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An Understanding of TATA-JLR deal with the concepts of Downsizing,

Corporate Culture and Leveraged Buyout

Article  in  Indian Journal of Applied Research · October 2011

DOI: 10.15373/2249555X/DEC2012/31

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 Research Paper Management Volume : 2 | Issue : 3 | December 2012 | ISSN - 2249-555X

An Understanding of TATA-JLR deal with the

concepts of Downsizing, Corporate Culture and
Leveraged Buyout

Keywords Merger, Downsizing, Leveraged buyouts, Acquisition and Corporate Culture

Bhavika S Batra Dharmendra B Khairajani

Asst. Professor, Global Institute of Management Asst. Professor, Global Institute of Management
Uwarsad Road, Gandhinagar, Affiliated to Gujarat Uwarsad Road, Gandhinagar, Affiliated to Gujarat
Technology University Technology University
ABSTRACT The present scenario of the world is about Glocalization where the Organizations have to explore the domestic
market as well as the International Market. One of the critical factors which is affecting the Organization in International Market
is Recession. In the Competitive market for attaining the Success, one needs to be a global player. A company can assess its
potential only in the Global Environment, which provides prospects for exploring new perspective and transforming entities.
This paper covers the Strategy of acquiring the Cross Border merger. In the Cross border Merger; the Acquirer has to face
many problems such as Downsizing, Leveraged and change in Corporate Culture which affects the whole business of that
Organization. This paper demonstrates through the case of “TATA Jaguar- Land Rover Deal.” This acquisition had affected
badly on TATA in many ways such as Financial, Corporate Culture and the domestic business. Simultaneously this acquisition
doesn’t prove prolific to the country as they have projected.

INTRODUCTION: possible, unviable and almost hopeless units. The acquirer

TATA GROUP is 150 year old, owns Tata Motors, earlier was driven mostly by the tax benefits of the loss carry for-
known as Tata Engineering and Locomotive Company, Telco. ward.
It is India’s largest passenger automobile and commercial
vehicle. Tata Motors was established in 1945 Listed on the Merger and acquisition (‘M&A’) activity in India, though cur-
New York Stock Exchange in 2004. TATA Motors is live exam- rently at its peak, is not as vibrant as that in the U.S. or Eu-
ple that has a number of Acquisition, subsidiaries, Associate rope. M&A transactions tend to be financed largely by equity
Companies and Strategic Tie-up. The expansion continues and / or by cash. While debt-financed deals are a handful,
with the Acquisition of Jaguar Land Rover, two of the world’s financing of acquisitions using high-yield bonds is non-ex-
most respectable and iconic brands. Through this Acquisition istent in India.
TATA Motors has come of age and join a league of World-
wide Entities that operate in the premium Global Car Market. BODY OF THE PAPER:
Mergers and acquisitions are strategic tools in the hands of
MERGER: Merger is said to occur when two or more com- management to achieve greater efficiency by exploiting syn-
panies combine into one company. Merger is defined as ergies and growth opportunities. Mergers are motivated by
‘a transaction involving two or more companies in the ex- desire to grow inorganically at a fast pace, quickly grab mar-
change of securities and only one company survives. ket share and achieve economies of scale.

ACQUISITION: Acquisition is defined as ‘A purchase of a TATA Jaguar- Land Deal

company or a part of it so that the acquired company is com- The deal has started in June, 2007 when FORD had an-
pletely absorbed by the acquiring company and thereby no nounced to sell two prime brands such as Jaguar & Land Rov-
longer exists as a business entity.’ Takeover is considered as er. At that time there were many players interested to acquire
a form of acquisition. such as Apollo Management, TPG Capital, Cerberus Capital
Management, Mahindra & Mahindra and Tata Motors. From
The concept of M&A can be better understood with the case them only two main bidders have bid for acquiring the Jag-
of TATA Jaguar- Land Deal. The deal basically focuses on the uar & Land Rover, one was Mahindra & Mahindra and second
prime sector of automobile and the reputation of these com- was Tata Motors. In June 2008, India-based Tata Motors Ltd.
panies at their own segment. Globally, the number and size of announced that it had completed the acquisition of the two
deals is heading toward record levels, with cross-border deals iconic British brands - Jaguar and Land Rover (JLR) from the
taking centre stage, as companies take advantage of cheap US-based Ford Motors for US$ 2.3 billion. Tata Motors stood
financing to pursue their expansive M&A strategies. Ford Mo- to gain on several fronts from the deal. One, the acquisition
tors Company (Ford) is a leading automaker and the third larg- would help the company acquire a global footprint and enter
est multinational corporation in the automobile industry. The the high-end premier segment of the global automobile mar-
company acquired Jaguar from British Leyland Limited in 1989 ket. After the acquisition, Tata Motors would own the world’s
for US$ 2.5 billion. Ford acquired Land Rover for $2.75 billion cheapest car. The US$ 2,500 Nano and luxury marquees like
in 2000. But the US auto major put the two marquees on the the Jaguar and Land Rover.
market in 2007 after posting losses of $12.6 billion in 2006.
SYNERGIES EXPECTED FROM DEAL
Today, corporate strategy is focused firmly on M&A as a tool The deal was anticipated to generate a lot of synergies such
to foster future growth and create sustainable value. As a re- as well known brands, customer preferences for that car
sult, companies are aggressively seeking and buying com- brands, emerging Indian car market, product being taken
patible and synergistic businesses to bolster core strengths, over by Tata group. This Deal generates two synergies such
and shedding non-core operations. But they are overlooking as Cost Synergies and Revenue Synergies. In the Cost Syner-
the evil effects of M&A to weaken the position of a country gies the TATA Motors has the Competitive Advantage from
after acquiring the firm and not running competently. the overall International Market through the Tata Group.

