- 1. A PROJECT TO
STUDY
Acquisition OF
TATA AND CORUS
BY
GROUP 4
SUURESH-9040
NANDITA-9048
MALATHI-9061
DINESH-9062
MITHUN KUMAR-9082
Background
Mergers and acquisitions (M&A) and corporate restructuring are
a big part of the corporate finance world. Every day, investment
bankers arrange M&A transactions, which bring separate
companies together to form larger ones. When they're not creating
big companies from smaller ones, corporate finance deals do the
reverse and break up companies through spin-offs, carve-outs or
tracking stocks. Not surprisingly, these actions often make the
news. Deals can be worth hundreds of millions, or even billions, of
dollars or rupees. They can dictate the fortunes of the companies
involved for years to come. For a CEO, leading an M&A can
represent the highlight of a whole career. And it is no wonder we
hear about so many of these transactions; they happen all the time.
Next time you flip open the newspapers business section, odds are
good that at least one headline will announce some kind of M&A
transaction. Sure, M&A deals grab headlines, but what does this
all mean to investors? To answer this question, this report
discusses the forces that drive companies to buy or merge with
others, or to split-off or sell parts of their own businesses. Once
you know the different ways in which these deals are executed,
you'll have a better idea of whether you should cheer or weep when
a company you own buys another company - or is bought by one. You
will also be aware of the tax consequences for companies and for
investors
Defining M&A
The Main Idea one plus one makes three: this equation is the
special alchemy of a merger or an acquisition. The key principle
behind buying a company is to create shareholder value over and
above that of the sum of the two companies. Two companies together
are more valuable than two separate companies - at least, that's
the reasoning behind M&A. This rationale is particularly
alluring to companies when times are tough. Strong companies will
act to buy other companies to create a more competitive,
cost-efficient company. The companies will come together hoping to
gain a greater market share or to achieve greater efficiency.
Because of these potential benefits, target companies will often
agree to be purchased when they know they cannot survive
alone.
Distinction between Mergers and Acquisitions
Although they are often uttered in the same breath and used as
though they were synonymous, the terms merger and acquisition mean
slightly different things. When one company takes over another and
clearly established itself as the new owner, the purchase is called
an acquisition. From a legal point of view, the target company
ceases to exist, the buyer "swallows" the business and the buyer's
stock continues to be traded. In the pure sense of the term, a
merger happens when two firms, often of about the same size, agree
to go forward as a single new company rather than remain separately
owned and operated. This kind of action is more precisely referred
to as a "merger of equals." Both companies' stocks are surrendered
and new company stock is issued in its place. For example, both
Daimler-Benz and Chrysler or Arcellor and Mittal ceased to exist
when the two firms merged, and a new company, DaimlerChrysler and
Arcellor-Mittal, was created. In practice, however, actual mergers
of equals don't happen very often. Usually, one company will buy
another and, as part of the deal's terms, simply allow the acquired
firm to proclaim that the action is a merger of equals, even if
it's technically an acquisition. Being bought out often carries
negative connotations, therefore, by describing the deal as a
merger, deal makers and top managers try to make the takeover more
palatable.
A purchase deal will also be called a merger when both CEOs agree
that joining together is in the best interest of both of their
companies. But when the deal is unfriendly - that is, when the
target company does not want to be purchased - it is always
regarded as an acquisition. Whether a purchase is considered a
merger or an acquisition really depends on whether the purchase is
friendly or hostile and how it is announced. In other words, the
real difference lies in how the purchase is communicated to and
received by the target company's board of directors, employees and
shareholders.
Synergy
Synergy is the magic force that allows for enhanced cost
efficiencies of the new business. Synergy takes the form of revenue
enhancement and cost savings. By merging, the companies hope to
benefit from the following:
Staff reductions - As every employee knows, mergers tend to mean
job losses. Consider all the money saved from reducing the number
of staff members from accounting, marketing and other departments.
Job cuts will also include the former CEO, who typically leaves
with a compensation package.
Economies of scale - Yes, size matters. Whether it's purchasing
stationery or a new corporate IT system, a bigger company placing
the orders can save more on costs. Mergers also translate into
improved purchasing power to buy equipment or office supplies -
when placing larger orders, companies have a greater ability to
negotiate prices with their suppliers.
Acquiring new technology - To stay competitive, companies need to
stay on top of technological developments and their business
applications. By buying a smaller company with unique technologies,
a large company can maintain or develop a competitive edge.
Improved market reach and industry visibility - Companies buy
companies to reach new markets and grow revenues and earnings. A
merge may expand two companies' marketing and distribution, giving
them new sales opportunities. A merger can also improve a company's
standing in the investment community: bigger firms often have an
easier time raising capital than smaller ones.
That said, achieving synergy is easier said than done - it is not
automatically realized once two companies merge. Sure, there ought
to be economies of scale when two businesses are combined, but
sometimes a merger does just the opposite. In many cases, one and
one add up to less than two. Sadly, synergy opportunities may exist
only in the minds of the corporate leaders and the deal makers.
Where there is no value to be created, the CEO and investment
bankers - who have much to gain from a successful M&A deal -
will try to create an image of enhanced value. The market, however,
eventually sees through this and penalizes the company by assigning
it a discounted share price. We'll talk more about why M&A may
fail in a later section of this tutorial.
Varieties of Mergers
From the perspective of business structures, there is a whole host
of different mergers. Here are a few types, distinguished by the
relationship between the two companies that are merging:
Horizontal merger - Two companies that are in direct competition
and share the same product lines and markets.
Vertical merger - A customer and company or a supplier and company.
Think of a cone supplier merging with an ice cream maker.
Market-extension merger - Two companies that sell the same products
in different markets.
Product-extension merger - Two companies selling different but
related products in the same market.
Conglomeration - Two companies that have no common business areas.
There are two types of mergers that are distinguished by how the
merger is financed. Each has certain implications for the companies
involved and for investors:
Purchase Mergers - As the name suggests, this kind of merger occurs
when one company purchases another. The purchase is made with cash
or through the issue of some kind of debt instrument; the sale is
taxable. Acquiring companies often prefer this type of merger
because it can provide them with a tax benefit. Acquired assets can
be written-up to the actual purchase price, and the difference
between the book value and the purchase price of the assets can
depreciate annually, reducing taxes payable by the acquiring
company. We will discuss this further in part four of this
tutorial.
Consolidation Mergers - With this merger, a brand new company is
formed and both companies are bought and combined under the new
entity. The tax terms are the same as those of a purchase
merger.
Acquisitions
An acquisition may be only slightly different from a merger. In
fact, it may be different in name only. Like mergers, acquisitions
are actions through which companies seek economies of scale,
efficiencies and enhanced market visibility. Unlike all mergers,
all acquisitions involve one firm purchasing another - there is no
exchange of stock or consolidation as a new company. Acquisitions
are often congenial, and all parties feel satisfied with the deal.
Other times, acquisitions are more hostile. In an acquisition, as
in some of the merger deals we discuss above, a company can buy
another company with cash, stock or a combination of the two.
Another possibility, which is common in smaller deals, is for one
company to acquire all the assets of another company. Company X
buys all of Company Y's assets for cash, which means that Company Y
will have only cash (and debt, if they had debt before). Of course,
Company Y becomes merely a shell and will eventually liquidate or
enter another area of business. Another type of acquisition is a
reverse merger, a deal that enables a private company to get
publicly-listed in a relatively short time period. A reverse merger
occurs when a private company that has strong prospects and is
eager to raise financing buys a publicly-listed shell company,
usually one with no business and limited assets. The private
company reverse merges into the public company, and together they
become an entirely new public corporation with tradable shares.
Regardless of their category or structure, all mergers and
acquisitions have one common goal: they are all meant to create
synergy that makes the value of the combined companies greater than
the sum of the two parts. The success of a merger or acquisition
depends on whether this synergy is achieved.
Valuation Matters
Investors in a company that is aiming to take over another one must
determine whether the purchase will be beneficial to them. In order
to do so, they must ask themselves how much the company being
acquired is really worth.
