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Theatrics at TATA M&A Street: Frenzy to freeze

The Tata group headquartered in India represents a global enterprise in the making.
The groups operations span over 100 nations, and it exports its products and
services to over 150 nations worldwide. The group employs over 580,000 people
globally. In FY 2013-2014, the total revenue of the group was US $103.27 billion,
which translates into INR 624,757 crores. Around 67% of this revenue is generated
from its operations outside India.
A highly diversified conglomerate, the Tata group operates in 7 business sectors
namely, engineering products and services, materials, chemicals, energy, consumer
products, services and information technology and communications. (Source:
http://tata.com/businesses/sectorsindex/Business-sectors). Under these defined
sectors over 100 Tata companies operate in automotive and engineering, metals
and composite, chemicals, beverages, hotels, airlines, financial services, consulting
and software etc. industries.
Tata group was founded nearly 150 years ago in 1868 by Jamsetji Tata. The Tata
group has always been a torchbearer of excellent corporate citizenship. It has a
distinctive ownership structure. Philanthropic trusts hold 66 percent of the equity of
the holding company, Tata Sons. Owing to such an ownership constitution and
philosophy of community service, the Tata name has been accorded a great deal of
respect and it enjoys immense trust for its unwavering devotion to ethics, values
and
corporate
social
responsibility.
(Source:
http://tata.com/aboutus/sub_index/Leadership-with-trust)
However the Tatas are widely perceived as nice, but then nave. In fact, Kiron
Kasbekars article Only the fittest survive on the www.tata.com portal seems to be
an admission by the Tatas they were perceived as the nice guys, but they do not
know
how
to
do
business
in
a
competitive
world.
(Source:
http://tata.com/company/articlesinside/hAepcfPFno0=/TLYVr3YPkMU=).
However,
Tatas fervently contest such an assessment for the period beginning early nineties
after Mr. Ratan Tata took over as the chairman of the group (1991).
The Tatas cite the vision, ambition and aggression displayed by Mr. Tata to
transform the group into a multi-national giant. According to Bloomberg, the group
spent at least $15.5 billion buying companies during late nineties and the first
decade of this century. It resulted in multiple marquee acquisitions and to name a
few, Tata Teas takeover of U.K.s Tetley for US$450 million, Tata Steels acquisition
of Anglo-Dutch rival Corus for US $12,8 billion, Tata Motors buying Jaguar Land
Rover from Ford Motor Co. for US$2.3 billion and so on.
However, all is not well. This is borne out of Tata groups actions in recent past.
Firstly, after Mr. Ratan Tata retired in Dec 2012, his successor Mr. Cyrus Mistry has
been writing down some of the $15.5 billion assets acquired by Mr. Ratan Tata.
Infact, three of the biggest Tata companies namely, Tata Steel, Tata Chemicals and
Indian Hotels have impaired their assets at least four times since Mr. Mistry took
over. The skeptics claim that the impairment is not over yet.

