 2006-7 which has decreased to
1.87 in the year 2007-08 and to 1.78 in the year 2008-09. The decrease in current ratio was due to
large cash outflow of the company for acquiring Corus in 2006-07. Cash and bank balances was
10887.96 crores which has decreased to 4231.86 crores and 6148.36 crores in 2007-08 and 2008-09
respectively. Current liability in the year 2006-07 was 5444.19 crores which has increased to
26360.74 crores 2007-08 and again to 23093.30 crores in 2008-09.
Chart 8.6
Chart-7.6 carries information regarding debt-equity ratio of the company. It is evident that the debt-
equity ratio has increased from 0.84 in 2006-07 to 1.99 in 2007-08 with a marginal slip in 2008-09 i.e.
to 1.65. The principal reason behind such increase in Debt Equity Ratio is increase in investment in
debts by the company for acquisition of Corus.
0
0.5
1
1.5
2
2.5
2006-07 2007-08 2008-09
CURRENT RATIO 2.45 1.87 1.78
Axi
s Ti
tle
CURRENT RATIO
0
0.5
1
1.5
2
2006-07 2007-08 2008-09
NET DEBT TO EQUITY 0.84 1.99 1.65
Axi
s Ti
tle
NET DEBT TO EQUITY
71
Chart 8.7
Chart-7.7 depicts the dividend pay out ratio of TATA. It is seen from the chart that in 2006-07 the
dividend payout ratio was 26%. But it declined to as low as 11% in 2007-08 owing mainly to decline
in equity dividend per share and increase in NP after tax preferential dividend. In 2008-09 it has
again increased to 30%.
Chart 8.8
Chart-7.8 shows that in 2006-07 P/E Ratio of the company under study was 6.95 which decreased in
2007-08 and 2008-09 to 3.92 and 3.12 respectively. This ratio highlights the EPS reflected by market
share. This decline in P/E ratio has been because of decline in market price of the share.
0%
10%
20%
30%
2006-07 2007-08 2008-09
DIVIDEND PAYOUT RATIO 26% 11% 30%
Axi
s Ti
tle
DIVIDEND PAYOUT RATIO
0
2
4
6
8
2006-07 2007-08 2008-09
PE RATIO 6.95 3.92 3.12
Axi
s Ti
tle
PE RATIO
72
Chart 8. 9
Chart-7.9 depicts that interest coverage ratio of the company before acquisition i.e., in 2006-07 was
16.38 which became substantially low in 2007-08 and 2008-09. It was 3.46 and 4.32 in 2007-08 and
2008-09 respectively. For acquiring Corus TATA borrowed funds from outside due to which interest
amount increased quite highly.
Chart 8.10
Chart-10 shows that in 2006-07 (Pre Corus) the inventory turnover ratio was 46 days which came
down to 37 days in 2007-08 (Post-Corus) which means after acquisition the inventory was utilized
more efficiently. However, in 2008-09 inventory turnover ratio again went up to 56 days mainly due
to the recession that pulled down the sales and also there was an increase in the stock lying with the
company.
0
5
10
15
20
2006-07 2007-08 2008-09
INTEREST COVERAGERATIO
16.4 3.5 4.3
Axi
s Ti
tle
INTEREST COVERAGE RATIO
0
20
40
60
2006-07 2007-08 2008-09
INVENTORY TURNOVER(IN DAYS)
46 37 55
Axi
s Ti
tle
INVENTORY TURNOVER (IN DAYS)
73
Chart 8.11
Chart-11 shows that in 2006-07 (Pre-Corus) debtors turnover was 21 says which has increased to 28
days and 39 days in 2007-08 and 2008-09 (Post Corus) respectively. Thus, there was an increase in
the amount of debtor in 2007-08 and 2008-09 as compared to 2006-07.