Naturally, both sides of an M&A deal will have different ideas
about the worth of a target company: its seller will tend to value
the company at as high of a price as possible, while the buyer will
try to get the lowest price that he can. There are, however, many
legitimate ways to value companies. The most common method is to
look at comparable companies in an industry, but deal makers employ
a variety of other methods and tools when assessing a target
company. Here are just a few of them:
1. Comparative Ratios - The following are two examples of the many
comparative metrics on which acquiring companies may base their
offers:
Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an
acquiring company makes an offer that is a multiple of the earnings
of the target company. Looking at the P/E for all the stocks within
the same industry group will give the acquiring company good
guidance for what the target's P/E multiple should be.
Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the
acquiring company makes an offer as a multiple of the revenues,
again, while being aware of the price-to-sales ratio of other
companies in the industry.
2. Replacement Cost
In a few cases, acquisitions are based on the cost of replacing the
target company. For simplicity's sake, suppose the value of a
company is simply the sum of all its equipment and staffing costs.
The acquiring company can literally order the target to sell at
that price, or it will create a competitor for the same cost.
Naturally, it takes a long time to assemble good management,
acquire property and get the right equipment. This method of
establishing a price certainly wouldn't make much sense in a
service industry where the key assets - people and ideas - are hard
to value and develop.
3. Discounted Cash Flow (DCF)
A key valuation tool in M&A, discounted cash flow analysis
determines a company's current value according to its estimated
future cash flows. Forecasted free cash flows (operating profit +
depreciation + amortization of goodwill capital expenditures cash
taxes - change in working capital) are discounted to a present
value using the company's weighted average costs of capital (WACC).
Admittedly, DCF is tricky to get right, but few tools can rival
this valuation method.
Synergy: The Premium for Potential Success
For the most part, acquiring companies nearly always pay a
substantial premium on the stock market value of the companies they
buy. The justification for doing so nearly always boils down to the
notion of synergy; a merger benefits shareholders when a company's
post-merger share price increases by the value of potential
synergy. Let's face it, it would be highly unlikely for rational
owners to sell if they would benefit more by not selling. That
means buyers will need to pay a premium if they hope to acquire the
company, regardless of what pre-merger valuation tells them. For
sellers, that premium represents their company's future prospects.
For buyers, the premium represents part of the post-merger synergy
they expect can be achieved. The following equation offers a good
way to think about synergy and how to determine whether a deal
makes sense. The equation solves for the minimum required
synergy:
In other words, the success of a merger is measured by whether the
value of the buyer is enhanced by the action. However, the
practical constraints of mergers, which discussedoften prevent the
expected benefits from being fully achieved. Alas, the synergy
promised by deal makers might just fall short.
What to Look For - It's hard for investors to know when a deal is
worthwhile. The burden of proof should fall on the acquiring
company. To find mergers that have a chance of success, investors
should start by looking for some of these simple criteria given as
below.
A reasonable purchase price - A premium of, say, 10% above the
market price seems within the bounds of level-headedness. A premium
of 50%, on the other hand, requires synergy of stellar proportions
for the deal to make sense. Stay away from companies that
participate in such contests.
Cash transactions - Companies that pay in cash tend to be more
careful when calculating bids and valuations come closer to target.
When stock is used as the currency for acquisition, discipline can
go by the wayside.
Sensible appetite An acquiring company should be targeting a
company that is smaller and in businesses that the acquiring
company knows intimately. Synergy is hard to create from companies
in disparate business areas. Sadly, companies have a bad habit of
biting off more than they can chew in mergers.
Mergers are awfully hard to get right, so investors should look for
acquiring companies with a healthy grasp of reality.
Doing the Deal
Start with an Offer When the CEO and top managers of a company
decide that they want to do a merger or acquisition, they start
with a tender offer. The process typically begins with the
acquiring company carefully and discreetly buying up shares in the
target company, or building a position. Once the acquiring company
starts to purchase shares in the open market, it is restricted to
buying 5% of the total outstanding shares before it must file with
the SEC. In the filing, the company must formally declare how many
shares it owns and whether it intends to buy the company or keep
the shares purely as an investment.
Working with financial advisors and investment bankers, the
acquiring company will arrive at an overall price that it's willing
to pay for its target in cash, shares or both. The tender offer is
then frequently advertised in the business press, stating the offer
price and the deadline by which the shareholders in the target
company must accept (or reject) it.
The Target's Response
Once the tender offer has been made, the target company can do one
of several things:
Accept the Terms of the Offer - If the target firm's top managers
and shareholders are happy with the terms of the transaction, they
will go ahead with the deal.
Attempt to Negotiate - The tender offer price may not be high
enough for the target company's shareholders to accept, or the
specific terms of the deal may not be attractive. In a merger,
there may be much at stake for the management of the target - their
jobs, in particular. If they're not satisfied with the terms laid
out in the tender offer, the target's management may try to work
out more agreeable terms that let them keep their jobs or, even
better, send them off with a nice, big compensation package. Not
surprisingly, highly sought-after target companies that are the
object of several bidders will have greater latitude for
negotiation. Furthermore, managers have more negotiating power if
they can show that they are crucial to the merger's future
success.
Execute a Poison Pill or Some Other Hostile Takeover Defense A
poison pill scheme can be triggered by a target company when a
hostile suitor acquires a predetermined percentage of company
stock. To execute its defense, the target company grants all
shareholders - except the acquiring company - options to buy
additional stock at a dramatic discount. This dilutes the acquiring
company's share and intercepts its control of the company.
Find a White Knight - As an alternative, the target company's
management may seek out a friendlier potential acquiring company,
or white knight. If a white knight is found, it will offer an equal
or higher price for the shares than the hostile bidder.
Mergers and acquisitions can face scrutiny from regulatory bodies.
For example, if the two biggest long-distance companies in the
U.S., AT&T and Sprint, wanted to merge, the deal would require
approval from the Federal Communications Commission (FCC). The FCC
would probably regard a merger of the two giants as the creation of
a monopoly or, at the very least, a threat to competition in the
industry.
Closing the Deal
Finally, once the target company agrees to the tender offer and
regulatory requirements are met, the merger deal will be executed
by means of some transaction. In a merger in which one company buys
another, the acquiring company will pay for the target company's
shares with cash, stock or both. A cash-for-stock transaction is
fairly straightforward: target company shareholders receive a cash
payment for each share purchased. This transaction is treated as a
taxable sale of the shares of the target company. If the
transaction is made with stock instead of cash, then it's not
taxable. There is simply an exchange of share certificates. The
desire to steer clear of the tax man explains why so many M&A
deals are carried out as stock-for-stock transactions. When a
company is purchased with stock, new shares from the acquiring
company's stock are issued directly to the target company's
shareholders, or the new shares are sent to a broker who manages
them for target company shareholders. The shareholders of the
target company are only taxed when they sell their new shares. When
the deal is closed, investors usually receive a new stock in their
portfolios - the acquiring company's expanded stock. Sometimes
investors will get new stock identifying a new corporate entity
that is created by the M&A deal.
Break Ups
As mergers capture the imagination of many investors and companies,
the idea of getting smaller might seem counterintuitive. But
corporate break-ups, or de-mergers, can be very attractive options
for companies and their shareholders.
Advantages
The rationale behind a spin-off, tracking stock or carve-out is
that "the parts are greater than the whole." These corporate
restructuring techniques, which involve the separation of a
business unit or subsidiary from the parent, can help a company
raise additional equity funds. A break-up can also boost a
company's valuation by providing powerful incentives to the people
who work in the, making it more difficult to attract interest from
institutional investors. Meanwhile, there are the extra costs that
the parts of the business face if separated. When a firm divides
itself into smaller units, it may be losing the separating unit,
and help the parent's management to focus on core operations. Most
importantly, shareholders get better information about the business
unit because it issues separate financial statements. This is
particularly useful when a company's traditional line of business
differs from the separated business unit. With separate financial
disclosure, investors are better equipped to gauge the value of the
parent corporation. The parent company might attract more investors
and, ultimately, more capital. Also, separating a subsidiary from
its parent can reduce internal competition for corporate funds. For
investors, that's great news: it curbs the kind of negative
internal wrangling that can compromise the unity and productivity
of a company. For employees of the new separate entity, there is a
publicly traded stock to motivate and reward them. Stock options in
the parent often provide little incentive to subsidiary managers,
especially because their efforts are buried in the firm's overall
performance.
Disadvantages
That said, de-merged firms are likely to be substantially smaller
than their parents, possibly making it harder to tap credit markets
and costlier finance that may be affordable only for larger
companies. And the smaller size of the firm may mean it has less
representation on major indexes synergy that it had as a larger
entity. For instance, the division of expenses such as marketing,
administration and research and development (R&D) into
different business units may cause redundant costs without
increasing overall revenues.
