CHAPTER - 1 INTRODUCTION

Introduction to Mergers and Acquisition

We have been learning about the companies coming together to from another company and companies taking over the existing companies to expand their business.

With recession taking toll of many Indian businesses and the feeling of insecurity surging over our businessmen, it is not surprising when we hear about the immense numbers of corporate restructurings taking place, especially in the last couple of years. Several companies have been taken over and several have undergone internal restructuring, whereas certain companies in the same field of business have found it beneficial to merge together into one company.

In this context, it would be essential for us to understand what corporate restructuring and mergers and acquisitions are all about. The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. Thus important issues both for business decision and public policy formulation have been raised. No firm is regarded safe from a takeover possibility. On the more positive side Mergers & Acquisition's may be critical for the healthy expansion and growth of the firm. Successful entry into new product and geographical markets may require Mergers & Acquisition's at some stage in the firm's development.

Successful competition in international markets may depend on capabilities obtained in a timely and efficient fashion through Mergers & Acquisition's. Many have argued that mergers increase value and efficiency and move resources to their highest and best uses, thereby increasing shareholder value. To opt for a merger or not is a complex affair, especially in terms of the technicalities involved. We have discussed almost all factors that the management may have to look into before going for merger.

Considerable amount of brainstorming would be required by the managements to reach a conclusion. e.g. a due diligence report would clearly identify the status of the company in respect of the financial position along with the net worth and pending legal matters and details about various contingent liabilities. Decision has to be taken after having discussed the pros & cons of the proposed merger & the impact of the same on the business, administrative costs benefits, addition to shareholders' value, tax implications including stamp duty and last but not the least also on the employees of the Transferor or Transferee Company.

MERGER
Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, the surviving company is the buyer, which retains its identity, and the extinguished company is the seller.

Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to transferee company in consideration of payment in the form of: Equity shares in the transferee company, Debentures in the transferee company, Cash, or A mix of the above modes.

In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. A merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding; in some cases, terming the combination a "merger" rather than an acquisition is done purely for political or marketing reasons. Merger is a financial tool that is used for enhancing long-term profitability by expanding their operations. Mergers occur when the merging companies have their mutual consent as different from acquisitions, which can take the form of a hostile takeover. The business laws in US vary across states and hence the companies have limited options to protect themselves from hostile takeovers. One way a company can protect itself from hostile takeovers is by planning shareholders rights, which is alternatively known as "poison pill.

If we trace back to history, it is observed that very few mergers have actually added to the share value of the acquiring company and corporate mergers may promote monopolistic practices by reducing costs, taxes etc.

Managers are concerned with improving operations of the company, managing the affairs of the company effectively for all round gains and growth of the company which will provide them better deals in raising their status, perks and fringe benefits.

ACQUISITON
Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company. Methods of Acquisition: An acquisition may be affected by: (a) agreement with the persons holding majority interest in the company management like members of the board or major shareholders commanding majority of voting power; (b) purchase of shares in open market; (c) to make takeover offer to the general body of shareholders; (d) purchase of new shares by private treaty; Acquisition of share capital through the following forms of considerations viz. means of cash, issuance of loan capital, or insurance of share capital Page

ACQUISITION PROCESS
The acquisition process can be divided into a planning stage and an implementation stage. The planning stage consists of the development of the business and the acquisition plans. The implementation stage consists of the search, screening, contacting the target, negotiation, integration. Process of acquisition can be in the following steps:

Developing the business plan

A merger or acquisition decision is a strategic choice. The acquisition strategy should fit the companys strategic goals of increasing the cash flows and reduce risk. Business plan communicates a mission or a vision for the firm and a strategy for achieving that mission. Business plan consists of the following activities: Determining where to compete i.e. The industry or the market in which the firm desires to compete. Determining how to compete. An external analysis can be made to determine how the firm can most effectively compete in its chosen market.

Self assessment of the firm by conducting an internal analysis of the firms strengths and weaknesses relative to the competition. Defining the mission statement by summarizing where and how the firm has chosen to compete Setting objectives by developing competitive measures of performance. Selecting the most likely strategy to achieve the objectives within a reasonable time period subject to the constraints in the self assessment. The strategic planning process identifies the companys competitive position and sets objectives to exploit its relative strengths while minimizing the effects of its weaknesses.
1 . The Search Process

The search for the potential acquisition takes place in two stages:It involves establishing a primary screening process. The primary criteria based on which the search process is based include factors like the industry, size of the transaction and the geographic location. The size of the transaction is best defined in terms of the maximum purchase price of a firm is willing to pay. This involves developing the search strategy. It uses computerized database and directory services to identify the prospective candidates. The screening process The screening process starts with the reduction of the initial list of potential candidates identified by using the primary criteria such as the size and the type of industry. First contact It involves meeting the acquisition candidate and putting forward the proposal of acquisition. It depends on the size of the company and whether it is publicly or privately held.

Preliminary legal documents

Confidentiality agreement Letter of intent

. Negotiation
Process consists of many activities conducted simultaneously by various members of the acquisition team. The actual purchase consideration is determined during this phase. Defining the purchase price: The purchase consideration can be defined in The total consideration Total purchase price The net purchase price

Structuring the deal

It involves meeting the needs of both parties by dealing with issues of risk and reward by legal, tax and accounting structures.
Due diligence required by law

According to Cadbury report, the due diligence report is required for acquisitions because the full board of directors of the purchasing company should review significant acquisitions.

In India, a merchant banker has to conduct due diligence to ensure the acquirers financial position and chance of implementation of terms of merger condition by the parties by giving a due diligence certificate to the SEBI. In a merger, both the parties will conduct due diligence. Due diligence can be conducted from different perspectives. Financial historical records, review of management and systems. Legal- various contractual acts in the country Commercial market conditions Tax- existing tax levels, liabilities and arrangements. Management mgmt quality, organizational structure

Closing the Deal

Closing is the final legal procedure where the company changes hands. It consists of all necessary shareholder, regulatory and third party. All the necessary approvals are attained at this stage. Conditions for closing Certain pre conditions set in the definitive agreement have to meet before the close of the contract. The pre conditions include the assumption that the seller would abide by the representations and warranties and will live up to the obligations.