0
20
40
60
2006-07 2007-08 2008-09
DEBTORS TURNOVER (INDAYS)
46 37 55
Axi
s Ti
tle
DEBTORS TURNOVER (IN DAYS)
74
CHAPTER 8
75
8.1 - TATA MOTORS AND JLR DEAL
8.1.1 BRIEF INTRODUCTION
The Tata acquisition of Jaguar Land Rover is a superb example to include in research notes
related to takeovers and mergers. At the time (early 2008), Tata’s investment in JLR seemed
to be poorly timed and there were many critics who questioned the strategic logic of the move
as well as its timing. Shortly after the takeover, demand in the global market for luxury cars
collapsed as a result of the financial crisis and Tata was forced to refinance to support its
investment.
Some years later, however, the takeover appears to be a compelling example of a successful
acquisition which is generating substantial shareholder value for Tata as well as continued
support from JLR’s many stakeholder groups in the UK.
76
8.1.2 BACKGROUND
JAGUAR LAND ROVER (JLR):
Jaguar Cars bought by Ford in 1989
Land Rover bought by Ford from BMW for $1.4bn in 1989
A difficult relationship between the UK firm and its US owners
Jaguar fell into heavy losses whilst owned by Ford (reaching up to $600million per
year)
However, Ford invested heavily in new model development
TATA GROUP:
One of India’s largest private conglomerates - used to investing in the UK
Bought Tetley Tea in 2000
Bought Corus Steel - a big supplier to JLR - in 2007
Tata Motors - was already India’s third largest car-maker, but struggling with a poor
image and hampered by rising raw material costs
8.1.3 THE TAMO-FORD DEAL
Ford sold JLR to Tata in March 2008 just over £1bn - just a few months before a
collapse in global demand in the international car market. Tata financed the takeover
with $3bn of new long-term loans
The price paid by Tata was approximately half of what Ford paid to buy Jaguar and
Land Rover. Ford had continued to incur heavy losses in Jaguar as it failed to turn the
business around.
The deal took over a year to agree - which may have helped with the post-merger
integration. Tata recognised that it would continue to need support from Ford who
are a main supplier of car components to the two brands.
No significant change proposed to the businesses by Tata. They claimed that staff,
trade unions and the UK government had been kept informed about the proposed
takeover and supported the move.
The deal has been endorsed by trade unions, which secured a commitment from Tata
to continue with JLR’s production plans until the end of 2011. This includes
development of new models.
77
8.1.4 TIMELINE OF THE DEAL
Year 2005- Ford starts facing problems with pension and health care costs and
falling sales in North American and thus reported losses from the second quarter.
Year 2006- Alan Mullaly takes over as chief executive and oversees a $12.7 billion loss, the
largest in the company's history and thus Ford decides to sell its Aston Martin brand
May 2007- Ford closes the Aston Martin sale for $848 million
June 2007- Ford indicates that it might look at buyers for Jaguar and Land Rover marques
July 2007-Ford receives preliminary bids for the brands. Reports say that TPG Inc., Cerberus
Capital Management Lp. Ripplewood Holdings, One Equity Partners Llc were in the fray,
along with Tata Motors Ltd and Mahindra & Mahindra
August 2007-Ratan Tata, chairman of Tata Motors Ltd, confirms that his company was
bidding for the premium car makers
November 2007- Investment bankers say that Apollo Alternative Assets is teaming up with
Mahindra & Mahindra reports say that Ford has shortlisted three bidders—Tata, Mahindra
and One Equity—for further negotiations with its trade unions Unite, the trade union
representing Land Rover and Jaguar workers, says it supports Tata Motors' bid
December 2007- The three bidders submit their bid
January 2008-Ford names Tata as "preferred buyer"
March 2008- Tata, Ford signed the deal
June 2008- Deal finally completed by both the parties
78
8.2.1
The TAMO-FORD deal “UP AND DOWNSTREAM INTERNATIONALISATION”
While the Nano development process was completed by early 2008 TML faced serious
challenges on the manufacturing side due to the increasing problems with the Singur plant
site. Despite increasing strain on management and financial resources TML seized a
‘strategic opportunity’ by bidding for Jaguar Land Rover (JLR) which had been put up for
sale by Ford Motors. The JLR acquisition was formally concluded in June 2008 with a final
price of US$ 2.3 billion and total cost of over US$ 3 billion to be financed through a rather
short-term bridge loan. The operation was ‘transformational’ of TML in several respects.
