Big buys can turn out okay

Big buys can turn out okay

Just bear with us while we revisit some headlines. “Tata Motors shares fall 6% on fund-raising plans for JLR"—May 2008; “Jaguar Land Rover drags Tata Motors into the red"—June 2009; “Tata Motors’ Foreign Gamble Pays Off"—November 2010.

The publications or websites where these stories appeared aren’t material. The facts, though, are. And, put simply, the facts on hand at the time each of these articles was written justified these headlines. To elaborate, JLR was a loss-making entity when it was sold by Ford Motor Co. to Tata Motors in 2008. In 2009, Tata Motors posted a post-tax consolidated loss of Rs2,505 crore, despite gaining 900 crore from the sale of investments. So what happened?

Simply put, JLR turned around on the back of a revival in demand for luxury cars. The unit made a post-tax profit in the three months ended September on the back of a pre-tax one in the preceding quarter. Analysts didn’t expect this to happen as soon as it did. And they were far more conservative in their growth estimates.

To be sure, analysts are trained to carefully assess mergers—and then conclude that they are bad for the acquirer. This mindset comes from their historical knowledge of mergers—most of the big ones do not work. This explains why analysts in India discounted shares of Tata Motors, Hindalco and Bharti Airtel, soon after these firms made significant acquisitions in other markets.

To be sure, analysts are yet to do their arithmetic on the nuances of Tata Motors’ performance and it still isn’t clear when the Indian automotive firm will recoup its significant investments in JLR. Indeed, in June 2009, this newspaper pointed out that Tata Motors’ investment in JLR hadn’t stopped at the $2.5 billion it had paid for the acquisition and that it had invested an additional $1.4 billion to turn things around.

Still, if the unit is already returning annualized profits (based on the September quarter numbers) in excess of a billion pounds, that shouldn’t take long. Which is as good a reason as any to disregard the reaction of analysts to big-ticket acquisitions.

In the world of big acquisitions, is Tata Motors’ JLR buy the rule or the exception? Tell us at