Ford out of its mind. Tatas' smart - Views on News from Equitymaster

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Ford out of its mind. Tatas' smart

Feb 5, 2009

JLR deal at a distressed price
The Tatas have received a fair amount of flak in recent times for their acquisitions binge at quite a few group companies. None more so than Tata Motors'. The company's leveraged buyout of JLR (Jaguar and Land Rover), which with the benefit of hindsight can now be thought of as ill timed, has caused enormous heartburn for shareholders. The wealth destruction in the past one year alone has been in the region of US$ 5 bn with the company losing as much as 82% of its market cap from its 52 week high. Not a good sight indeed. Recently though, the deal has received an endorsement from the most unlikely of quarters. It is from a man that has given value creation a whole new name, EVA.

Joel Stern, co founder of Stern Stewart and Co, the firm that has devised the value measuring metric, spoke to one of India's leading business dailies on a wide variety of things. And when the topic of JLR acquisition came up, he had following to say, "The Tatas' timing wasn't great. But there's always tomorrow. As long, as they have enough equity to carry through into two-three years from now then the Tata-JLR deal would be fine. Plus it was a distressed price. He paid almost nothing for it." He even went to add that while someone in Ford had lost his mind (the erstwhile owner of JLR), Tatas have turned out to be smart. Words that will no doubt give the men running the beleaguered company a huge shot in the arm.

And now, the man's metric says it's time to buy.
Fortune, one of US' leading magazine has just published a chart. The chart depicts the relationship between the total market value of US stocks and the country's GNP over a period of time, starting from as back as 1924. What is so special about the chart you would say? Well, in late January it reached a point, which according to Warren Buffett, one of the most successful investors walking on the planet today, signals a very good time to buy stocks. Buffett believes that if the percentage relationship between market value of US stocks and its GNP falls between 70% and 80%, then buying stocks is likely to work out very well for investors. In late January, the percentage had touched the 75% mark, thus pointing towards high odds of attractive returns in stock market based on Buffett's metric.

It should be noted that in the aftermath of the event that sowed the seeds of the last bull run, the ratio stood at 133%. This could be an indication that an even bigger bull run is staring us in the face. For all the things that Buffett is known for, we are quite sure that none of those things pertain to taking broad market based calls. He has done it very sparingly indeed albeit the success ratio has been higher than even the most adept economists can boast of. His last call had come only a few months ago when he wrote an op-ed for the New York Times stating that stocks have begun looking attractive and if they continue to fall further, he will move to 100% equities in his personal portfolio.

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