Some of them are mentioned below:
The acquisition more than doubled TMLs overall revenues and almost quadrupled its
revenues from passenger cars.
Apart from some more direct product relatedness to TML’s SUV segment with the
Land Rover part of JLR, the acquisition represents a diversification into the segment
of larger premium class cars, an entirely new market for a vehicle manufacturer like
TML which was predominantly specialised in low cost and small cars.
While TML had some marginal exports of its passenger cars before the company
went into a kind of ‘instant outward internationalisation’ in passenger cars. From a
company with marginal assets overseas TML transformed into a global player with
the majority of its assets abroad.
8.2.2
GRAPHICAL REPRESENTATION OF TAMO’S SALE BEFORE AND AFTER THE
DEAL
Figure 9.1
79
8.2.3
KEY POINTS OF THE ACQUISITION FROM TATA’S POINT OF VIEW
Despite criticism for this move by financial analysts and experts, a number of reasons can
be put forward which made the acquisition attractive from TML’s point of view or which
are evident. Some of them are mentioned below:
Internationalisation: TML would instantly become an international player with
operations in North America, Europe and Asia.
Brands: Jaguar and Land Rover are two iconic British brands. Product flow: Ford had bought the company from BMW and had in addition to the
preceding BMW funds invested an estimated $ 10 billion in modernising the JLR
model range. Although it was loss making at the time of the deal a range of new
models and additional variants from both Jaguar and Land Rover was close to launch.
Fit: Land Rover fit in the position above TML’s existing utility vehicles; there were
likely synergies to be obtained with the SUV range in sourcing, design and
engineering. Scale: Possible synergies in parts procurement (from India) might help reduce the
costs for the British brands (although this has met with scepticism). Demand: There is a growing demand for luxury cars in emerging markets, including
India, which TML might be able to exploit better then Ford. Manufacturing: TML would get access to three relatively modern production plants. R&D: TML would have access to the know how and human resources in JLRs R&D
centers. Technologies: there would be access to proprietory designs and multiple learning
opportunities and synergies between the R&D capabilities of JLR, INCAT, TMETC
and the ERC in Pune.
80
8.2.4 TABLE SHOWING JLR PERFORMANCE IN THE YEARS 2011 AND 2012
Table 9.1 (Source:Annual Reports of FY11 and FY12)
After Tata’s acquisition, JLR returned to be a profitable company. Data from 2012 released
by JLR, showed that in the period between the 1st of April 2011 and 31st of March 2012,
profits increased to £445 million. A major factor for these results is the growth experienced in
China, where sales increased by more than 80%. Jaguar increased sales by 5% world-wide, in
most part with launch of the 2.2L XF. In reality, the increase in profits of the group is more
the merit of Land Rover, which increased sales by 33% due to their new Evoque SUV.
Tata was successful for a number of reasons. In first place, while Jaguar was just an appendix
of a much larger organization under Ford, the new owner decided to bring it back as a central
and independent brand. Earlier, Ford ruined Jaguar’s image by trying to “massify” luxury,
removing its exclusivity. For example, it took its own parts and put them in Jaguar cars,
something that was viewed by traditional owners as unacceptable. This type of behavior may
be justifiable in ventures between different car companies, but not with Jaguar.
$ million ,
unless stated
Quarter Ended 31st March Year Ended 31
st March
$mn(unless
stated)
2012 2011 Change 2012 2011 Change
Retail
Volumes
(‘000 units)
99 67 48% 306 241 27%
Whole sale
Volumes(‘000
units0
98 66 48% 314 244 29%
Revenue 4144 2735 1409 13512 9871 3641
EBITDA 605 375 230 2027 1502 525
EBITDA % 14.6% 13.7 0.9 ppt 15% 15.2% (0.2)ppt
Profit Before
Tax
530 299 231 1507 1115 392
Profit After
Tax
696 261 435 1481 1036 445
Free Cash
Flow
342 183 159 958 876 82
Cash 2430 1028 1402 2430 1028 1402
81
8.3.1 LATER SCENARIO
Significant slump in new car sales in late 2008 as a result of the credit crunch; Tata had to
refinance in order to keep JLR solvent. UK government considered a financial aid package,
indicating the strategic importance of JLR to the UK economy
February 2010: Tata secures a £340million loan from the European Investment Bank to
support JLR through recession.