Secondly, the aggressive global acquisition spree has abruptly and absolutely halted
after 2010. There are hardly any acquisitions in past 4 years (2011-2014). Also
whatever opportunities they were so ardently following earlier were abruptly
ditched. And in a significant departure from its erstwhile aggressive acquisitions
when it can be accused of going overboard, it is seems to have rediscovered respect
for both valuations and negotiations. For instance, Tata Communications opted out
of a race in 2012 to acquire Cable & Wire Worldwide Plc. finding the asking price too
high. In the second instance, Indian Hotels did not pursue its offer to buy the
residual 93.1% stake in Orient-Express Hotels.
In November 2012, Mr. Curus Mistry, the current chairman of the Tata group opted
out of the almost $1.2-billion bid for the OEH (renamed Belmond in March, 2014),
which the group had been trying desperately for over five years, to purchase the
hotel chain through Indian Hotels. The Taj group of hotels currently owns a 7% stake
in
OEH.
(http://online.wsj.com/articles/SB1000142405270230394970457946137193298841
0) It is notable that the stock price is at $13.38 on NYSE in Nov 2014, and that the
Tatas had paid $42 a share in 2007.
Tatas can be accused of destroying share-holder wealth. Even Mr. Tata admits that
the group had to reach deep into its pockets to keep some subsidiaries going
(Source: http://www.economist.com/node/18285497). This article is also available at
Tata.com
portal
at
http://www.tata.in/company/reportsinside/m3NH1LUSPKA=/TLYVr3YPkMU=)
Hence Tatas under Mr. Ratan Tata can be accused of burning serious cash. It is
useful to note that his personal stake in the group is less than 1%.
Thirdly, there seems to be more than what can be called a garage sale initiated by
the group. For instance Tata Power sold an Indonesian coal mine for $500 million,
Tata Communications is in talks with Vodacom to sell South African subsidiary, Tata
Teleservices according to sources, is on the block, Tatas stake in the Dhamra port
project is also on the block.
Fourthly, majority of the group companies well deserve the label of also-rans. The
article Reinventing Tata published in The Economist in Feb 2001 points out that out
of the 80 companies, 11 companies account for 85% of revenues and 90% of profits.
(http://www.economist.com/node/507484)
Hence, it so appears that their new found ambition and aggression during 19952010 dissipated thereafter. This was two years before Ratan Tatas tenure came to
an end.
An unmatched heritage
The foundation of the Tata Group was laid by Jamsetji Nusserwanji Tata in 1868. He
was 29 years old when he established a trading company in Bombay (now Mumbai).
He is fondly remembered as an avowed nationalist, a devoted philanthropist and a
visionary entrepreneur. He contributed immensely to industrialization in India. His
first major enterprise was a textile company, Empress Mills in Nagpur in central
India in 1877. His vision included setting up an iron and steel company, generating
hydroelectric power and founding an institution to inspire and support Indian

scholars to pursue sciences and higher studies. For the latter, he established the JN
Tata Endowment in 1892 for promoting higher studies in India as a philanthropic
initiative.
In 1903, the magnificent Taj Mahal Hotel in Bombay was setup. Today, the Taj Group
of Hotels is an embodiment for luxury and quality. After his death in 1904, Sir Dorab
Tata, the elder of his two sons, set up the Tata Iron and Steel Company in 1907. In
1911, the Indian Institute of Science (IISc), set up in Bangalore, as a center for
scientific learning and research. In 1915, the Tata Group set up hydroelectric power
generation facility near Bombay.
In 1912, well before it became statutory in most parts of the Western world, Tata
Steel introduced 8 hour working days. In 1920, Tatas introduced the provident fund
scheme, while the Indian governmental regulation came into force in 1952. Also the
Tata townships along with the facilities they provide, is a striking example of an
organization caring for its employees.
For more than a century before the Giving Pledge formally came into being, the
members of the Tata family have been bequeathing significant portions of their
wealth to many trusts they set up. These trusts now own 65.8 per cent of the shares
of Tata Sons, the holding company.
In next two decades, the Tata Group entered new businesses like insurance,
chemicals etc. In 1932, after Sir Dorab Tatas demise, Sir Nowroji Saklatwala
became the chairman. In 1938, following Sir Nowrojis passing away, JRD Tata who
was then a 34 year old, was appointed the chairman of the group. JRD Tata led the
group for the next five decades till 1991.
Under his dynamic leadership, the Tata Group diversified further. For instance, Tata
Aviation Service (1932), Tata Chemicals (1939), Tata Motors (1945), Tata Industries
(1945), Voltas (1954), Tata Tea (1962), Tata Consultancy Services (1968) and Titan
Industries (1984). This was the era when businesses and businessmen were viewed
with skepticism and hostility by the governments and by the society as well. The
state exerted tight controls on businesses, and often unleashed the power of the
state machinery upon businesses to make them subservient to the state. To the
uninitiated, it may appear shocking that the Indian economy had been so rigidly
regulated that businesses were fined and those at the helm could even incarcerated
for surpassing the defined output quotas. However it was not possible to crush the
entrepreneurial spirit of the legends as JRD Tata.
Mercifully, the early 1990s ushered in systemic economic reforms in India. It is often
referred to and rightly so as Indias second independence. It heralded freeing the
domestic economy from the control regime with restricting of the role of the
government and the advent of global companies and hence global competition in
many sectors. The rules of the game were rapidly evolving. Most Indian
businessmen were skeptical of their abilities to survive such unbridled competition
and scared of the multinational companies appetite for fight and their endless
cash-reserves. The sale of Thums Up by Parles Chauhan brothers to Coca-Cola for
US$60 million in 1993 serves to highlight the skepticism amongst many Indian
businesses that prevailed then.

