We have been seeing companies coming together to form another firm and companies purchaseing out other existing companies to expand their business. With recession, many businesses and the feeling of insecurity surging over our, it is not surprising when we hear about the enormous numbers of corporate restructurings taking place, especially in the last couple of years.
Deals can be worth hundreds of millions or billions of dollars. They can order the fate of the companies involved for years to come. For a CEO, leading an M&A can symbolize the highlight of his entire career graph. And it is no wonder that we hear about so many of such deals; that happen all the time. Next time you go through a Newspaper, chances are that at least one headline will proclaim some kind of M&A.
Many companies have been bought over and many have taken up internal reshuffle, while some organisations in the same arena of business have realised it is favorable to merge together into a single firm. Hence it would be important for us to understand what corporate restructuring and mergers and acquisitions are all about.
On the more positive side Mergers & Acquisitions may be critical for the healthy expansion and growth of the firm. Successful entry into new product and geographical markets may require Mergers & Acquisitions at some stage in the firm's development.
Merger
Merger is defined as amalgamation of two or more companies into a single firm where one survives and the others cease to have their corporate existence. The survivor acquires whole of the assets as well as the liabilities of the merged firm or companies. Normally, the surviving firm is the purchaseer, which retains its identity, and the extinguished firm is the seller.
A merger takes place when two companies, usually about the similar sizes, decide to go ahead as a single new firm rather than be separately owned and run. This is more precisely known as a "merger of equals." Both companies' stocks are surrendered and new firm stock is listed in its place.
Acquisition
Acquisition basically means taking over the ownership of the property. In the premise of business, an acquisition is the purchase-out of a controlling interest in the share capital of another existing firm by other firm.
Methods of Acquisition:
An acquisition can take place by following:
agreement with the individuals having majority interest in the management like board members or majority shareholders commanding majority of voting power;
by purchaseing shares from the stock market;
to make offer of takeover to the body of shareholders;
purchase of new shares by private accord;
Acquisition Process
The whole of acquisition process can be classified into plan phase and an execution phase. The plan phase consists of the devising the business and the acquisition plan. The execution phase consists of the search, scrutinizing, contacting the target firm, negotiating, integrating. Acquisition process follows the following steps.
1. Business plan development
A merger or acquisition decision is a strategic in nature. The acquisition strategy should align with the firm's strategic objectives. Business plan should speak a mission or a long term vision of the firm and a prolonged strategy for accomplishing that mission.
The purpose of the process of strategic planning is to identify the firm's competitive strength and set goals to take advantage of its competitive strengths and to negate the effects of its weaknesses.
2 .The Hunt
The hunt for the potential firm happens in two stages:-
It basically is the basic screening process. Industry, size of the deal and the geographic location are some of the criteria used for search process. The size of the entire deal is best expressed in terms of the maximum purchase price of a firm is ready to pay.
3. Negotiation Stage
This stage consists of many activities conducted simultaneously by various acquisition team members. The actual purchase consideration is determined during this phase. It is in this phase that the actual purchase considera
Defining the purchase price: The purchase consideration can be defined in
The total consideration
Total purchase price
The net purchase price
4. Structuring the deal
It involves meeting the needs of both parties by dealing with issues of risk and reward by legal, tax and accounting structures.
5 . Closing the Deal
Closing is the final legal procedure where the firm changes hands. It consists of all necessary shareholder, regulatory and third party. All the necessary approvals are attained at this stage.
Certain pre conditions set in the definitive agreement have to meet before the close of the contract. The pre conditions include the assumption that the seller would abide by the representations and warranties and will live up to the obligations.
Distinction between mergers and acquisitions
A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two "equals". The combined business, through structural and operational advantages secured by the merger, can cut costs and increase profits, boosting shareholder values for both groups of shareholders. A typical merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a firm that is worth more than the sum of its parts. In a merger of two corporations, the shareholders usually have their shares in the old firm exchanged for an equal number of shares in the merged entity. For example, back in 1998, American Automaker, Chrysler Corp. merged with German Automaker, Daimler Benz to form DaimlerChrysler. This has all the makings of a merger of equals as the chairmen in both organizations became joint-leaders in the new organization. The merger was thought to be quite beneficial to both companies as it gave Chrysler an opportunity to reach more European markets and Daimler Benz would gain a greater presence in North America.
