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| Deal-making hubris | | Ratan Tata's admission of poor timing in Corus and Jaguar Land Rover deals must be applauded for courage and openness |
| Business Standard / New Delhi May 12, 2009, 00:10 IST |
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It is rare for a businessman to readily admit in public that he has made a mistake with a major business decision. In recent times, perhaps, only Warren Buffet has admitted to being “dead wrong” in the investment decisions that he made in 2008. From that point of view, Ratan Tata’s admission to a British newspaper of poor timing in the Corus and Jaguar Land Rover (JLR) deals in 2007 and 2008, respectively, must be applauded for courage and openness. But Mr Tata was not the only Indian businessman to be afflicted by the irrational M&A exuberance of those years. He had Kumar Mangalam Birla (Novelis) and perhaps Vodafone’s Arun Sarin (Hutch-Essar) for company, not to speak of the CEOs of scores of medium and small enterprises that rode the boom times to make expensive acquisitions, in India and abroad. Mr Tata’s admission is interesting because it highlights the danger of hubris in a buoyant business environment—a frequent failing of businessmen everywhere, especially since they can be said to be susceptible to the “dominant alpha male” syndrome.
In M&As, 2007 marked an apogee, not just for India but globally. India saw $70 billion worth of deals in that year, two-and-a-half times the $28 billion in 2006. Of this, Tata-Corus, Vodafone-Hutch and Hindalco-Novelis accounted for half the total. Yet, despite these headline-grabbing deals, India accounted for just 1.5 per cent of global M&As in that year—a sign of a worldwide herd mentality, if there ever was one. The first quarter of 2008, when Jaguar and Land Rover were acquired, marked a spillover of sentiment from the year before. Had the world’s big investment banks not imploded, 2008 could well have set a new record in global deal-making. So, if these two Tata acquisitions prove anything, it’s the danger of strategic over-stretch, to rephrase Paul Kennedy.
The Tata group is now grappling with the consequences of both acquisitions. The Anglo-Dutch steelmaker Corus, for which Tata Steel paid $6.7 billion following a bruising auction against Brazilian rival CRN, is currently reeling under losses. A rescue package for one of its UK plants fell through after four international companies terminated their contract with the organisation, raising fears of 2,000 job losses. In retrospect, it seems as though the stock markets anticipated these problems—the Bombay Stock Exchange Sensex crashed the day after the buy, prompting wry criticism from Mr Tata. Still, Corus can said to be suffering the downturn in the commodity cycle and, providing the Tata group is able to fend off predators till the next upturn, the acquisition could pay off in the long run. With JLR, there are questions about whether the acquisition was a good idea in the first place. True, Tata Motors acquired the two luxury brands for $2 billion—about half the price Ford had paid to acquire them earlier. But the group is now struggling to raise about $1 billion to finance the rest of the loan that it took to buy JLR after a rights issue mostly devolved on the promoters (again, the markets knew a thing or two!). Also, given that the fundamentals of the car industry are changing, it is uncertain whether even a well-funded revival strategy would restore the brands to their former glory. Tata Motors might write this off as acceptable risk. But when it has the potential to precipitate the company into a crisis, the lines between risk and imprudence begin to get blurred.
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