Mergers and Acquisitions the Most Recent Worldwide

Mergers and Acquisitions

The most recent worldwide economic meltdown that began in 2007 decimated the auto industry. Chrysler and GM were two of the 'big three' that did not escape without filing bankruptcy and restructuring; shedding thousands of jobs and debts in the process. Ford managed to escape this fate and the accompany government take-over but also suffered tremendous loss in terms of sales and employees. At the height of the recession sales of U.S. vehicles had plummeted by nearly a third; with GM falling by 45%, Ford 30% and Chrysler 35% (BBC News online, 2009).

If anyone was projecting the recession; their warnings went unheeded while investing continued at breakneck speed until the economy sputtered to a standstill. It resulted in some formidable takeovers including the loss of the Jaguar and Land Rover luxury brands by Ford to Tata Motors Ltd. (TML). The former is known for its luxury passenger cars and the latter for its opulent SUVs. Tara, an Indian auto manufacturer, acquired the brands through a cash transaction of $2.3 billion (TML press release, 2008). The deal rested on Tara receiving approval for fusion control through the 'Merger Law'. Tata Motors supplies a variety of vehicle products including buses, commercial vehicles and passenger cars. Its audience is overwhelmingly buyers in India (89% of all revenues); their base of operations.

Analysis of the motivations of Ford and Tata

Ford's motivation for acquiring Jaguar and Land Rover; a UK-based luxury car manufacturer; was to make a dramatic entrance into the luxury car market; dominated in 1989 by German automakers. Ford rolled out the S. model of the Jaguar in 1998 and an X model in 2001. Neither was successful; Jaguar was showing continuous losses and a manufacturing plant was closed in response. By 2007 they had lost 17% of their market share. Conversely, Land Rover's sales and profits soared - reaching worldwide records in 2006. Meanwhile as the world was poised to enter a dramatic and devastating economic downturn Ford was facing multiple challenges. Fuel prices were increasing as were the healthcare and legacy costs to support their aging workforce. At the same time, all U.S. auto manufacturers were facing a decidedly shrinking share of the market. Even Ford's cash cow - Land Rover - was putting up weak sales and profits numbers. Finally, the Asian auto market - ever the aggressive competitor was turning out vehicles with greater fuel efficiency that appealed to Ford's consumers - leaving Ford 'in their rearview mirror' (so to speak). Suddenly, Ford was operating from a depleted financial position and by 2006 it reported its worst annual loss of $12.7 billion (Srivastava, 2009). To remain viable Ford had no choice but to divest itself of Jaguar and Land Rover; a move they completed when they sold the brands to TATA Motors in 2008.

TATA's first foray into the European global market with its City Rover model was an abject failure. Principles of the organization realized that its success to become a contender in the luxury passenger vehicle market likely lay in its ability to create a singular brand identity; a task they completed with the acquisition of JLR. The chart below shows the breakdown of the industry and the Tata motors percentage within the passenger vehicle market in India thus the success recorded by Tata as depicted in the chart supports its decision to go for the said acquisition of JLR.

Table: Indian Passenger Vehicle Market 2003-4 (Salwan, 2011)

Their execution was achieved with Land Rover but; as with the former owner; Jaguar continued to be a drag on their achievements. Remember that Ford had previously invested $12.7 with little improvement. It appeared TATA was facing a similar fate; and industry experts were quick to weigh in. In one assessment (Brown Robin & Fogarty Justin, 2009) the authors noted Ford was much more experienced in the global automotive market than TATA. This gave Ford an edge yet they were still unable to make a go of Jaguar. Meanwhile TATA lacked marketing and production expertise to compete in European and even Indian markets; witness the failed acquisition of City Rover and their inability to master the differences in carbon emission rules among markets. A second study (Paul Newton) claims the acquisition of Land Rover was ill-advised and will not benefit TATA in the long-term. The reason for this is two-fold. First, the global economy was on the precipice of disaster; a fact that impacted the breadth of industries around the world - not just the auto industry. Too, the largest customer base - Americans and Europeans - were showing signs of moving away from large SUVs into more economical and environmentally conscious vehicles.

