The big idea: Can an aspiring global competitor from a developing economy use the acquisition of an established Western business to grow its earnings and diversify?
The scenario: In the wake of launching the world’s cheapest car, the Nano, Ratan Tata, chairman of Tata Motors, is contemplating what would be his boldest move yet: the acquisition of luxury automobile manufacturer Jaguar Land Rover from Ford Motor. Historically an Indian truck manufacturer, Tata Motors had diversified into automobiles to capitalize on the emerging automotive market in India, growing into a respected regional competitor. Tata now had its sights on becoming a global competitor in passenger vehicles. The Jaguar Land Rover acquisition would give Tata entry into the luxury automotive segment and provide it a foothold in the U.S. and European markets.
Jaguar and Land Rover were premier luxury automotive brands from Britain. Jaguar and Land Rover had gone through a number of mergers and acquisitions over the years before being acquired by the Ford, in 1989 and 2000, respectively. They joined a stable of other luxury brands — Aston Martin, Volvo and Lincoln — to make up Ford’s Premier Automotive Group. When the brands produced anemic returns over the early years of the 2000s, Ford reconsidered its luxury strategy and began to sell some of the brands. Jaguar Land Rover, which posted losses estimated at up to $10 billion, was put up for sale by Ford in June 2007.
An acquisition of Jaguar Land Rover would probably present a number of challenges for Tata Motors, not the least of which is whether it would be able to turn around an automotive group that was underperforming and unprofitable. How would the maker of the world’s cheapest car fare in manufacturing and selling a venerable brand of luxury vehicles? Unions in Britain expressed concerns about whether Tata was up to the task and would keep production there. Complicating matters, the sale of Jaguar Land Rover had attracted a number of bidders, including a handful of private equity groups as well as Mahindra & Mahindra, a regional competitor of Tata Motors. At what price would Tata be able to acquire Jaguar Land Rover? Would it be able to generate future earnings to justify that purchase price?
The resolution: Tata Motors completed the acquisition of Jaguar Land Rover in June 2008. Early reports suggest that Tata has turned around and grown Jaguar Land Rover. In 2011, Jaguar Land Rover accounted for two-thirds of Tata Motors’ net income.
The lesson: Acquisitions are an important tool in a business leader’s tool kit. They can help increase earnings and alter a company’s strategic direction. However, the decision to pursue an acquisition is often not simple. There are more failed acquisitions than successes, and numerous factors influence whether an acquisition succeeds or fails. A broad set of strategic factors must be considered to make reasonable judgments on whether to move forward.
— Michael Lenox
Lenox is a professor of business administration and associate dean and executive director of the Batten Institute at the University of Virginia Darden School of Business.