The Tatas have accepted defeat, after
throwing a few billion dollars down the Corus drain. In an announcement
yesterday (30 March), the group said it will be selling Tata Steel (UK), the
erstwhile Corus Steel’s British operations, but will keep the Netherlands part,
which is at least profitable.
It is unlikely that there will be too
many suitors rushing to buy Tata Steel UK in a downbeat global steel market,
but that is another story. The news is that the group under Cyrus Mistry has
finally accepted that buying Corus in 2007 at a huge premium was a disaster.
While contested takeovers do often
bring with them the winner’s curse of having overpaid for an asset, the Tatas
are not unique in having made this mistake. What they will probably not admit
is the two underlying mistakes that enabled this unwarranted gamble on Corus: a
mistaken belief in conglomerate culture, and an even more mistaken belief in
giving the promoter too much say in how capital is allocated within the group.
Put simply, a lot of the profits
earned from Tata Consultancy Services have been blown up on Corus.
The Corus acquisition is not just a
defeat for the Tatas, but for the Ratan Tata stewardship of the group. Ratan’s arrival
as group head in the 1990s marked a decisive shift away from his predecessor
JRD Tata’s approach of decentralising the group’s decision-making to energetic
satraps who effectively ran their companies as part of a voluntary federation
of near independent fiefs. Thus JRD spotted leadership talent and allowed them
to run their companies almost like they owned them. It was only JRD’s
personality that made Tatas a group, for the likes of Russi Mody (Tata Steel),
Darbari Seth (Tata Chemicals), Sumant Moolgaokar (Tata Motors) and Ajit Kerkar
(Indian Hotels, which runs the Taj chain) did not need to be told what to do –
and they would have resented it too. Under JRD, and thanks also to the climate
of suspicion that surrounded big business in the licence-permit Nehru-Indira
era, the Tatas managed to keep their companies with very low shareholdings.
As a product of the liberalisation
era, Ratan Tata saw the need for greater shareholding in key group companies,
and to make the group think more like a group. As he battled and gradually
defeated the Modys, Seths and Kerkars for control of group companies, the group
ended up being manned by CEOs loyal to Ratan Tata, and who looked up to him for
key decisions, even if it meant just a nod of approval.
Ratan Tata made the group more
promoter-driven, and a more closely-knit conglomerate, with crossholdings
between group companies enabling it to raise the Tata stakes to levels where
predators could be kept out.
It is this larger-than-life promoter
involvement that drove the Tatas to seek global glory with the purchase of Tata
Tetley (now well digested), Corus and Jaguar Land Rover. In the last two, Tata
got lucky with the latter, but unlucky with the former. JLR turned out to be
lucky because it was being sold fairly cheap by Ford Motor, and the market for
luxury cars was about to boom with the rise of China’s rich brat-pack
entrepreneurs. JLR made it big in China, and it became so profitable that it
had the resources to rescue even the mother ship, Tata Motors. Corus, on the
other hand, was just the opposite: it was bought with huge debt at the wrong
time, both in terms of an about-to-crash global economy, followed by a
precipitate collapse in the steel market.
That Ratan Tata should take some of the blame, if not most of it, for Corus, and the credit for JLR, is obvious because these acquisitions were driven by his passion for globalisation.
Tata Steel was the group’s flagship, and
Ratan probably wanted to leave a legacy by taking it to new heights; in cars,
he had a personal passion, which also explains why he converted a truck-maker
into a car-maker, first with the Indica, and then with the Nano. Both were
close to Ratan Tata’s heart, especially cars. Both steel and cars will now have
troubled legacies, and it was the fortuitous acquisition of cash-generating JLR
that saved the day, for neither Nano nor the Indica is going great guns today.
The Nano decision also explains why
promoter emotions play such a huge role in capital allocation. Tata wanted to
provide a cheap car costing just a bit more than a two-wheeler, and it was this
thought process that enabled the creation of the Nano. It was a great dream,
and the fact that it did not work as planned need not be held against Rata
Tata. All great entrepreneurs are great dreamers. But when you are group head,
you have to use your head more than the heart; it will be a tough call for the
Tatas, even now under Cyrus Mistry, to pull the plug under the Nano, if it
comes to the crunch. Because it was close to Ratan Tata’s heart.
Another area of passion was flying,
and Rata Tata tried repeatedly to get into civil aviation, but was each time
thwarted by lobbies led by Jet Airways’ Naresh Goyal, among others. This too
was fortunate, for it is unlikely a Tata Airlines would have fared much better
than a Jet or Kingfisher, with one going kaput, and the other nearly broke
before Etihad rescued Goyal.
Interestingly, the one business Tata
showed no great interest in – the consumer business – is where the group has
been most entrepreneurially successful – Titan Industries. And the one business
Tata sold was also a consumer business – Tomco, which was sold to Hindustan
Lever (now Hindustan Unilever).
What the success or failure of the
Tata group’s various initiatives show is that big conglomerates cannot be
driven by a promoter culture. They must be capital allocators. Under JRD, the
Tatas shared values, but entrepreneurship was provided by talented CEOs. Under
Ratan Tata, the group became more important than the company, and this led to
mishaps. The big successes often came when the group left managers to do their
own thing, as in the case of Titan under Xerxes Desai and his equally worthy
The two lessons the Tatas – or all
conglomerates, for that matter - need to learn after the collapse of Corus are
the days of promoter-driven conglomerate culture are over. Companies have to be
driven by internal core competencies, focus and competent leadership, and
conglomerates – if they exist – must be finance and capital allocation-driven.
They must have holding companies which allocate capital to potential winners
and pull the plug on potential losers.
belonging to a group does not confer any particular advantage to a company that
has to compete with the world. Companies that get easy money may blow it on
stupid ideas, and those that don’t may be constrained in raising the same from
the market, since the group wants control of shareholding.
Consider why the Tatas under Ratan
bought Corus. They thought they had India’s most cost-effective steel company
(Tata Steel, thanks to its ownership of low-cost ore mines) and access to lots
of easy money from the cash gushing Tata Consultancy Services. Both failed to
Cyrus Mistry, who succeeded Ratan Tata as chairman of the group a few years ago, has taken a bold decision to sell Tata Steel UK. He will have to find the courage to overturn one more Ratan Tata legacy – and that is the concept of the promoter-driven conglomerate.
might find a return to the JRD style of independent companies a more sensible
option for the group than Ratan Tata’s approach.
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