A takeover, or acquisition, on the other hand, is characterized by the purchase of a smaller firm by a much larger one. This combination of "unequal's" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A larger firm can initiate a hostile takeover of a smaller firm, which essentially amounts to purchaseing the firm in the face of resistance from the smaller firm's management. Unlike in a merger, in an acquisition, the acquiring firm usually offers a cash price per share to the target firm's shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio. Either way, the purchasing firm essentially finances the purchase of the target firm, purchaseing it outright for its shareholders. An example of an acquisition would be how the Walt Disney Corporation bought Pixar Animation Studios in 2006. In this case, this takeover was friendly, as Pixar's shareholders all approved the decision to be acquired.
Motives behind M&A
The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance:
Economy of scale: This refers to the fact that the combined firm can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the firm relative to the same revenue stream, thus increasing profit margins.
Economy of scope: This refers to the efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products.
Increased revenue or market share: This assumes that the purchaseer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices.
Cross-selling: For example, a bank purchaseing a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products.
Synergy: For example, managerial economies such as the increased opportunity of managerial specialization. Another example are purchasing economies due to increased order size and associated bulk-purchaseing discounts.
Taxation: A profitable firm can purchase a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring firm. Tax minimization strategies include purchasing assets of a non-performing firm and reducing current tax liability under the Tanner-White PLLC Troubled Asset Recovery Plan.
Geographical or other diversification: This is designed to smooth the earnings results of a firm, which over the long term smoothens the stock price of a firm, giving conservative investors more confidence in investing in the firm. However, this does not always deliver value to shareholders (see below).
Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.
Vertical integration: Vertical integration occurs when an upstream and downstream firm merges (or one acquires the other). There are several reasons for this to occur. One reason is to internalise an externality problem. A common example is of such an externality is double marginalization. Double marginalization occurs when both the upstream and downstream firms have monopoly power, each firm reduces output from the competitive level to the monopoly level, creating two deadweight losses. By merging the vertically integrated firm can collect one deadweight loss by setting the downstream firm's output to the competitive level. This increases profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable.
However, on average and across the most commonly studied variables, acquiring firms' financial performance does not positively change as a function of their acquisition activity. Therefore, additional motives for merger and acquisition that may not add shareholder value include:
Diversification: While this may hedge a firm against a downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger.
Manager's hubris: Manager's overconfidence about expected synergies from M&A which results in overpayment for the target firm.
Empire-building: Managers have larger companies to manage and hence more power.
Manager's compensation: In the past, certain executive management teams had their payout based on the total amount of profit of the firm, instead of the profit per share, which would give the team a perverse incentive to purchase companies to increase the total profit while decreasing the profit per share (which hurts the owners of the firm, the shareholders); although some empirical studies show that compensation is linked to profitability rather than mere profits of the firm.
Mergers and Acquisitions in recent times
Indian M&As
Inbound M&A activity is slow compared to out bound M&A because of valuation resistance but, going forward, this too may pick up as international companies realize the potential of the Indian markets.
Airtel and Zain
Airtel acquired South Africs's Zain on 8 th of June 2010. The total cost of the deal is USD 9 billion and the takeover has made Bharti Airtel the fifth largest telecom firm in the world.
Bharti Airtel bought the African operations of Kuwait's Zain after the two entered into a deal in March this year. After this, the total subscriber base of Bharti has become 180 million and its operations are spread over 18 countries including India. 32 per cent stake in Bharti is owned by Singapore Telecommunications and it chose Zain after MTN.
Tata Steel-Corus
On January 30, 2007, Tata Steel purchased 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at USD 12.2 billion. The deal is the largest Indian takeover of a foreign firm till date and made Tata Steel the world's fifth-largest steel group.
Vodafone-Hutchison Essar
On February 11, 2007, Vodafone agreed to purchase out the controlling interest of 67% in Hutch-Essar for USD 11.1 billion. Vodafone Essar is owned by Vodafone 52%, Essar Group 33% and other Indian nationals 15%.
Hindalco-Novelis:
Aluminium and copper major Hindalco Industries, the Kumar Mangalam Birla-led Aditya Birla Group flagship, acquired Canadian firm Novelis Inc in a USD 6-billion, all-cash deal in February 2007.The acquisition made Hindalco the global leader in aluminium rolled products and one of the largest aluminium producers in Asia.
Ranbaxy-Daiichi Sanky
Marking the largest-ever deal in the Indian pharma industry, Japanese drug firm Daiichi Sankyo in June 2008 acquired the majority stake of more than 50 per cent in domestic major Ranbaxy for over Rs 15,000 crore (USD 4.5 billion).
