Tata Group: A tale of two acquisitions

Well, a short take on them actually. But, here's the news first. Tata Motors acquires Jaguar and Land Rover. This is another big acquisition for a Tata group company. The figure of $2.3 billion may not be as big as $11 billion (approximately) that Tata Steel spent to buy corus. Remember that Jaguar has the capacity to drain resources. A case in point is Ford spending over $10 billion in all (including the purchase price of about $2.5 billion), to try to rejuvinate them. So, $2.3 billion is just the acquisition cost. The cost of turning around the company is certain to go higher. Tata Motors (and the group as a whole) may be well funded. But, can they afford to spend something like Ford did. Ford, itself being a deep-pocketed company, is finding it tough to run the companies. May be because of tough conditions at home, Ford is disposing-off its non core assets even though they are no longer making losses.

There are some similarities in the two Tata deals. Both the targets are based in the UK. Both are highly leveraged deals. Both are struggling legacy companies of the erstwhile famed British manufacturing sector. But the similarities end there. Tata Steel, which eventually paid a higher price for Corus in the bidding war with the Brazilian company, CSN, had a near-perfect timing with the deal. They saw the future that steel prices knew only one direction from now on - northwards. They were not wrong but that couldn't have been the only reason. With the industry getting consolidated and big M&As becoming the norm, they probably felt threatened they may be the next acquisition target of Mittal Steel(Arcelor Mittal now). In order to survive, they needed size of operations to be in their favor. With the industry consolidated, steel producers have pricing power which had eluded them so far. Hence this daring acquisition which was many times the size of Tata Steel itself. But, steel is a commodity at the end of the day. Buyers don't necessarily go by which brand of steel they buy. Big buyers like the automobile industry may look at the sustainability and quality of suppliers. That would have been easier for Tata Steel to convince Corus' buyers. With steel prices going through the roof, the going has not been that difficult for Tata Steel. But Jaguar and Land Rover are brands. Big ones at that. Moreover, they sell at retail level. So, it'll be a lot more difficult for Tata Motors to convince its customers. It is easier for Tata Steel to convince XYZ Manufacturing Co. to buy Corus steel than for Tata Motors to convince the same company's executives to buy Jaguars or Land Rovers. Consumers associate brands with a certain image. They pay premiums for brands that give them the feeling of royalty. JLR are certainly in that exclusive club. But, right now, that may have taken a small beating. Or atleast till the time the consumers come to terms with it. Dealers of the brands, who ew-ed at the thought of the deal going in Tata's favor in the initial stages of bidding, are now welcoming it. They may not have any other option but to welcome the deal. But buyers do. If they feel a Jaguar or a Land Rover doesn't give them the kind of image they want, they may easily go for a BMW or a Merc. Tata Motors executives know that. They have said that they don't intend to interfere with the plans these two companies currently have. That their management has freedom to implement them. There may be spill-over benefits to Tata Motors like technology-transfer. Tata Motors may not have had the best technology used in its cars. With JLR deal, they can now certainly say so.

A big question that only time will tell is, when a pioneer like Ford struggled to turn them around, can Tata Motors achieve that?