Acquire and Impair – Case of Tata’s

The impairment of assets to the tune of Rs. 28000 crores or USD 4 billion by Tata Motors in Jaguar, Land Rover Unit manifests aggressive call taken by Tata Motors at the time of acquisition of Jaguar. Impairment of asset is nothing but over capitalized balance sheet and the value of impairment reflects the value of worthless assets. It is hard to believe that a high quality management of Tata would have taken such a poor decision by paying incredibly high price for an asset, which warranted such a deep haircut. Tata management would have employed competent investment bankers for valuations and due diligence but it appears that the aggregate efforts of all the concerned were based on hypothetical assumptions and projections, which led a very competent Tata board to such poor decision.

When we see impairment of assets by a management with moderate reputation, eyebrows are raised about the past decisions and management of financial affairs and such decisions are generally not welcomed by public, however here is a case of Tata’s. In spite of such a huge impairment their brand and management quality is certainty going to overlook their past imperfect decisions. This is least expected from brand Tata House.

Acquisition of Bhushan Steel by Tata’s

My opinion about another acquisition by Tata’s recently in Bhushan Steel is equally froth with consequences. Tata’s paid an aggregate amount of close to Rs. 39000 crores for acquiring a 5 million ton steel plant of Bhushan’s. The capacity is doubted not more than 4.5 million tons actually. It translates a cost of Rs. 8000 crores per million ton of steel, which is an aggressive price to pay for a steel plant. The appropriate price per million ton in the current scenario of steel is not warranted more than Rs. 5000 crores per million ton. Therefore there is an excess capitalization to the tune of Rs. 15000 crores. Even if one assumes a strategic premium of Rs. 1000 crores per million ton translating into an aggregate pricing of Rs. 6000 crores per million ton, still the price is higher by about Rs. 10000 crores. Such aggressive pricing and capitalization of Bhushan Steel by Tata’s will remain a real challenge to manage the company by Tata’s. Let us see how it unfolds.