Merger of one company with another was viewed, as a sign Cost Synergies include the following things.
of failure. The laws and regulations previously allowed the · The TATA motors have Joint Venture in Auto Ancillary
acquisition of only sick, dying, moribund (declining), and im- Space.

INDIAN JOURNAL OF APPLIED RESEARCH X 101

 Research Paper Volume : 2 | Issue : 3 | December 2012 | ISSN - 2249-555X

· In International Market they have acquired Corus, which ally implies a reduction in its employee headcount as well.
provided the Raw Material at Lower Cost for manufactur- Downsizing results from many factors, including increased
ing Cars. global competition, new technologies, and weaker labor
· Tata Consultancy Services provide the help regarding the unions; it takes various forms and has various outcomes.
engineering design. Some firms use downsizing as part of a long-term effort to
Revenue Synergies transform their businesses; others turn to downsizing simply
· It was expected in the long run TATA group and Tata to slash costs and boost earnings. Sometimes downsizing
Motors should help Jaguar & Land Rover diversified the boosts employee morale by giving the remaining workforce
geographic dependence. new responsibilities and opportunities; in other cases, down-
sizing leaves a demoralized staff that is undermanned when
LEVERAGED BUYOUTS economic conditions improve. Some firms carry out down-
A leverage buyout (‘LBO’) is the acquisition of a business, sizing relatively gently by offering workers strong incentives
typically a mature company, by a financial investor whose to retire; for other companies, downsizing means chopping
objective is to exit the investment after 3-7 years realizing heads as quickly and cheaply as possible. Whether downsiz-
an Internal Rate of Return (‘IRR’) of in excess of 20% on its ing generally helps or hurts a company’s long-term profitabil-
investment over the horizon. The term ‘Leveraged’ signifies a ity remains controversial. Evidence can be presented on both
significant use of debt for financing the transaction. sides, but most would agree that the answer greatly depends
on how the downsizing is executed.
The purpose of a LBO is to allow an acquirer to make large
acquisitions without having to commit a significant amount of TATA Jaguar- Land Deal
capital. A typically transaction involves the setup of an acqui- TATA wants to avoid the downsizing concept but on the con-
sition vehicle that is jointly funded by a financial investor and trary they have to implement the downsizing for some of the
management of the target company. Often the assets of the plants. TATA has reduced the Agency staff by 800. They had
target company are used as collateral for the debt. left 300 workers of Bromwich and Solihull plant. Beside that
TATA has additionally left another 450 employees which were
Typically, the debt capital comprises of a combination of including of 300 managers. They have made an agreement
highly structured debt instruments including prepayable with Unions to implement pay freeze and longer working hour’s
bank facilities and / or publicly or private placed bonds com- equivalent to approximately 20% reduction in labor costs.
monly referred to as high-yield debt.
CORPORATECULTURE:
Buyout Culture  is  a  system  of Shared  values, Beliefs, Behavio-
The term ‘Buyout’ suggests the gain of control of a major- ral norms, Observed behavioral norms, Dominant values and
ity of the target company’s equity. The target company goes Learning the ropes for newcomers. In terms of globalization,
private after a LBO. It is owned by a partnership of private enterprises have to be aware of their own identity, values and
investors who monitor performance and can act right away if thoughts and develop a grasp for interaction with foreign
something goes awry. Again, the private ownership is not in- cultures. Culture is an “everyday thing”; it is present in every
tended to be permanent. The most successful LBOs go pub- situation. It is a guideline for living together in large groups,
lic again as soon as debt has been paid down sufficiently and giving rules to act and behave. In most instances these facts
improvements in operating performance have been demon- are not written down but unexpressed rules. There are many
strated by the target company. definitions in literature. The most widespread definition is
likely “Culture refers to the cumulative deposit of knowledge,
TATA Jaguar- Land Deal experience, beliefs, values, attitudes, meanings, hierarchies,
This deal has provided the Leveraged to TATA Group in religion, notions of time, roles, spatial relations, concepts of
many ways to repay the amount for the deal. the universe, and material objects and possessions acquired
by a group of people in the course of generations through
· Rs. 1.92 Billion underwriting agreement with J M financial individual and group striving”. Already the Egyptians and Ro-
Consultants. mans created their own distinct hierarchies, laws, knowledge
· Rs.1.75 Billion was raised through a deposits scheme bases and values and tried to preserve it over several hun-
from the Public. dred years. Culture is needed to organize and administrate a
· Additional subscriptions by promoter companies such as group of people or whole population. Nowadays, this leads
TATA sons, TATA Capital and Investment. to sophisticated cultures in every country of the world. These
· And above that TATA was leveraged by British Govern- cultures are non-static grown individual reflections of society
ment also. that are always adapting to their environment.