May 2011: Tata announces £5b five year investment programme in JLR - focused on new
product development & new equipment at JLR three UK plants + investment in a planned
factory in China. JLR also to link closer with Tata Steel to provide new lightweight steel
alloys for new car models.
November 2011: JLR announces 1,000 new jobs a Land Rover plant in Solihull boosted by
rising demand for SUVs in China, Russia, India and Brazil.
February 2012: Soaring sales of Jaguar and Land Rover cars have helped Indian firm Tata
Motors to a huge rise in profits (up 41% on 2010). JLR arm saw sales rise 37%, helped by
selling 32,000 of its new Range Rover Evoque. China overtakes the UK as JLR’s biggest
market.
March 2012: JLR and Chery Automobile agree a joint venture that should pave the way for
production of Jaguar and Land Rover cars in China.
April 2012: JLR announces that it will build a successor to its previous sports cars called the
F-type at its factory in Birmingham.
8.3.2 HIGHLIGHTS OF THE CONFERENCE CALL OF TATA MOTORS
Tata Motors has signed a share purchase agreement to acquire the business of Jaguar
and Land Rover (JLR) in an all cash deal of US$ 2.3 bn. This includes the 3
manufacturing plants, 2 advanced designed centres, located in UK and 26 national
sales companies.
The regulatory approval will take around 2 months time.
Ford will contribute US$ 600 m to pension fund which will be sufficient to meet the
requirements.
There is no debt in the books except for trade payables.
82
Ford has guaranteed for a minimum capital allowance of US $ 1.1 billion for taxation
purposes.
The deal includes perpetual royalty free licenses.
The agreement includes supply of engines for 79 years manufactured by JLR and
Ford.
Ford will continue to supply Jaguar Land Rover for differing periods with power
trains, stampings and other vehicle components, in addition to a variety of
technologies, such as environmental and platform technologies.
Ford Motor Credit Company will provide financing for Jaguar and Land Rover,
dealers and customers during a transitional period, which can vary by market, of up to
12 months.
The management stressed on the fact that JLR combined is a profitable business and
has made profits in each of the quarter of CY2007. However, the management did not
share financials.
The five year plan that the management has agreed upon factors in the decline in sales
in matured markets.
8.3.4 REASONS BEHIND TAMO GOING FOR THE DEAL
100% stake in Jaguar and Land Rover : TAMO has acquired the businesses and initially
they will operate independently of the parent.
3 plants in UK : These are well invested modern plants.
2 advanced designs and engineering designs : 4-5000 engineers engaged in testing ,
prototype building , design and powertrain engineering, development and integration.
Intellectual Property Rights : This covers all key technologies to be covered. To JLR and
perpetual royalty free on technologies shared with Ford.
Pension contributed by Ford: Ford will contribute $600 mn to the pension fund and the
next actuarial valuation will place only in April 2009.
83
8.3.5 REASONS BEHIND FORD’S DECISION TO SELL JAGUAR LAND ROVER
2006, reports said that losses at Jaguar stood at USD 715 million. Jaguar was not performing
well as it was unable to provide any profit for Ford due to high manufacturing costs in United
Kingdom. The wellbeing of Land Rover's profit, on the other hand, was boost up by the
record sale of 226,000 vehicles, an 18% year over year growth in 2007. "Bringing down
production costs and turning around the company successfully will be the challenge,”
analysts said. It was a test that Ford failed. Ford is combining both the brands since the
products and manufacturing of vehicles for Land Rover and Jaguar is so intertwined.