ONGC-Imperial Energy
The Oil and Natural Gas Corp took control of Imperial Energy Plc for USD 2.8 billion, in January 2009, after an overwhelming 96.8 per cent of London-listed firm's total shareholders accepted its takeover offer.
NTT DoCoMo-Tata Tele
Japanese telecom giant NTT DoCoMo picked up a 26 per cent equity stake in Tata Teleservices for about Rs 13,070 crore (USD 2.7 billion) in November 2008.With a subscriber base of 25 million in 20 circles DoCoMo paid Rs 20,107 per subscriber to acquire the stake. DoCoMo picked up the equity through a combination of fresh issuance of equity and acquisition of shares from the existing promoters.
HDFC Bank-Centurion Bank of Punjab
HDFC Bank acquired Centurion Bank of Punjab for Rs 9,510 crore (USD 2.4 billion) in one of the largest mergers in the financial sector in India in February, 2008. Post-acquisition, HDFC Bank became the second-largest private sector bank in India.
Sterlite-Asarc
Anil Agarwal-led Sterlite Industries Ltd's USD 1.8 billion Asarco LLC purchaseout deal is the ninth biggest-ever merger and acquisitions deal involving an Indian firm, and the largest so far in 2009. This is despite the deal size falling by almost USD 1 billion, from a projected estimate of USD 2.6 billion in May 2008, due to devaluation of mining assets and a sharp fall in copper prices. Sterlite, the Indian arm of the London-based Vedanta Resources Plc, acquired Asarco in March 2008.
Suzlon-RePower:
Wind power major Suzlon Energy in May 2007 acquired the German wind turbine manufacturer REpower for USD1.7 billion. The deal now ranks as the country's 10th largest corporate takeover. REpower is one of Germany's leading manufacturers of wind turbines, with a 10-per cent share of the overall market. Suzlon is now the largest wind turbine maker in Asia and the fifth largest in the world.
RIL-RPL merger:
Reliance Industries in March 2009 approved a scheme of amalgamation of its subsidiary Reliance Petroleum with the parent firm. The all-share merger deal between the two Mukesh Ambani group firms was valued at about Rs 8,500 crore (USD 1.68 billion).
Post-merger, RPL shareholders received one fully paid equity share of Rs 10 each of the firm for every 16 fully paid equity shares of Rs 10 each of RPL held by them.
The RIL-RPL merger swap ratio was at 16:1. The merger became effective from April 1, 2008.
Graphical representation of Indian outbound deals since 2000
Global M & As
Oracle-Sun
Information Technology firm Oracle is purchaseing Sun Microsystems in a cash deal the firm valued at USD7.4 billion. The deal comes after IBM abandoned its bid to purchase the networking equipment maker. The blockbuster deal would give industry's largest database software vendor entry into the server and storage markets. Redwood Shores-based Oracle will purchase Sun shares for USD9.50 each.
Fiat and Chrysler
Italy's Fiat and US car maker Chrysler inked a merger deal to create a global auto giant.
The deal could be termed one of its kind after the Italian automaker stepped in to save the bankrupt US firm. The new firm now exits Chapter 11 bankruptcy.
Pfizer and Wyeth
Pfizer completed its acquisition of rival drugmaker Wyeth following the receipt of regulatory approval from all government authorities required by the merger agreement. It was a USD68 billion deal that cements Pfizer's position as the world's biggest drugmaker.
Volkswagen purchases 49.9% stake in Porsche for USD5.8 bn
European auto giant Volkswagen bought 49.9 per cent stake in luxury car maker Porsche AG for USD 5.8 billion. Volkswagen said the combination of the two companies follows a compelling strategic, industrial and financial logic and the move is expected to help it gain around 700 million euros in annual operating profits in the long term.
Volkswagen - Suzuki
German carmaker Volkswagen has entered into a long-term strategic partnership with Suzuki of Japan by purchasing a 20 per cent stake in Suzuki Motor for about Rs. 11,500 crore. (USD 2.5 Billion). The cross-border deal is expected to have a positive fall-out for Maruti Suzuki, which could become a global hub for supplying small cars through Volkswagen's strong network.
JFE Steel, JSW Steel form strategic alliance
JSW Steel has inked a deal with Japan's JFE Steel, the world's sixth-largest steelmaker, to co-operate in the domestic market to make high quality steel for automobiles.