In her article published in Business Standard in 2009 The brand that refused to die,
Shamni then cites Thums up as possibly Indias most resilient iconic brand. In 1993
Coca-Cola re-entered India, spurring a three-way Cola War with Thums Up and Pepsi.
That same year, Parle sold out In 1993, Chauhan sold five brands to Coca-Cola
India: Thums Up, Gold Spot, Limca, Maaza and Citra to Coke. Many assumed Parle
had lost the appetite for a fight against the two largest cola brands; others surmised
that the international brands' seemingly endless cash reserves overwhelmed Parle.
In 1993, Thums Up had a 36% market share versus 26% for Pepsi. (Source:
http://businesstoday.intoday.in/story/the-brand-that-refused-to-die/1/4179.html)
While Chauhan argued a likely mass defection by his bottlers as a significant reason
for laying down arms but it is hard to dismiss the skeptical views that multinationals
would win anyway. In 1998, when Donald Short took over as the new CEO of CocaCola India, he admitted that 40% of Coca-Cola Indias turnover at the time came
from Thums Up and 17% from Limca, and Cokes share was a mere 23%. And till
date, it remains the largest selling Cola in India.
In 1991, it was in such a tumultuous scenario that Mr. Ratan Tata took over as the
chairman of the group. One on hand, there were the threats that liberalization
presented. The first threat was of global competition in an erstwhile protected
domestic market. The second was that the Tatas were vulnerable as their holding in
many group companies was low, leaving it open to hostile takeovers. In 1996, Tata
Sons held a insignificant stake in these companies. The article Reinventing Tata
published in The Economist (Feb, 2001) quotes Mr. Ratan Tata, I found that the Tata
stake had become diluted down to single figures. In the case of Tata Steel, for
instance, we owned only 2%. By 2001, improved it to an average, 26% stake in
operating companies and he aimed at achieving 50%. Three, many Tata companies
were not in a position to offer significant competition owing to their size and lack of
dynamism within.
On the other hand, was a significant danger that stemmed from within, and that
was danger of implosion. For one, the coordination and synergy at the group level
was low. In some instances, they competed with each other so vigorously that four
textile
mills
drove
each
other
out
of
business.
(Source:
http://www.economist.com/node/18285497).
Secondly, the Bombay House, the groups Headquarters did not have an effective
control over many companies who were widely perceived as being run as fiefdoms.
These fiefdoms detested any imposition of a group mandate and refused to toe the
group vision. Since 1981 this challenge assumed epic proportions when JRD stepped
down as the chairman of Tata Industries and named Ratan Tata his successor. The
four prominent names who resented this succession plan were Russi Mody of Tata
Steel, Ajit Kerkar of Indian Hotels, Darbari Seth of Tata Chemicals and Nani
Palkhivala of ACC (Source: http://www.thehindu.com/todays-paper/tp-business/manwho-made-the-elephant-dance/article4233391.ece) The level of acrimony can be
judged from the fact that Rusi Mody had once likened Ratan Tata to a 'circus
performer', and invited journalists to showcase the workers support for him at the
TISCO, Jamshedpur plant.
Ratan Tata ultimately triumphed over the barons but it consumed a large part of his
first five years. He emerged with his supremacy recognized and accepted too. Later
Mr. Tata was quoted by The Hindu, he said, If I reflect on what these ten years have