Documents required completing the transaction of a merger or an acquisition is:Loan agreements, trademarks and trade names Supplier and customer contracts Distributor and sales representative agreements Insurance policies and claim pending Articles of incorporation, bylaws and corporate seals. Employee incentive programs

TATA GETS JAGUAR AND ROVER UNDER ITS PAW!

ABSTRACT

Creating history, Indias top corporate Tatas on Wednesday acquired luxury auto brandsJaguar and Land Roverfrom Ford Motors for $ 2.3 billion, stamping their authority as a takeover tycoon. Beating compatriot Mahindra and Mahindra for the prestigious brands on 2 nd June 2008 announced the deal they signed with Ford, which on its part would chip in $600 million towards JLRS pension plan. We are very pleased at the prospect of Jaguar and Land Rover being a significant part of our automotive business, Group Chairman Ratan Tata said after making the deal public. Tata Motors' acquisition of two iconic British brands - Jaguar and Land Rover - was finally completed. Well, it is true that their immediate previous owners were American, but the flavour of the two companies continues to be very Brit. Tata has acquired the two companies for about half the price that Ford paid their original owners when the latter acquired them in 1989. Though that sounds like a good deal, it is not going to be all rosy for Tata Motors after the acquisition. The real work starts now for this global Indian, trying to pull together the two brands and making them more profitable while still being weighed down by their historical issues. Jaguar and Land Rover are both special, super premium brands that have a huge fan following. The ownership of the two brands has changed hands, but the brands themselves will remain untarnished. And Tata Motors itself has just become more global. Calls to separate the passenger car business from the rest of the company will only get shriller now. Tata Motors is now officially the proud parent of the Jaguar, and its sister Land Rover. The deal is a fulfillment of Mr. Tatas personal vision and is intended to catapult Tata Page 12 Motors, the owner of the cute lil Nano, into the global big league of auto majors. It will also reinforce the global perception of India Inc as a leader in international business, and not just in IT. Yet, the final lap of Group Tatas long-drawn-out bid to acquire Jaguar-Land Rover (JLR) from Ford for $2.3 billion in cash was a bit of an anti-climax. Compared with the Corus deal, this was almost hush-hush. In open-for-business Britain, the headlines are already calling the Tatas the Corus owners, and not the Indian auto company. The key challenge for the new owner of Jaguar and Land Rover will be to grow and maintain sales of the two brands in a global downturn and credit crunch. Tata Motors will have to commit significant managerial and financial resources to

engineer a turnaround. It will have to significantly step up its R&D budget as well as increase operating expenditure and capital expenditure to meet JLRs requirements. Auto analysts tracking the development say the acquisition was just the first step; the real challenge lies in running JLR. The acquisition cost of $2.3 billion is financed by a bridge loan, which will be raised through a syndicate of banks. The bridge money will be replaced by a combination of long-term debt and equity at an appropriate time. The company will raise funds to finance its equity contribution by selling a portion of its stake in some of its subsidiaries in the next few months. Largest cross-border auto takeover SOURCES indicate that initially two joint ventures with Hitachi for axles and transmissionHVAL and HVTLand auto component maker TACO are some of the subsidiary companies Tata Motors is looking to divest. Citigroup and JPMorgan are the lead advisors to the deal, which is the largest crossborder auto acquisition by an Indian company. The deal is expected to close by the end of June 2008, subject to regulatory approvals and the achievement of financial closure. The transaction is significant for a number of reasons. Coming as it does amidst a global freeze in credit markets; it shows that top-notch Indian companies have the ability to raise large amounts of money at reasonably low rates of interest. Besides the two US banks, the bridge loan is being underwritten by a consortium of eight banks State Bank of India, Bank of Tokyo-Mitsubishi UFJ, BNP Paribas, ING, Mizuho and Standard Chartered. The loan has been structured in the form of step-up financing: for the first six months, the interest charge would be Libor (London InterBank Offered Rate) plus 70 basis points and for the next six months, it would be 140 basis points over the benchmark rate. The six-month Libor is currently at 2.63%. The bridge loan is being raised by a special purpose vehicle Tata Motors UK, which will own these two brands, banking sources said. Tata Motors UK is 100% owned by Tata Motors. .

THE COMPANY PROFILE : TATA

Tata Motors Limited, formerly known as TELCO (TATA Engineering and Locomotive Company), is a multinational corporation headquartered in Mumbai, India. It is India's largest passenger automobile and commercial vehicle manufacturing company and a midsized player on the world market with 0.81% market share in 2007 according to OICA data. Part of the Tata Group, and one of the world's largest manufacturers of commercial vehicles. The OICA ranked it as the world's 19th largest automaker, based on figures for 2007. as well as the second largest automaker of commercial vehicles. Tata Motors Limited is Indias largest automobile company, with revenues of Rs. 35651.48 crores (USD 8.8 billion) in 2007-08. It is the leader in commercial vehicles in each segment, and among the top three in passenger vehicles with winning products in the compact, midsize car and utility vehicle segments. The company is the worlds fourth largest truck manufacturer, and the worlds second largest bus manufacturer The companys 23,000 employees are guided by the vision to be best in the manner in which we operate best in the products we deliver and best in our value system and ethics. Established in 1945, Tata Motors presence indeed cuts across the length and breadth of India. Over 4 million Tata vehicles ply on Indian roads, since the first rolled out in 1954. The companys manufacturing base in India is spread across Jamshedpur (Jharkhand), Pune (Maharashtra), Lucknow (Uttar Pradesh) and Pantnagar (Uttarakhand). Following a strategic alliance with Fiat in 2005, it has set up an industrial Join t venture with Fiat Group Automobiles at Ranjangaon (Maharashtra) to produce both Fiat and Tata cars and Fiat powertrains. The company is establishing two new plants at Dharwad (Karnataka) and Sanand (Gujarat). The companys dealership, sales, services and spare parts network comprises over 3500 touch points; Tata Motors also distributes and markets Fiat branded cars in India. Tata Motors, the first company from Indias engineering sector to be listed in the New York Stock Exchange (September 2004), has also emerged as an international automobile company. Through subsidiaries and associate companies, Tata Motors has operations in the UK, South Korea, Thailand and Spain. Among them is Jaguar Land Rover, a business comprising the two iconic British brands that was acquired in 2008. In 2004, it acquired the Daewoo Commercial Vehicles Company, South Ko reas second largest truck maker. The rechristened Tata Daewoo Commercial Vehicles Company has launched several new products in the Korean market, while also exporting these products to several international markets. Today two-thirds of heavy commercial vehicle exports out of South Korea are from Tata Daewoo. In 2005, Tata Motors acquired a 21% stake in Hispano Carrocera, a reputed Spanish bus and coach manufacturer, with an option to acquire the remaining stake as well. Hispanos presence is being expanded in other markets. In 2006, it formed a joint venture with the Brazil-based Marcopolo, a global leader in body-building for buses and coaches to manufacture fully-built buses and coaches for India and select international markets. In 2006, Tata Motors entered into joint venture with Thonburi Automotive Assembly Plant Company of Thailand to manufacture and market the companys pickup vehicles in