As per the deal, both JSW and JFE will purchase into each other. The valuation and pricing of the deal are being worked out and will get finalised over the next few months
ArcelorMittal purchases 35% stake in Uttam Galva
Steel giant ArcelorMittal owned by London-based NRI billionaire LN Mittal is finally entering India. ArcelorMittal will purchase 35 per cent stake for Rs. 500 crore in the Indian secondary steel producer, Uttam Galva Steels, to become the co-promoter of the firm.
The firm which has been looking to set up a couple of fresh production facilities in Eastern India (both projects are much behind schedule) with multibillion dollar investments.
GM sells Hummer to China's Sichuan Tengzhong
General Motors and Sichuan China's Tengzhong Heavy Industrial Machinery have signed the much-anticipated deal for GM to sell the gas-guzzling, military-style SUV Hummer.
Soaring gas prices have battered sales of the boxy vehicles, which roar along on oversize tires and can weigh up to five tons. Tengzhong, which is keeping production of the Hummer in the United States, will face daunting hurdles in reviving the vehicle, known in Chinese as "Han Ma," or Bold Horse.
Fortis purchases Wockhardt Hospitals for Rs. 909 crore
Fortis, India's biggest listed healthcare provider, sealed a deal to purchase the cream of rival Wockhardt Hospital chain's assets of 8 running hospitals and 2 green field projects, for Rs. 909 crore.
The move will give Fortis a larger pan-India presence and help it reach out to the southern part of India, where it is absent. The deal will provide Fortis with a mix of big and small hospitals, including 2 multi specialty hospitals and the top management of Wockhardt Hospitals.
UltraTech to merge with Grasim cement arm
Aditya Birla group firm UltraTech Cements will merge Grasim's subsidiary Samruddhi Cements into itself.
The group, which had acquired UltraTech from engineering giant L&T in 2004, had planned to hive-off Grasim cement into Samruddhi, a wholly owned subsidiary of Grasim Industries. The demerged entity would be listed and then merged with UltraTech.
Lenovo and IBM
IBM and Lenovo merger was one of the biggest in the IT industry. The combined entity aimed to focus on quality, service and innovation in technology.
IBM provides services and customer financing to Lenovo, while Lenovo supplies PCs to IBM. Lenovo also gained the advantage of IBM brand name and helped them to combat competition in the US and Europe market.
Tata Motors - Corporate Profile
Tata Motors Limited is India's largest automobile firm, with consolidated revenues of Rs. 92,519 crores (USD 20 billion) in 2009-10. It is the leader in commercial vehicles in each segment, and among the top three in passenger vehicles with winning products in the compact, midsize car and utility vehicle segments. The firm is the world's fourth largest truck manufacturer, and the world's second largest bus manufacturer.
Tata Motors is a part of the Tata Group manages its share-holding through Tata Sons. The firm was established in 1935 as a locomotive manufacturing unit and later expanded its operations to commercial vehicle sector in 1954 after forming a joint venture with Daimler-Benz AG of Germany. Despite the success of its commercial vehicles, Tata realized his firm had to diversify and he began to look at other products. Based on consumer demand, he decided that building a small car would be the most practical new venture. So in 1998 it launched Tata Indica, India's first fully indigenous passenger car. Designed to be inexpensive and simple to build and maintain, the Indica became a hit in the Indian market. It was also exported to Europe, especially the UK and Italy. In 2004 it acquired Tata Daewoo Commercial Vehicle, and in late 2005 it acquired 21% of Aragonese Hispano Carrocera giving it controlling rights of the firm. It has formed a joint venture with Marcopolo of Brazil, and introduced low-floor buses in the Indian Market. Recently, it has acquired British Jaguar Land Rover (JLR), which includes the Daimler and Lanchester brand names.
It is India's largest firm in the automobile and commercial vehicle sector with upwards of 70% cumulative Market share in the Domestic Commercial vehicle segment, and had a 0.81% share of the world market in 2007 according to OICA data.
(Source : www.tatamotors.com)
The OICA ranked it as the 19th largest automaker, based on figures for 2007 and the second largest manufacturer of commercial vehicles in the world. The firm is the world's fourth largest truck manufacturer, and the world's second largest bus manufacturer. In India Tata ranks as the leader in every commercial vehicle segment, and is in the top 3 makers of passenger cars. Tata Motors is also the designer and manufacturer of the iconic Tata Nano, which at INR 100,000 (ex-factory) or approximately USD 2300, is the cheapest production car in the world
Tata Motors has auto manufacturing and assembly plants in Jamshedpur, Pantnagar, Lucknow, Ahmedabad, Sanad and Pune in India, as well as in Argentina, South Africa and Thailand.
