In essence, Ford Motor Company is a leader in the world of automobile manufacturers and as such, it was the manufacturer of the luxury brands such as Jaguar and Land Rover. Ford is the second largest automaker in the United States and at the same time the fifth-largest in the world. This is in terms of the sales made. On the other hand, Tata Motors Limited (TML) is one of the India's largest and respected business conglomerates which were established by Tata formerly a trading firm in 1968. TML was established in 1945 to manufacture locomotives along with engineering products as the Tata group part. Land Rover is one of the oldest sports utility vehicle abbreviated SUV. In line with this, SUV brands have been in the market as such they are so popular around the world. Jaguar on the on the other hand is the popular name of a brand that is associated with sports car racing to ultimate luxury. It was founded by William Lyons as the Swallow Sidecar Company in 1992. Arguably, 2006 witnessed declining financial performance of Ford and as a result, Ford had to sell its luxury brands Land Rover and jaguar to restructure it portfolio for reasons of creating a strong company and profitable growth.
Strategic and Economic Rationale for the Acquisition in the Case
The strategic and economic rationale for the acquisition of Jaguar and Land Rover by Tata Motors Limited was based on various factors. To begin with, Tata Motors Limited used this acquisition as a strategic plan. According to Thadamalla, Shah & Chatterjee (2009), the acquisition of Jaguar and Land Rover by Tata Motors Limited was being used as an avenue towards launching this company into a race of global automobile manufacturer by improving its technology and broadening product range. It is important to understand that Tata Motors Limited had dominated the market in India and some of the Asian countries. Notably, there was stiff competition on the international market that challenged the entry of companies into this market. However, since Jaguar and Land Rover had been on the international market, acquiring these brands served as an excellent strategy of international market entry by Tata Motors Limited.
Apart from using this acquisition to step into the international market, Tata Motors Limited also wanted to improve its technology since the international market had high technological standards. Furthermore, the technological knowhow of Jaguar as well as Land Rover was on based on international standards. In addition, Ford was willing to provide technology know-how to Tata Motors Limited on these brands for a period of time. In reference to Thadamalla, Shah & Chatterjee (2009), Ford committed to provide Jaguar and Land Rover with vehicle components and access to engineering and technological support for Tata Motors Limited.
In reference to Thadamalla, Shah & Chatterjee (2009), the acquisition of Jaguar and Land Rover by Tata Motors Limited would give the company a comprehensive product line-up from low-end to most expensive cars. Note that before the acquisition, Tata Motors Limited did not have a variety of products that could satisfy consumers from different economic backgrounds. Importantly, there was a high competition among the most expensive vehicle brands. On the contrary, low-priced brands of vehicles were less competitive in the market. In line with this, the management of Tata Motors Limited argued that the acquisition of Land Rover as well as Jaguar would increase the ability of the company to make profits in the market. Furthermore, by focusing on the fact that there has been a growing realignment of companies in market in order to make an impact in their respective markets, the acquisition of Tata Motors Limited was a timely venture that could enable the company to rise to an international competitive level. As such, global growth of this company would be enhanced. In addition, the acquisition could also be a cost-effective way of gaining competitive advantages such as technology, brand names valued in the target market and logistical and distribution advantages, while simultaneously eliminating a local competitor (Eiteman, 2007, p.72).
On the other hand, the acquisition of Jaguar and Land Rover by Tata Motors Limited was an important strategy that could enable the company to enhance its economic standpoint in the market. To begin with, the speculations in the market that Tata Motors Limited was the preferred bidder for Jaguar and Land Rover raised the price of shares of this company. According to Thadamalla, Shah & Chatterjee (2009), it was projected that the market for Tata Motors Limited was poised to expand with the acquisition of these brands. Recent financial results show that Tata has profited from the acquisition of Jaguar and Land Rover. In reference to Crain Communications, Inc. (2011), Jaguar and Land Rover posted a profit after tax of 275 million pounds ($440 million) in the quarter as sales climbed in China where Tata plans to start building the British brands. In line with this, the acquisition of Jaguar and Land Rover was an economic strategy that was meant to boost the economic status of Tata Motors Limited.
Strengths of Jaguar and Land Rover most Valuable for Tata
In mergers and acquisition, manifold benefits have been identified and so to speak, mergers and acquisitions seek to enhance as well as develop long-term profitability. This is accomplished by means of expanding the company's operations and in this case the company which is acquiring the other benefits as well as the one which is being acquired. This was the case for Tata Motors limited which sought to acquire the Jaguar and Land Rover (JLR). It applied a long term strategy that would enable it to come out of the level of low operation since it has been hit by the economic downturn. Following the acquisition, it is important to bring out the point that Tata Motors limited (TML) would benefit by the mere fact that it would benefit from the global market share. Along with this point, TML acquisition of JLR enables it to access technology and a complementary range of products (Thadamalla Shah & Chatterjee, 2009).