Thailand. The new plant of Tata Motors (Thailand) has begun production of the Xenon pickup truck, with the Xenon having been launched in Thailand at the Bangkok Motor Show 2008. Tata Motors is also expanding its international footprint, established through exports since 1961. The companys commercial and passenger vehicles are already being marketed in several countries in Europe, Africa, the Middle East, South East Asia, South Asia and South America. It has franchisee/joint venture assembly operations in Kenya, Bangladesh, Ukraine, Russia and Senegal. The foundation of the companys growth over the last 50 years is a deep understanding of economic stimuli and customer needs, and the ability to translate them into customer-desired offerings through leading edge R&D. With over 2,500 engineers and scientists, the companys Engineering Research Centre, established in 1966, has enabled pioneering technologies and products. The company today has R&D centres in Pune, Jamshedpur, Lucknow, in India, and in South Korea, Spain, and the UK. It was Tata Motors, which developed the first indigenously developed Light Commercial Vehicle, Indias first Sports Utility Vehicle and, in 1998, the Tata Indica, Indias first fully indigenous passenger car. Within two years of launch, Tata Indica became Indias largest selling car in its segment. In 2005, Tata Motors created a new segment by launching the Tata Ace, Indias first indigenously developed mini-truck In January 2008, Tata Motors unveiled its Peoples Car, the Tata Nano, which India and the world have been looking forward to. A development, which signifies a first for the global automobile industry, the Nano brings the comfort and safety of a car within the reach of thousands of families. When launched in India later in 2008, the car will be available in both standard and deluxe versions. The standard version has been priced at Rs.100,000 (excluding VAT and transportation cost). Designed with a family in mind, it has a roomy passenger compartment with generous leg space and head room. It can comfortably seat four persons. Its mono-volume design will set a new benchmark among small cars. Its safety performance exceeds regulatory requirements in India. Its tailpipe emission performance too exceeds regulatory requirements. In terms of overall pollutants, it has a lower pollution level than two-wheelers being manufactured in India today. The lean design strategy has helped minimize weight, which helps maximize performance per unit of energy consumed and delivers high fuel efficiency. The high fuel efficiency also ensures that the car has low carbon dioxide emissions, thereby providing the twin benefits of an affordable transportation solution with a low carbon footprint. The years to come will see the introduction of several other innovative vehicles, all rooted in emerging customer needs. Besides product development, R&D is also focusing on environment-friendly technologies in emissions and alternative fuels. Through its subsidiaries, the company is engaged in engineering and automotive solutions, construction equipment manufacturing, automotive vehicle components manufacturing and supply chain activities, machine tools and factory automation solutions, high-precision tooling and plastic and electronic components for automotive and computer applications, and automotive retailing and service operations. True to the tradition of the Tata Group, Tata Motors is committed in letter and spirit to Corporate Social Responsibility. It is a signatory to the United Nations Global Compact, and is engaged in community and social initiatives on labor and environment standards

in compliance with the principles of the Global Compact. In accordance with this, it plays an active role in community development, serving rural communities adjacent to its manufacturing locations. With the foundation of its rich heritage, Tata Motors today is etching a refulgent future

Tata Code of Conduct

This comprehensive document serves as the ethical road map for Tata employees and companies, and provides the guidelines by which the group conducts its businesses

Clause:1 National interest Clause:2 Financial reporting and records Clause:3 Competition Clause:4 Equal opportunities employer Clause:5 Gifts and donations Clause: 7 Political non-alignment Clause:8 Health, safety and environment Clause:9 Quality of products and services Clause:10 Corporate citizenship Clause:11 Cooperation of Tata companies Clause:12 Public representation of the company and the group Clause:13 Third party representation

Clause:13 Third party representation Clause:14 Use of the Tata brand Clause:15 Group policies Clause:16 Shareholders Clause:17 Ethical conduct Clause:18 Regulatory compliance Clause:19 Concurrent employment Clause:20 Conflict of interest Clause:21 Securities transactions and confidential information Clause:22 Protecting company assets Clause: 23 Citizenship Clause:24 Integrity of data furnished Clause:25 Reporting concerns

Company profile:
The Ford Motor Company (NYSE: F) is an American multinational corporation and the world's fourth largest automaker based on worldwide vehicle sales, following Toyota, General Motors, and Volkswagen. Based in Dearborn, Michigan, a suburb of Detroit, the automaker was founded by Henry Ford and incorporated on June 16, 1903. In addition to the Ford, Lincoln, and Mercury brands, Ford also owns Volvo Cars of Sweden, and a small stake in Mazda of Japan and Aston Martin of England. Ford's former UK subsidiaries Jaguar and Land Rover were sold to Tata Motors of India in March 2008. In 2007, Ford fell from the second-ranked automaker to the third-ranked automaker in US sales for the first time in 56 years, behind General Motors and Toyota. Based on 2007 global sales, Ford fell to the fourth-ranked spot behind Volkswagen. Ford is the seventh-ranked overall American-based company in the 2007 Fortune 500 list, based on global revenues in 2007 of $172.5 billion. In 2007, Ford produced 6.553 million automobiles and employed about 245,000 employees at around 100 plants and facilities worldwide. Also in 2007, Ford received more initial quality survey awards from J. D. Power and Associates than any other automaker. Five of Ford's vehicles ranked at the top of their categories and fourteen vehicles ranked in the top three. Ford introduced methods for large-scale manufacturing of cars and large-scale management of an industrial workforce using elaborately engineered manufacturing sequences typified by moving assembly lines. Henry Ford's methods came to be known around the world as Fordism by 1914

