Challenges in Mergers and Acquisitions - Tata Motors Case Study -

Praveen P Kadle June 28, 2007

Agenda
Indian automotive industry in 2004 Tata Motors in 2004 M&A Strategy of Tata Motors M&A Experience of Tata Motors
Acquisition of Daewoo Commercial Vehicles, Korea Tata Technologies acquisition of INCAT International Plc Merger of Tata Motors Ltd and Tata Finance Ltd

Indian Automotive industry in 2004

1. Cyclical nature of Indian Commercial Vehicle Industry 2. Large scale road development projects signaling the development of a Hub and Spoke model for transportation

3. Growing disposable incomes driving passenger car penetration levels

Tata Motors in 2004

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

HCVs

MCVs

LCVs

Ace

1. Successful turnaround after posting huge losses in FY 01

International business, 7.6%

2. Significant portion of CV sales in Medium & Light CV category

Domestic Business, 92.4%

3. International business contributing to less than 8% of top line

M&A Strategy of Tata Motors

Technology New Markets

Access to Technology and R&D capabilities

Access to new markets to support TMs globalization drive

Products

Price

Complementary product range to ensure faster Time-to-market

Right price to create value

Tata Motors acquisition of Daewoo Commercial Vehicles, Korea

February-March 2004

This year we will also be focusing on expanding our business internationally. This will demand that our products and services are globally competitive and that our enterprises operate to international standards in terms of quality and customer service. We will need to be extremely aggressive in the marketplace and much more proactive than we have been in the past in order to be leaders in our fields of business. We need a change of mindsets that break with past tradition in welcoming rather than resisting change." - Mr. Ratan Tata, Chairman, Tata Group, January 2004

Daewoo Commercial Vehicles Company

Established by Daewoo Group in 1982 and built into the second largest automobile and truck manufacturer in Korea Daewoo Groups bankruptcy lead to the bankruptcy of Daewoo Motors in 2000 Car business of Daewoo Motors sold to GM in Nov 2002 Daewoo Commercial Vehicles Company (DWCV) had an installed capacity of 20,000 vehicles from a state-of-the-art plant built in 1995 Produced more than 90 truck models in the heavy commercial vehicle range (210 400 hp engine) DWCV had the second largest market share in heavy trucks in Korea in 2003

Strategic Fit
Opportunity to overcome
Major markets DWCV South Korea 5% Heavy trucks (15 to 45 tons) 210 to 420hp Cummins Sourced externally Tata India 10% Light and medium trucks (2 to 40 tons) 50 to 210hp In-house, through joint venture with Cummins Internal manufacture

cyclicality of Indian CV market Enhance product portfolio through catering to increasing demand for heavy vehicles Managing business in developed markets Access to technology and complementary product range Lead a change in the domestic market

% exported Product range (GVW) Engine types Engine source Major drive train components

Challenges and Lessons Learnt

Need for Quick and dirty Due Diligence
Strong technical and manufacturing capability Complimentary product range

Beyond the bid price - Winning acceptance of DWCV employees

Structured program to educate DWCV about India, Tata Group and Tata Motors Communication (in Korean) to management, unions and employees emphasizing Tata Motors capabilities and Tata Groups reputation for good corporate governance Respecting strong work ethics of Koreans through significant efforts during the Due diligence process

Managing the Korean culture

Respecting hierarchy and values Managing Unions

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Measuring success
TDCV launched a new range of medium trucks in 2006 first major product launch since 2000 Doubling of exports in 2004 and 2005 accounting for 66% of heavy truck exports from South Korea Launch of Novus in Indian market Increased market share in HCVs from 25% to 28% and achieved market share of 13.5% in MCVs Joint development of World Truck between Tata Motors India and TDCV, Korea to be launched in 2009
Sales (USD mn) Profit after tax (USD mn) Total unit sales Domestic market share Export units 2004-05 225 10.8 4,540 29.1% 874 2005-06 343 16.8 5,734 28.1% 1,850 2006 - 07 518 18.4 8,630 26.1% 3,016

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Tata Technologies acquisition of INCAT International Plc

July - Aug 2005

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Tata Technologies Background

Where we were in 2005
20,000 15,000 10,000 5,000 FY01 FY02 FY03 FY04 FY05 5,768 6,976 9,265

Where we wanted to be
7,200 7,053 5,216 3,881 2,947 2,273 1,704 10% 2005 14% 2006 14% 2007 17% 2008 20% 23%
17,158