Still another industry analyst was quick to point out that the Jaguar brand had been positioned to compete against much more esteemed companies including Lexus and Mercedes Benz (M.Anand, Outlook Business, 2008). Both are considered the 'blue bloods' of luxury cars and Jaguar was simply not established enough to be a contender. However, one author who reviewed the data offered that the purchase of Jaguar and Land Rover could actually be beneficial for TATA in that they would use these vehicles as models in the quest to learn how to build quality and technologically advanced automobiles and SUVs (R.Duane, 2008). At the same time Mike Peng (2008) opined that TATA's decision to move the manufacturing of JLR to its homebase in Pune, India was economically strategic because it would lower production costs considerably. And, TATA had benefited fiscally from the purchase of JLR in the Chinese auto market; finding itself with $2 billion in revenues by 2009. In their estimation the acquisition was nothing short of a coup and the brands should be nurtured; a point reiterated in another industry review of the acquisition. Another report went further; stating that TATA had the capability to improve Jaguar's performance with further design and branding investments (Gautam Kumar & Pradeep Jain, Business Standard, 2009). The table below however depicts that the acquisition of JLR was again strongly supported by Tata Motors prior success with the commercial trucks and cars.

Table: Indian Commercial Vehicle Market 2003-4 (Salwan, 2011)

Ford and TATA are two wholly different auto manufacturing entities. Ford is renowned globally but TATA owns a number of reputable brands well-known in other countries. They are a regional player that made its wealth through catering to the low and middle economic levels of India (Robin and Justin, 2009). It would be fair to say that India is its marketing 'bread and butter'. Now, as it looks to expand into the European market company principles are aware of their lack of expertise in developing a market base and becoming competitive in this new market. The point is that many feel if an internationally savvy marketer such as Ford was unable to save Jaguar; the less experienced Tata Motors will experience the same fate. Moreover, there are those that think TATA moved too fast and will trip over themselves as a result.

Yet, TATA's seeming objective was to find easy egress into the luxury car market which they thought they'd done with the purchase of JLR. The employed the strategies exhibited in the table below to follow through on the successful acquisition and aimed to continue their success on an upward spiral. Instead, they have learned it is a fiercely competitive arena and they must butt heads with the likes of Lexus and Mercedes; both of whom have all but perfected the art of luxury car manufacturing, marketing and sales. Even if this were not true; TATA seems to have made an error in judgment when turning to Jaguar as their premier vehicle for luxury car sales. The image of this brand has been in decline for years and it would appear that TATA can expect more of the same in the next decade. It is a long road back for Jaguar through image and manufacturing repairs that may never pay off.

Table: Multinational Strategic content 2009-2010 (Salwan, 2011)

Unfortunately for TATA the once 'sure bet' in the Land Rover brand is beginning to show signs of waning as well. Land Rover was once the premier sports utility vehicle but recent research shows a sharp decline in demand (IHS Global) which could prove disastrous for TATA. Recommendations for how to respond to this include diversifying the LR business and replacing it with the production of lower class vehicles. It is not lost on TATA or industry experts that the prospect looks to be an expensive venture for the auto manufacturer - in technological investments alone - never mind all of the associated costs of bringing a vehicle to market. Peng (2008) noted that in the flush of the purchase Tata Motors likely believed that by moving JLR production to India they could save billions. However, this was a short-sighted plan; as the cost to translate the technological requirements of the Indian market to that of Europe before such a move could be possible is prohibitive both in time, money and R & D.

Other problems plague any authentic consideration of moving the Jaguar-Land Rover operations to India. To begin with, JLR is based primarily in the United Kingdom - a nation that, like the rest of the globe, has only begun to experience economic recover. For all practical purposes they are still on the downward slope of the recession and honest assessments state they are several years away from a return to a robust economy. Therefore, Tata seems to have no other option than to endure sustained losses to JLR. Should it even attempt to pull the manufacturing operations out of the UK at this time they would face a huge backlash from the English government and unions. It is just not realistic to think that the country would abide the shuttering of plants. This means that Tata Motors will need to continue to finance JLR as a losing proposition with profits generated from its other divisions.

Succinctly, it appears that Tata Motors erred in its acquisition of the Jaguar/Land Rover franchise - a mistake that is costing them dearly and will continue to do so well into the future. Of course, one could make the argument that Tata was the beneficiary of a sweetheart deal considering that Ford paid $2.5 billion for Jaguar and $2.7 billion for Land Rover and sold them for a combined total of $2.3 to Tata (M. Anand, 2008). But, needless to say, these numbers do not reveal the underlying investment costs associated with trying to turn 'a loser into a winner'. In that case - the jury is still out but it doesn't appear that the decision will be in Tata's favor.