Corporate governance:
Members of the board as of early 2007 are: Chief Sir John Bond, Richard Manoogian, Stephen Butler, Ellen Marram, Kimberly Casiano, Alan Mulally (President and CEO), Edsel Ford II, Homer Neal, William Clay Ford Jr., Jorma Ollila, Irvine Hockaday Jr., John L. Thornton and William Clay Ford (Director Emeritus).[7] The main corporate officers are: Lewis Booth (Executive Vice President, Chairman (PAG) and Ford of Europe), Mark Fields (Executive Vice President, President of The

Americas), Donat Leclair (Executive Vice President and CFO), Mark A. Schulz (Executive Vice President, President of International Operations) and Michael E Bannister (Group Vice President; Chairman & CEO Ford Motor Credit). Paul Mascarenas (Vice President of Engineering, the Americas Product Development).

Our Progress
We get it. We need a new way of doing business. You'll be glad to know Ford has been making great progress we're sure you will agree.

Ford Motor Company, Honda Motors and Toyota Motors quality ratings are in a dead heat. Our cars, trucks and SUVs deliver fuel economy that's competitive with that of all other automakers.

PROFILE OF JAGUAR:

Jaguar Cars Ltd. ( better known simply as Jaguar) is an automaker from England, United Kingdom that manufactures luxury and executive motor car. Jaguar was founded as the Swallow Sidecar Company by Sir William Lyons in 1922, originally making motorcycle sidecars before switching to passenger cars.

The name was changed to Jaguar after the second world war due to the unfavourable connotations of the SS initials. Jaguar cars are designed in an engineering centre at their headquarters in Coventry, England and are manufactured in one of three English Jaguar plants; Castle Bromwich in Birmingham, Halewood near Liverpool and Gaydon in Oxfordshire. Following several subsequent changes of ownership since the 1960s, Jaguar was listed on the London Stock Exchange and became a constituent of the FTSE 100 Index, which ended when Ford acquired Jaguar in 1989. The Ford Motor Company made offers to the US and UK Jaguar shareholders to buy their shares in November 1989; Jaguar's listing on the London Stock Exchange was removed on 28 February 1990. In 1999 it became part of Ford's new Premier Automotive Group along with Aston Martin, Volvo Cars and, from 2000, Land Rover; Aston Martin was subsequently sold off in 2007. Between Ford purchasing Jaguar in 1989 and selling it in 2008 it did not earn any profit for the Dearborn-based auto manufacturer. On 11 June 2007, Ford announced that it planned to sell Jaguar, along with Land Rover and retained the services of Goldman Sachs, Morgan Stanley and HSBC to advise it on the deal. The sale was initially expected to be announced by September 2007, but was delayed until March 2008. On 26 March 2008, Ford announced that it had agreed to sell its Jaguar and Land Rover operations to Tata Motors of India, and that the sale was expected to be completed by the end of the second quarter of

2008. Included in the deal were the rights to three other British brands, Jaguar's own Daimler, as well as two dormant brands Lanchester and Rover.On 2 June 2008, the sale to Tata was completed at a cost of 1.7 billion.

PROFILE OF LAND ROVER:

Land Rover is an all-terrain vehicle and Multi Purpose Vehicle (MPV) manufacturer, based in Solihull, West Midlands, England. Originally the term Land Rover referred to one specific vehicle, a pioneering civilian all-terrain utility vehicle launched on 30 April 1948, at the Amsterdam Motor Show, but was later used as a brand for several distinct models, all capable of four-wheel drive. Starting out as a model in the Rover Company's product range, the Land Rover brand developed, first as a marquee, then as a separate company, developing a

range of four-wheel drive capable vehicles under a succession of owners, including British Leyland, British Aerospace and BMW. In 2000, the company was sold by BMW to the Ford Motor Company, becoming part of their Premier Automotive Group. In June 2008, Ford sold its Jaguar and Land Rover operations to Tata Motors

EVENTS OF THE TATA-FORD DEAL

1. FORD STARTS FACING PROBLEM WITH PENSION COSTS AND FALLING SALES IN NORTH AMERICA .

Ford has been forced to sell two companys based at Solihill and Castle Bromwich in the West Midlands and Halewood on Merseyside in order to concentrate on its loss making core US car business, which it hopes to turn around in the next two years. The largest loss of a $127 billion, overseen by Allan Mullay, who took over as a Chief Executive Officer in the same year, decided to sell its iconic Aston Martin Brand to aU.K based investment consortium in a deal worth $955.2 million in 2007. Ford mission became to integrate the Ford brand globally, and create a strong Ford motor company that delivers profitable growth to all.
2 . FORD INDICATES THAT IT MIGHT LOOK FOR BUYERS FOR JAGUAR AND LAND ROVER MARQUES

After the losses drained out cash and resources out of the Ford Company, Ford Motorgave a lucid indication for buyers of its two other brands- Jaguar and Land Rover, asluxury car sales went down across the globe. Jaguar sales dropped 33% in the US andEurope in the first two months of the year while Land Rover sales fell 13% in the USand 7.7% in Europe during the period. Ford bought Jaguar for $2.5 billion in 1989 andLand Rover for $2.7 billion in 2000. But it has been struggling and wants to focus on itsmain brands. It has now sold the marques for less than what it paid then. 3 . TATA CONFIRMS THE NEWS TO PARTICIPATE IN THE BID The head of India's Tata conglomerate confirmed Friday that his group was interestedin bidding for luxury UK car brands Jaguar and Land Rover, in an