In respect to this point, TML will enjoy the strength of launching products at low levels of investments as compared to competitors at the global level (Thadamalla Shah & Chatterjee, 2009, p.6). As well, it would reduce the overdependence of Tata Motor's on the Indian market which is estimated to have accounted for about 90 percent of its sales. The acquisitions would expose Tata and as such bring it into the broad view of the global market whereby trading can be carried out with efficacy. This is to suggest that TML would benefit from the opportunity to spread its business in varied and different geographical areas and as such reach a large pool of customers.
Along with this point, acquisition of JLR would enable TML to gain complementary capabilities. In the same line of thought, the acquisition was potentially able to increase the diversity of the business across global markets as well as sectors of products. On the other hand, there is the benefit for Tata Motors to share in the best and as such competitive practices held by JLR both in the present and the future. Another thing to note is that the acquisition has the capability to benefit TML through the fact that JLR are brands that are globally famed ((Thadamalla Shah & Chatterjee, 2009, p.6). Together with this, TML would benefit from the fact that it would enjoy low cost of both the services of design and the low cost of engineering. Outstandingly, the acquisition offers TML with the golden opportunity to participate in the fast growing segments of auto-motors. Again in this context, Jaguar offers high performance and luxury vehicles which enhances as well as broadening of the portfolio of the brands.
The Indian auto major which is Tata has admittance to latest technology and the very help through which to broaden its branches to foreign geographies for a large market share. Arguably, there was much that the acquisition of Jaguar and Land Rover did to Tata Motors Company and as such, it acquired the right of entry to 100 percent right of entry to three UK plants. As well, centres for advanced design and engineering were opened for TML (Thadamalla Shah & Chatterjee, 2009). This would lower the cost of production for the company. Needless to say, the acquisition made it possible for Tata access to 26 sales companies together with the IP rights. In addition, capital allowances were opened for TML in the sense that it would acquire $1.1 billion in capital allowances for taxes. Interestingly enough, pension contributions amounting to $600 million made part of the share that the acquisition gave access to (Thadamalla Shah & Chatterjee, 2009, p.2-4). Just before the acquisition, TML would not access the luxury market segments but upon the acquisition, TML is able to access these kinds of markets. Such a deal will translate to TML being known from a global point of view along with the aspect of gaining recognition.
What were the major challenges for Tata motors in this acquisition?
Tata Motor JLR acquisition has not come along without any impeding challenges. In line with this, economic slowdown in both European and American markets stood as main challenge to the acquisition of the JLR by Tata Motors. There were also challenges of funding risks given that Tata Motors had limited resources. Again in this milieu, currency risks could potentially affect the acquisition of JLR by Tata since it was a cross-border acquisition. Cross-border acquisition is associated with different challenges and as such, there is need to value the target enterprise on the fundamentals of the performance which is projected in the market.
Such a strategy requires funding which may pose a great challenge for Tata Motors. Another challenge that Tata motors faced in this acquisition had to do with the tough conditions that prevailed in the US key markets (Thadamalla Shah & Chatterjee, 2009). Following this point, Tata needed a lot of funding in order that the JLR brand may be made profitable and thus enjoy competitive advantage. Apart from this, there was a potential challenge of the recession which had started wiping out the market that existed for luxury cars and in this case the JLR market. Economic decline in most of the times brings about people investing very little on luxury goods and in this case, JLR market would face the effect altogether.
Furthermore, it was feared that JLR's acquisition would have had a negative effect to Tata Motors since it had increased the volatility of the earnings. As well, Tata Motors was expected to incur a very huge expenditure of capital since it had planned to invest an extra $1 billion in JLR. In conjunction with this, TML was expected to invest huge capital while developing the Nano car (Thadamalla Shah & Chatterjee, 2009). This together with the market conditions that prevailed during the time of acquisition would translate to great losses of profit. From a global standpoint, the sales of cars had dropped with a 5 percent decrease as compared to the year that preceded.
From a general point of view, Tata Motors was faced by the challenge of the market being volatile due to the fact that new products were being introduced in the market. At the same time, the presence of competitors cannot be underrated since BMW, Lexus, Infinity and Mercedes stood out to compete with JLR (Eiteman, 2007). In spite of this, brand image has been in the recent times receding and if this is combined with the receding sales, then JLR acquisition would bring more strain to TML. During the times of economic crisis, it is important to consider the fact that investments have a tendency to become more of a risk and as such more costly than anticipated (Eiteman, 2007).