Revenues
13,294

6,000 Rs million 4,800 3,600 2,400 1,200 -

Rs. Lacs

2009

2010

Revenues EBITDA

Vision 2000

Division of Tata Motors hived off into a separate company in Apr 99 to form Tata Technologies Limited Significant dependence on Tata Motors business even after 8 years of operation in FY 05 From Rs.1.7 bn in FY 2005, TTL was seeking to become a Rs.7.0 billion company with an operating margin of 19% by FY 2010

To become the largest automotive focused Engineering Design company in India To become a global provider of integrated E&D solutions to automotive OEM clients by attaining Tier I status with them

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Inorganic growth opportunity

An acquisition at this stage could:
Provide access to strong client relationships Escalate offshore growth through On-site presence Rapidly acquire world class skills Attract and retain talent
Shareholding pattern - post IPO
Stock options, 7% Directors, 25%

Target profile of INCAT International Plc

A 65 m global provider of PLM and engineering design services Listed on the AIM (November 2004). Market capitalization of approximately 48.5 mn Business: PLM Consulting, E&D services, Support services and Education - 51% of total revenues PLM software / hardware - 49% of total revenues Verticals : Automotive, Industrial manufacturing and Aerospace Geographies: North America (80%), UK (10%), Europe Germany & Netherlands (9%) and Asia - Japan (1%) Key clients : Daimler Chrysler; Ford, Lotus, Northrop Grumman, Honda, Magna Steyr Employees : Approximately 600 people worldwide

Financial institutions, 39%

Other employees, 2% Employees with significant ownership, 19%

Other private investors, 8%

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INCAT International Plc

Revenue Streams
PLM services process consulting managed services, content services integration, support services

Clients INCATs automotive revenue is

60% of total, aerospace is 11% and industrial manufacturing is 29% INCAT is engaged with 8 of top 10 auto OEMs INCAT supports the worlds top 5 aero OEMs

Geographies
Presence in North America (USA, Canada and Mexico) Europe (Netherlands, UK, Germany, France) A-Pac(Japan and Singapore)

PLM technology resold PLM software; Hardware; infrastructure, workstations

Proprietary PLM technology iCheck

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Business Strategy of Combined Entity

The combined entity would have the competencies to provide a complete Digitization Strategy to Automotive, Aerospace, & Manufacturing clients in all areas of their product value chain through differentiated services and proprietary software

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Challenges
Deciding on the right price
Market Price increase Planned acquisitions of in USA (CADPO) and Germany by INCAT Onsite vs. Offshore Leveraging key account relationships by broadening service offerings Realization of targeted offshoring of E&D work UK Takeover code limited scope for Due diligence Irrevocable undertakings from management of INCAT and institutional shareholders Foster Entrepreneurial culture of INCAT Retail key management personnel through Earn out based payment Restricted Stock options to INCAT management Rationalization of subsidiaries Tax re-structuring through International Headquarters
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Alignment of business models

Due Diligence

Ownership achievement of minimum 70% stake Cultural challenges / Retention of employees

Corporate Restructuring

100 Day Integration Plan

Integration process starting from 1st Sep 2005 to 10th Jan 2006 to be completed within 100 days Challenges addressed through integration
Defining Corporate structure based on rationalization of subsidiaries, servicing clients, tax optimization and management control Election under section338(g) for US tax purposes Definition of clear roles and responsibilities in the new organization structure Creating a blue print for a seamless IT system for Measuring and Monitoring organizational performance Creating joint marketing teams to devise key accounts management strategies Preparation of a board approved business plan with target performance parameters Devise an ESOP/Restricted Stock Unit plan to retain key employees

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New Corporate Structure

India Tata Technologies, India
Tata Group Holding companies Divisions Company Status to be evaluated Operating Legal entities

Outside India

Tata Technologies (IHQ)

INCAT

iKnowledge Solutions

INCAT Ltd (UK) INCAT USA Branch / Subsidiary to be evaluated Branch / Subsidiary to be evaluated iKnowledge Solutions USA

INCAT KK (Japan)

iKnowledge Solutions Singapore

INCAT GmbH (Germany)

Tata Technologies (Thailand)

INCAT Solutions (Canada)

IST Mexico

INCAT SAS (France) INCAT BV (Netherlands) Branch / Subsidiary to be evaluated

North America

Europe

Asia Pacific
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Go-To Market Model

We achieve our Mission via two divisions

Tata Technologies (Holding Company)

Provides Products & Services

Develops and Sells Knowledge Products & Services through Channels including INCAT competitors.