Restructuring Methods
There are several restructuring methods: doing an outright
sell-off, doing an equity carve-out, spinning off a unit to
existing shareholders or issuing tracking stock. Each has
advantages and disadvantages for companies and investors. All of
these deals are quite complex.
Sell-Offs
A sell-off, also known as a divestiture, is the outright sale of a
company subsidiary. Normally, sell-offs are done because the
subsidiary doesn't fit into the parent company's core strategy. The
market may be undervaluing the combined businesses due to a lack of
synergy between the parent and subsidiary. As a result, management
and the board decide that the subsidiary is better off under
different ownership. (IPO) of shares, amounting to a partial
sell-off. A new publicly-listed company is created, but the parent
keeps a controlling stake in the newly traded subsidiary. A
carve-out is a strategic avenue a parent firm may take when one of
its subsidiaries is growing faster and carrying higher valuations
than other businesses owned by the parent. A carve-out generates
cash because shares in the subsidiary are sold to the public, but
the issue also unlocks the value of the subsidiary unit and
enhances the parent's shareholder value. The new legal entity of a
carve-out has a separate board, but in most carve-outs, the parent
retains some control. In these cases, some portion of the parent
firm's board of directors may be shared. Since the parent has a
controlling stake, meaning both firms have common shareholders, the
connection between the two will likely be strong. That said,
sometimes companies carve-out a subsidiary not because it's doing
well, but because it is a burden. Such an intention won't lead to a
successful result, especially if a carved-out subsidiary is too
loaded with debt, or had trouble even when it was a part of the
parent and is lacking an established track record for growing
revenues and profits. Carve-outs can also create unexpected
friction between the parent and subsidiary. Problems can arise as
managers of the carved-out company must be accountable to their
public shareholders as well as the owners of the parent company.
This can create divided loyalties.
Spin-offs
A spin-off occurs when a subsidiary becomes an independent entity.
The parent firm distributes shares of the subsidiary to its
shareholders through a . Since this transaction is a dividend
distribution, no cash is generated. Thus, spin-offs are unlikely to
be used when a firm needs to finance growth or deals. Like the
carve-out, the subsidiary becomes a separate legal entity with a
distinct management and board. Besides getting rid of an unwanted
subsidiary, sell-offs also raise cash, which can be used to pay off
debt. In the late 1980s and early 1990s, corporate would use debt
to finance acquisitions. Then, after making a purchase they would
sell-off its subsidiaries to raise cash to service the debt. The
raiders' method certainly makes sense if the sum of the parts is
greater than the whole. When it isn't, deals are
unsuccessful.
Equity Carve-Outs
More and more companies are using equity carve-outs to boost
shareholder value. A parent firm makes a subsidiary public through
a raiders initial public offering stock dividend meaning they don't
grant shareholders the same voting rights as those of the main
stock. Each share of tracking stock may have only a half or a
quarter of a vote. In rare cases, holders of tracking stock have no
vote at all. Like carve-outs, spin-offs are usually about
separating a healthy operation. In most cases, spin-offs unlock
hidden shareholder value. For the parent company, it sharpens
management focus. For the spin-off company, management doesn't have
to compete for the parent's attention and capital. Once they are
set free, managers can explore new opportunities. Investors,
however, should beware of throw-away subsidiaries the parent
created to separate legal liability or to off-load debt. Once
spin-off shares are issued to parent company shareholders, some
shareholders may be tempted to quickly dump these shares on the
market, depressing the share valuation.
Tracking Stock
A tracking stock is a special type of stock issued by a publicly
held company to track the value of one segment of that company. The
stock allows the different segments of the company to be valued
differently by investors. Let's say a slow-growth company trading
at a low (P/E ratio) happens to have a fast growing business unit.
The company might issue a tracking stock so the market can value
the new business separately from the old one and at a significantly
higher P/E rating. Why would a firm issue a tracking stock rather
than spinning-off or carving-out its fast growth business for
shareholders? The company retains control over the subsidiary; the
two businesses can continue to enjoy synergies and share marketing,
administrative support functions, a headquarters and so on.
Finally, and most importantly, if the tracking stock climbs in
value, the parent company can use the tracking stock it owns to
make acquisitions. Still, shareholders need to remember that
tracking stocks are price-earnings ratio class B.
Why They Can Fail
It's no secret that plenty of mergers don't work. Those who
advocate mergers will argue that the merger will cut costs or boost
revenues by more than enough to justify the price premium. It can
sound so simple: just combine computer systems, merge a few
departments, use sheer size to force down the price of supplies and
the merged giant should be more profitable than its parts. In
theory, 1+1 = 3 sounds great, but in practice, things can go
awry.
Historical trends show that roughly two thirds of big mergers will
disappoint on their own terms, which means they will lose value on
the stock market. The motivations that drive mergers can be flawed
and efficiencies from economies of scale may prove elusive. In many
cases, the problems associated with trying to make merged companies
work are all too concrete.
Flawed Intentions
For starters, a booming stock market encourages mergers, which can
spell trouble. Deals done with highly rated stock as currency are
easy and cheap, but the strategic thinking behind them may be easy
and cheap too. Also, mergers are often attempt to imitate: somebody
else has done a big merger, which prompts other top executives to
follow suit. A merger may often have more to do with glory-seeking
than business strategy. The executive ego, which is boosted by
buying the competition, is a major force in M&A, especially
when combined with the influences from the bankers, lawyers and
other assorted advisers who can earn big fees from clients engaged
in mergers. Most CEOs get to where they are because they want to be
the biggest and the best, and many top executives get a big bonus
for merger deals, no matter what happens to the share price later.
On the other side of the coin, mergers can be driven by generalized
fear. Globalization, the arrival of new technological developments
or a fast-changing economic landscape that makes the outlook
uncertain are all factors that can create a strong incentive for
defensive mergers. Sometimes the management team feels they have no
choice and must acquire a rival before being acquired. The idea is
that only big players will survive a more competitive world.
The Obstacles to making it Work
Coping with a merger can make top managers spread their time too
thinly and neglect their core business, spelling doom. Too often,
potential difficulties seem trivial to managers caught up in the
thrill of the big deal. The chances for success are further
hampered if the corporate cultures of the companies are very
different. When a company is acquired, the decision is typically
based on product or market synergies, but cultural differences are
often ignored. It's a mistake to assume that personnel issues are
easily overcome. For example, employees at a target company might
be accustomed to easy access to top management, flexible work
schedules or even a relaxed dress code. These aspects of a working
environment may not seem significant, but if new management removes
them, the result can be resentment and shrinking productivity. More
insight into the failure of mergers is found in the highly
acclaimed study from McKinsey, a global consultancy. The study
concludes that companies often focus too intently on cutting costs
following mergers, while revenues, and ultimately, profits, suffer.
Merging companies can focus on integration and cost-cutting so much
that they neglect day-to-day business, thereby prompting nervous
customers to flee. This loss of revenue momentum is one reason so
many mergers fail to create value for shareholders. But remember,
not all mergers fail. Size and global reach can be advantageous,
and strong managers can often squeeze greater efficiency out of
badly run rivals. Nevertheless, the promises made by deal makers
demand the careful scrutiny of investors. The success of mergers
depends on how realistic the deal makers are and how well they can
integrate two companies while maintaining day-to-day
operations.
LITERATURE REVIEW THE STEEL INDUSTRY
THE GLOBAL STEEL INDUSTRY
The current global steel industry is in its best position in
comparing to last decades. The price has been rising continuously.
The demand expectations for steel products are rapidly growing for
coming years. The shares of steel industries are also in a high
pace. The steel industry is enjoying its 6th consecutive years of
growth in supply and demand. And there is many more merger and
acquisitions which overall buoyed the industry and showed some good
results.
The subprime crisis has lead to the recession in economy of
different Countries, which may lead to have a negative effect on
whole steel industry in coming years. However steel production and
consumption will be supported by continuous economic growth.
