INTRO
In June 2008, Tata Motors announced the acquisition of Jaguar and Land Rover from Ford Motor Company for 2.3 billion $.
In this episode, we'll explore the key factors and the critical moments that shaped the negotiations between Tata and Ford.
ACT 1 - Ford perspective
Ford Motors acquired Jaguar in 1989 for 2.5 billion $ and Land Rover in 2000 for 2.7 billion $.
However, over the years, Ford failed to derive the desired benefits from these acquisitions.
When it acquired Jaguar, Ford planned to produce around 400,000 units a year to compete with Mercedes-Benz, Audi, and BMW. But, in 2006, the sales of Jaguar reached only 61,000 units. Jaguar was basically perceived as an old man's car."
Land Rover, on the other hand, was starting to deliver profits.
2006 was the worst year in Ford's history, with losses of 12.7 billion $.
Ford’s CEO Alan Mulally saw the two British brands as a drain on the company’s financial and management resources as he tried to turn around Ford’s operations.
ACT 2 - Alan Mulally
After a 37 years career at Boeing, where he was hired out of college in 1969 and was twice passed over for the top job,
Alan Mulally was named President and CEO of Ford Motor Company in September 2006.
It was the worst year for the company in its century-long history.
Whenever Mulally was asked whether or not Ford would make it, his answer was always that it was a race against the clock.
In spite of the backing provided by Bill Ford, the great-grandson of company founder Henry Ford. Mulally faced strong internal resistance and skepticism due to his lack of automotive experience.
On the other hand, although Mulally lacked extensive auto industry knowledge, he was free of many intellectual biases and habits that have gotten Ford into such financial troubles.
In order to turn the company around, non-core units such as Jaguar and Land Rover had to be sold.
ACT 3 - Ford interests
The news reported five potential bidders for Jaguar and Land Rover:
Hyundai, Renault-Nissan, and three private equity firms:
Cerberus, the new owners’ of Chrysler,
Ripplewood Holdings, led by former Chrysler executive Thomas Stallkamp, and
One Equity Partners, the private equity arm of JPMorgan, led by Jack Nasser, the former CEO of Ford.
Ford was very concerned about selling jaguar and Land Rover to a company that would look after the workers' interests.
Since the UK was Ford's second-largest market, the interests of the unions had to be taken into account during the negotiations.
In addition, Ford also decided to sell jaguar and land rover as a "package" without separating the two brands for two main reasons:
1- Jaguar and Land Rover have been fully integrated since 2002. They shared technologies, engineering teams, and support functions.
2- Land Rover had a brighter outlook than Jaguar. Trying to sell Jaguar on its own would be difficult.
In light of these factors, the private equity bid for the two heritage brands could have been met with negative reactions from the British public and Gordon Brown, the new prime minister.
Yet Ford expected to recapture at least the entire amount it spent on acquiring the two brands: 5.2 billion $
ACT 4 - Union perspective
In early July 2007, Unite, the largest trade union in Britain, sent a five-point charter to Ford, demanding to be involved in the sale process.
These were the requests of the union:
First, No jobs will be shed at the three jaguar and land rover factories and the two Engineering sites. A total of 16,000 workforce.
Second, Jaguar and Land Rover will be produced in Britain.
Third,. Employee terms and conditions (including pensions) will be maintained.
Fourth. The status quo in the engine-sourcing agreement with Ford UK plants will be preserved.
Lastly, The planned R&D investments will be maintained.
ACT 5 - TATA perspective
There is a common misconception that takeovers must lead to layoffs and factory closures,
but Tata has a history of merging in a different way.
Tata has been careful in all its deals to signal respect for workers.
Since its founding in 1868, the company has been controlled by a long-term shareholder structure, which has prevented Tata from laying off workers or closing plants.
It leaves executives in place and creates a joint management board that makes decisions on growth targets and talent development.
According to Arun Maira, Boston Consulting Group's chairman in India, "Tata buys companies overseas not to reduce costs but to improve its own capabilities".
Between 2000 and 2008, Tata applied this approach to several overseas deals in different industries, from steel to energy, trucks, tea, and coffee, in different countries, from Europe to the US, and Asia.
ACT 6 - Ratan Tata
Educated in Mumbai's Catholic schools, Ratan Tata, the grandson of the founder of the company, left India at the age of 15 to attend high school in New York City.
In 1955 Tata enrolled in Cornell University, earning a bachelor's degree in architecture in 1959.
After graduation, Tata joined a small architectural consultancy firm in Los Angeles. While he had no intention of returning to India, he changed his plans when his grandmother, the woman that raised him after his parent’s divorce, got sick.
He then joined the Tata group in 1961, starting on the shop floor at Tata Steel. After serving in several roles, he was appointed chairman of the Tata Group in 1991.
Under his tenure, Tata expanded and globalized aggressively through more than 20 acquisitions. Additionally, he further increased the scope of the company philanthropic trust.