Tata Motors - Product Portfolio
TATA Motors Going International
Major international ventures of TATA Motors in recent past are discussed below:
TATA Daewoo Commercial Vehicle- In 2004, TATA Motors acquired the Daewoo Commercial Vehicle Firm of South Korea. TATA remains India's largest heavy commercial vehicle manufacturer and TATA Daewoo is the 2nd largest heavy commercial vehicle.
Hispano Carrocera- In 2005, sensing the huge opportunity in the fully built bus segment, TATA Motors acquired 21% stake in Hispano Carrocera SA Aragonese bus manufacturing firm with an option of holding 100 % holding. It is an extablishd and reputed bus and coach manufacturer in Spain. With this deal Tata Motors acquired the license for technology and brnad right fro hispano. The total deal consisting of equity, debt and technology licensing amounted to about Rs 70 crore to Tatas.
TATA Marcopolo (TMML)
TATA Motors has formed a 51:49 joint venture in bus body building with Marcopolo of Brazil. This joint venture is to manufacture and assemble fully built buses and coaches targeted at developing mass r apid transportation systems.
Tata Motors signed a joint venture with Thonburi Automotive Assembly Plant Co.:
Ford Motor Firm: Corporate Profile
The Ford Motor Firm is an American multinational corporation and the world's fourth largest automaker based on worldwide vehicle sales, following Toyota, General Motors, and Volkswagen. Based in Dearborn, Michigan, a suburb of Detroit, the automaker was founded by Henry Ford and incorporated on June 16, 1903. In addition to the Ford, Lincoln, and Mercury brands, Ford also owns Volvo Cars of Sweden, and a small stake in Mazda of Japan and Aston Martin of England. Ford's former UK subsidiaries Jaguar and Land Rover were sold to Tata Motors of India in March 2008.
In 2007, Ford fell from the second-ranked automaker to the third-ranked automaker in US sales for the first time in 56 years, behind General Motors and Toyota. Based on 2007 global sales, Ford fell to the fourth-ranked spot behind Volkswagen. Ford is the seventh-ranked overall American-based firm in the 2007 Fortune 500 list, based on global revenues in 2007 of USD172.5 billion. In 2007, Ford produced 6.553 million automobiles and employed about 245,000 employees at around 100 plants and facilities worldwide. Also in 2007, Ford received more initial quality survey awards from J. D. Power and Associates than any other automaker. Five of Ford's vehicles ranked at the top of their categories and fourteen vehicles ranked in the top three.
Ford introduced methods for large-scale manufacturing of cars and large-scale management of an industrial workforce using elaborately engineered manufacturing sequences typified by moving assembly lines. Henry Ford's methods came to be known around the world as Fordism by 1914.
About Landrover
Land Rover is currently a luxury-type four-wheel drive, all-terrain vehicle manufacturer, based in Gaydon, Warwickshire, England. It operates as the Jaguar Land Rover business unit by Tata Motors of India.
Originally the term Land Rover referred to one specific vehicle (see Land Rover Series), a pioneering civilian all-terrain utility vehicle launched on 30 April 1948, at the Amsterdam Motor Show, but was later used as a brand for several distinct four-wheel drive models.
Starting out as a model in the Rover Firm's product range, the Land Rover brand developed, first as a marque, then as a separate firm, developing a range of four-wheel drive capable vehicles under a succession of owners, including British Leyland, British Aerospace, and BMW. In 2000, the firm was sold by BMW to the Ford Motor Firm, becoming part of their Premier Automotive Group. In June 2008, Ford sold its Jaguar and Land Rover operations to Tata Motors.
Land Rover, coming in second to Jeep, is one of the longest surviving four-wheel drive (4WD) brands.
Current Models
Model
Type
Land Rover Defender
Light Utility 4x4 vehicle
Freelander 2
Compact 4x4
Discovery 4
Mid-size 4x4
Range Rover
Full-size 4x4
Range Rover Sport
Full-size 4x4
(Source: Wikipedia)
About Jaguar
Jaguar Cars Ltd., better known simply as Jaguar, is a British luxury car manufacturer, headquartered in Coventry, England. It is a wholly owned subsidiary of the Indian firm Tata Motors Ltd. and is operated as part of the Jaguar Land Rover business.
