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An Overview

Nilotpal Biswas
M.B.A (F), Dept. of Commerce
Roll No: 23
Mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate
strategy, corporate finance and management dealing with the buying, selling and
combining of different companies that can aid, finance, or help a growing company
in a given industry grow rapidly without having to create another business entity.
Mergers and acquisition, now a day’s has become a well practiced phenomenon in
the Indian corporate sector. In 2007, there were a total of 676 M&A deals and 405
private equity deals, in 2007, the total value of M&A and PE deals was USD 70
billion, Total M&A deal value was close to USD 51 billion, Private equity deals
value increased to USD 19 billion. The growth in mergers and acquisition
Came because of three reasons,
(a) Globalisation and increased competition
(b) Concentration of companies to achieve economies of scale
(c) Cash Reserves with corporate

This Merger and acquisition is seeing a major change in trend and now a day’s
Cross-border deals are growing faster than domestic deals. And of course Private
Equity (PE) houses have funded projects as well as made a few acquisitions in

In year 2008, M&A deals in India in 2008 totaled worth 19.8 bn $, less compared
to last year which stood at 33.1 bn $. Decline of M&A activity was in line with the
global activity. Cross border M&A totaled 8.2 bn $ compared to 18.7 bn $. But one
deal of acquisition happened that year which took the world by storm. That is Tata
Motor’s acquisition of Jaguar-Land Rover. On March 26, 2008, Tata Motors
entered into an agreement with Ford for the purchase of JLR. Tata Motors agreed
to pay US$ 2.3 billion in cash for a 100% acquisition of the businesses of JLR. As
part of the acquisition, Tata Motors did not inherit any of the debt liabilities of JLR
- the acquisition was totally debt free.


Tata Motors Limited, formerly known as TELCO (TATA Engineering and

Locomotive Company), is a multinational corporation headquartered in Mumbai,
India. It is India's largest passenger automobile and commercial vehicle
manufacturing company and a midsized player on the world market with 0.81%
market share in 2007 according to OICA data. Part of the Tata Group, and one of
the world's largest manufacturers of commercial vehicles. The OICA ranked it as
the world's 19th largest automaker, based on figures for 2007. as well as the second
largest automaker of commercial vehicles.
Established in 1945, when the company began manufacturing locomotives, today 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 company is the world’s fourth largest truck manufacturer,
and the world’s second largest bus manufacturer. Tata Motors has its
manufacturing base in Jamshedpur, Pantnagar, Lucknow, Ahmedabad and Pune in
India as well as manufacturing facilities in Argentina, South Africa and Thailand.
The company manufactured its first commercial vehicle in 1954 in collaboration
with Daimler-Benz AG, which ended in 1969. Tata Motors is a dual-listed
company traded on both the New York Stock Exchange and the Indian Stock
Exchange (where it is a component of the Sensex index). Tata Motors was listed on
the NYSE in 2004, and in 2005 it was ranked among the top 10 corporations in
India with an annual revenue exceeding INR 320 billion. In 2004, it bought
Daewoo's truck manufacturing unit, now known as Tata Daewoo Commercial
Vehicle, in South Korea. It also, acquired a 21% stake in Hispano Carrocera SA,
giving it controlling rights in the company. In March 2008, it finalised a deal with
Ford Motor Company to acquire their British Jaguar Land Rover (JLR) business,
which also includes the Rover, Daimler and Lanchester brand names. and the
purchase was completed on 2 June 2008.


Jaguar Cars Ltd. ( better known simply as Jaguar) is an automaker from England,
United Kingdom that manufactures luxury and executive motor car.
Jaguar was founded as the Swallow Sidecar Company by Sir William Lyons in
1922, originally making motorcycle sidecars before switching to passenger cars.
The name was changed to Jaguar after the second world war due to the
unfavourable connotations of the SS initials. Jaguar cars are designed in an
engineering centre at their headquarters in Coventry, England and are
manufactured in one of three English Jaguar plants; Castle Bromwich in
Birmingham, Halewood near Liverpool and Gaydon in Oxfordshire. Following
several subsequent changes of ownership since the 1960s, Jaguar was listed on the
London Stock Exchange and became a constituent of the FTSE 100 Index, which
ended when Ford acquired Jaguar in 1989. The Ford Motor Company made offers
to the US and UK Jaguar shareholders to buy their shares in November 1989;
Jaguar's listing on the London Stock Exchange was removed on 28 February 1990.
In 1999 it became part of Ford's new Premier Automotive Group along with Aston
Martin, Volvo Cars and, from 2000, Land Rover; Aston Martin was subsequently
sold off in 2007. Between Ford purchasing Jaguar in 1989 and selling it in 2008 it
did not earn any profit for the Dearborn-based auto manufacturer.

On 11 June 2007, Ford announced that it planned to sell Jaguar, along with Land
Rover and retained the services of Goldman Sachs, Morgan Stanley and HSBC to
advise it on the deal. The sale was initially expected to be announced by September
2007, but was delayed until March 2008. On 26 March 2008, Ford announced that
it had agreed to sell its Jaguar and Land Rover operations to Tata Motors of India,
and that the sale was expected to be completed by the end of the second quarter of
2008. 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 at a cost of £1.7 billion.