CONTRIBUTION OF COUNTRIES TO GLOBAL STEEL INDUSTRY
Fig-1
The countries like China, Japan, India and South Korea are in the
top of the above in steel production in Asian countries. China
accounts for one third of total production i.e. 419m ton, Japan
accounts for 9% i.e. 118m ton, India accounts for 53m ton and South
Korea is accounted for 49m ton, which all totally becomes more than
50% of global production. Apart from this USA, BRAZIL, UK accounts
for the major chunk of the whole growth.
The steel industry has been witnessing robust growth in both
domestic as well as international markets. In this article, let us
have a look at how has the steel industry performed globally in
2007.
Capacity: The global crude steel production capacity has grown by
around 7% to 1.6 bn in 2007 from 1.5 bn tonnes in 2006. The
capacity has shown a growth rate of 7% CAGR since 2003. The
additions to capacity over last few years have ranged from 36 m
tonnes in 2004 to 108 m tonnes in 2007. Asian region accounts for
more than 60% of the total production capacity of world, backed
mainly by capacity in China, Japan, India, Russia and South Korea.
These nations are among the top steel producers in the world.
Fig-2
Production: The global steel production stood at 1.3 bn tonnes in
2007, showing an increase of 7.5% as compared to 2006 levels. The
global steel production showed a growth of 8% CAGR between 2003 and
2007. China accounts for around 36% of world crude steel production
followed by Japan (9%), US (7%), Russia (5%) and India (4%). In
2007, all the top five steel producing countries have showed an
increase in production except US, which showed a decline.
RankCountryProduction (mn tonnes)World share
(%)1China48936.0%2Japan1209.0%3US987.0%4Russia725.0%5India534.0%6South
Korea513.5%
Source: JSW Steel AR FY08
Table-1
Consumption: The global steel consumption grew by 6.6% to 1.2 bn
tonnes as compared to 2006 levels. The global finished steel
consumption showed a growth of 8% CAGR, in line with the
production, between the period 2003 and 2007. The finished steel
consumption in China and India grew by 13% and 11% respectively in
2007. The BRIC countries were the major demand drivers for steel
consumption, accounting for nearly 80% of incremental steel
consumption in 2007.
RankCountryConsumption (mn tonnes)World share
(%)1China40836.0%2US1089.0%3Japan806.7%4South
Korea554.6%5India514.2%6Russia403.3%
Source: JSW Steel AR FY08
Table-2
Outlook: As per IISI estimates, the finished steel consumption in
world is expected to reach a level of 1.75 bn tonnes by 2016,
growth of 4% CAGR over the consumption level of 2007. The steel
consumption in 2008 and 2009 is estimated to grow above 6%
Indian Steel Industry
India, which has emerged among the top five steel producing and
consuming countries over the last few years, backed by strong
growth in its economy.
Capacity: Steel capacity increased by 6% to 60 m tonnes in FY08. It
registered a robust growth of 8% CAGR between the period FY04 and
FY08. The capacity expansion in the country was primarily through
brown field expansions as it requires lower investments than a
greenfield expansion.
Fig-3
Production: Steel production has registered a growth of 6% to reach
a level of 54 m tonnes in FY8. The production has grown nearly in
line with the capacity expansion and registered a growth of 7% CAGR
with an average capacity utilization of 92% between the period FY04
and FY08. India is currently the fifth largest producer of steel in
the world, contributing almost 4% of the total steel production in
world. The top three steel producing companies (SAIL, Tata Steel
and JSW Steel) contributed around 45% of the total steel production
in FY08.
Fig-4
Consumption: Steel consumption has increased by 10% to 51.5 m
tonnes in FY08. Consumption growth has been exceeding production
growth since past few years. It grew at a CAGR of 12% between FY04
and FY08. Construction & infrastructure, manufacturing and
automobile sectors accounted for 59%, 13% and 11% for the total
consumption of steel respectively in FY08. Although steel
consumption is rapidly growing in the country, the per capita steel
consumption still stands at 48 kgs. Moreover, in the rural areas in
the country, it stands at a mere 2 kg. It should be noted that the
worlds average per capita steel consumption was 189 kg and while
that of China was 309 kg in 2007.
Fig-5
Trade equations: India became net importer of steel in FY08 with
estimated net imports of 1.9 m tonnes. In the past few years, its
exports have remained at more or less the same levels while on the
other hand, imports have increased on the back of robust demand and
capacity constraints in the domestic markets. The imports showed a
growth of around 48% while exports declined by around 6% in
FY08.
Outlook: As per IISI estimates, the demand for steel in India are
expected to grow at a rate of 9% and 12% in 2008 and 2009. The
medium term outlook for steel consumption remains extremely bullish
and is estimated at an average of above 10% in the next few
years.
TATA Vs. CORUS
CorusThe Corus was created by the merger of British Steel and Dutch
steel company, Hoogovens. Corus was Europes second largest steel
producer with a production of 18.2 million tonnes and revenue of
GDP 9.2 billion (in 2005). The product mix consisted of Strip steel
products, Long products, Distribution and building system and
Aluminum. With the merger of British Steel and Hoogovens there were
two assets the British plant asset which was older and less
productive and the Dutch plant asset which was regarded as the
crown jewel by every one in the industry. They have union issues
and are burdened with more than $ 13 billion of pension
liabilities. The Corus was making only a profit of $ 1.9 billion
from its 18.2 million tonnes production per year (compared to $ 1.5
billion form 8.7 million tone capacity by Tata).
The Corus was having leading market position in construction and
packaging in Europe with leading R&D. The Corus was the 9th
largest steel producer in the world. It opened its bid for 100 %
stake late in the 2006. Tata (India) & CSN (Companhia
Siderurgica Nacional) emerged as most powerful bidders.CSN
(Companhia Siderurgica Nacional)
CSN (Companhia Siderurgica Nacional) was incorporated in the year
1941. The company initially focused on the production of coke, pig
iron castings and long products. The company was having three main
expansions at the Presidente Vargas Steel works during the 1970s
and 1980s. The first completed in the year 1974, increased
installed capacity to 1.6 million tons of crude steel. The second
completed in 1977, raised capacity to 2.4 million tons of crude
steel. The third completed in the year 1989, increased capacity to
4.5 million tons of crude steel. The company was privatized by the
Brazilian government by selling 91 % of its share.
The Mission of CNS is to increase value for the shareholders.
Maintain position as one of the worlds lowest-cost steel producer.
Maintain a high EBITDA and strengthen position as a global player.
CNS is having fully integrated manufacturing facilities. The crude
steel capacity was 5.6 million tons. The product mix consisted of
Slabs, Hot and Cold rolled Galvanized and Tin mill products. In
2004 CSN sold steel products to customers in Brazil and 61 other
countries. In 2002, 65 % of the steel sales were in domestic market
and operating revenues were 70 %. In 2003, the same figures were 59
% and 61 % and in 2004 the same figures were 71% and 73 %.The
principal export markets for CSN were North America
(44%),Europe(32%) and Asia(11%).
Tata Steel
Tata steel, Indias largest private sector steel company was
established in the 1907.The Tata steel which falls under the
umbrella of Tata sons has strong pockets and strong financials to
support acquisitions. Tata steel is the 55th in production of steel
in world. The company has committed itself to attain global scale
operations.Production capacity of Tata steel is given in the table
below:-
Table-3The product mix of Tata steel consist of flat products and
long products which are in the lower value chain. The Tata steel is
having a low cost of production when compared to Corus. The Tata
steel was already having its capacity expansion with its indigenous
projects to the tune of 28 million tones.
Indian Scenario
After liberalization, there have been no shortages of iron and
steel materials in the country. Apparent consumption of finished
(carbon) steel increased from 14.84 Million tonnes in 1991-92 to
39.185 million tonnes (Provisional) in 2005-06. The steel industry
which was facing a recession for some time has staged a turn around
since the beginning of 2002. Demand has started showing an uptrend
on account of infrastructure boom. The steel industry is buoyant
due to strong growth in demand particularly by the demand for steel
in China. The Steel industry was de-licensed and de-controlled in
1991 & 1992 respectively. Today, India is the 7th largest crude
steel producer of steel in the world. In 2005-06, production of
Finished (Carbon) Steel was 44.544 million tonnes. Production of
Pig Iron in 2005-06 was 4.695 Million Tonnes. The share of Main
Producers (i.e. SAIL, RINL and TSL) and secondary producers in the
total production of Finished (Carbon) steel was 36% and 64%
respectively during the period of April-November, 2006.