been for me personally - they have been a mixed bag. There is some satisfaction.
there is also a sense of frustration at the resistance to change from many of my
colleagues that I have seen through this period of time. Some resistance is open,
which I can deal with, but some resistance in the form of undercurrents, has been
very destructive.(Source: http://www.thehindu.com/todays-paper/tp-business/manwho-made-the-elephant-dance/article4233391.ece)
Then, there were the opportunities that liberalization presented. Mr. Tata set about
streamlining with a vengeance. He focused the group on seven industries
mentioned in the beginning. Revitalizing current and entering new businesses,
manufacturing breakthrough products and acquiring foreign companies for a global
footprint were the key initiatives. For instance, in 1996, Tata Teleservices for
telecom market; in 1998, the first indigenously made car the Indica was launched;
in 2002, VSNL, countrys leading international telecom service provider was
acquired; in 2004, TCS was the largest private sector IPO in the domestic market;
and, in 2008, the worlds cheapest car Tata Nano was announced, and launched a
year later. The next section focusses on globalization by Tatas.
Global footprint
He embraced globalization with a vengeance. The article Out of India published in
the economist in March 2011 states that the foreign acquisitions grew dramatically:
in 1995-2003 Tata companies made, on average, one purchase a year. (Source:
http://www.economist.com/node/18285497).

Table 1.1

Mergers and acquisitions

Given below is a list of the various companies that have been merged with or have
been acquired by Tata companies.
Tata company Acquired company

Country

Stake acquired

2014
Tata Global
Beverages

Earth Rules (acquired by


Bronski Eleven, a TGB
subsidiary)

Australia

100 per cent

TCS

Alti SA

France

100 per cent


(wholly-owned)

April

Tata Chemicals

Olam International, Republic Republic of


of Gabon
Gabon

August

Tata Chemicals EPM Mining Ventures

Canada

30.6 per cent

Tata
BT Group's (BT) Mosaic
Communication business

UK

100 per cent

May
2013
July
2011

25.1 per cent

2010
January

s
April

TRF

Hewitt Robins International

UK

Metahelix Life Sciences

India

53.5 per cent

Tata Chemicals British Salt

UK

100 per cent


(wholly-owned)

Tata
International

Bachi Shoes India

India

76 per cent

Tata
International

Euro Shoe Components

India

76 per cent

Decembe Rallis India


r
(through Tata
Chemicals)

2009
January

Tata
Neotel
Communication
s

South Africa

30 per cent

March

Tata Tea
(now Tata
Global
Beverages)

Grand

Russia

33.2 per cent

July

TRF

Dutch Lanka Trailer


Manufacturers

Sri Lanka

51 per cent

October

Tata Motors

Hispano Carrocera SA

Spain

Remaining 79 per
cent

Tata Chemicals General Chemical Industrial


Products (now Tata
Chemicals North America)

US

100 per cent


stake

Tata Projects

Artson Engineering

India

Tata Motors

Jaguar and Land Rover


brands

UK

Tata Hitachi
Construction
Machinery
(Telcon)

Serviplem SA

Spain

79 per cent

Tata Hitachi
Construction
Machinery
(Telcon)

Lebrero SA

Spain

60 per cent

2008
January

March

June

Tata
China Enterprise
Communication Communications Limited
s
(CEC)

China

50 per cent
equity interest

August

Voltas

Rohini Industrial Electricals

India

51 per cent

Septemb Tata Power


er

Geodynamics

Australia

10 per cent

October

Miljbil Grenland /
Innovasjon

Norway

50.3 per cent

Tata Motors
European
Technical
Centre Plc

Decembe TCS
r

Citigroup Global Services

US

100 per cent

100 per cent

2007
January

Tata Steel

Corus

UK

March

Tata Steel

Rawmet Industries

India

April

Indian Hotels

Campton Place Hotel

US

Tata Power

Acquired Coastal Gujarat


Power

India

Tata
Tea through
Tetley group
(now Tata
Global
Beverages)

Vitax and Flosana


trademarks

Poland

Tata
Transtel Telecoms (TT)
Communication
s

South Africa

June

Tata Power

PT Kaltim Prima Coal


and PT Arutmin Indonesia

Indonesia

30 per cent
equity stake

October

TRF

York Transport Equipment


(Asia)

Singapore

51 per cent stake

Tata Metaliks

Usha Ispat, Redi Unit

India

100 per cent


(wholly-owned)