The identification of key post-acquisition challenges faced by Tata

Current External Influences & Pressures facing JLR/Tata Motors

The auto industry world-wide currently faces greater challenges than any time in the recent past. Tata is not the only company with struggles; nearly every automotive manufacturer has failed to turn a profit in the past half-decade or more which has resulted in a flurry of mergers, acquisitions and closings to stave off bankruptcy - and even then several went through the bankruptcy and restructuring process. Today, many of the automotive companies are fighting their way back - but are hardly out of the woods; and the unexpected beneficiary of this economic trauma is that the industry as a whole has become highly competitive - turning out a better product more fairly priced while being quite acquiescent to the consumer. Tata Motors is not without their own troubles as well. Even before their purchase of JLR they were underperforming; a problem that continued after 2008. Tata Motors is currently in debt 'to the tune of' Rs 18,800 crore. Last year they carried a debt of Rs 23,750 crore. Surprisingly - even though JLR has been denigrated through the entirety of this essay - it has contributed partly in a reduction of Tata Motors debut thanks to its excelled results in the prior fiscal years (Prashant, 2011).

That is not to say that Tata or JLR for that matter are on the upswing. Both are suffering the same long doldrums that other auto brands and manufacturers are experiencing in these extremely challenging economic conditions. Too, Tata Motors is not unlike its competitors in its efforts to improve its product, value and customer service in order to maintain and grow its market share (Prashant, 2011). Unfortunately, universally the auto companies as a whole shed thousands and jobs and found other ways to cut costs which eventually had a negative impact on their businesses as employees suffered emotionally from the trauma of seeing their friends fired while being expected to carry a greater load themselves. Time and again, recessions lead to job losses which leads to greater unproductivity of the remaining workforce - all of which impacts the customers. It is a domino effect that is not exclusive to the auto industry but is something companies dread. The only way to stem the problem is through exceptional Human Resource managers who are prepared to combat this. Specific to JLR what follows are business pressures that face now and into the future (Mortimer, 2009).

Closing 1 of 3 Jaguar Factories in the UK

One of the overriding problems currently facing JLR is the very real possibility that the company intends to close down at least one of the Jaguar production plants in the United Kingdom. Both Ford and Tata are aware that the high cost of manufacturing these vehicles in the UK is keeping it from becoming profitable. Tata Motors is examining the move to outsourcing the production to reduce costs. They are actually looking at opening a new plant in China and moving its manufacturing there - where immediate cost savings would be realized. Tata claims no final decisions have been made and any could be tabled as long as Jaguar continues its sudden and unexpected trajectory towards profitability. A new management team has been put in place and one of their priorities is to conduct authentic negotiations with the British government to secure 'give-backs' and financial support in turn for keeping production in their country (Rahul, 2013).

This decision could have positive and negative ramifications. Some believe that shuttering a plant in the UK would be an excellent strategic response financially. Conversely this would have a long-term negative impact on the human aspect of the decision as JLR currently employs over 14,000 people in Great Britain. Many people stand to lose their job without a chance for relocation. The jobs would likely go to the Chinese where labor and overhead costs are much cheaper (Rahul, 2013). In the table below, we present a breakdown of the labor costs and productivity in different countries.

Table: Labor Productivity in India (Salwan, 2011)

The Economic Crisis: Recession

This latest global recession that dates back to late 2007 in some cases - as the stage was being set for fiscal disaster from foolhardy decision-making - the automotive industry was one that bore the brunt of the fallout. In many cases, automotive product came to a halt as sales ground to zero. Cost cutting measures were applied as auto companies were fighting for their very lives - and even then it was a literal bloodbath that resulted in massive job losses, wage and benefit cuts, bankruptcy, restructuring and an inexorably slow climb back to profitability. Absolutely no company escaped this debacle unscathed including JLR. After all, they had already been experiencing losses regularly during times of what were considered economic boon - there was little hope that they would be exempt during a recession (Singh, 2011).

This recession led to the overall restricting of the taxation policies with increased percentages and returns even in India. The table below depicts how the pre-recession taxation structure was and how this structure supported a major acquisition by Tata Motors. Despite the percentages depicted below, the recession that followed shortly did, of course, leave a gaping hole in the tax structure but Tata's strength in recuperation helped it to record good returns still in comparison to other manufacturers.