The table below shows the number of sales of JLR after acquired by Ford
Numbers 2005 2006 2007
Jaguar 86,651 72,680 57,578
Western Europe 46,789 41,367 33,024 57%
America 32,131 22,136 16,836 29%
Rest of Word 7,731 9,177 7,718 13%
Land Rover 170,156 174,940 202,609
Western Europe 97,303 95,399 109,785 54%
America 51,634 53,638 57,092 28%
Rest of world 21,219 25,903 35,732 18%
Total 256,807 247,620 260,187
Western Europe 144,092 136,766 142,809 55%
America 83,765 75,774 73,928 28%
Rest of word 28,950 35,080 43,450 17%
Table 9.2
84
From the table, we may see that the sales of Jaguar are decreasing dramatically from 2005
until 2007. After intertwined Jaguar and Land Rover, sales from year to year fluctuated
without certainty of growth. This is one of the reasons that lead Ford’s decision to sell JLR to
Tata Motor.
The table below shows the cost of production for JLR:
Table 9.3
From the table, we may observe that Ford failed to reduce production costs as major
proportion of cost is material cost and they unable to bought cheaper materials from
suppliers. This however is very different if Tata Motor takes the ownership because they are
utilizing country’s vast natural resources.
Brands LAND ROVER JAGUAR JAGUAR + LAND
ROVER
In Pounds 2005 2006 2005 2006 2005 2006
Material
cost/car
20254 21243 16299 16928 18919 19976
Employee
cost /car
2565 2444 4316 4706 3156 3108
Material
cost /car
84.5% 85.4% 112.8% 91.7% 91.7% 90.3%
Employees 9.6% 8.9% 24.3% 13.4% 13.4% 12.4%
85
8.4.1 COST SYNERGIES
Material costs and not manpower key to better margins.
Investors concerns on manpower costs misplaced
Investors apprehensive that TAMO has agreed to continue with plants in UK
Purchasing basket offers bigger opportunity for cost reduction
It is more important to manage the material & sourcing costs to improve margins –
Material Cost is 4-6x the wage cost for high-end products such as Land Rover
Tata Steel
Leader in automotive grade steel in the European markets.
16% of revenue from auto steel division
Enjoys “Q1” supplier status with Ford to supply steel for Jaguar and Land Rover
INCAT
Provides services like supplier programs, consulting services and global sourcing
Major customers are Chryslers, Ford, GM , Honda and Nissan.
JLR
INCAT
TACO
TCS
TATA STEEL
86
TCS
Provides services like engineering design, manufacturing solutions, and sourcing
services.
Automative decision accounted for 15% revenue.
Major customers are Ford, Chrysler, GM.
Tata Auto Comp (TACO)
Flagship company of TAMO’s ancillary business
Manufacturing, Engineering and Supply Chain Management
Customers include Global OEMs like Ford, Daimler- Chrysler, FIAT
8.4.2 FINANCING PROCEDURE OF THE DEAL
SPV Structure
Figure 9.2
87
SPV 1: TML Holding Pvt Limited
SPV 2: Jaguar Land Rover Limited
TAMO raised $ 3 billion bridge loan from Citi Group and and JP Morgan for a period
of 15 months
$ 2.3 billion was paid directly to Ford to acquire full ownership of jaguar and Land
Rover. Rest $ 0.7 billion towards working capital
Ford agrees to pay $ 600 million pension funds
8.4.3 FUNDING STRUCTURE
Step I – The entire acquisition was made through an SPV. Initially it will be by way of
bridge finance which is obtained for a period of 15 months in the SPV guaranteed by Tata
Motors. The company has made an arrangement for US$ 3 bn of bridge finance. Step II – The temporary financing will be replaced by mix of debt and equity. Thus, the
company required around 6 months time to arrange for long term funds (debt as well as
equity).
Funding
Point in Time Source of Fund Amount
Jan 2009
Sale of stake in Tata
Steel and
TataTeleservices to
other group
companies
$ 1.11 billion
Jan 2009 Right Issue
April 2009
Secured Non
convertible debenture
(NCD)
$ 0.89 billion
May 2009
External Commercial
Borrowing (ECB)
$ 1 billion
Refinance concluded in May 2009 Total $ 3 billion
Table 9.4 (Source: Tata Motos website)
88
8.5.1 LAND ROVER–The Profit Centre and JAGUAR– The Trouble Maker
Land Rover
Land Rover has a portfolio of 5 brands including the successful Range Rover series
with competition mainly from Toyota, Mitsubishi, GM etc.
In contrast to the struggling Jaguar, LR achieved its highest ever volumes of 226,395
units in 2007.