INCAT

iKnowledge Solutions

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Tata Motors Tata Finance Merger

April 2005

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Background FY 05
Bureau of Hire Purchase & Credit (BHPC), a financing division of TML, financing approx. 9% of TMLs domestic retail sales Tata Finance Ltd (TFL), on its own, financed approx. 8% of TMLs domestic retail sales Tata Motor Finance (TMF), a virtual entity formed in August 03 by BHPC and TFL, contributed around 17% of total TML domestic retail sales TML planned to grow vehicle financing business closer to international benchmarks
Formidable captive financing arm by leveraging synergies of dealer driven sourcing model of BHPC and direct business model of TFL for supporting its core business Eliminate cost disadvantages Ensure better customer retention by bundling financing options across the value chain

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Tata Finance Limited - Background

Tata Finance Ltd was started by Tata Motors and Tata Industries in 1984 with an objective to support TML products sales by customer financing options In 1996-97, TDLF (Telco Dealers Leasing & Finance Co) was merged with TFL to boost its customer /dealer financing offerings TFL achieved finance disbursal of Rs.1311 crores in FY 1998-99 becoming a leading NBFC in auto-financing industry In late 90s TFL diversified in various non-core financial solutions such as merchant banking, stock broking, home loans, credit cards, two wheeler financing, foreign exchange dealing etc resulting in losses
Losses in FY 00-01 Losses in FY 01-02 Losses in FY 02-03 Rs. 381 crs Rs. 157 crs Rs. 76 crs

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Automotive Financial Services

Automotive Financial services form an important & integral business for all the global Automotive OEMs
Key global automobile majors have their own financing arms to address the different financing needs in the marketing value chain. GMAC, Ford credit, Chrysler financial corporation , Toyota financial services, Volvo Financial services have played an important role in their parent companys growth Manufacturers captive units dominate the financing industry in US, Europe and other markets They capture 39 -44% of OEMs total retail sales Contribute to 16- 48% to the net income of the parent company substantially in economic downturns

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Importance of a Captive Financier

5 Envelop additional profits de-risking from cyclicality of auto sales business by extended value chain Source of stable stream of annuity revenue of financing Additional value propositions of Captive financier 3 Enhance customer loyalty 2 Better Synchronization Capture early signals of industry trends & retail buying patterns with retail market
Continuous feedback on product economics and life cycles Improve replacement demand, control replacement cycle Increase customer loyalty with more customer touch points Increase repeat purchase, buying of spares and services Improvement in EPS

4 Capture complete vehicle life cycle

Extend value chain by combining financing offerings with insurance, fleet management, operating leases, re-finance, spares & service financing, fuel cards

1
Expand / develop the markets

Generic benefits of financiers

bundling financing with Flexibility in sales and pricing to make offerings more the products
attractive Enhancement of channel profitability and relationship

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Objectives of the Merger

BHPC and TFL formed joint marketing front end, Tata Motor Finance (TMF), in Aug-03 with an objective to leverage complimentary strengths and operational synergies The model has achieved early success ( disbursements and market share have improved substantially than on a stand alone basis) However, the model had certain limitations which need to be overcome
The financial rate disparity between the two units due to substantial difference in Cost of Borrowing Integration related issues Ambiguous positioning of TMF in market place, among channel partners Duplication of support cost

The issues would be best addressed upon merger of TFL into TML among various options evaluated

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Benefits to Shareholders
Tata Finance Shareholders The auto-finance business would create more shareholders value on TML balance sheet, than that of TFL
Benefits of being captive financier Low CoB and better financial strength

Tata Motors Shareholders Build a formidable captive financier by consolidating strengths available inhouse and within The Group De-risk the Companys revenue stream from the cyclicality of vehicles sales business Ensure customer loyalty by enveloping a complete value chain of customers life cycle spending on vehicles Generate sustainable profit stream to increase shareholders value

Participate in the growth of leading auto manufacturer Fair exit value for all shareholders Better appreciation on their investments, with an upside of dividends

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Merger of Tata Finance with Tata Motors

All equity shareholders of Tata Finance Ltd to get 8 ordinary shares of Tata Motors Ltd of Rs. 10/- ( Rs. Ten only) for every 100 equity shares of Tata Finance Ltd of Rs. 10/- (Rs. Ten only)

199,806,246 shares of TFL exchanged for 15,984,500 shares of TML

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Vehicle Financing Business in FY 07

TMF 2nd Largest player in Auto financing market TML Financial Services Limited created as a subsidiary of Tata Motors in September 2006 Average book size of Rs.8500 Cr. as on 31st March 2007 Net Interest Margins (NIMs) of vehicle financing in the range of 5.5 6.5%
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