Monday evening’s mutiny at Bombay House, the headquarters of India’s steel-to-software conglomerate Tata, was as swift as it was abrupt. Not only did the board of Tata Sons, the holding company, dump Cyrus Mistry as chairman after less than four years, it also brought back Ratan Tata, 78, as the interim boss, leaving nobody in any doubt that the founding family of the 148-year-old empire was reasserting control.
But what made Tata reach for the nuclear option?
The company’s brief statement gave no clues, though conspiracy theories range from Mistry’s futile attempts at micro-managing a maddening potpourri of companies, to not having a nose for talent (a six-member executive council put together by him was also disbanded), and selling the family silver to pay down debt when he should have focused more on growth.
Investors in Tata’s suite of operating companies were picking up signs of discord, but were still unprepared for a coup. After all, Ratan Tata seemed to be nothing less than delighted when a selection committee tasked to find his successor returned from a 15-month global hunt with the idea that Mistry — a member of the search panel as well as the son of a large shareholder — was the best choice. If the 48-year-old executive is now being removed for being out of his depth, the more experienced Ratan Tata deserves some blame for putting him in that position in the first place.
Besides, it’s not clear that Mistry was doing a lousy job. Start the clock in late August 2004, when the IPO of software business Tata Consultancy created the group as it exists today. In the subsequent eight years that Tata guided the behemoth, a market capitalization-weighted index of its 26 listed units barely managed to beat the Sensex. Over a shorter time frame, Mistry has outperformed the benchmark more convincingly.
When it comes to future returns, though, Ratan Tata may have reasons to be anxious about the direction in which Mistry was steering the ship.
Tata took advantage of a China-fueled boom in commodity demand to load up on debt, which led to an eightfold expansion in the annual net income of the group’s publicly traded companies in the six years through 2011, according to data compiled by Bloomberg. But with overcapacity in the People’s Republic hitting the group’s steel business hard, profitability waned.
In wanting to reduce leverage by selling everything from money-losing U.K. steel operations to coal mines in Indonesia and hotels in the U.S., Mistry has veered too far away from his predecessor’s expansionist strategy. With the pace of capital expenditure down to a 12-month run rate of $2 billion versus $3.7 billion in Tata’s final year at the helm, the group runs the risk of courting irrelevance.
More worrisome, from a Tata perspective, is that the group nowadays makes news mostly for the wrong reasons. Whether it’s an almost $1 billion jury award against its software unit for a U.S. intellectual-property infringement case, or the embarrassment of losing a $1.17 arbitration brought against Tata Sons by NTT Docomo for alleged failure to honor a partnership contract, the conglomerate’s reputation for good corporate citizenship has taken a beating.
Year Tata Group founded
It’s hard to say if Monday’s putsch will fix everything from strategic wobbles to PR snafus. Investors will want to see if the mutiny leads to a bounty in the form of superior shareholder returns. That depends mainly on whether the search panel gets lucky this time around. Pending the induction of the new chairman, however, what matters is how operating companies — and their bosses — react to Ratan Tata’s return.
For now, palace intrigue looks unlikely to affect performance. Tata Group investors should worry if that were to change.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.