Since Land Rover's May 2000 purchase by Ford, it has been closely associated with Jaguar. In many countries they share a common sales and distribution network (including shared dealerships), and some models now share components, although the only shared production facility is Halewood, for the X-Type and the Freelander 2. However operationally the two companies were effectively integrated under a common management structure within Ford's PAG
EVENTS OF THE TATA-FORD DEAL
FORD STARTS FACING PROBLEM WITH PENSION COSTS AND FALLING SALES IN NORTH AMERICA.
Ford has been forced to sell two firm's based at Solihill and Castle Bromwich in the West Midlands and Halewood on Merseyside in order to concentrate on it's loss-making core US car business, which it hopes to turn around in the next two years. The largest loss of a USD127 billion, overseen by Allan Mullay, who took over as a Chief Executive Officer in the same year, decided to sell its iconic Aston Martin Brand to a U.K based investment consortium in a deal worth USD955.2 million in 2007. Ford mission became to integrate the Ford brand globally, and create a strong Ford motor firm that delivers profitable growth to all.
FORD INDICATES THAT IT MIGHT LOOK FOR PURCHASEERS FOR JAGUAR AND LAND ROVER MARQUES
After the losses drained out cash and resources out of the Ford Firm, Ford Motor gave a lucid indication for purchaseers of its two other brands- Jaguar and Land Rover, as luxury car sales went down across the globe. Jaguar sales dropped 33% in the US and Europe in the first two months of the year while Land Rover sales fell 13% in the US and 7.7% in Europe during the period. Ford bought Jaguar for USD2.5 billion in 1989 and Land Rover for USD2.7 billion in 2000. But it has been struggling and wants to focus on its main brands. It has now sold the marques for less than what it paid then.
TATA CONFIRMS THE NEWS TO PARTICIPATE IN THE BID
The head of India's Tata conglomerate confirmed Friday that his group was interested in bidding for luxury UK car brands Jaguar and Land Rover, in an interview with an Indian news channel. Tata Motors, India's biggest car firm, has appointed advisors to evaluate a bid and signed a confidentiality agreement with Ford to access financial details of the two brands which have a combined British workforce of 19,000, the Business Standard daily quoted unnamed sources as saying last month. The move would be in keeping with Tata group's growing appetite for overseas acquisitions.
MAHINDRA-MAHINDRA FAILED TO MAKE IN TO BID
Mahindra & Mahindra has pulled out of the race to acquire iconic British brands Jaguar and Land Rover, which have been put on the block by Ford, citing complexities in the way the deal was structured. The development strengthened the case for Tata Motors, which is now pitted against private equity firm One Equity Partners that has roped in former Ford boss Jacques Nasser as an advisor. Sources close to the negotiations said M&M - though a serious contender in the beginning - decided against pursuing the deal as there were concerns related to Intellectual Property Rights (IPR) associated with the two brands. "The whole deal was considered to be very complex, prompting the firm not to pursue it," a source said. M&M thought that it would have to go back to Ford on many crucial issues related to use of technology even after bagging the two brands. Crucial IPRs related to the brands are locked in with the US auto major, making it difficult for the eventual winner to "derive full benefits unhindered and Ford's continuing involvement was a crucial concern".
FORD ANNOUNCES TATA AS "PREFERRED PURCHASEER".
On 1 January 2008, Ford made a formal announcement which declared Tata as the preferred bidder. Tata Motors also received endorsements from the Transport And General Worker's Union (TGWU)-Amicus combine as well as from Ford. According to the rules of the auction process, this announcement would not automatically disqualify any other potential suitor. However, Ford (as well as representatives of Unite) would now be able to enter into more focused and detailed discussions with Tata to iron out issues ranging from labour concerns (job security and pensions), technology (IT systems and engine production) and intellectual property as well as the final sale price. Ford would also open its books for a more comprehensive diligence by Tata. On 18 March 2008, Reuters reported that American bankers Citigroup and JP Morgan shall be due underwriting a loan of USD 3 billion in order to finance the deal.
EUROPEAN COMMISION CLEARS ACQUISITION OF JAGUAR AND LAND ROVER BY INDIAN FIRM, TATA MOTORS.
On 26th April 2008,The European Commission (EC), the executive panel of the 27-member European Union, cleared the acquisition of the Jaguar and Land Rover business (JLR) of US-based Ford Motor Firm by India's Tata Motors Ltd The EC announced in Brussels. that it has granted clearance under the EU Merger Regulation Procedure.
