Sunday, February 3, 2013

Where’s the ammo, Chief?

Expensive acquisitions have dented the group’s financial position

Hunger for growth and expansion should be in-built in the DNA of an ambitious business corporation, for only then can it make the cut. It is indeed a trait we would want the Tatas to retain. After all, their role in the evolution and growth of India Inc. since the early 20th century can hardly be overestimated.

However if ambition is not combined with prudence and a clear understanding of the competitive landscape, it can lead to terrible consequences. Tata’s over-ambitious acquisitions of Corus, Jaguar & Land Rover have landed this business giant in quite a bit of bother. If the purchase of the Anglo Dutch steel manufacturer, Corus (in 2007) catapulted the combined entity, Tata-Corus (worth $8 billion) to the position of the fifth largest steel producer in the world; it also brought along a debt burden of $6 billion. This increased the debt-equity ratio of Tata Steel from 1:1 in 2006 to a post acquisition high of 2.74:1. To add to the woes of Tata, the double whammy of rupee depreciation and falling demand and profitability in the ongoing economic downturn made the payback of the loan a cumbersome task.

And Tata did not stop there. As the global auto industry was beginning to feel the slowdown heat, Tata Motors went ahead and bought two dead dodos from Ford Motors – Jaguar & Land Rover (JLR), for a whopping $2.3 billion in March 2008. “Corus and JLR purchases have turned into financial bottlenecks for Tata Group. They have led to funding problems for the entire group, which are likely to persist for the next two years. This is hurting future business prospects of Tata Group Companies,” explains N. Wadhwa, MD, SKI Capital Ltd. It comes as no surprise that the sales of Land Rover plummeted by 58% during the last quarter of 2008.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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