India's Tata Group Looks To Go Global, One Buy At A Time
Dow Jones Newswire
March 04, 2008: 05:27 AM EST
HONG KONG (Dow Jones) -- Tata is an odd mixture of very large, and very, very little.
India's oldest and best-known industrial house is the biggest software exporter via its Tata Consultancy Services, the largest private-sector steelmaker thanks to Tata Steel and the leading hotelier with its Indian Hotels Co.
Tata Motors (TTM), meanwhile, is turning heads with the Nano, a three-meter long, four-seater minicar that'll have a top speed of 65 miles per hour and sell for about $2,500 when it hits the home market later this year.
But such size belies the conglomerate's global ambitions, with Tata Motors widely expected to soon acquire Ford Motor Co.'s (F) luxury Jaguar and Land Rover brands. The Wall Street Journal reported last week that a deal was imminent.
An acquisition of such scale and prominence would be the latest in a string of global deals, part of the industrial behemoth's strategy to look well beyond its domestic successes.
"They (the Tatas) have become far more outgoing and aggressive in their approach," said Ajit Surana, managing director at brokerage Dimensional Securities in Mumbai.
"Ten years ago, they were seen as a staid, conservative group. That perception has changed completely... If there is a (merger-and-acquisition) deal out there, and if it makes sense, they'll go for it, even pay a premium," added Surana.
The nearly 100 companies to fall under the Tata Group umbrella raked in $28.8 billion in revenue in the financial year ended March 31. Its 27 listed companies, including Tata Motors, Tata Steel (TATIFM) and Tata Consultancy Services (TACSF), had a market value of more than $65 billion.
Outside India, Tata is becoming known for these bold and often surprising acquisitions.
In some cases, the target has well exceeded the suitor in terms of revenue. This was the case with Tata Tea's $540 million acquisition of U.K.-based beverage major Tetley in 2000 and Tata Steel's $11.3 billion takeover of Anglo- Dutch steelmaker Corus Group Plc. last year.
The Tetley acquisition was the largest-ever cross-border takeover by any Indian company in 2000, while the Corus buy is the largest-ever overseas acquisition by an Indian company to date.
The Corus deal gave Tata a meaningful presence outside India. It also stirred up emotions at a national level, as Corus was several times bigger than Tata Steel. That acquisition almost overnight lifted the Indian company nearly 50 places in the rankings, making it the world's sixth-largest steelmaker.
"Their acquisition of Corus last year made every Indian proud and that, in my view, is a very significant milestone in the march of the Indian industry from a closed economy," said Rahul Bajaj, chairman of India's second-largest motorcycle and scooter maker, Bajaj Auto (BJJAF). Bajaj was referring to the economy prior to 1991, when India ended state controls over industry and opened the doors to foreign direct investment.
Turning global
As a result of these cross-border acquisitions, Tata Group will earn nearly 60% of its total revenue from overseas markets during the current financial year ending March 31. That compares with a contribution of less than 10% in the financial year 2000-01.
And for the first time in its 140-year history, India is set to become the second-largest area of geographic importance for Tata, with Europe seizing that No. 1 spot, said Alan Rosling, executive director at the Mumbai-based Tata Group holding company, Tata Sons.
That shift looks set to continue, given the rising exports of its various group companies, new projects being started overseas and the continued pace of acquisitions.
"Exports are the bedrock of our overseas sales, and we are now also investing in greenfield assets," said Rosling, who was member of the policy unit and a special advisor to John Major when he was the British prime minister.
"Many of these overseas expansions are in joint venture with local partners ... mergers and acquisitions have attracted more media interest than (our) organic growth, but M&A is only part of our strategy," added Rosling.
Though Rosling wouldn't detail growth targets, he said projects under way include a ferro-chrome manufacturing plant in South Africa, a steel plant in Vietnam, a joint venture with the South African government for long-distance telephone services and a joint venture to assemble pickup trucks in Thailand.
Meanwhile, Tata Consultancy Services, the group's software major that earns half its total revenue from exports to the U.S., is looking to expand its software-development activities outside India, and has its eye on China, Brazil, Uruguay and Hungary.
Short-term pain; long-term gain?
As the Ford deal reportedly nears, the acquisition spree continues apace.
In February, chemicals and fertilizers company Tata Chemicals acquired New Jersey-based soda ash producer General Chemical Industrial Products for $1 billion. The acquisition will consolidate Tata Chemicals' position as the world's second-largest producer of soda ash, a commodity used to make glass and detergents, while expanding its global footprint.
Tata's aggressive acquisition strategy may deliver the group the desired benefits of scale and reach in the long run, but it also presents short-term challenges. These include integrating operations in different countries and cultures, and managing the high amounts of debt Tata group firms typically raise to fund these deals.
"As long as the group's acquisitions are made a reasonable price and there are new markets which get added, I think it is a positive sign," said I.V. Subramaniam, chief investment officer at Quantum Advisors in Mumbai.
"My worry is less on the financial part and more on the people-management aspect," Subramaniam added, referring to differences in culture and management style that often crop up following an overseas acquisition.
Tata's management skills will likely be put to the test if it successfully completes the Land Rover-Jaguar brand acquisition, given that Tata's low-cost, value-for-money products stand in sharp contrast to products sold under the two luxury, marquee brands.
Subramaniam Ramnath, an analyst with IDFC-SSKI Research in Mumbai, said a successful deal could potentially stretch the Indian company's financial resources and lead to earnings downgrades, unless the move is carefully managed.
Also, there are "no apparent synergies in terms of shared product platforms or distribution networks, given the stark contrast in pricing as well as position of Jaguar-Land Rover and Tata Motors' products," he said.
Ramnath, however, expects "significant cost savings at the two units over a longer term, stemming from higher component sourcing out of (low-cost) India." Even if Tata Motors can manage a small improvement in their profitability, it would translate into significant benefits for the Indian company, given Land Rover-Jaguar's estimated revenue of $13 billion is much larger than Tata Motors' consolidated revenue of $8.2 billion in the previous financial year.
Dimensional's Surana says Tata's bid for Jaguar and Land Rover underscores confidence that it will be able to trim manufacturing costs.
"They are leveraging on the growth that is expected in Asia over the next several years. Most of the sales for these premium cars will take place in India and China," said Surana. "If they can bring down the costs, selling the iconic brands won't be a problem."