THE DEAL
The definitive agreement was agreed by Tata Motor's Ltd., on 26th March 2008 to acquire luxury British marques, Jaguar and Land Rover.
The all-cash deal, which was agreed in March, includes all necessary intellectual property rights, manufacturing plants, two advanced design centers in the UK and a worldwide network of sales companies. Included in the deal were the rights to three other British brands, Jaguar's own Daimler, as well as two dormant brands Lanchester and Rover. On 2 June 2008 the sale to Tata was completed by both parties
TRANSITION SUPPORT
Other areas of transition support from Ford include IT, accounting and access to test facilities. The companies will also cooperate in areas such as design and development through sharing of platforms and joint development of hybrid technologies and power train engineering, Tata Motors said.
TIMELINE OF THE HISTORIC DEAL
2005
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Ford starts facing problems with pension and health care costs and falling sales in North America.
Starts reporting losses from the second quarter
2006
-
Alan Mullaly takes over as chief executive and oversees a USD12.7 billion loss, the largest in the
firm's history Ford decides to sell its Aston Martin brand
May, 2007
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Ford closes the Aston Martin sale for USD848 million
June, 2007
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Ford indicates that it might look at purchaseers for Jaguar and Land Rover marques
July, 2007
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Ford receives preliminary bids for the brands. Reports say that TPG Inc., Cerberus Capital Management Lp. Ripplewood Holdings, One Equity Partners Llc are in the fray, along with Tata Motors
Ltd and Mahindra & Mahindra
August, 2007
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Ratan Tata, chairman of Tata Motors Ltd, confirms that his firm was bidding for the premium car Makers
November, 2007
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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
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The three bidders submit their bid
January , 2008
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Ford names Tata as "preferred purchaseer"
March, 2008
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Tata, Ford sign deal
June, 2008
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Deal finally completed by both the parties.
Rationale of the Deal
Why did Ford sell?
Reports said losses at Jaguar stood at USD 715 million in 2006. Jaguar has been a dog i.e. it has not been able to provide any profit for ford because of the high manufacturing costs provided in the United Kingdom.
The strong boy Land Rover's profit, on the other hand, was driven by the record sale of 2.26 lakh vehicles, an 18% YoY growth in 2007..
Bringing down production costs and turning around the firm 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.
Why did Tatas acquire JLR?
Long term strategic commitment to automotive sector.
Opportunity to participate in two fast growing auto segments.
Increased business diversity across markets and products.
Land rover provides a natural fit for TML's SUV segment.
Jaguar offers a range of "performance/luxury" vehicles to broaden the brand portfolio.
Benefits from component sourcing, design services and low cost engineering
What did Tata get?
100% stake in Jaguar & land Rover Business
TAMO has acquired the business & initially they will be operated independently of the partner.
3 Plants in UK
These are well invested plants
2 advanced design & engineering center
4-5000 engineers engaged in testing ,prototype design & powertrain
Engineering , development & integration
26 National sales firm
Both existing national sales companies of jaguar/land rover & also those that are carved out of current Ford operation
Intellectual property rights
This covers all key technologies to be transferred to JLR & perpetual royalty free license on technologies shared with Ford
Capital Allowance
A minimum guaranteed amount of USD1.1 bn which will help managing in Tax going forward
Support from Ford Motor Credit
Ford Motor Credit will continue to support the sales of JLR for around next 12 months
Pension Contributed by Ford
Ford will contribute USD 600 mn of the Pension Fund
Financial Implications: Statements before and after the Deal
Tata Sons Chairman Ratan Tata recently said he may have overstretched himself paying 1.15 billion pounds for Jaguar Land Rover just as a recession loomed. A year after the Tata group took over the two of Britain's most iconic automobile brands, Jaguar and Land Rover, it is faced with newer and bigger challenges than it would have expected when it paid USD2.3 billion to Ford for the acquisitions on March 26, 2008.
In FY 2008-09, Tata Motors Ltd posted its first annual loss in at least eight years after sales at the luxury units, Jaguar and Land Rover plunged amid the global recession. The consolidated net loss was Rs 2,500 crore in the year ended 31 March, 2009 compared with a net income of Rs 2,200 crore billion a year ago. Ratan Tata is slashing investments by as much as 38% in the year to March on slow economic growth.