Corus decides to sell Reasons for decision:
Total debt of Corus is 1.6bn GBP
Corus needs supply of raw material at lower cost
Though Corus has revenues of $18.06bn, its profit was just $626mn
(Tatas revenue was $4.84 bn & profit $ 824mn)
Corus facilities were relatively old with high cost of
production
Employee cost is 15 %( Tata steel- 9%)
Tata Decides to bid: Reasons for decision:
Tata is looking to manufacture finished products in mature markets
of Europe.
At present manufactures low value long and flat steel products
while Corus produces high value stripped products
A diversified product mix will reduce risks while higher end
products will add to bottom line.
Corus holds a number of patents and R & D facility.
Cost of acquisition is lower than setting up a green field plant
and marketing and distribution channels
Tata is known for efficient handling of labour and it aims at
reducing employee cost and improving productivity at Corus
It had already expanded its capacities in India.
It will move from 55th in world to 5th in production of steel
globally.
Tata Steel Vs CSN: The Bidding War
There was a heavy speculation surrounding Tata Steel's proposed
takeover of Corus ever since Ratan Tata had met Leng in Dubai, in
July 2006. On October 17, 2006, Tata Steel made an offer of 455
pence a share in cash valuing the acquisition deal at US$ 7.6
billion. Corus responded positively to the offer on October 20,
2006.
Agreeing to the takeover, Leng said, "This combination with Tata,
for Corus shareholders and employees alike, represents the right
partner at the right time at the right price and on the right
terms." In the first week of November 2006, there were reports in
media that Tata was joining hands with Corus to acquire the
Brazilian steel giant CSN which was itself keen on acquiring Corus.
On November 17, 2006, CSN formally entered the foray for acquiring
Corus with a bid of 475 pence per share. In the light of CSN's
offer, Corus announced that it would defer its extraordinary
meeting of shareholders to December 20, 2006 from December 04,
2006, in order to allow counter offers from Tata Steel and
CSN...
Financing the Acquisition
By the first week of April 2007, the final draft of the financing
structure of the acquisition was worked out and was presented to
the Corus' Pension Trusties and the Works Council by the senior
management of Tata Steel. The enterprise value of Corus including
debt and other costs was estimated at US$ 13.7 billion
The Integration Efforts
Industry experts felt that Tata Steel should adopt a 'light handed
integration approach, which meant that Ratan Tata should bring in
some changes in Corus but not attempt a complete overhaul of
Corus'systems (Refer Exhibit XI and Exhibit XII for projected
financials of Tata-Corus). N Venkiteswaran, Professor, Indian
Institute of Management, Ahmedabad said, If the target company is
managed well, there is no need for a heavy-handed integration. It
makes sense for the Tatas to allow the existing management to
continue as before.
The Synergies
Most experts were of the opinion that the acquisition did make
strategic sense for Tata Steel. After successfully acquiring Corus,
Tata Steel became the fifth largest producer of steel in the world,
up from fifty-sixth position.There were many likely synergies
between Tata Steel, the lowest-cost producer of steel in the world,
and Corus, a large player with a significant presence in
value-added steel segment and a strong distribution network in
Europe. Among the benefits to Tata Steel was the fact that it would
be able to supply semi-finished steel to Corus for finishing at its
plants, which were located closer to the high-value markets.
The Pitfalls
Though the potential benefits of the Corus deal were widely
appreciated, some analysts had doubts about the outcome and effects
on Tata Steel's performance. They pointed out that Corus' EBITDA
(earnings before interest, tax, depreciation and amortization) at 8
percent was much lower than that of Tata Steel which was at 30
percent in the financial year 2006-07.
The Road Ahead
Before the acquisition, the major market for Tata Steel was India.
The Indian market accounted for sixty nine percent of the company's
total sales. Almost half of Corus' production of steel was sold in
Europe (excluding UK). The UK consumed twenty nine percent of its
production.
After the acquisition, the European market (including UK) would
consume 59 percent of the merged entity's total production.
Tata - Corus: Visionary deal or costly blunder?
After four months of twists and turns, Tata Steel has won the race
to acquire Corus Group. The bidding war between Tata Steel and
Brazilian company CSN was riveting and ended in a rapid-fire
auction. Initial reactions to the deal were highly diverse and
retail investors were completely puzzled by the market
reaction.
Going by the stock market reaction, the acquisition was a big
blunder. The stock tanked 10.5 per cent after the deal was
announced and another 1.6 per cent. Investors were worried about
the financial risks of such a costly deal.
Media reaction to the deal had been just the opposite. Almost all
the reports were adulatory while editorials praised the coming of
age of Indian industry. A prominent financial daily presented the
deal almost as revenge of the natives against the old colonial
masters with a picture of London covered in our national colours.
Its editorial warned the market 'not to bet against Tata', citing
the previous instances when skeptics were proved wrong by the
group. Official reaction had been no different and the finance
minister even offered all possible help to the Tata Group.
Was the acquisition too costly for Tata Steel? Was price the only
criterion while evaluating an acquisition? Should managers focus on
keeping shareholders happy after every quarter or should they focus
on the long-term, big picture? These are tough questions and,
unfortunately, answers would be clear only after many years - at
least in this case.
When could the steel cycle turn?
The last few years were some of the best ever for the global steel
industry as robust demand from emerging economies like China pushed
up prices. Profits of steel manufacturers across the globe swelled
and their market capitalizations have multiplied many times.
Global Steel output(in million tonnes)Country20052006%
changeChina355.8418.817.7Japan112.5116.23.3US94.998.53.8Russia66.170.66.8South
Korea47.848.41.3Germany44.547.26.1India40.944.07.6Ukraine38.640.85.7Italy29.431.67.5Brazil31.630.9(2.2)World
production1,028.81,120.78.9
Table-4
How long will the good times last? Tata Steel believes the steel
cycle is in a long-term up trend and the risk of a downturn in
prices is low. In fact, managing director B Muthuraman said the
global steel industry might witness sustained growth as during the
30-year period between 1945 and 1975.
The massive post-war infrastructure build-up in Western countries
led to the sustained steel demand growth in that period. The coming
decades would see similar infrastructure spending in emerging
economies and steel demand would continue to grow, according to
this view.
The International Iron and Steel Institute (IISI), a respected
steel research body, corroborates this in its outlook. The growth
in demand for global steel would average 4.9 per cent per year till
2010 according to the IISI. Between 2010 and 2015, demand growth is
expected to moderate to 4.2 per cent per annum according to IISI
forecasts. Much of this demand growth would come from China and
India, where the IISI estimates growth rates to be 6.2 per cent and
7.7 per cent annually from 2010 to 2015.
Now lets consider steel prices. Expectations of sustained demand
growth have already led to massive capacity additions, mostly in
emerging markets. Chinese steel capacity has expanded significantly
over the last decade while a large number of mega steel plants are
being planned in India. Capacity additions by Russian and Brazilian
steelmakers would also be significant in future as they have access
to raw material.
Would the capacity additions outrun the demand growth and lead to
subdued steel prices? Under normal circumstances, that could have
been a very strong possibility. But many industry leaders believe
that the global steel industry would see a structural shift in the
coming years.
Some of the inefficient steel mills in mature markets would face
closure while others would shift production to high value-added
products using unfinished and semi-finished steel supplied by steel
mills in locations like India, Russia and Brazil with access to raw
material. This would limit aggregate supply growth and keep prices
stable in future.
Major global steel makers are also not unduly worried about the
possibility of large-scale exports from China, which would depress
international steel prices. Chinese capacity is expected to
continue to grow in the coming years, but so would the
demand.
Besides, Chinese steel plants are not expected to emerge very
efficient as they depend on imported raw materials, which limit
their pricing power. Many steel analysts expect significant
consolidation in the Chinese steel industry as margins erode
further in future. The Chinese government has already started
squeezing the smaller units by withdrawing their raw material
import permits.
The need for scale
Going by the IISI forecasts, global steel demand would be 1.32
billion tonnes by 2010 and 1.62 billion tonnes by 2015. Even
Arcelor-Mittal, the largest global steel player by far, has a
present capacity, which is just 6.8 per cent for projected demand
in 2015. To maintain its current share, Arcelor-Mittal would have
to add another 50 million tonnes of capacity by then. This confirms
the view that there is still considerable scope for consolidation
in the steel industry.