LR’s global presence has also been increasing with the success of the Rover-Sport.
Acquired by Ford in 2000
Ford acquired LR from BMW in 2000, and has been working with Jaguar for sharing
of common technologies such as engines and manufacturing facilities.
Land Rover remains a profit making company
LR is estimated to clock USD 10-11bn in revenues, and is expected to be profit
making.
Plagued with quality issues
LR has lost out on the race for quality to the Japanese, and has attracted criticism for
its high emission levels.
Significant investments will be required to meet emission norm changes in Europe in
2012. (estimated R&D cost in CY07 for LR was USD 400mn).
LR has displayed an impressive pipeline of products including the LRX concept car,
due in 2012.
JAGUAR
A premium luxury car brand
Has a portfolio of 5 models including its flagship model the XJ manufactured at three
plants in UK.
Main competitors include BMW, Mercedes Benz, Audi, Porsche etc.
Acquired by Ford in 1989 for USD 2.5bn
Acquired to compete against Toyota’s Lexus brand
Ford is believed to have invested over USD 10bn in the company to improve the
production facilities.
Jaguar has been struggling to find a mass market model over the last few years
89
Jaguar is in the process of changing the complete product profile, starting with the
launch of the XF.
Exciting possibilities with XF
Jaguar’s latest offering launched in Mar 2008, has created a buzz amongst car experts
with over 18,000 pre-bookings. Given the German and Japanese dominance in this
segment, we believe Jaguar volumes could hit a “glass-ceiling”
8.5.2 POST MERGER POSITIVES AND NEGATIVES
Negatives
Drop in share price
Failure of right issues
Huge debt burden
Sales volume decreased by 35.2 %
Lack of consumer loans
Issue of timing
Operational freedom slows pace of change
Depressed state of the global premium car market
Jaguar/ Land Rover lost 306 million pounds( $504 million ) for the fiscal year ending
March 2009
Tata Motors reported reported a net loss of Rs. 3.29 bn( $67 million ) for the quarter
to end- June
Tata’s core commercial vehicle market in India is also suffering from slower sales
Extremely high manufacturing costs in Britain
Eliminated more than 2,200 jobs
Positives
Tata wanted to make a global impact on it thinks that buying these brands at a lower
rate now, will give better value later on.
This acquisition also eases the entry of Tata in European market which it has been
eyeing for long. A previous JV with FIAT took place which would further help them
penetrate EU market.
Reduce the company dependence on the Indian market which accounted for 90% of
its sales.
Increase sales in emerging markets.
Reduced dependence on mature markets
Opportunity to spread its business across different customer segment
90
At the price starting from 63 lakhs and going upto 93 lakhs, it seems that Tata has got
the right place to compete with the current market leaders – BMW, Audi , Mercedez
Publicity on an international scale
Access to large distribution network
JLR had many new models lined up for the next 3 years, so no much work just profits
Strong R & D culture and facilities
Component sourcing, engineering and design benefits.
8.5.3 Stock Market Scenario for TAMO and FORD
Tata Motors is one of the largest companies in India and a recent drop in equity prices in that
country (and other emerging market countries) has led to a significant buying opportunity in
Tata Motors, which appears dirt-cheap when compared to other global auto stocks. TAMO’s
stock was recently added to the Goldman Sachs "conviction buy" list, and it looked like a
great bargain:
Figure 9.5 (Source: www.moneycontrol.com)
91
As the chart above shows, this stock was trading for $ 25, and even over $ 28 per share in late
May. However, the stock has come under some undeserved selling pressure due to the sell-off
in emerging countries, like India.
Shares of Tata Motors have underperformed Ford and other car makers but it could be poised
to play catch up. Many investors have been bullish on Ford for a while but they took profits
due to a strong run in the stock and have invested those funds in Tata Motors. Below is the
chart of Ford that used to own Jaguar and Land Rover:
Figure 9.6 (Source: www.moneycontrol.com)
With Ford trading around $17 and Tata Motors trading for about $24, one could buy a share
of Tata for just a few dollars more, and get a stock that is expected to earn twice as much per
share as Ford.