Unfortunately for Tatas, the worst fear of the skeptics has come to pass. Within months of the acquisition, the world witnessed the onset of a financial crisis that triggered a credit crunch and precipitated a real economy recession. Industries such as steel and automobiles were among the worst affected. This had two implications. First, the sales and revenues of JLR were far short of expectations, making it difficult for Tatas to meet commitment on their debt and reduce the degree of leverage. Second, with much of this debt being of a bridge loan kind, loans that mature and cannot be repaid have to be refinanced and rolled over to prevent default. Given the current circumstances, this is difficult, as Tatas discovered this May, when the USD3 bn it had borrowed to finance acquisition of JLR was due for refinancing.
The Tatas are trying to persuade the British government to stand guarantee for loans that they plan to seek from the UK banks to bail out JLR. The British government has been reluctant to provide these loan guarantees so far. If the UK government's help does not come soon, Tata Motors will have to cut down its investment plans for Jaguar Land Rover (JLR) with possible job losses and plant closures.
What is remarkable is that the Tata group has been able to ride the waves and come ashore safely this time as well. Tata Motors returned USD1.11 bn of its original bridge loan by mobilizing funds through a rights issue, launching a fixed deposit scheme and by selling the shares of Tata Steel it held. Second, the Tata group has mobilized the support of the Indian government. Even when the group embarked on its ambitious overseas acquisition strategy, there was evidence that it had the backing of the Indian government, which too was seeking to build India itself as a global brand. Tatas mobilized Rs 42 bn through bond markets with the help of government-owned State Bank of India. Tatas are also in talks with defense establishment to obtain secure orders for the Land Rover. Finally, the Tatas have used innovation to obtain support from the Indian public for its UK operations. Tatas launched Nano in Apr'09 and received 203,000 advance orders & raised Rs 25 bn from Indian public. This money was in essence a loan from public at large & Tatas will pay interest rate on the same. This money is also crucial to the Tatas' survival strategy.
In FY 2008-09, Tata Motors Ltd posted its first annual loss in at least eight years after sales at
the luxury units, Jaguar and Land Rover plunged amid the global recession. The consolidated net
loss was Rs 2,500 crore in the year ended 31 March, 2009 compared with a net income of Rs
2,200 crore billion a year ago. Ratan Tata is slashing investments by as much as 38% in the year
to March on slow economic growth.
At the time of acquisition of JLR by TATA Motors, there were some who called for caution.
They pointed out that purchaseing into an automobile major when the market for automobiles was set
for a downturn might not reflect good business sense. Moreover, post acquisition, debt at the
level of both parent and the United Kingdom subsidiaries in the TATA group was slated to rise
sharply.recession set in and This had two implications. First, the sales and revenues of JLR were far short of expectations, making it difficult for Tatas to meet commitment on their debt and reduce the
degree of leverage. Second, with much of this debt being of a bridge loan kind, loans that mature
and cannot be repaid have to be refinanced and rolled over to prevent default. Given the current
circumstances, this is difficult, as Tatas discovered this May, when the USD3 bn it had borrowed to
finance acquisition of JLR was due for refinancing
Tata JLR: One year later
Thanks to the good showing of Jaguar Land Rover, Tata Motors reported a consolidated net profit of Rs 1,989 crore for the first quarter of the fiscal, a significant turnaround from a loss of Rs 329 crore in the same period last year. Consolidated net revenue grew 64 per cent to Rs 27,772 crore from Rs 16,842 crore.
The JLR business reported Å“220 million (Rs 1,590 crore) net profit for the quarter against a net loss of Å“64 million (Rs 490 crore) a year ago. Net revenue for the quarter was Å“2.2 billion (Rs 16,060 crore).
The two British brands have recovered from the downward spiral they experienced in 2008 and the early part of 2009 owing to the global slowdown and have since been reporting profits for the last three quarters. Volumes grew 59 per cent to 57,153 units (35,947 units).
Mr Carl-Peter Forster, CEO and Managing Director, Tata Motors, said demand for JLR vehicles was so high that the companies were facing a supply shortage of engines from Ford. Talks were on to remedy the situation. "We could have sold more cars if we had more engines." JLR sales have increased across various markets, particularly China, they have more than doubled. In the US and the UK, the two big markets, they were up 23 per cent.
Mr Ralf Speth, CEO, JLR, said the newly launched Jaguar XJ had been well received worldwide. While Europe and the US were looking good, the market in China was slowing down. The firm is now gearing for the launch of Land Rover LRX in 2011.
India Assembly plans
As for the India chapter, plans are on for local assembly of Land Rover vehicles. This will go a long way in bringing down its price and creating a new space in the luxury SUV market.