Global steel rankingCompanyCapacity (in million tonnes)Arcelor
Mittal110.0Nippon Steel32.0Posco30.5JEF Steel30.0Tata Steel -
Corus27.7Bao Steel China23.0US Steel19.0Nucor18.5Riva17.5Thyssen
Krupp16.5
As the industry consolidates further, Tata Steel - even with its
planned greenfield capacity additions - would have remained a
medium-sized player after a decade. This made it absolutely vital
that the company did not miss out on large acquisition
opportunities. Apart from Corus, there are not many among the
top-10 steel makers, which would become possible acquisition
targets in the near future.
Tata Steel - Corus : Present capacity (in million tonnes per
annum)Corus Group (in UK and The Netherlands)19Tata Steel -
Jamshedpur5Nat Steel - Singapore2Millennium Steel -
Thailand1.7Aggregate present capacity27.7
Tata Steel - Corus : Projected capacity(in million tonnes per
annum)Corus Group (in UK and The Netherlands)19Tata Steel -
Jamshedpur10Tata Steel - Jharkhand12Tata Steel - Orissa6Tata Steel
- Chhattisgarh5Nat Steel - Singapore2Millennium Steel -
Thailand1.7Aggregate projected capacity55.7
With Corus in its fold, Tata Steel can confidently target becoming
one of the top-3 steel makers globally by 2015. The company would
have an aggregate capacity of close to 56 million tonnes per annum,
if all the planned greenfield capacities go on stream by
then.
Neat strategic fit
Corus, being the second largest steelmaker in Europe, would provide
Tata Steel access to some of the largest steel buyers. The
acquisition would open new markets and product segments for Tata
Steel, which would help the company to de-risk its businesses
through wider geographical reach.
A presence in mature markets would also provide Tata Steel an
opportunity to go further up the value chain as demand for
specialized and high value-added products in these markets is high.
The market reach of Corus would also help in seeking longer-term
deals with buyers and to explore opportunities for pushing branded
products.
Corus is also very strong in research and technology development,
which would add to the competitive strength for Tata Steel in
future. Both companies can learn from each other and achieve better
efficiencies by adopting the best practices.
But at what cost?
Now that Tata Steel has achieved its strategic objective of
becoming one of the major players in the global steel industry and
steel demand growth is likely to be robust over the next decade,
has the company paid too much for Corus? Even those analysts and
industry observers who agree on the positive outlook for steel
demand growth and the need to achieve scale believe so.
The enterprise valuation of Corus at around $13.5 billion appears
too steep based on the recent financial performance of Corus. Tata
Steel is paying 7 times EBITDA of Corus for 2005 and a higher 9
times EBITDA for 12 months ended 30 September 2006. In comparison,
Mittal Steel acquired Arcelor at an EBITDA multiple of around 4.5.
Considering the fact that Arcelor has much superior assets, wider
market reach and is financially much stronger than Corus, the price
paid by Tata Steel looks almost obscenely high. Tata Steel's B
Muthuraman has defended the deal arguing that the enterprise value
(EV) per tonne of capacity is not very high. The EV per tonne for
the Tata-Corus deal was around $710 is only modestly higher than
the Mittal-Arcelor deal. Besides, setting up new steel plants would
cost anywhere between $1,200 and $1,300 per tonne and would take at
least five years in most developing countries.
But, are the manufacturing assets of Corus good enough to command
this price? It is a well-known fact that the UK plants of Corus are
among the least efficient in Europe and would struggle to break
even at a modest decline in steel prices from current levels.
Recent financial performance of Corus would dent the hopes of Tata
Steel shareholders even further. EBITDA margins, after adjusting
for one-time incomes, have steadily declined over the last 3 years.
For the 9-month period ended September 2006, EBITDA margins of
Corus were barely 8 per cent as compared to around 40 per cent for
Tata Steel.
Corus FinancialsYear20042005Jan-Sep
2006Revenues18.3219.9114.10EBITDA1.911.861.12EBITDA Margin
(%)10.449.347.96Operating Profits1.301.170.75Operating Profit
Margin (%)7.095.895.29Net Profit0.870.720.25Net Profit Margin
(%)4.733.631.77Figures in $ Billion
Table-8
The price of an asset is more a factor of its future earnings
potential than its past earnings record. Operating margins of Corus
can be significantly improved if Tata Steel can supply slabs and
billets. Tata Steel is targeting consolidated EBITDA margins of
around 25 per cent as and when it starts supplying crude steel to
Corus. If the company can sustain such margins on the enlarged
capacities, it would be quite impressive.
But that is a long way off as Tata Steel would have sufficient
crude steel capacity only when its proposed new plants become
operational. Till then, the company is targeting to maximize gains
through possible synergies between the two operations, which are
expected to yield up to $350 million per annum within three years.
In the meanwhile, Tata Steel has to make sure that cash flows from
Corus are sufficient to service the huge amount of debt, which is
being availed to finance the acquisition. According to the details
available so far, Tata Steel would contribute $4.1 billion as
equity component while the balance $9.4 billion, including the
re-financing of existing debt of Corus after adjusting for cash
balance, would be financed through debt. The debt facilities are
believed to be structured in such a way that they can be serviced
largely from the cash flows of Corus.
Interest rates on credit facilities for such buy-outs are often
higher than market rates because of the risks involved. At an
expected interest rate of 7 per cent per annum, the interest outgo
alone would be over $650 million per year. Along with repayment of
principal, the annual fund requirement to service this debt would
be around $1.5 billion - assuming a 10-year repayment
horizon.
The current cash flows of Corus are barely sufficient to cover
this, even after considering the synergy gains. If international
steel prices decline even modestly, Tata Steel would have to dip
into its own cash flows or find other sources like an equity
dilution to service the debt.
Besides, funds may also be required for upgrading some of the Corus
plants to improve efficiencies. Tata Steel would have to manage all
this without jeopardizing its greenfield expansion plans which may
cost a staggering $20 billion over the same 10-year period.
No wonder investors are deeply worried!
To its credit, the Tata Steel management has acknowledged that it
would not be an easy task to manage the next five years when Corus
would have to hold on to its margins without the help of cheaper
inputs supplied by Tata Steel. If the group can survive this
initial period without much damage, life may become much easier for
the Tata Steel management.
Investors would consider Corus a burden for Tata Steel until such
time there is a perceptible improvement in its margins. That would
keep the Tata Steel stock price subdued and any decline in steel
prices would have a disproportionately negative impact on the
stock.
However, long-term investors would appreciate that right now steel
manufacturing assets are costly and Corus was a prized target which
made it even more costly. With the strategic importance of such a
large deal in mind, Tata Steel management has taken the plunge. If
it can pull it off, even after a decade, the Corus acquisition
would become the deal, which would transform Tata Steel.
Tata and Corus:
In addition to Tata Steel's bid for Corus, the largest private
sector steel producer in India has made a mark and consolidated it
is presence in the foreign land, through acquisition his latest
one's being in Indonesia. In case of Corus, only time will tell
whether Tata Steel would succeed or not, but in other endeavours
the company has already succeeded in acquiring some steel plants.
Tata Steel, the country's largest private sector steel company, was
in talks with Anglo American of South Africa to acquire its 79 per
cent stake in Highveld Steel. While the Highveld acquisition is
still going through the evaluation process. According to analysts,
if the acquisition of Highveld Steel goes through to completion,
Tata Steel's production capacity will go up to 6 million tonne from
the current level of 5 million tonne. Highveld, the largest
vanadium producer in the world, manufactures steel, vanadium
products, Ferro-alloys, carbonaceous products and metal containers
and closures. Analysts observe a clear trend in Tata Steel's plans
to expand capacities. But Highveld was not supposed to be the first
global acquisition for Tata Steel. In February 2005, the company
completed the acquisition of Singapore's largest steel company,
NatSteel Asia, which has a two-million tonne steel capacity with
presence across Singapore, Thailand, China, Malaysia, Vietnam, the
Philippines and Australia. As per the deal, the enterprise value of
NatSteel Asia was pegged at Rs 1,313 crore. Tata Steel has plans to
establish steel manufacturing units in Iran and Bangladesh too.
With a stated vision to become a 20-25 million tonne company by
2015, the company has also signed a few joint ventures and
announced organic expansion plans.