92
8.6.1 RATIO ANALYSIS
STANDALONE FINANCIAL PERFORMA OF TATA MOTORS
Rs Million FY07 FY08
Gross Revenue 318,194.8 330,939.3
Net Revenue 274,700.3 287308.2
EBITDA 33,123.7 30,923.2
EBITDA Margin 12.06% 10.76%
PBT 25,731.8 25,764.7
Profit After Tax 19,134.6 20,289.2
Basic EPS (Rs.) 49.76 52.64
Table 10.1
Figure 10.1
The above chart shows for FY07, the Net Revenue was Rs. 2,74,700.3 million and for FY08,
the Net Revenue was Rs. 2,87,308.2 million. Thus, there has been rise in net reveues of Tata
Motors after the deal and the percentage increase is 4.6%
FY07 FY08
2,74,700.30
287308.2
Net reveue
Net reveue
93
Figure 10.2
The above chart shows for FY07, the EBITDA was Rs. 33,123.7 million and for FY08, the
EBITDA was Rs. 30,923.2 million. Thus, there has been fall in EBITDA of Tata Motors after
the deal and the percentage decrease was 6.6%.
Figure 10.3
The above chart shows for FY07, the PAT was Rs. 19,134.6 million and for FY08, the PAT
was Rs. 20,289.2 million. Thus, there has been rise in PA of Tata Motors after the deal and
the percentage increase was 6.0%.
FY07 FY08
33,123.70
30,923.20
EBITDA
EBITDA
FY07 FY08
19,134.60
20,289.20
PAT
PAT
94
Figure 10.4
The above chart shows for FY07, the Basic EPS was Rs. 49.76 and for FY08, the Basic EPS
was Rs. 52.64. Thus, there has been rise in Basic EPS of Tata Motors after the deal and the
percentage increase was 5.8%.
FY07 FY08
49.76
52.64
Basic EPS
Basic EPS
95
CHAPTER 9
96
9.1Findings and Conclusions 9.1.1 Findings
Tata Group has a global presence in 150 countries with group revenue of 96.8 bn
USD out of which 63% of which are generated from international operations.
Market Capitalisation of 32 listed companies as on 30th
April 2014 was US$116.07 bn
which is about 9.2% of Bombay Stock Exchange's total market capitalisation.
There were 72 Mergers & Acquisitions done by the Tata Group from the time period
of 2000 to 2011 which effectively contributed to the International Revenue Growth of
Tata Group.
The cultural integration was one of the notable factors for the high success rate of
Mergers and Acquisitions in Tata Group
9.1.2 Conclusions
The results from the case study concludes that Mergers and Acquisition drive of Tata
Group brought long term gains with respect of profitability, performance, turnover, capacity,
economies of scale and enhanced control. This study of impact of merger and acquisition on
value matters resulted with positive influenced in profitability, capital base, dividends and
earnings for shareholders. This is a positive characteristic for strong future. There will be a
lot of potential synergies in terms of sharing of best practices across the companies.