Table: Tax Structure in India (Salwan, 2011)

Tata managed to keep JLR afloat with capital cash injections secured from independent banks; then lobbied the British government for financial assistance that ultimately never materialized. Ultimately, this was a providential move that benefited Tata Motors as noted when they announced pre-tax returns earned by JLR for the fiscal year that ended in March to be as high as £32m in comparison to the loss incurred in the past 10 months of £281m (Singh, 2011).

In the table below, we see a further breakdown of the major competitors in the automobile industry according to the profits made and how they rank in accordance to those. The most important column in the table is the last one (YTD % change) which is complemented or supported by the second one (% change) as it accurately shows how Land Rover has grown and improved leaps and bounds since Tata took over by showing the highest rate of change to year-ending change, i.e. more than almost twice as much as majority of its competitors, which is quite a stellar percentage to record.

Rank

Automaker

Change

Year To Date

YTD

% Change

#1

Ford

18,527

+ 9.3%

168,905

+ 3.8%

#2

Vauxhall

17,999

+ 11.1%

133,931

- 6.8%

#3

Volkswagen

13,435

- 1.5%

109,240

+ 1.2%

#4

+ 13.1%

75,099

+ 7.3%

#5

Nissan

+ 14.0%

62,290

+ 11.3%

#6

BMW

- 9.4%

71,816

+ 4.6%

#7

Peugeot

+ 8.5%

59,624

+ 3.1%

#8

Mercedes-Benz

+ 11.2%

54,405

+ 14.2%

#9

Toyota

+ 25.2%

51,039

+ 19.0%

#10

Kia

+ 25.2%

39,071

+ 23.1%

#11

Citroen

+ 17.7%

42,674

+ 5.3%

#12

Hyundai

+ 32.7%

40,394

+ 13.7%

#13

Skoda

+ 25.7%

32,314

+ 17.1%

#14

Fiat

+ 40.7%

29,197

+ 13.3%

#15

Honda

+ 26.3%

31,130

+ 7.8%

#16

Land Rover

+ 62.6%

29,511

+ 33.7%

Brand Loyalty and Company Image

The argument in favor of JLR is not that they are ill-respected in the luxury car market - 1 uite the opposite. In many cases experts feel they are an exclusive - even marquee - brand that is synonymous with quality. The country of production origin plays a role in the consumer consideration of a vehicle. Currently, British produced vehicles are held in high regard. The British vehicle production is known for its craftsmanship and the perception is one of quality, heritage, and singularity. Some believe JLR would be well-advised to continue to maintain this image rather than moving towards replacing the manufacturing of JLR with high-profit/low volume automobiles. In fact, moving production to another country would cost Jaguar its 'made-in-England' branding that is part of what makes it distinctive and could actually be a death-knell for the franchise (Singh, 2011).

Many believe the best and only right move for Tata Motors to make regarding JLR is to keep production in the United Kingdom and focus on continued improvements to quality, technology and marketing. The workforce would be virtually unaffected and company loyalty could soar. This would allow for improvements to craftsmanship and manufacturing and monies earmarked for relocation could be plowed back into the plants. Despite the fact that JLR's brand image has taken a beating in the past decade; the decision to remain in Great Britain could bolster this; and a grateful workforce would be more inclined to work hand-in-hand with management to carry out improvements (Singh, 2011).

Competing Luxury Car Makers

The luxury car and SUV market is one of the most competitive in the industry; long-suffering from its rivalry with both Mercedes and BMW. The latter regularly has sales figures that are six times that of JLR so it is easy to understand why there is no love-loss between them. The pie chart below shows the competitive market for each of the brands that pose a strong opposition or threat to Tata/Land Rover acquisition within the UK. The pie chart depicts a very accurate representation of how stiff is the entry or sustenance into this industry and how Tata will need to construct effective market strategies that will help it propel and make inroads in the global market. One of the marketing strategies of each company is to belittle their rivals. But, perhaps a more effective behavior on JLR's part would be to put their efforts into performing an in-depth customer analysis on which to make future decisions. The goal is to create a vehicle that excites the consumer base. Additionally, they might find greater success by refocusing on customer service; something that BMW is renowned for. In this way JLR may eventually begin to close the gap between the two companies in sales and profits. Some analysts have even recommending that Tata Motors should create a special division dedicated solely to concerns of customer service; beginning with training staff to be sensitive to their customer's needs while adding a variety of services including adding online assistance and 24-hour hotlines. These are just a few ideas that would help make Jaguar and Land Rover competitive (Mortimer, 2009).