interview with anIndian news channel. Tata Motors, India's biggest car company, has appointedadvisors to evaluate a bid and signed a confidentiality agreement with Ford to accessfinancial details of the two brands which have a combined British workforce of 19,000,the Business Standard daily quoted unnamed sources as saying last month. The move would be in keeping with Tata group's growing appetite for overseas acquisitions. 4 . MAHINDRA-MAHINDRA FAILED TO MAKE IN TO BID Mahindra & Mahindra has pulled out of the race to acquire iconic British brands Jaguar and Land Rover, which have been put on the block by Ford, citing complexities in the way the deal was structured. The development strengthened the case for Tata Motors, which is now pitted against private equity firm One Equity Partners that has roped informer Ford boss Jacques Nasser as an advisor. Sources close to the negotiations said M&M though a serious contender in the beginning decided against pursuing the deal as there were concerns related to Intellectual Property Rights (IPR) associated with the two brands. "The whole deal was considered to be very complex, prompting the company not to pursue it," a source said. M&M thought that it would have to go back to Ford on many crucial issues related to use of technology even after bagging the two brands. Crucial IPRs related to the brands are locked in with the US auto major, making it difficult for the eventual winner to "derive full benefits unhindered and Ford's continuing involvement was a crucial concern". 5 . FORD ANNOUNCES TATA AS PREFERRED BUYER . On 1 January 2008, Ford made a formal announcement which declared Tata as the preferred bidder. Tata Motors also received endorsements from the Transport And General Workers Union (TGWU)-Amicus combine as well as from Ford. According to the rules of the auction process, this announcement would not automatically disqualify any other potential suitor. However, Ford (as well as representatives of Unite) would now be able to enter into more focused and detailed discussions with Tata to iron out issues ranging from labour concerns (job security and pensions), technology (underwriting a loan of USD 3 billion in order to finance the deal. (IT systems and engine production) and intellectual property as well as the final sale price.Ford would also open its books for a more comprehensive diligence by Tata. On 18March 2008, Reuters reported that American bankers Citigroup and JP Morgan shall be due

6 .EUROPEAN COMMISION CLEARS ACQUISITION OF JAGUAR AND LAND ROVER BY INDIAN COMPANY, TATA MOTORS. On 26th April 2008,The European Commission (EC), the executive panel of the 27member European Union, cleared the acquisition of the Jaguar and Land Rover business (JLR) of US-based Ford Motor Company by India's Tata Motors Ltd The EC announced in Brussels. that it has granted clearance under the EU Merger Regulation Procedure.

THE DEAL

The definitive agreement was agreed by Tata Motors Ltd., on 26th March 2008 to acquire luxury British Marques, Jaguar and Land Rover. The all-cash deal, which was agreed in March, includes all necessary intellectual property rights, manufacturing plants, two advanced design centers in the UK and a worldwide network of sales companies. Included in the deal were the rights to three other British brands, Jaguar's own Daimler, as well as two dormant brands Lanchester and Rover. On 2 June 2008 the sale to Tata was completed by both parties
Tata Motors has signed a share purchase agreement to acquire the business of Jaguar and Land Rover (JLR) in an all cash deal of US$ 2.3 bn. This includes the 3 manufacturing plants, 2 Advanced designed centers, located in UK and 26 national sales companies. The regulatory approval will take around 2 months time. Ford will contribute US$ 600 m to pension fund which will be sufficient to meet the requirements. There is no debt in the books except for trade payables . Ford has guaranteed for a minimum capital allowance of US $ 1.1 bn for

taxation purposes. The deal includes perpetual royalty free licenses f ree licenses of all necessary Intellectual Property Rights The agreement includes supply of engines for 79 years manufactured by JLR and Ford Ford will continue to supply Jaguar Land Rover for differing periods with power trains, stampings and other vehicle components, in addition to a variety of technologies, such as environmental and platform technologies. Ford Motor Credit Company will provide financing for Jaguar and Land Rover dealers and customers during a transitional period, which can vary by market, of up to 12 months. The management stressed on the fact that JLR combined is a profitable business and has made profits in each of the quarter of FY2007. However, the management did not share financials. The five year plan that the management has agreed upon factors in the decline in sales in matured markets.

TRANSITION SUPPORT
Other areas of transition support from Ford include IT, accounting and access to test facilities. The companies will also cooperate in areas such as design and development through sharing of platforms and joint development of hybrid technologies and power train engineering, Tata Motors said.

TIMELINE OF THE HISTORIC DEAL

2005 Ford starts facing problems with pension and health care costs and falling sales in North America. Starts reporting losses from the second quarter Alan Mullaly takes over as chief executive and oversees a $12.7 billion loss, the largest in the company's history Ford decides to sell its Aston Martin brand

2006

May,2007

Ford closes the Aston Martin sale for $848 million

June,2007

Ford indicates that it might look at buyers for Jaguar and Land Rover marques

July,2007

August,2007

Ford receives preliminary bids for the brands. Reports say that TPG Inc., Cerberus Capital Management Lp. Ripplewood Holdings, One Equity Partners Llc are in the fray, along with Tata Motors Ltd and Mahindra & Mahindra Ratan Tata, chairman of Tata Motors Ltd, confirms that his company was bidding for the premium car Makers

November, 2007

Investment bankers say that Apollo Alternative Assets is teaming up with Mahindra & Mahindra Reports say that Ford has shortlisted three biddersTata, Mahindra and One Equityfor further negotiations with its trade unions Unite, the trade union representing Land Rover and Jaguar workers, says it supports Tata Motors' bid The three bidders submit their bid

December, 2007

January, 2008

Ford names Tata as "preferred buyer

March, 2008

Tata, Ford sign deal

June,2008

Deal finally completed by both the parties.

STUDENTS ANALYSIS
OFFER AND ACCEPTANCE Offer and acceptance: there must be two parties to an agreement, i.e., one party making the offer and the other party accepting it. The terms of the offer must be definite and the acceptance of the offer must be absolute and unconditional. The acceptance must also be according to the mode prescribed and must be communicated to the offer o The deal was offered by Tata and finally accepted on 2nd June 2008 by William Clay Ford (Chairman of Ford) and Allan Mulally (CEO of Ford)OFFER BY TATA ACCEPTANCE BY FORD LEGAL RELATIONSHIP Intention to create legal relationship: When the two parties enter into an agreement ,there intention must be to create a legal relationship between them. If there is no such intention on the part of the parties, there is no contract between them. Both the parties have the intention to create legal Relationship between them and were agreed to legalize the deal in written LAWFUL CONSIDERATION An agreement to be enforceable by law must be supported by consideration. Consideration means an advantage or benefit moving from one party to another. It is the essence of a bargain. In simple words, it means something in return. The agreement is legally enforceable only when both the parties give something and get something in return. Consideration need not necessarily be in cash or kind. It may be an act, abstinence, or promise to do or not to do something. It may be past, present or future. But it must be real and lawful. Consideration is lawful in the deal. Mr. Ratan Tata (Chairman of Tata) gets the Ford Company as his consideration. CAPACITY OR COMPETENCY OF PARTIES
Capacity of parties- competency: The parties to the agreement must be capable of entering into a valid contract. Every person is competent to contract if he (a) is the age of majority, (b) is of sound mind, and (c) is not disqualified from contracting by

any law to which he is subject. There are three conditions that are required for a party to become competent to contract were fulfilled:-Both the parties attains the age of majority at the time of contract. -Both the parties are of sound mind -Both Tata and Ford were not disqualified by any law from signing any contract.

