Land Rover Acquisition - Essay Example

LAND ROVER ACQUISITION ISSUE MENT This report is basically going to investigate the acquisition problem that landrover faces because of its status as a global leader. In June 2008, Tata Motors acquired Jaguar and Land Rover (JLR). However, by the end of 2009, according to the comments of David Smith, JLR, Tata Motors was, up to very recent, reeling in the severe business and financial crunch. Through this report, we shall analyze critically the many problems that Tata Motors is facing, the reasons of the fall in the business of Tata Motors, and the effect of the Global Recession on the company’s performance in post acquisition. CASE DATA ANALYSIS. All throughout the fiscal year that ended on March the company was bleeding blood, losing $517 million on $ 14.7 billion in revenues, On its India operations alone. An additional $510 million was lost by Jaguar and Land Rover in the months Tata owned it up to 2009 and a consolidated net profit of Rs 1,988 crore was posted for the quarter that ended June 30 (Faulkner, et al. 2012). Tata Motors took $3bn ($2.3bn for purchasing JLR and the remainder for supplying important parts that included engine and other parts from Ford) bridge loan so as to fund this acquisition at $2.3bn with the aim of paying back a part through right issue, its stake sale in other subsidiaries and raising the rest through long term debt. The bridge loan was raised by Tata Motors, UK (which is a 100% subsidy of Tata Motors). The margin of the interest for the initial 6months on the bridge loan was 85% over LIBOR, followed by 1.2% for the following three months and then up to the end of term at 1.5% ( Gaughan, P. A. 2011). The same was intended to be pated through the rights issue, issue of securities overseas and its portfolio investments divesting. Before, Tata Motors requested to secure the funds using three simultaneous right issues, of which, of which one was o.5% convertible preference shares. However, the company was forced to share its plan for issuing the convertible preference shares as the prices of the share of the company fell greatly and remained low till as recent as August 2009. The other 2 rights issue (one was meant to earning Rs.21.86 billion with each other share at Rs.340/- and the other issue was aimed at 19.60 billion with every share priced at Rs. 305/-) was not able to generate the expected amount of subscriptions from the share holders and required to be bailed out by company’s promoters and the underwriters. The company favored the deposit scheme from the public in December 2008 and private placement Non – Convertible debentures at rates that were high in an attempt to look at the alternatives options of funding. Tata Motors was able to get Rs. 1.75 billion through this scheme. However, despite all these measures, the company could only repay $1bn of the total amount of loan by the end of December 2008. Since the likeliness of Tata paying the whole amount was very slim, as had been agreed upon by June 2009, they resolved to roll over the remaining $2bn loan with consent from Consortium of banks. However, because of the circumstances of the market, the interest on the loan was higher than the charged interest at the time that when the loan was initially taken and this resulted to higher debts for Tata Motors (Gong, Y. 2013). With the funding difficulty that was existing, Tata Motors was hoping from the past record with both Land Rover and Jaguar would be able to earn enough funds of their respective work capital. By October 2008, because of the global recession the automobile segment in the world suffered a big setback with sales falling drastically. Markets, more so the UK and US were severely affected and the demand for these luxury cars declined drastically. Because of this, the volume of sales for JLR for quarter that ended in December 2008 fell by nearly 35% and the situation became so drastic the Tata Motors announced that it was necessary for them to invest additional 630 million pounds in order to continue their operations itself. The company was forced to request the British Government for assistance so as to sustain itself. In January 2009, British Government offered it 250 million pounds of which the better of it was to be utilized for sustaining the organization’s operations. The demand for luxury cars at the time of recession was at the lowest. In UK, the demand for cars was estimated to fall by at least 31% out of 2.4 million in January 2008 up to 1.79 million in January 2009. This is in record as the lowest demand in the past 35 years (Wang, et al. 2014). The trend was similar in United States and other parts of the world like Brazil, Japan, etc. Tata Motors sales in India were also not spared by the global financial crisis. The crisis had resulted to a lot of job cuts, more so in the IT and ITEZ markets and also many cost cutting measures so as to survive. This resulted in spending power reduction in the public and the fall in car demands. By the end of 2008 December, the sale of passage cars dropped by 14.4% in comparison to the vehicles sales in the previous year same duration. Because of the economic slowdown and resultant salary cuts and job retrenchments, there were many cases of defaults in loan repayments and this led to many banks to reducing the loans being offered to customers to buy cars. This added to the fall of demand for cars in the market. This also led to the banks in the area to raise the percentage of interest and this interest rise dissuaded in the new customers applying for a loan to think again regarding their request. This, specifically was the reason for the fall so that commercial vehicles in Quarter ending December 2008 to drop by almost 40% over the time in the previous year. Even though vehicles sales in the domestic market had indicated an increase in numbers in 2008 first quarter, the profits had dropped by almost 30% in comparison to the same period the last year mainly owing to the interest that the company was paying for the loan it had taken to acquire Land Rover and Jaguar Brands. REFERENCES. Faulkner, D., Teerikangas, S., & Joseph, R. J. (2012). The handbook of mergers and acquisitions. Gaughan, P. A. (2011). Mergers, acquisitions, and corporate restructurings. Hoboken, NJ: Wiley. Gong, Y. (2013). Global operations strategy: Fundamentals and practice. Berlin: Springer. Wang, C., & He, J. (2014). Brand management in emerging markets: Theories and practice. Read More