Over all scenario
Tata Steel acquiring Corus throws up several interesting questions
on emerging multinationals and traditional multinationals in the
steel industry and particularly the complexities of the acquisition
in the above context. What has been surprising in the above case is
that how could a small steel maker, Tata Steel from a developing
country like India buy up a large steel company, Corus PLC from the
United Kingdom. Prior to the acquisition, Corus was four times
bigger than Tata Steel. However, the operating profit for Tata
Steel was $840 million (sale of 5.3 million tons), whereas in case
of Corus it was $860 million(sale of 18.6 million tons)in the year
2006.It is also interesting to find out why a large global steel
maker, Corus decided to sell itself off to a small steel maker from
a developing country.
Many questioned if the Tatas were wise in acquiring Corus that had
accumulated huge debt burden, made operational losses and whose
share price had drastically come down. The intriguing issue of this
acquisition has been on how the final bidding price of the Corus
rise up to 70% over the stock price of Corus prior to the bidding.
Most importantly, how did Tata Steel organize the huge capital for
the acquisition? It appears that several external players
participated in the acquisition process and so how were they all
involved in the bidding process. Further, the issues of post
acquisition are also unique in this case as the context and culture
of the acquirer and the acquired companies are different.
Until the 1990s, not many Indian companies had contemplated
spreading their wings abroad. An Indian corporate or group company
acquiring a business in Europe or the U.K. seemed possible only in
the realm of fantasy.In addition to these issues, Indian companies
in general have had huge liabilities of origin in term of poor
quality, service and reliability in the international markets. At
the same time many the global steel industry was getting
restructured from a large number of smaller steel makers to a fewer
large steel conglomerates through the worldwide mergers and
acquisition. The steel companies in India were also wondering on
how to go about in these circumstances.In the above context, how
did the top management of Tata Steel and the Tata Group Perceive
the acquisition of Corus? When Tata Steel began bidding higher
price on Corus plc, many wondered how the Tatas manage the huge
financial deal and whether it will be good for the financial health
of Tata Steel.
Tata acquired Corus on the 2nd of April 2007 for a price of $12
billion making the Indian Company the worlds sixth largest steel
producer. This acquisition process has started long back in the
year 2005. However, Corus itself was involved in a considerable
number of Merger & Acquisition (M&A) deals and joint
ventures (JVs) beginning in the year2000. In a period of seven
years Corus was involved in 14 deals. In 2006, the Tata first
offered 455 pence per share of Corusbut by the end of the bidding
process in2007, Tata offered 608 pence per share, which is 33.6%
higher than the first offer. For this deal, Tata has financed only
$4 billion, though the total price of this deal was
$12billion.Given below are the reactions of Ratan Tata and B.
Muthuraman on what they felt about the acquisition.
Tata steel financial status post merger
Post Acquisition Management:
There has been a great deal of suspicion on how well the two
entities, viz., Tata Steel and Corus plc integrate in the post
acquisition situation. This concern has been expressed since the
culture and perspectives of the two companies and the people are
seemingly very different from each other. Ratan Tata however, has
been confident that the post acquisition management will not be too
difficult as the two organizational cultures will be effectively
integrated.
Ratan Tata has said he is confident the two companies will have a
cultural fit and similar work practices.
Nearly 30 years ago J.R.D Tata had lured away a young engineer from
Coruss predecessor company, British Steel, to work at Tata Steel.
That young Sheffield-educated engineer Sir Jamshed J. Irani
(knighted by the Queen 10 years ago) was Tata Steels Managing
Director until six years ago.
Tata Corus has made developed some management structure to deal
with the smooth operation of the two entities. It has also adopted
several system integrations in both the entities to smoothen the
transactions between the two entities.Tata Steel has formed a
seven- member integration committee to spearhead its union with
Corus group. While Ratan Tata, chairman of the Tata group, heads
the committee, three of the members are from Tata Steel and the
other three are from Corus group. Members of the integration
committee from Tata Steel include Managing Director B Muthuraman,
DeputyManaging Director (steel) T Mukherjee, and chief financial
officer Kaushik Chatterjee. The Corus group is represented in the
committee by CEO Phillipe Varin, executive director(finance) David
Lloyd, and division director (strip products) Rauke Henstra.
The company has also createdseveralTaskforce Teams to ensure
integration specific set of activities in the two entities for
smoother transaction. For instance, the company has created a task
force to integrate the UK/EU model in construction to the Indian
market.
Tata Corus Task force
Post Tata Corus merger, Tata Steel has access to considerable IP
and expertise in Construction from UK/EU based models. The key
driver is to find ways to utilize this knowledge and assist the
capture of value for Tata Steel in the construction market in
India. To achieve, a taskforce comprising of following executives
from both the entities is being formed with immediate
effects.
Members from Corus
Mr. Matthew Poole (Director Strategy Long Products Corus)
Mr. Colin Ostler (GM Corus Construction Centre)
Mr. Darayus Shroff (Corus International)
Members from Tata Steel:
Mr. Sangeeta Prasad (CSM South, Flat Products)
Mr. Pritish Kumar Sen (Market Research Group)
Mr. Rajeev Sahay (Head Planning & Scheduling, TGS)
The scope of the taskforce will be to:
1.Ensure smooth market knowledge exchange between Tata Corus and
Tata Bluescope and identify Knowledge gaps.
2.Complete mapping of construction sector for Indian market using
external
resource if necessary.
3.Understand key drivers for construction through knowledge gained
from
stakeholders of the construction community.
4.Map key competencies of Tata Corus against market drivers/
requirements.
5.Develop a five- year strategy.
The taskforce members will report to Mr. Paul Lormor (Director
Construction Development).
The engagement of the members of the taskforce will be on part time
basis and they will continue to discharge their current
responsibilities.
The taskforce will continue till June 2008, by which time it is
expected to taskforce prepare the business case and place it before
the board for approval
Corus Acquisition Financing
Tata steel is pleased to announce the refinancing of its GBP 3,620
million acquisition bridge facility and revolving credit facility
which had been provided by Credit Suisse, ABN AMRO andDeutsche Bank
to fund its acquisition of Corus Group plc that was completed on
April 2, 2007.
The refinancing is by way of non recourse Facilities totaling GBP
3,170 million (theRefinancing Facilities) which are being Arranged
by a syndicate led by Citigroup, ABN AMRO and Standard Chartered
Bank. This refinancing provides significant benefits and
flexibility over the term of financing to the group.
The Refinancing Facility comprises a five year GBP 1670 million
amortizing loan which will be syndicated by the joint book runners
to relationship banks of Tata steel and Corus and a seven year
minimally amortizing term loan of GBP 1500 million that will be
syndicated to institutional investors and banks in the USA, Europe
and Asia. The balance amount of the acquisition bridge is being
repaid by an additional equity contribution by Tata Steel/ Tata
Steel Asia which had been previously disclosed on April 17,
2007.
Subsequent to the conclusion of the discussions on the commercial
terms of the financing, the process to discuss the security package
for the above transaction will commence with the Trustees of the UK
Pension Funds in continuation of the dialogue with the Trustees
from October 2006. Concurrently, Corus will engage in the
consultative process with the Corus Netherlands Works Council to
seek their advice on the above financing.
Tata Steel is one of Indias largest companies and is amongst the
worlds lowest cost steel producers and most profitable steel
companies. Corus Group plc is Europes second largest steel producer
and the combined entity is the fifth largest steel producer in the
world with an installed capacity of 28 million tons p.a.
Group Strategy Function - Tata Corus
The Tata Steel Group has the ambition to become a bench mark in the
global steel industry in terms of value creation and corporate
citizenship. The group strategy function will be organized to
support the delivery of the group ambition. The main
responsibilities of the group strategy function are as
follows:
- To originate the group strategy i.e. portfolio management,
market sector positioning, industrial foot print, partnerships and
alliances, and translate the Group strategy into strategy action
plans.