Germany

90 per cent

Tertia Edusoft AG

Switzerland

90.38 per cent

Tata Infotech

India

2006
January

Tata Interactive Tertia Edusoft Gmbh


February TCS
March

Tata Chemicals Brunner Mond (now Tata


Chemicals Europe)

UK

36.5 per cent

April

Tata Steel

Millennium Steel

Thailand

67.11 per cent

May

Tata
Tea through
Tata Tea (GB)
(now Tata
Global
Beverages)

JEMCA

Czech Republic

Assets: intangible
and tangible

June

Tata Coffee
(now Tata
Global
Beverages)

Eight O' Clock Coffee


Company

US

100 per cent


(wholly-owned)

Septemb Tata
er
Tea through
Tata Tea (GB)
(now Tata
Global
Beverages)

Joekels Tea Packers

South Africa

33.3 per cent

Novembe Indian hotels


r

Ritz-Carlton hotel

US

2005
February Tata Steel
Tata Motors

NatSteel Asia Pte

Singapore

100 per cent


(wholly-owned)

Hispano Carrocera

Spain

21 per cent

March

Tata Chemicals Indo Maroc Phosphore


S.A. (IMACID)

Morocco

Equal partner

April

Tata Motors

Tata Finance

India

Merger

July

Indian Hotels

The Pierre

US

Management
contract

Tata Industries

Indigene Pharmaceuticals
Inc

US

<30 per cent

August

Tata
Teleglobe International
Communication
s

UK

Tata
Technologies

INCAT International

UK

Trent

Landmark

India

Septemb Tata AutoComp Wndsch Weidinger


er

76 per cent

Germany

Tata
Tata Power Broadband
Communication
s

India

Tata
Tea through
Tata Tea (GB)
(now Tata
Global
Beverages)

Good Earth Corporation &


FMali Herb Inc

US

TCS

Financial Network Services

Australia

TCS

Pearl Group

UK

Novembe TCS
r

Comicrom

Chile

Decembe Indian Hotels


r

Starwood group (W Hotel)

Sydney

100 per cent


(wholly-owned)

UK

63.5 per cent


(December 2005)

October

Tata Chemicals Brunner Mond (now Tata


Chemicals Europe)

100 per cent


(wholly-owned)

Structured deal

36.5 per cent


(March 2006)
2004
January

TCS

Airline Financial Support


Services India (AFS)

India

100 per cent


(wholly-owned)

March

Tata Motors

Daewoo Commercial
Vehicle Company

Korea

100 per cent


(wholly-owned)

Tata
Dishnet DSL's ISP division
Communication
s

India

TCS

India

Aviation Software
Development Consultancy

India (ASDC)
June

Tata Chemicals Hind Lever Chemicals

India

July

TCS

India

Phoenix Global Solutions

Novembe Tata
Tyco Global Network
r
Communication
s

Amalgamation

US

2003
July

Tata
Gemplex
Communication
s

US

2002
February Tata Sons

Tata Communications
(formerly VSNL)

India

100 per cent


(wholly-owned)

Septemb Indian Hotels


er

Regent Hotel (renamed Taj


Lands End)

India

Effective 100 per


cent stake

Decembe Tata
r
Teleservices

Hughes Telecom (India)

India

50.83 per cent

Novembe Tata Sons (TCS) Computer Maintenance


r
Corporation (CMC)

India

2001

2000
February Tata Tea and
Tata Sons
(now Tata
Global
Beverages)

Tetley group

UK

Source: http://tata.com/htm/Group_MnA_YearWise.htm
Table 1.2

Year-wise number of M&A

Acquisition

Number of
companies merged
or acquired by a
TATA company

2000

2001

2002

2003

2004

2005

17

Year of
Merger and

100 per cent


(wholly-owned)