Land Rover is an all-terrain vehicle and Multi Purpose Vehicle (MPV)

manufacturer, based in Solihull, West Midlands, England. Originally the term Land
Rover referred to one specific vehicle, 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 models, all capable of four-wheel drive.
Starting out as a model in the Rover Company's product range, the Land Rover
brand developed, first as a marquee, then as a separate company, developing a
range of four-wheel drive capable vehicles under a succession of owners, including
British Leyland, British Aerospace and BMW. In 2000, the company was sold by
BMW to the Ford Motor Company, becoming part of their Premier Automotive
Group. In June 2008, Ford sold its Jaguar and Land Rover operations to Tata

Morgan Stanley reported that JLR's acquisition appeared negative for Tata Motors.
Ford had bought Jaguar for US$ 2.5 billion in 1989 and Land Rover for US$ 2.7
billion in 2000. However, over the years, the company found that it was failing to
derive the desired benefits from these acquisitions. It can prove a bane for tata
motors as it had increased the earnings volatility, given the difficult economic
conditions in the key markets of JLR including the US and Europe. Moreover, Tata
Motors had to incur a huge capital expenditure as it planned to invest another US$
1 billion in JLR. This was in addition to the US$ 2.3 billion it had spent on the
acquisition. Tata Motors had also incurred huge capital expenditure on the
development and launch of the small car Nano and on a joint venture with Fiat to
manufacture some of the company's vehicles in India and Thailand. This, coupled
with the downturn in the global automobile industry, was expected to impact the
profitability of the company in the near future...


Tata Motors was interested in acquiring JLR as it would reduce the company's
dependence on the Indian market, which accounted for 90% of its sales. The
company was of the view that the acquisition would provide it with the opportunity
to spread its business across different geographies and across different customer
segments. Tata Motors had formed an integration committee with senior executives
from the JLR and Tata Motors, to set milestones and long-term goals for the
acquired entities. One of the major problems for Tata Motors could be the slowing
down of the European and US automobile markets. It was expected that the
company would address this issue by concentrating on countries like Russia,
China, India, and the Middle East. Forming a part of the purchase consideration
were JLR's manufacturing plants, two advanced design centers in the UK10,
national sales companies spanning across the world, and also licenses of all
necessary intellectual property rights. Tata Motors had several major international
acquisitions to its credit. It had acquired Tetley, South Korea-based Daewoo's
commercial vehicle unit, and Anglo-Dutch Steel maker Corus. Tata Motors' long-
term strategy included consolidating its position in the domestic Indian market and
expanding its international footprint by leveraging on in-house capabilities and
products and also through acquisitions and strategic collaborations.

Analysts were of the view that the acquisition of JLR, which had a global presence
and a repertoire of well established brands, would help Tata Motors become one of
the major players in the global automobile industry.

On acquiring JLR, Ratan Tata, Chairman, Tata Group, said, "We are very pleased at
the prospect of Jaguar and Land Rover being a significant part of our automotive
business. We have enormous respect for the two brands and will endeavor to
preserve and build on their heritage and competitiveness, keeping their identities
intact. We aim to support their growth, while holding true to our principles of
allowing the management and employees to bring their experience and expertise to
bear on the growth of the business


The sensitivity analysis indicates that Tata Motors will have to generate additional
net profits of US $ 250 m in the worst case scenario (maximum equity dilution) to
be EPS neutral. It should be noted that media reports indicate that JLR could have
generated profits to the extent of US $ 200 mn to 500 mn in FY07.

Key highlights:

• 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
centers, 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 .
• Ford has guaranteed for a minimum capital allowance of US $ 1.1 bn 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
• 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
FY2007. 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.
TATA MOTORS LTD Result Update:

Funding Structure
Step I – The entire acquisition will be 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. This
We expect company to require around 6 months time to arrange for long term
funds (debt as well as equity). We believe that there exists reasonable probability
of funding the equity portion without significantly diluting the share capital.
Probable Funding structure
Impact analysis of the above structure
Assuming the above funding structure, and interest rate @ 7%, Diluted EPS stands
at Rs 48.1 for FY10. To be EPS neutral, the entity would have to generate profit of
US$ 144 mn (see table below). It should be noted that the combined profits of the
two brands is estimated to be around US$ 300 mn. In such a scenario we believe
that acquisition will be EPS accretive in the above mentioned funding structure.
Also the debt equity scenario will be around 0.8 times.

Impact analysis – assuming no subsidiary stake sale and higher equity

Also, we undertook a sensitivity analysis assuming that the company will not be
able to raise money through stake sale in subsidiary and hence would have to resort
to higher dilution. Even I such a scenario the company will have to generate an
additional profit of US$ 248 mn to be EPS neutral in FY10.

