Monday, December 24, 2007

Tata-JagRover bet - will it payoff...?

It is dangerous to substitute return on equity with business hubris when doing deals, and the whole thing had better make business sense” – goes T.N.Ninan of Business Standard on the Tata-Jaguar/Land Rover deal.

Ninan is sceptical even though Ratan Tata is getting both brands for $2 billion, much less than $5 billion paid by Ford to acquire them back in 1989 and further $10 billion that went into Jaguar to refurbish it. Rover is profitable, but Jaguar reportedly lost over $700 million in 2006 and perhaps over $550 million in 2007; it is expected to lose $300 million more in 2008. Rover sells close to 200,000 vehicles a year, but Jaguar sales have been falling quite sharply in its main market, the United States. He wonders whether Tata has bitten off more than he can chew. I am also reminded of Mitchell Madison and Whitman Hart deal where two billion $$ companies merged only to find the combined revenues were far less than $2 billion.

While Ninan concedes – going by earlier Tata buyouts overseas including Corus - that “Tata seems to have a good head for corporate strategy”, he doubts whether Tata would be able to achieve what Ford could not. He cites the examples of recent Sovereign wealth fund investments in Citigroup and Morgan Stanley (there are UBS, Merryl Lynch and Bear Stearns too) where the investors remain passive and would not insist on management control - but Indian acquirers love control. I say they have the chutzpah.

May be Ninan feels Tata could be in for a jam in this deal because of dealer perceptions, as he says “the people whom Tata would want on its side are the dealers in the US, but they seem to think Indian ownership is poor branding”.

My sense is that Ninan’s comparison of Tata-Jag Rover acquisition with fund infusion into American banks by Asia’s Sovereign funds is not quite up. Those funds are basically financial investors that focus on maximising ROI on their forex surplus as a part of their portfolio management strategy. To that extent, it's their fiscal management strategy too. They are concerned more about returns and not where it comes from. They simply don’t have the strategic bandwidth to take control and run diverse businesses that they invest in. Moreover, the managements of American banks like Citi, Merryl Lynch, Morgan Stanley are not bad by themselves going by the size and scale they've notched up. Just that they took a few bad bets that backfired. But that is to be expected because banking is indeed a business of betting on credit risks of varying degrees. What if those bets had paid off? But Tatas (and Lenovo example that he cites) are strategic investors with a track record of running global businesses and it’s not right to put them in the same basket as pure financial investors like wealth funds. The rationale behind their investments are fundamentally different. Tata would have certainly done their math and if the experience of Corus acquisition and its on-going integration is anything to go by, they would make the most of Jaguar-Land Rover deal too.

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