ACT 7 - TATA interests
At the end of August 2007, Ratan Tata confirmed his interest in Jaguar and Land Rover, stating that maintaining their "Britishness" was crucial for their future success.
As a result of the acquisition, Tata would gain access to international markets, a presence in the premium car segment, and, most importantly, acquire to know-how and technology.
ACT 8 – Skepticism
Due to Tata Motors' lack of experience and the competition of several prestigious brands within the luxury car segment, analysts doubted the company's ability to market Jaguar and Land Rover. Even after spending over 10 billion $ over 18 years, Ford couldn't restore Jaguar's fortune.
According to an analyst from Morgan Stanley, "Buying Jaguar and Land Rover was value-destructive for Tata, given the lack of synergies and the high-cost operations involved."
Finally, there was also widespread skepticism about an Indian company bidding for such iconic brands. In the words of Ken Gorin, head of Jaguar's American dealers, "I don't believe the American public is ready for buying Jaguars out of India...".
ACT 9 – Timeline of negotiations
In early June 2007, the Financial Times leaked news of the formal auction process for Jaguar and Land Rover.
Three of the potential bidders for Jaguar and Land Rover were private equity firms.
Because the UK market played a crucial role in the company's restructuring plan, Ford was more concerned with maintaining its image in the UK than maximizing the financial aspects of the deal.
A number of very stringent conditions were placed on the sale of Jaguar and Land Rover, including the requirement that any buyer would keep the factories in Britain open for a considerable period of time.
In November 2007, Ford announced the three preferred bidders: Tata, Mahindra & Mahindra (21st largest company in India with revenues of US$ 2,7 billion in 2007.), and One Equity Partners (In-house private equity arm of JPMorgan, led by former Ford CEO Jack Nasser).
Despite growing consensus among experts that Tata had an advantage over its two competitors, Tata Motors managing director Ravi Kant decided to proactively answer questions pertaining to the "Britishness" of its brands.
A massive public relations effort was put together, and Tata began to make presentations to workers, union representatives, members of parliament, and local and government officials to diffuse widespread skepticism over an Indian company acquiring such iconic and luxury brands.
The three preferred bidders were invited to meet with the unions on November 20. In order to win their confidence, labor leaders sought assurances that jobs and factories would be protected in the UK under the new owner.
Tony Woodley, Unite's general secretary was very impressed with Mahindra & Mahindra's CEO and chairman, Anand Mahindra's presentation.
Nevertheless, the union leaders moved to support Tata's bid after the meeting, stating, "Tata is the only company among the final bidders with enough resources, clout, and industry experience."
The company's managing director Ravi Kant assured the unions that jobs would not be outsourced or production moved. He also affirmed Tata's long-term commitment to the brands and his endorsement of the current management.
Although the union's vote was not binding for Ford, it gave Tata a significant boost in the pursuit of Jaguar and Land Rover. If Ford wanted to meet the primary interest of not damaging its image in the UK, it had to sell to Tata.
Prior to the November meeting, Tata has been informally courting union representatives. During initial meetings, Ravi Kant faced skepticism from the unions. Still, those concerns were eased after a second round of meetings, in which he committed to Ford's five-year business plan and preserving jobs and plants in the UK. Union leaders ultimately supported Tata Motors because of its history in dealing with acquisitions.
On January 3, Ford committed to focused negotiations with Tata Motors. According to experts, five key obstacles needed to be resolved before deal completion.
The first critical issue was the valuation of Jaguar, which, contrary to Land Rover, was losing money.
The second issue pertained to the location of Jaguar and Land Rover headquarters, even though Ravi Kant had several times reassured that the brands would preserve their Britishness.
The third issue was whether Tata would keep the management in place beyond the short term.
The fourth issue involved current suppliers: the unions and Ford required that the next owner continued to source components from existing Ford sites and suppliers.
But the most strenuous issue concerned technology access: Both companies were likely to benefit from a long-term engine supply agreement. But then, how much was Tata willing to commit, in terms of money and time, to supply crucial powertrain components from Ford?
On March 26, Ford entered a definitive agreement to sell Jaguar and Land Rover to Tata.
The total amount to be paid in cash by Tata Motors for Jaguar Land Rover was $2.3 billion. Concurrently, Ford had to contribute $600 million to the Jaguar Land Rover pension plans at closing. Consequently, Ford received $ 1.7 billion after the sale.
OUTRO
Tata clearly identified Ford's main interest, preserving its image in the UK over maximizing the financial side of the deal and canceled the alternatives represented by Mahindra & Mahindra and One Equity Partners by building a coalition with the unions before entering into focused negotiations with Ford. Furthermore, it minimized any concern by the British public opinion and the new Labor government by clearly stating the intention of preserving the Britishness of the two brands.
Last year Jaguar and Land Rover sold 376.000 vehicles (299.000 Land Rovers and 77.000 Jaguars), with a total turnover of 22.5 billion $.