Additional PAT to be EPS neutral

Having said that, the incremental profit generation that is required in FY09
could be higher by 6% to 12% due to higher interest outgo during the period
of bridge financing. We expect the company to arrange for long term funds
with a period of six months from the date of the regulatory approval.

Overhang to continue till clarity emerges on the following aspects

• Profitability and Cash flow generation
The management empathetically said that for CY07 JLR combined has reported
profits and that profitability existed for each of the quarter of CY07. We view the
development as a positive. Having said that, management did not share the
financials of the two brands.We believe that also relevant is the cash generation
from the business to understand the further funding requirement. The fact that
management has arranged for US$ 3 bn against the purchase consideration of US $
2.3 bn indcates some immediate funding for R&D and regular capex.
It should be noted that as a part of the agreement, JLR will not pay any royalty to
Ford. At the same time JLR will have to bear the burden of the R&D activities.
Currently, R&D expenses are re-billed by JLR to Ford. Based on CY06 financials,
the immediate requirement could be in the range of US $ 500 m. Having said that,
it is possible that the entire R&D activity does not pertain to JLR alone but also
includes for other Ford group entities. In such a scenario, the immediate
requirement could be on the lower side.

 Currency risks – an issue for profitability

As the manufacturing locations for JLR are situated in UK, we believe that the one
of the key risks to the profitability of the company would be currency risks. It
should be noted that UK account for around 30% of the revenues. As is evident
from the graph below GBP has been appreciating against the USD.

 Strategy to reduce dependence on mature market

JLR derived 80% of their sales from the North America and Europe which a cause
of concern as the automobile sales in these regions is under pressure. This could
put pressure or delay the recovery plans of Jaguar. Having said that, management
has shown confidence in the five year plans and claims that the plans have factored
in the decline in sales in the mature market.

While, the sales in emerging markets (Asia Pacific and RoW) have improved
the continuance of the same holds key for the company to provide cushion against
sales in the North American and European markets especially when 80% of the
sales in
CY2006 came from Europe and US.
 Pension Funding – Not much clarity given
While the management has stated that Ford is likely to fund US $ 600 mn to the
pension liability, it did not state the current status of deficit/liability. Also, it did not
indicate the composition of the pension assets. Considering the fact that more than
70% of the pension assets invested in equities, there exists a possibility of funding
requirement by Tata Motors in April 2009 when the actuarial valuation of the
assets are due.
Existing business contains multiple triggers during FY09- FY10

The likely recovery in the M&HCV segment together with a series of new product
line ups in passenger vehicle segment should enable the company to generate
adequate profitability during FY09-FY10. We have build in a case of 10% and
6.4% YoY domestic growth in our estimates for FY09 and FY10 respectively.
Having said that, our channel check indicates that Tata Motors can surpass our
Valuation and View

While we are disappointed with lack financial information, we have believe that
the conference call has reduced concern and uncertainties with respect to long term
arrangement with Ford on various issues like engine supply, R&D support and cost
sharing. Also, the fact that management stressed that JLR combined is a profitable
brand and has made profits in each of the quarter of CY07 and the five year plans
factors in the decline in sales in the US markets also addresses some of the
concerns with respect to financials. We continue to maintain our positive view on
the stock. However, we are revising downwards our price to Rs 840 to factor in the
reduction in per share value of subsidiaries post the dilution in the equity. We have
revised the per share value of subsidiary from Rs 200 per share to Rs 158 per


On June 28, 2009 Sunday, two of Britain's most luxurious and elegant auto brands,
Jaguar and Land Rover, were launched here at prices as rich as their features,
although their Indian owner Tata Motors swallowed a Rs 2,500 crore loss on
account of them.
Tata will sell the Jaguar, which had its origins in a motorcycle sidecar company,
XF and XKR series for between Rs 63 lakh and Rs 92 lakh, while Land Rover's
Discovery and Range Rover would be priced between Rs 63 lakh and Rs 89 lakh.

"It's quite a memorable day in the history and heritage of Tata Motors... JLR has
been well received and well established in India (in the past), but over the years
this brand has been disconnected from India," Tata group Chief Ratan Tata told
reporters here announcing the launch.

Tata Motors, the country's largest automobile company, suffered a net loss of Rs
2,505.25 crore in 2008-09 mainly on account of JLR that it acquired in March
2008. The expensive JLR marquee suffered on account of the economic meltdown.

But, still the deal mean a lot from business point of view as it is a major step of
India Inc. to really become Global as well as on emotional point of view as it
brought pride to India.

May be the deal is not sounding convincing in the first year of its operation but of
course the technological knowledge and advancement it will bring to Tata Motors
with its world class R & D, it will surely benefit Tata Motor in long run and will
establish it as a major player in global auto market.


International Business (By: Charles W L Hill, Arun K Jain)
1. Bussiness world (March 31, 2008, April 20, 2009)
2. Bussiness Today (April 5, 2008)
3. India Today (April 18, 2009)
4. 4p’s (April, 2008)
5. Business & Economy (April, 2008)
1. Times of India
2. Economics Times
3. The Telegraph
4. businessstandard .com