Giant takes global strides

Updated on: Dec 27, 2012




bl28_Tata acquisitions table for tata special.eps

bl28_Tata acquisitions table for tata special.eps

It was in the second decade under Ratan Tata’s leadership that the Tata group of companies decided to go global. Each company in the group was asked to develop its international strategy while weighing the nature of the industry, its markets and available opportunities.

Ratan Tata, who was quoted in an interview in Ernst & Young’s T Magazine in 2011, said “I believed that Tata could not remain a purely Indian company. Its future had to lie outside India.”

The group has acquired stakes in over 45 overseas companies since 2000 in the US, Europe, Australia, Africa and Asia. For the fiscal year 2012, 59 per cent of the group’s revenues were from international operations and the group got Rs 7,600 crore as net foreign exchange earnings.

We take a look at some of the more talked about acquisitions of the Tatas and what prompted these moves:

Steel in trouble

Tata Steel’s $12-billion purchase of Anglo-Dutch steel company Corus in January 2007 is the largest and the most criticised cross-border acquisition of Ratan Tata. This deal moved Tata Steel to the fifth position from 56{+t}{+h} in terms of global capacity then. The earlier purchase of NatSteel Asia in 2005 and Millennium Steel in 2006 had bolstered Tata Steel’s access to South-East Asian and Chinese markets.

Explaining the rationale for the Corus deal, Ratan Tata had then said, “it will take several years for us (Tatas) to build a 19-million-tonne enterprise from scratch, leave alone establishing it in Europe with a brand name.” The deal was, however, concluded 30 per cent higher than the initial offer in October 2006 making many say that the deal was overvalued.

This deal is yet to deliver for Tata. Slowdown in demand in the UK and Europe since 2008, coupled with inability to pass on higher cost of raw materials to end users has been impacting operations of Corus. It is now left to the domestic operations of Tata Steel that account for only 27 per cent of revenue to make up for its limping subsidiary.

Brewing brands

The ‘go global’ chant began with Tata Global Beverages’ (TGB) purchase of the UK-based tea manufacturer, Tetley for $450 million in 2000. Tetley was the second largest tea brand in the world then. This deal was then touted as the largest cross-border takeover of an international brand by an Indian firm. The purchase was based on the premise that the global tea market would be dominated by few brands in the years to come. The deal gave Tata Tea the impetus to change itself from a pure commodity company in the business of selling tea to a company possessing world class brands. It also opened up the US, the UK, Canadian and European markets for Tata Tea’s products.

TGB kept up its acquisition spree motivated towards — one, diversifying from the stagnating tea market; two, adapting itself to changing consumer habits (need for health drinks, enhanced water and so on); and, three, moving into higher margin branded products segment. Thus followed the purchases of Good Earth Corporation, a maker of green and herbal teas in 2005, another US firm Eight O’ Clock Coffee in 2006, a third of South African tea producer Joekels and the trademarks Vitax and Flosana in Poland in 2007.

TGB has been successful in its strategy as 90 per cent of its revenues now come from branded products. But the company continues to grapple with volatile input costs and slowing market. Despite the subsidiaries accounting for about 70 per cent of the company’s operating income they contribute only 30 per cent to the bottomline.

Motoring profits

Tata Motors’ purchase of Jaguar and Land Rover brands from Ford for about $2.3 billion in March 2008 was also not well received when the deal was announced.

Doubts were raised about how premium luxury brands such as Jaguar and Land Rover could fit with the product portfolio of Tata Motors that included utility vehicles and run-of-the-mill passenger cars. Doubts were also raised over the demand for JLR in the Indian market. But even as the domestic operations of Tata Motors struggled with slowing demand and high input costs, JLR’s profits are supporting the company’s consolidated numbers. Factors that helped make this acquisitions a success are — one, Tata Motors has managed to keep the brand identity of JLR separate and undiluted; two, it has focused more on emerging markets such as Russia and China for volumes; three, it has moved a portion of the material and component sourcing and assembling of vehicles to low-cost countries like India and China.

In the September quarter, more than 60 per cent of revenues and profits of Tata Motors came from its subsidiaries that include Daewoo Commercial Vehicle of Korea and Hispano Carrocera of Spain.

And the others

Tata Chemicals’ purchase of Brunner Mond, a leading producer of soda ash and other chemicals in Europe, the buyout of Magadi Soda Company in Africa and General Chemical and Industrial Products of North America in 2008 cemented its position as the second largest soda ash producer in the world with a 50-lakh tonne capacity.

Tata Chemicals’ global forays have had a threefold benefit for the company. These purchases helped the company reduce cost, gave it access to markets in Europe and America and have helped improve its profit margins.

Overseas acquisitions of other companies in the group such as TCS were driven by need to broaden its product portfolio, give it access to new geographical regions and enhance its product innovation capabilities.

Tata Power’s acquisitions were motivated towards addressing its need for fuel and gaining a foothold in the renewable energy market. Indian Hotels has been buying premium properties in the US and Australia in order to have a presence in “key gateway cities of the world”.

It is too soon to pass a judgment on the success or failure of these deals. Under a new leadership and with economic revival, these deals could start paying off.

(With inputs from BL Research Bureau)

Published on December 27, 2012
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