FREE CONSENT
Free and genuine consent: It is essential to the creation of every contract that there must be free and genuine consent of the parties to the agreement. The consent of the parties is said to be free when they are of the same mind on all the material terms of the contract. The parties are said to be of the same mind when they agree about the subject matter of the contract in the same sense and at the same time. There is absence of free consent if the agreement is induced by coercion, undue influence, fraud, misinterpretation, etc. In this case the consent of both the parties are free i.e. It is not caused by Coercion Undue Influence Fraud Misrepresentation Mistake Thus the contract is genuine.

LEGALITY OF OBJECT
Lawful object: The object of the agreement must be lawful. In other words, it means that the object must not be (a) illegal, (b) immoral, or (c) opposed to public policy. If an agreement suffers from any legal flaw, it would not be enforceable by law. In Tata Ford deal nothing was illegal, immoral or opposed to public policy hence legality of object criteria also got fulfilled.

POSSIBILITY OF PERFORMANCE
Certainty and possibility of performance: The agreement must be certain and not vague or indefinite. If it is vague and it is not possible to ascertain its meaning, it cannot be enforced. The term of the agreement must also be such as are capable of performance. Agreement to do an act impossible in itself cannot be enforced. In this deal both the parties were perform there respective promises so the deal is successful.

LEGAL FORMALITIES
Legal formalities: A contract may be made by words spoken or written. As regards the legal effects, there is no difference between a contract by writing and a contract made by word of mouth. It is in the interest of the parties that the contract should be in the writing. There are some other formalities also which have to be complied with in order to make an agreement legally enforceable. In some cases, the document in which the contract is incorporated is to be stamped. In some other cases, a contract, besides being a written one, has to be registered. Thus, where there is a statutory requirement that a contract should be made in writing or should be made

in the presence of witnesses or registered, the required statutory formalities must be compiled with. In this deal all the legal formalities like registration etc. are fulfilled hence the deal is successful. Thus, all the elements which are essential for an agreement to become a contract are present. Thus Contract is a Valid Contract

Profitability Trend of Tata Motors

Tata Mar Motors 2003 Ltd. Mar 2004 Mar 2005 Mar 2006 Mar 2007 Mar 2008

Sales 10704.2 15311.72 20276.56 23568.37 31119.5 32496.03 PAT 300.11 810.34 1236.95 1528.88 1913.46 2028.92

PAT (as a % on 3.29 Net Sales)

6.58

7.18

6.86

4.8

4.36

Change in PAT (+/-)

3.29

0.6

(0.32)

(2.06) (0.44)

Reason for the Deal

Ford purchased Jaguar in 1989 in a bidding war with General Motors paying 2.5billion dollars which was quite higher than industry estimates (1.3 billion) Land Rover was sold by BMW to Ford Motor Company for 2.7billion dollars in 2000 Jaguar sales in the U.S. were down by 25.7% in May 2007 from the same period a year ago. Land Rover sales were down by1.8% despite having an entirely new model, the LR2, on sale. Jaguar sales dropped 33% in the US and Europe in the first two months of 2008

Land Rover sales fell 13% in the US and around 7.7% in Europe during the same period. Ford has lost 15.3 billion dollars over the past two years and responded by shuttering plants and slashing its workforce in North America by more than 40,000 workers. Ford is getting less than half what it paid for the two brands Ford sold Jaguar and Land Rover as a package since the engineering, purchasing, and distribution of the two brands have become interdependent as Ford has tried to find efficiencies running the businesses. Jaguars and Land Rovers are even manufactured at a common plant today Ford is considering a restructuring plan in North America with the amount it is getting from the deal

RATIONALE FOR THE ACQUISITION The sale of jaguar and landrover was initiated by their former owner ford. Ford acquired jaguar for $2.5 billion in 1989 and it acquired landrover from bmw in 2000 for $2.7 billion, the us auto major put both of them on sale in june 2008 . various factors ignited the sale of jaguar and landrover by ford and bidding for its purchase by tata, some of them are discussed below: CUMULATIVE LOSSES FOR MANY YEARS: Ford made losses of 12.6 billlion in the year 2006, the biggest ever in its 103 year history, most of it was a result of bad performance of jaguar, landrover however was performing steadily though not at its best, landrover was driven by a record sale of 2.26 lakh vehicles in the year 2007,ford announced for a combined sale of both jaguar and landrover. The reason which could be best associated with this strategy is that ford wanted to get rid of jaguar on one hand which had been making losses and realize a good amount by offering landrover for sale also which would not have been possible by offering jaguar alone, moreover jaguar and landrover being two unique brands with distinctive features would attract more bidders . GOODTIME TO GET HOLD OF TWO UNIQUE BRANDS FOR TATA MOTORS: Automobile industry was well affected by the economic downturn, the market was not on its flow hence it was a good time for tata motors to get hold of jaguar and landrover at a reasonable price. Tata motors acquired both jaguar and landrover for an amount of 2.3 billion whereas ford acquired them for a total sum of 5.2billion, tata did not pay even half of that amount.

