By Jason Simpkins
Tata Motors Ltd. (TTM), India's largest auto manufacturer by revenue, is aiming to expand – and not just by sales or geography.
The automaker that's looking to bring the world a fully featured $2,500 car is now aiming at the other end of the price spectrum and has joined rival Mahindra & Mahindra (MAHMF) and U.S. buyout group One Equity to pursue the upscale Jaguar and Land Rover brands put up on the auction block by embattled U.S. carmaker Ford Motor Co., (F). The list of potential suitors is a long one, the Financial Times reported.
Tata is largely a domestic company that relies heavily on truck sales. It was originally founded in 1945 as Tata Engineering and Locomotive Co. Ltd., a manufacturer of locomotives and engineering products. From there, the company slowly morphed into a producer of medium-sized commercial vehicles.
Two years ago, the company caught a huge break when Indian authorities began to crack down on drivers with overloaded trucks, a regulatory nightmare for shippers that translated into a nice sales increase for Tata – especially after it introduced a bare-bones light truck with an unheard-of sticker price of only $5,100. The smallish vehicle may not have been a monster truck, but it was a certified monster hit: Tata sold 100,000 of them in only 20 months.
Tata also has created a profitable niche for itself as a premier manufacturer of affordable compact cars for India's middle-class.
A successful acquisition of the Jaguar and Land Rover brands would greatly bolster Tata Motors' image and global reach. It would also be the perfect complement to the company's current plan to build the world's cheapest passenger vehicle – the "one-lakh car," which, at current exchange rates, would sell for about $2,500.
"If one wants a brand, which is recognized as one of the top brands in a space, one has to play in the premium end of the market," Bharti Gupta Ramola, head of financial advisory services at PricewaterhouseCoopers told the Hindustan Times. "Mergers and acquisitions are, perhaps, the only quick way to build a brand. To do so from scratch requires a lot of time and investment."
However, some analysts think Tata Motors' may be in over its head. Both Jaguar and Land Rover have large, unionized work forces that would make the transference of design and engineering work to India difficult. Additionally, the company could face integration problems as it attempts to merge its commercial trucking and low-cost passenger vehicle segments with high-end, low-volume U.K. brands.
Worse, signs that the company is losing ground domestically are starting to emerge. Amid growing competition from Daimler AG (DAI), AB Volvo (VOLV), and MAN AG, Tata's heavy truck sales declined 8.9% in the quarter ended September 30. That has led some analysts to believe that such a weighty acquisition might drain the company of significant resources at a crucial time.
"This deal would be a turn of the roulette table as far as Tata Motors is concerned," a banker familiar with the group told the Financial Times.
But Tata Motors isn't deterred. Nor is its parent company, Tata Sons Ltd., one of India's industrial heavyweights, and a firm that's no novice when it comes to mergers and acquisitions. To date, the group has spent an estimated total of $15.5 billion on foreign acquisitions. That includes Tata Tea's $407 million buyout of U.K- based Tetley tea brand in 2000 and Tata Steel Ltd.'s hefty $12 billion acquisition of Corus Group PLC earlier this year.
Tata Motors is one of three bidders that has been short-listed by Ford and invited to meet union leaders on Nov. 20. Should Tata make a good impression and land a deal, it could be a make or break moment for the company.
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