97
CHAPTER 10
98
10.1 Appendices and Reference
10.1.1 APPENDICES:
1. TABLE SHOWING ALL THE MERGERS AND AQUISTIONS DONE BY TATA GROUP
Acquired company Country
Stake acquired
Year
Indian Hotels Campton Place Hotel US April 2007
Ritz-Carlton hotel US November 2006
Starwood group (W Hotel)
Sydney 100 per cent (wholly-owned)
December 2005
The Pierre US Management contract
July 2005
Regent Hotel (renamed TajLands End)
India Effective 100 per cent stake
September 2002
Rallis India (through Tata Chemicals)
Metahelix Life Sciences
India 53.5 per cent December 2010
Tata Autocomp Systems
WündschWeidinger Germany September 2005
Tata Chemicals EPM Mining Ventures Canada 30.6 per cent August 2011
Olam International, Republic of Gabon
Republic of Gabon
25.1 per cent April 2011
British Salt UK 100 per cent (wholly-owned)
December 2010
General Chemical Industrial Products (now Tata Chemicals North America)
US 100 per cent stake
January 2008
Brunner Mond (now Tata Chemicals Europe)
UK 36.5 per cent March 2006
Brunner Mond (now Tata Chemicals Europe)
UK 63.5 per cent December 2005
99
Indo MarocPhosphore SA (IMACID)
Morocco Equal partner March 2005
Hind Lever Chemicals India Amalgamation June 2004
Tata Communications (formerly VSNL)
BT Group's (BT) Mosaic business
UK 100 per cent January 2010
Neotel South Africa
30 per cent January 2009
China Enterprise Communications Limited (CEC)
China 50 per cent equity interest
June 2008
Transtel Telecoms (TT)
South Africa
April 2007
Tata Power Broadband
India September 2005
Teleglobe International
US July 2005
Tyco Global Network US November 2004
Dishnet DSL's ISP division
India March 2004
Gemplex US July 2003
Tata Consultancy Services
Citigroup Global Services
US 100 per cent December 2008
Tata Infotech India February 2006
Comicrom Chile November 2005
Pearl Group UK Structured deal
October 2005
Financial Network Services
Australia October 2005
Phoenix Global Solutions
India March 2004
Aviation Software Development Consultancy India (ASDC)
India March 2004
100
Airline Financial Support Services India (AFS)
India January 2004
Tata Global Beverages (Formerly Tata Tea Limited)
Grand Russia 33.2 per cent
March 2009
Vitax and Flosana trademarks
Poland
April 2007
Joekels Tea Packers South Africa
Africa 33.3 per cent
September 2006
Eight O' Clock Coffee Company
US 100 per cent (wholly-owned)
June 2006
JEMCA Czech Republic
Assets: intangible and tangible
May 2006
Good Earth Corporation &FMali Herb Inc
US 100 per cent (wholly-owned)
October 2005
Tetley group UK 100 per cent (wholly-owned)
February 2000
Tata Industries Indigene Pharmaceuticals Inc
US <30 per cent July 2005
Tata Interactive TertiaEdusoftGmbh Germany 90 per cent January 2006
TertiaEdusoft AG Switzerland 90.38 per cent
Tata International Bachi Shoes India India 76 per cent December 2010
Euro Shoe Components
India 76 per cent December 2010
Tata Metaliks UshaIspat, Redi Unit India 100 per cent (wholly-owned)
January 2006
Tata Motors Hispano Carrocera SA
Spain Remaining 79 per cent
October 2009
Jaguar and Land Rover brands
UK March 2008
101
Tata Finance India Merger April 2005
Hispano Carrocera Spain 21 per cent February 2005
Daewoo Commercial Vehicle Company
Korea 100 per cent (wholly-owned)
March 2004
Tata Motors European Technical Centre plc
MiljøbilGrenland / Innovasjon
Norway 50.3 per cent October 2008
Tata Power Geodynamics Australia 10 per cent September 2008
Acquired Coastal Gujarat Power
India April 2007
PT Kaltim Prima Coal and PT Arutmin Indonesia
Indonesia 30 per cent equity stake
June 2007
Tata Projects Artson Engineering India January 2008
Tata Steel Rawmet Industries India March 2007
Corus UK 100 per cent
January 2007
Millennium Steel Thailand 67.11 per cent April 2006
NatSteel Asia Pte Singapore 100 per cent (wholly-owned)
February 2005
Tata Sons Tata Communications India February 2002
Tata Sons through TCS
Computer Maintenance Corporation (CMC)
India November 2001
Tata Technologies INCAT International UK August 2005
Tata Teleservices Hughes Telecom (India)
India 50.83 per cent December 2002
Tata Hitachi Construction
Serviplem SA Spain 79 per cent March 2008
102
Machinery (Telcon)
Lebrero SA Spain 60 per cent March 2008
Trent Landmark India 76 per cent August 2005
TRF Hewitt Robins International
UK April 2010
Dutch Lanka Trailer Manufacturers
Sri Lanka 51 per cent July 2009
York Transport Equipment (Asia)
Singapore 51 per cent stake
October 2007
Voltas Rohini Industrial Electricals
India 51 per cent August 2008
SOURCES: TATA GROUP BUSINESS PROFILE: MERGERS AND ACQUISITIONS
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