This would not have been possible had the market been steadysteady

Reasons that justifies Tata acquiring Jaguar Land Rover:

GLOBAL FOOTPRINT Acquiring jaguar and landrover would give tata an enormous opportunity to penetrate global market, which in the long run would act as a catalyst to boost revenues and create brand value. Tata motors generated 90% of its revenue from the Indian market acuring jlr would help in diversifying its revenue generating sources. LONG TERM ECONOMIES OF SCALE Acquiring jlr would help tata for component sourcing, design services and low cost engeenering which would in the long run reduce the cost of production and and facilitate in increasing the bottomline BROADEN THE BRAND PORTFOLIO Jaguar and land rover would broaden the brand portfolio of tata motors with a variety of performance and luxury vehicles, land rover being a natural fit for tmls suv segment Exploring intangible opportunities Jaguar and land rover are distinguished brands with good research and development behind them, acquiring jlr would give tata an opportunity to explore and utilize the r&d to generate greater revenues in the long run. More over tata gore two advance design studios and technology which would help them to improve their core products in india like indica and safari had problems of Internal noise and vibration. LONG TERM COMMITMENT TO AUTOMOBILE SECTOR Tata motors is engaged in production of various range of vehicles for different customers, acquiring jlr would give a chance to further explore the automobile industry and hence would be a step further towards its long term commitment to automobile sector. RECOGNITION TO OWN THE CHEAPEST CAR AS WELL AS MOST LUXURIOUS CARS Acquiring jlr would give tata a recognition in the market of being the owner of the cheapest car nano as well as premium cars like jaguar svx COST COMPETITIVE ADVANTAGE Corus being the major supplier of automotive high grade steel to jlr and other automobile industries in usa and Europe, acquiring jlr would result in a cost synergy for tata motors

PROBLEMS DURING ACQUISITION

Tata motors acquired jlr when the world automobile industry was rationalizing its products and differing the research and development works the impact of downturn was clearly visible in the automobile sector with a decrease in world revenue of around 10%, tatas decision to acquire jlr at this point of time was not accepted positively, it was negated at many stages. Tata motors faced a lot of problems while acquiring jlr starting from funds to investors unacceptance, some of the major problems are discussed below

PRE ACQUISITION PROBLEMS : FINANCING THE DEAL: Just before acquiring jlr, tata had acquired corus and moreover tata motors had undergone huge capital expenditure to bring nano into the market and hence financing the acquisition was a major concern for tata motors INVESTOR DISAGREEMENT: Investors were not in favour of the decision of acquiring jlr at that time , both jaguar and landrover were loss making units and automobile industry at that point of time was under pressure of downturn, infact tata motors itself had gone in for rationalization and retrenchment stratigies. Investors believed that the balance sheet of tata motors was not strong enough to absorb more loans UNFAVOURABLE ECONOMIC CONDITIONS ESPECIALLY IN THE TARGET MARKET: During the acquisition the worldwide car sales were down by 5%, the automobile industries over the world were rationalizing to conserve funds, moreover difficult economic conditions prevailed in the key markets comprising usa and Europe, which were the major factors influencing the earnings volatility POST ACQUISITION PROBLEMS: DEBT BURDEN: To finance the acquisition tata motors raised a bridge loan of 3 billion through consortium of banks by the end of 2009. Tata motors had yet to pay 2 billion towards the bridge loan , moreover it required additional funds and

that too quickly to keep the operations running. FALL IN SHARE PRICE: Tata motors share prices dropped in the market after acquisition of jlr because of the investor perception that it was not the right time to invest in that acquisition, when tata had recently undergone huge capital expenditure for the nanao project, especially in singur and the results were still unrevealed, moreover the investor thought that it was the time to be conservative and stabilize reserves rather than insourcing more debt burden. INEXPERIENCE IN HANDLING LUXURY BRANDS: Tata motors had never ventured into luxury car segment before acquiring jlr, hence the inefficiency in handling such segment hampered tata motors operational efficiency for quite some time. STRONG COMPETITION Tata motors strategy to penetrate global market through acquisition of jlr faced hurdles in the form of strong competition from global automobile giants like Mercedes, bmw, lexus and infinity

EVALUATION OF THE ACQUISITION

Acquisition of JLR by TATA can be evaluated on the basis of various advantages and disadvantages associated with the project

ADVANTAGES
Acquisition of two well known automobile brands that is JAGUAR and LANDROVER

DISADVANTAGES
JAGUAR was a loss making unit at the time of being acquired from its former owner FORD, LANDROVER, however recorded growth in sales but in declining trend Due to stringent availability of funds and huge capital expenditure incurred in NANO project simultaneously, TATA had to face debt burden Investors believed it was rather a time to conserve funds, moreover the balance sheet of TATA MOTORS was not in a position to absorb more loans Increasing compettion from global

TATA acquired both the brands at $2.3billion, which is less than half of the price that ford paid for acquiring both of them that is $5.7 billion RATAN TATA was of the view that it was the right time to invest as the price was cheap and there were lot of hidden opportunities to be explored in the strong r&d of jlr TATA got an opportunity to establish

a global footprint

giants like MERCEDES, BMW, LEXUS and INFINITY Benefits to be received in the long run without short term visibility , which in turn is subject to more volatility. Inexperience in handling luxurious brands like JLR

Insourcing technical knowhow of JLR to achieve economies of scale and develop domestic brands Wide diversity from being the owner of the worlds cheapest car to owner of luxury brands like JLR

Funding Structure Step I The entire acquisition will be made through an SPV. Initially it will be byway of bridge finance which is obtained for a period of 15 months in the SPV guaranteed by Tata Motors. The company has made an arrangement for US$ 3 bn of bridge finance. Step II The temporary financing will be replaced by mix of debt and equity. This we expect company to require around 6 months time to arrange for long term funds (debt as well as equity). We believe that there exists reasonable probability of funding the equity portion without significantly diluting the share capital.

Probable Funding structure

Impact analysis of the above structure

Assuming the above funding structure, and interest rate @ 7%, Diluted EPS stands at Rs 48.1 for FY10. To be EPS neutral, the entity would have to generate profit of US$ 144 mn (see table below). It should be noted that the combined profits of the two brands is estimated to be around US$ 300 mn. In such a scenario we believe that acquisition will be EPS accretive in the above mentioned funding structure. Also the debt equity scenario will be around 0.8 times

Impact analysis assuming no subsidiary stake sale and higher equity Dilution

Also, we undertook a sensitivity analysis assuming that the company will not be able to raise money through stake sale in subsidiary and hence would have to resort to higher dilution. Even I such a scenario the company will have to generate an additional profit of US$ 248 mn to be EPS neutral in FY10.

