Ratan Tata's M&A gamble falling into place

Many in corporate India would be envious of the Tata Group's M&A strategy. Over the last eight years, the Tata Group had made 35 overseas acquisitions, including coal and iron ore mines, totalling $17.79 billion (Rs 78,347 crore), many of them coming in the last three years. But how has the group fared?

It's been a good going till now. The group has been able to make an impact in most of its acquisitions "" be that Tetley, which helped Tata Tea make a transition from a largely plantation company to a branded player with a global footprint, or Daewoo's commercial vehicles business, which has regained its lost ground.

REVVING UP FOR A LONG DRIVE

Daewoo Commercial Vehicles has been its biggest success: it has regained lost market share, and grew its sales by 35% last year

Tatas plan to acquire iron ore and coal mines to increase Corus' operating margins from 10.8 per cent to 30 per cent by 2012

Daewoo is perhaps been its biggest success. ''When it was acquired, Daewoo's market share had fallen sharply (5-10 per cent). Today, it has 35 per cent market share,'' said an analyst with an FII brokerage firm, who did not wish to be identified.

Last fiscal, Daewoo's grew sales by 35 per cent to Rs 2,248.81 crore and net profits 59 per cent to Rs 97.46 crore.

The Tetley acquisition helped Tata Tea transform from a plantation company into a branded consumer goods company, and achieve a consolidated turnover of the Rs 4103.23 crore or nearly US$ 1 billion in 2006-07""89 per cent of this came from its branded tea and coffee business. Tetley retained its volumes in the UK, Canada, Western Europe, and acquired JEMCA, a Czech speciality tea maker.

The bets in hotels seem to working as well. ''I have been a big fan of their hotel strategy. They realise, in the long run, they could get run over by the enemy. So, they are trying to strengthen the post by acquiring marquee properties in Chicago, Boston, Switzerland. It's an aggressive strategy; it's a new Tata you are seeing,'' said the CEO of a private equity major who has been closely tracking the group.

Fortune favours the bold, and in steel including their big bet in Corus, the Tatas have been helped by steel prices staying firm. ''They have not done anything significant to reduce costs,'' said the CEO of private equity player.

''These are early days for Corus. In a year, you cannot do much. It clinched the financing only three months back. You can't reduce costs, restructure overnight. Integration is not easy,'' said the M&A head with a corporate. He said that Tatas may be negotiating long-term contracts on coal, iron ore which may not be visible.

While Tata Steel, which has access to captive iron ore and coal mines, enjoys operating margins of 39.3 per cent, Corus' margins are only 10.8 per cent as it has buy iron ore and coal.

The Tatas had said earlier they plan to acquire mines to increase margins to 30 per cent by 2012. ''If steel prices remain high, it gives them more time to think through on how to go about it,'' said an expert.

The earlier buyouts of Millennium Steel and NatSteel have given it a base in Thailand, which is considered a good market to supply from in the region as leading auto and appliance majors are based in Thailand.

''It has given the Tatas foothold in the region, and a very good distribution presence. It's a good platform in Asia, which even global majors like ArcelorMittal don't have,'' added an expert.

The two acquisitions by Tata Chemicals in soda ash, though not as glamorous as the Jaguar deal, make it the second largest player. As the business consolidates, analysts feel it should help Tata Chemicals improve its margins. The M&A play has also brought significant lessons for the group.

Tata Tea had acquired 30 per cent in Energy Brands in August 2006 for $677 million. After Coca-Cola acquired the company, Tata Tea had to sell its stake in Energy Brands for $1.2 billion, netting nearly $523 million in a windfall. Its investments in Orient-Express could go the same way.

Indian Hotels had acquired 11.5 per cent stake in Orient-Express Hotels and proposed cross-marketing of holiday packages. Orient-Express rejected the offer, saying any association with Indian Hotels would result in a 'reduction in the value of its brands and business.' The Tatas are now reportedly planning to increase their stake by acquiring shares from the open market. 
 

BIG BUYS Tata Group's global conquests
Acquirer	Acquired	Country	Value (Rs cr)
Tata Steel	Corus Steel	UK	53,850
Tata Power	PT Bumi Resources Tbk	Indonesia	4,840
Tata Chemicals	General Chemical Industrial Products (GCIP)	US	4,020
Tata Tea	Energy Brands Inc	US	3,046
Tata Tea	Tetley	UK	1,831
Tata Steel	Millenium Steel	Thailand	1,818
Tata Steel	Natsteel	Singapore	1,282
VSNL	Teleglobe	Canada	1,075
Tata Coffee	Eight O' Clock	US	990
Samsara Prop	Orient Express Hotels	US	850
Tata Chemicals	Brunner Mond Group	UK	798
Indian Hotels	Ritz Carlton (in Boston)	US	770
VSNL	Tyco Global Network	US	585
Tata Motors	Daewoo Commercial Vehicles	S Korea	465
Tata Tech	INCAT International PLC	UK	410
TCS	TKS Technosoft	Switzerland	360
Indian Hotels	Hotel Campton Place,	US	260
Indian Hotels	The Pierre	US	202
Tata Chemicals	Indo Maroc Phosphore S.A.	Morocco	171
Tata Tea	Good Earth Corporation	US	144

Corporate India is impressed with Tatas strategy. ''They have been aggressive, and very successful,'' said Adi Godrej, chairman, Godrej Group. ''The Tatas make a strategic investment, and then back it up with the right financing so that the business becomes viable,'' said Nimesh Kampani, CEO, JM Financial.

''They have taken calculated risks, and have gone all-out, and tried to deliver. M&A is a mix of business (operational support), the right type of financing and very good HR,'' said Kampani.