Introspectively, cross-border acquisitions face almost the same challenges and in this case, there are general challenges that are expected to occur in this case. They take in the challenges that come along with integrating different cultures from different countries (Finkelstein, 1999). Communication across borders over long distances is another issue of concern since by acquiring JLR does not mean that these will be shifted in India but given that they are British Margues, they have to remain in the Britain market. There is also the challenge of the misunderstandings that come as a result of different business norms and the differences that come as a result of styles of management since TML has not been acquainted with the management of the JLR cars (Finkelstein, 1999). Moreover, foreign market integration effort as well poses a great challenge to a cross-border acquisition.
The Major Potential Synergies from the Deal. Were they Realized?
One of the main reasons that contribute to merging or rather collaboration of businesses across the globe is to attain synergies that enhance the company's position in the market. In this respect, the acquisition of Jaguar and Land Rover by Tata Motors Limited provided major potential synergies from the deal. To begin with, it is important to mention the fact that the major synergies in this deal were expected to emerge from Corus, TACO and TCS. These companies provided vital avenues towards taking advantage of the synergies that arose as a result of the acquisition.
To begin with, it was expected that TAMO would be assisted to improve on the quality of its current products in the Indian markets by capitalizing on the design capability as well as the experience of Jaguar and Land Rover. According to Mohandas (2010), the design and aesthetics of the new models, will stay in the UK, which is the hallmark of the iconic luxury brands, but such designs would be provided to other companies of Tata, especially those that are based in India. It is important to state that TAMO faced different challenges in regard to its design capabilities. As such, working as a stand-alone company, it was poised to face stiff competition from brands such as Jaguar and Land Rover, a factor that threatened its overall existence. As such, the acquisition of Jaguar and Land Rover proved to be an important step since it eliminated high competition as well as created avenues of sharing technological skills and knowledge together with enhanced designs.
Apart from sharing designs, knowledge and skills as well as reducing competition in the market, the acquisition of Jaguar and Land Rover by Tata Motors Limited also reduced the cost of production of Jaguar and Land Rovers through synergies with other Tata Companies such as Corus. Note that Tata had other companies or rather subsidiaries that specialized in various area of production. As such, these companies provided the much needed raw materials for the production of Land Rovers and Jaguar brand models. In reference to Mohandas (2010), Jaguar will source more parts from India, increasing its number of Indian suppliers from four to 10 by December 2010.
Apart from the above mentioned synergies, it is also important to understand that the acquisition of JLR by TML also created cost synergies in the sense that Tata Motors Limited was able to reduce operations costs up to a certain level. To begin with, this acquisition enabled Tata to acquire vital technological pieces that were needed for its success in the market. Furthermore, it is important to state that the costs of manpower was also reduced as a result of the acquisition, with manpower being outsources from India to Britain and vice versa. For instance, Mohandas (2010) argues that off shoring engineering services to India was one of the best ways of saving money. In other words, by relying on the available technology from Britain, Jaguar as well as Land Rovers provided the best way to save money.
One of the questions that have emerged in regard to the acquisition of Jaguar and Land Rover by Tata Motors Limited is whether potential synergies were realized. Notably, the acquisition of these two brands had realized synergies in the operations of this company. As such, Khanna, Palepu & Bullock (2009) affirms that Tata Steel anticipated that the combined entity would save $450 million in production, procurement, financing, and other synergies over the first three years after the acquisition (p.8). In addition to this, there were enhanced technology, skills and knowledge transfers from India to Britain and vice versa. Therefore, the company realized the major potential synergies.
Jaguar and Land Rover acquisition will improve Tata motors balance sheet in the sense that its revenues will increase owing to the reduced cost of production. As well, expenses of engineering and designs services will be lowered and as such TML will enjoy the benefit of low production cost. In connection to this point, the revenues from increased sales will be realized and linked to this point is that JLR are famed brands which will give Tata Motors an access to the luxury market segments. Accordingly, TML will be exposed to the global market and as such will gain market share of which it will in turn increase the income.
Although loans obtained to cater for risks of funding may have a negative effect to the Balance sheet, this may be offset by the mere fact that profits will increase for Tata Motors Limited. Notably, there are several challenges that TML might have faced and in this context they may be caused by economic decline, huge amounts of capital needed to acquire and launch, along with the challenges which come from the competitors. Outstandingly, cross-border acquisitions like the one in the context have been associated with challenges of long distance communication, the misunderstanding which comes as a result of operating between two business norms along with the limitation brought about by Tata's management of a luxury car. This is given to the reason that Tata Motors are not used of managing luxury cars.
On the other hand, the ability of this company to meet potential synergies from the acquisition played a vital role in enabling it to thrive in the market. As such, whereas most analysts were skeptical towards this acquisition, Tata Motors Limited had risen above these challenges and met the needs of potential synergies in its operations. With this in mind, the company was sharing resources in a way that eliminated inefficiencies.