Additional PAT to be EPS neutral

Having said that, the incremental profit generation that is required in FY09 could be higher by 6% to 12% due to higher interest outgo during the period of bridge financing. We expect the company to arrange for long term funds with a period of six months from the date of the regulatory approval.

Overhang to continue till clarity emerges on the following aspects

Profitability and Cash flow generation The management empathetically said that for CY07 JLR combined has reported profits and that profitability existed for each of the quarter of CY07. We view the development as a positive. Having said that, management did not share the financials of the two brands.We believe that also relevant is the cash generation from the business to understand the further funding requirement. The fact that management has arranged for US$ 3 bn against the purchase consideration of US $ 2.3 bn indcates some immediate funding for R&D and regular capex. It should be noted that as a part of the agreement, JLR will not pay any royalty to Ford. At the same time JLR will have to bear the burden of the R&D activities. Currently, R&D expenses are re-billed by JLR to Ford. Based on CY06 financials, the immediate requirement could be in the range of US $ 500 m. Having said that, it is possible that the entire R&D activity does not pertain to JLR alone but also includes for other Ford group entities. In such a scenario, the immediate requirement could be on the lower side.

Currency risks an issue for profitability As the manufacturing locations for JLR are situated in UK, we believe that the one of the key risks to the profitability of the company would be currency risks. It should be noted that UK account for around 30% of the revenues. As is evident from the graph below GBP has been appreciating against the USD.

Strategy to reduce dependence on mature market JLR derived 80% of their sales from the North America and Europe which a cause of concern as the automobile sales in these regions is under pressure. This could put pressure or delay the recovery plans of Jaguar. Having said that, management has shown confidence in the five year plans and claims that the plans have factored in the decline in sales in the mature market

While, the sales in emerging markets (Asia Pacific and RoW) have improved significantly, the continuance of the same holds key for the company to provide cushion against declining sales in the North American and European markets especially when 80% of the sales in CY2006 came from Europe and US. Pension Funding Not much clarity given While the management has stated that Ford is likely to fund US $ 600 mn to the pension liability, it did not state the current status of deficit/liability. Also, it did not indicate the composition of the pension assets. Considering the fact that more than70% of the pension assets invested in equities, there exists a possibility of funding requirement by Tata Motors in April 2009 when the actuarial valuation of the assets are due.

Existing business contains multiple triggers during FY09- FY10 The likely recovery in the M&HCV segment together with a series of new product line ups in passenger vehicle segment should enable the company to generate adequate profitability during FY09-FY10. We have build in a case of 10% and

6.4% YoY domestic growth in our estimates for FY09 and FY10 respectively. Having said that, our channel check indicates that Tata Motors can surpass our estimates.

Valuation and View While we are disappointed with lack financial information, we have believe that the conference call has reduced concern and uncertainties with respect to long term arrangement with Ford on various issues like engine supply, R&D support and cost sharing. Also, the fact that management stressed that JLR combined is a profitable brand and has made profits in each of the quarter of CY07 and the five year plans factors in the decline in sales in the US markets also addresses some of the concerns with respect to financials. We continue to maintain our positive view on the stock. However, we are revising downwards our price to Rs 840 to factor in the reduction in per share value of subsidiaries post the dilution in the equity. We have revised the per share value of subsidiary from Rs 200 per share to Rs 158 per share.

Post merger analysis of TATA and JLR

TATA motors acquired JAGUAR and lANDROVER from its former owner FORD MOTORS an 2nd of june 2008, the world economic scenario was on a downturn during this time and its impact was clearly visible in the automobile sector. Moreover JAGUAR as well as LANDROVER had been making losses under their former owner for many years before being acquired by TATA MOTORS, however Ratan Tata was of the belief that acquiring JAGUAR AND LANROVER may not result in an instant success but will surely be fruitful in the long run. The management of TATA MOTORS visualized the valuable intangible assets like the research and development as well as the brand value hidden behind JAGUAR AND LANDROVER which would bring in handsome results for them in the long run. Some of the factors on basis of which the post acquisition performance can be analysed are discussed below: MARKET CAPITILISATION Two months before it acquired JAGUAR AND LANDROVER (JLR) in March 2008, TATA MOTORS had a market capitalisation of Rs 24,000 crore. Five months after the deal, it had plunged to Rs 6,500 crore. The market as whole during that time negated the acquisition as both the companies JAGUAR AND LANDROVER had been making losses under their former owner ford motors, however there was an opportunity hidden in exploring the strong brand value and research and development hidden behind both the companies and eventually this opportunity was utilized to the fullest extent by tata motors and its market capitilasation now stands at 71500 crore which is more than a tenfold rise from the initial post acquisition low. BRAND VALUE Rescently TATA MOTORS drove past Reliance Industries to top the 2010 edition of Indias Most Valuable Brands survey with a valuation of $8.45 billion. A major part of this success can be attributed to the JAGUAR AND LANDROVER brands. Jaguar and land rover both have been part of a larger conglomerate for a long time, however their potential was not unlocked then, TATA MOTORS succeded in doing that. Jaguar and landrover steadily started regaining their rhythm in the market and contributed towards creating a good brand value for TATA MOTORS. TATA MOTORS-JLR brand soared 172% in one year to $8.45 billion from only $3.1 billion in 2008-09. CASH FLOWS AND BOTTOMLINE

During the quarter ended june 2010 JAGUARLANDROVEr has generated a positive cash flow of 23 million, post capital and product development expenses the first such instance since the deal. Moreover It posted a profit of 221 million (Rs 1,613 crore) for the quarter ended June against a loss of 64 million in the corresponding quarter. The margin expansion was driven by cost cutting measures and currency tailwinds as well as sales of higher variants of landrover and increasing sales in china and usa TOPLINE JAGUAR LANDROVER global sales in July 2010 were 19,386 vehicles, higher by 30%. Jaguar sales for the month were 5,676, higher by 26%, while Land Rover sales were 13,710, higher by 31%. Cumulative sales of Jaguar Land Rover for the fiscal are 76,539 nos., higher by 50%. Cumulative sales of Jaguar are 21,131 nos., higher by 31%, while cumulative sales of Land Rover are 55,408 nos., higher by 59%.