Buyout was done to improve the following things but its TATA Jaguar- Land Deal
shrink back the issues such as Cost Rationalization initiatives The one of the big issue in the deal was to handle and
were taken to improve cash flows, Single shifts and down maintain the culture of the organization which will be han-
time at all three UK assembly plants, Supplier payment terms dled by the TATA after acquiring the FORD. And simulta-
extended from 45 to 60 days in line with industry standard, neously they have to face the Human Resource issues also.
Receivables reduced by £133 million from 38 to 27 days and You cannot hire and fire the person without giving satisfac-
Inventory reduced by £217m between June 2008 and March tory reason for that. And you have to face the some of the
2009 from 70 to 50 days. racisms issues also for firing the candidate. The failure of
several Mergers and Acquisitions (M&A) has been a matter
Tata Motors had to incur a huge capital expenditure as it of concern. HR issues are a key factor in unlocking value
planned to invest another US$ 1 billion in JLR deal. This was in through the M&A route.
addition to the US$ 2.3 billion it had spent on the acquisition.
Tata Motors had also incurred huge capital expenditure on CONCLUSION:
the development and launch of the small car Nano and on a Over the past decade, Mergers and Acquisitions (M&A) have
joint venture with Fiat to manufacture some of the company’s reached unprecedented levels as companies use corpo-
vehicles in India and Thailand. Basically in this deal FORD had rate financing strategies to maximize shareholder value and
leveraged by TATA for relinquish of the past losses and to run create a competitive advantage. Acquisitions occur when
the production at the required phase. But the above mention a larger company takes over a smaller one; a merger typi-
benefits recoil for the TATA’s to work out the future scenario cally involves two relative equals joining forces and creating
for the running the operations as per desired manner. a new company. Most mergers and acquisitions are friendly,
but a hostile takeover occurs when the acquirer bypasses the
DOWNSIZING board of the targeted company and purchases a majority of
Downsizing is a cutback in a company’s operations and usu- the company’s stock on the open market.

102 X INDIAN JOURNAL OF APPLIED RESEARCH

 Research Paper Volume : 2 | Issue : 3 | December 2012 | ISSN - 2249-555X

Morgan Stanley reported that JLR’s acquisition appeared neg- A merger is considered a success if it increases shareholder
ative for Tata Motors, as it had increased the earnings volatil- value faster than if the companies had remained separate.
ity, given the difficult economic conditions in the key markets Because corporate takeovers and mergers can reduce com-
of JLR including the US and Europe. This, coupled with the petition, they are heavily regulated, often requiring govern-
downturn in the global automobile industry, was expected to ment approval. To increase chances of the deal’s success,
impact the profitability of the company in the near future. acquirers need to perform rigorous due diligence-a review of
the targeted company’s assets and performance history-be-
Domestic Market Effect: The Nano was targeted at the seg- fore the purchase to verify the company’s stand-alone value
ment of two-wheeler drivers. The Nano was touted to be and unmask problems that could jeopardize the outcome.
the least expensive car in the world. Tata Motors spent ap-
proximately US$ 430 million on developing the Nano. The But this deal had created the big issues for the TATA such as
company had invested more than Rs 20 million on the Singur drop in share prices, failure of rights issue, and huge debt
plant, which had created many problems for the TATA’s to burden by acquiring the giant and the sales volume had de-
shift the plant for safety of Labours. creased by 35.2%. Nobody was interested if TATA wants to
Issue Following Public Offer (FPO).

REFERENCE An HR manager’s guide to M&A-David Zatz. | “Challenges faced in executing Leveraged buyouts in India- the
Evolution of the Growth buyouts”- Narendra Chokshi | Mergers and Acquisitions by Rajinder S. Aurora, Kavita Shetty and
Sharad R. Kale. | M&A prospects for Global recover - International Business Report 2010 | M&A during Economic Recession
- The Moscow Times: Ian Ivory and Anton Rogoza | Practical insight to Cross Border M&A - International comparative Legal
| Recession and Recovery - Neil Lee, Katy Morris and Alexandra Jones of the work foundation | Report of Morgan Stanley.

INDIAN JOURNAL OF APPLIED RESEARCH X 103

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