2006

2007

2008

10

2009

2010

2011

2012

2013

2014

Nice guys but not street smart


On the Tata.com portal is an article by Kiron Kasbekar that refers to the groups
image in early nineties. In the article Only the fittest survive in October 2007, Kiron
Kasbekar
(http://tata.com/company/articlesinside/hAepcfPFno0=/TLYVr3YPkMU=)
writes that A decade and a half ago, surveys would show the Tata group scoring
high on trust but low on street smart. The implication: these are nice guys, but
they dont know how to do business in a competitive environment.
Much latter, a profile in Fortune in 2002 characterized Tata as both one of India's
most beloved companies and a mess.
Tata historically has been a very conservative group, not looking to take very
leveraged or risky calls in business, said Mumbai-based Bajpai, who helps manage
$1.8 billion of shares as senior vice president at IIFL Wealth Management. It went
after deals so aggressively only in the last 10 years, which was so unlike the group.
(Source:
http://www.bloomberg.com/news/2013-11-18/tata-writing-down-assetsafter-buying-spree-corporate-india.html)

Euphoria grips TATAs


By October 2007, it stood at Rs.129,994 crore ($28.8 billion). In 1991, the group had
little by way of operations outside India, except for the onsite work done by its

software people and some marginal hotel operations. The group now has operations
in more than 54 countries across six continents, and exports products and services
to 120 nations.
In one decade, the Tata group acquired companies around the globe at an
investment cost of about $15.5 billion, pitching itself into the global league.
By November 2013, the groups turnover reached USD $103 billion.

Dormant with US$35 Billion Debt


Deafening silence during past 4 years after euphoria
The Tata group has been less active in the last four years, after the global financial
crisis brought growth in developed economies almost to a halt.
Refer Table 1.1, and you notice that the Group has merged or acquired with only 4
companies in past 4 years. This is in sharp contrast to 2004-2010 period, where it
merged or acquired between 4-17 companies every single year.
The groups 32 listed firms and Tata Sons have $35 billion of debt with a third of
that due in the next three years, according to data compiled by Bloomberg.
(http://www.bloomberg.com/news/2013-04-07/tata-said-to-seek-m-a-head-as-mistrygrows-team.html).
In 2007, after nine grueling rounds of bidding, India's Tata Steel acquired the
Anglo-Dutch steel maker Corus, a company four times its size, for US$12 billion.
Tata's acquisition of Corus strained their finances severely. It raised $6.17bn of
debt to pay for the deal through a new subsidiary of the acquired firm called Tata
Steel UK. Analysts said the deal, which coincided with the global economic
slowdown, was highly overpriced.
Tata Motors Ltd. (TTMT) purchased Jaguar and Land Rover.
Tata Communications Ltd dropped out of a race in 2012 to acquire Cable and
Wireless Worldwide Plc after failing to agree on a price.

Massive writing down of the assets


As of Nov 2013, Cyrus Mistry, chairman of Tata Sons Ltd, is writing down the value

of some of the $15.5 billion assets purchased by his predecessor over two decades
to boost the allure of Indias biggest corporate group. Less than a year after taking
over as chief of the conglomerate, the billionaire scion has pared the value of
overseas assets by at least Rs.9,500 crore after Europes record recession and a
global

slowdown.

(http://www.livemint.com/Companies/BhpIjAWeoFupY602aqgh6I/Tata-group-writingdown-assets-after-buying-spree.html)
In the article, Bhuma Shrivastava quotes Alan Greene, a Singapore-based analyst at
Moodys Investors Service, said in telephone interview on Monday on Tata Steel
Ltds impairment charge. It makes you feel more positive as after a spring
cleaning. If there are overvalued assets on the balance sheet, you may end up
hanging onto them. If you are not sure of some of the assets, it creates uncertainty.

Write-downs made by Tata Group companies under Cyrus Mistry


TATA STEEL
Rs 8,356 cr For goodwill on the Corus acquisition, in May 2013
Rs 1,577 cr For goodwill on the Benga project, in Aug 2014
TATA CHEMICALS
Rs 484 cr

For fixed assets & goodwill on Tata Chemicals Europe, in May 2013

Rs 924 cr

For fixed assets and goodwill on Tata Chemicals Magadi, in May 2014

INDIAN HOTELS COMPANY


Rs 373 cr In May 2013
Rs 287 cr In November 2013
Rs 500 cr In March 2014
TATA MOTORS
Rs 700 crore

For its acquisition of Hispano Motors, in November 2013

(Source: http://www.business-standard.com/article/companies/tata-group-writesdown-2-2-bn-under-mistry-114083100285_1.html)