- 2. To organize and support the strategic planning process
across the group
3. To originate and assess corporate business development
initiatives i.e. corporate partnerships/alliances. 4. To monitor
the steel industry which includes macro economic trends, steel
market dynamics, competitive arena, technology, standards and
regulationsTHE DETAILS ABOUT THE COMPANYS PERFORMANCE
Balance sheet
Mar ' 10Mar ' 09Mar ' 08Mar ' 07Mar ' 06Sources of fundsOwner's
fundEquity share capital887.41730.79730.78580.67553.67Share
application money---147.06-Preference share
capital-5,472.665,472.52--Reserves &
surplus36,281.3423,501.1521,097.4313,368.429,201.63Loan
fundsSecured loans2,259.323,913.053,520.583,758.922,191.74Unsecured
loans22,979.8823,033.1314,501.115,886.41324.41Total62,407.9556,650.7845,322.4223,741.4812,271.45Uses
of fundsFixed assetsGross
block22,306.0720,057.0116,479.5916,029.4915,407.17Less :
revaluation reserve-----Less : accumulated
depreciation10,143.639,062.478,223.487,486.376,699.85Net
block12,162.4410,994.548,256.118,543.128,707.32Capital
work-in-progress3,843.593,487.684,367.452,497.441,157.73Investments44,979.6742,371.784,103.196,106.184,069.96Net
current assetsCurrent assets, loans &
advances13,425.2711,591.6638,196.3414,671.914,997.00Less : current
liabilities &
provisions12,003.0211,899.959,755.788,279.706,913.83Total net
current
assets1,422.25-308.2928,440.566,392.21-1,916.83Miscellaneous
expenses not
written-105.07155.11202.53253.27Total62,407.9556,650.7845,322.4223,741.4812,271.45Notes:Book
value of unquoted
investments44,243.2441,665.633,790.475,793.463,477.38Market value
of quoted
investments4,397.791,491.893,260.652,979.004,079.52Contingent
liabilities13,184.6112,188.559,250.087,185.933,872.34Number of
equity sharesoutstanding
(Lacs)8872.147305.927305.845804.735534.73
Profit loss accountMar ' 10Mar ' 09Mar ' 08Mar ' 07Mar '
06IncomeOperating
income24,940.6524,348.3219,654.4117,452.6615,132.09ExpensesMaterial
consumed8,491.428,279.446,024.805,679.954,661.53Manufacturing
expenses3,803.333,349.962,693.732,589.242,364.40Personnel
expenses2,361.482,305.811,589.771,454.831,351.51Selling
expenses82.1761.4952.5364.7180.75Adminstrative
expenses1,622.771,518.831,224.54986.20902.30Expenses
capitalised-326.11-343.65-175.50-236.02-112.62Cost of
sales16,035.0615,171.8811,409.8710,538.919,247.87Operating
profit8,905.599,176.448,244.546,913.755,884.22Other recurring
income331.59305.36347.28485.14256.95Adjusted
PBDIT9,237.189,481.808,591.827,398.896,141.17Financial
expenses1,848.191,489.50929.03251.25168.44Depreciation1,083.18973.40834.61819.29775.10Other
write offs-----Adjusted
PBT6,305.817,018.906,828.186,328.355,197.63Tax
charges2,168.502,114.872,380.282,040.471,734.38Adjusted
PAT4,137.314,904.034,447.904,287.883,463.25Non recurring
items909.49297.71239.13-123.02-4.37Other non cash
adjustments---57.2947.50Reported net
profit5,046.805,201.744,687.034,222.153,506.38Earnigs before
appropriation14,555.7811,589.209,281.017,198.315,296.59Equity
dividend709.771,168.951,168.93943.91719.51Preference
dividend45.88109.4522.19--Dividend
tax122.80214.10202.43160.42100.92Retained
earnings13,677.3310,096.707,887.466,093.984,476.16
Cash flow
Mar ' 10Mar ' 09Mar ' 08Mar ' 07Mar ' 06Profit before
tax7,214.307,315.617,066.366,261.655,239.96Net cashflow-operating
activity8,369.227,397.226,254.205,118.103,631.39Net cash used in
investing
activity-5,254.84-9,428.08-29,318.58-5,427.60-2,464.59Netcash used
in fin. activity-1,473.133,156.4215,848.077,702.46-1,125.13Net
inc/dec in cash and
equivlnt1,641.251,125.56-7,216.317,392.9641.67Cash and equivalnt
begin of year1,592.89465.047,681.35288.39246.72Cash and equivalnt
end of year3,234.141,590.60465.047,681.35288.39
DIVIDEND
YearMonthDividend
(%)2010May802009Jun1602008Jun1602007May1552006May1302005May1302004May1002003May802002April-2001May402000May501999May401998May401997May45
Annual results in brief
Mar ' 10Mar ' 09Mar ' 08Mar ' 07Mar '
06Sales25,021.9824,315.7719,693.2819,762.5717,144.22Operating
profit8,952.099,133.438,223.546,973.275,931.51Interest1,508.401,152.69878.70173.90118.44Gross
profit8,297.488,289.017,679.847,233.046,067.83EPS
(Rs)56.8771.1864.1472.7163.33
Annual results in detailsMar ' 10Mar ' 09Mar ' 08Mar ' 07Mar '
06Other income853.79308.27335.00433.67254.76Stock
adjustment134.97-289.27-38.73-82.47-104.91Raw
material5,494.745,709.913,429.523,121.462,368.30Power and
fuel1,268.281,091.37--819.17Employee
expenses2,361.482,305.811,594.771,456.831,353.01Excise---2,210.552,004.83Admin
and selling expenses-----Research and development
expenses-----Expenses capitalised-----Other
expenses6,810.426,364.526,484.186,082.934,772.31Provisions
made-----Depreciation1,083.18973.40834.61819.29775.10Taxation2,167.502,113.872,379.332,039.501,733.58Net
profit / loss5,046.805,201.744,687.034,222.153,506.38Extra ordinary
item--221.13-152.10-52.77Prior year adjustments-----Equity
capital887.41730.79730.78580.67553.67Equity dividend
rate-----Agg.of non-prom. shares
(Lacs)6051.624825.234825.874033.174051.91Agg.of non promotoHolding
(%)68.5366.0566.0669.4873.21OPM (%)35.7837.5641.7635.2934.60GPM
(%)32.0733.6638.3435.8134.87NPM (%)19.5021.1223.4020.9120.15
The Acquisition Process:
The acquisition process started on September 20, 2006 and completed
on July 2, 2007. In the process both the companies have faced many
ups and downs. The details of the process of acquisition are
provided in the Exhibit 1 After the final round of bidding and when
the results were awaited Ratan Tata seemed to have asked Muthuraman
to prepare two speeches viz., (a) on conceding defeat and (b) on
winning the bid. A group of executives from Tata Steel described on
what Muthuraman had to say about his writing the two speeches
Exhibit 1: Key Milestones of the Tata Corus Deal
September 20, 2006:-Corus Steel has decided to acquire a strategic
partnership with a Company that is a low cost producer
October 5, 2006 :- The Indian steel giant, Tata Steel wants to
fulfill its ambition to Expand its business further.
October 6, 2006 :- The initial offer from Tata Steel is considered
to be too low both by Corus and analysts.
October 17, 2006:- Tata Steel has kept its offer to 455p per
share.
October 18, 2006:- Tata still doesnt react to Corus and its bid
price remains the same.
October 20, 2006:- Corus accepts terms of 4.3 billion takeover bid
from Tata Steel.
October 23, 2006:- The Brazilian Steel Group CSN recruits a leading
investment bank to offer advice on possible counter- offer to Tata
Steels bid.
October 27, 2006:- Corus is criticized by the chairman of JCB, Sir
Anthony
Bamford, for its decision to accept an offer from Tata.
November 3, 2006:- The Russian steel giant Severstal announces
officially that it will not make a bid for Corus.
November 18, 2006:- The battle over Corus intensifies when
Brazilian group CSN approached the board of the company with a bid
of 475p per share.
November 27, 2006:- The board of Corus decides that it is in the
best interest of its will shareholders to give more time to CSN to
satisfy the pre- conditions and decide whether it issue forward a
formal offer
December 18, 2006:- Within hours of Tata Steel increasing its
original bid for Corus to500 pence per share, Brazil's CSN made its
formal counter bid for
Corus at 515 pence per share in cash, 3% more than Tata Steel's
Offer.
January 31, 2007:- Britain's Takeover Panel announces in an e-
mailed statement that after an auction Tata Steel had agreed to
offer Corus investors
608 pence per share in cash
April 2, 2007:- Tata Steel manages to win the acquisition to CSN
and has the full voting support form Corus shareholders
When Mr. Muthuraman tried to write the speech on conceding defeat;
he could not write anything for long; his hand writing which is
usually neat and beautiful was illegible with number of
overwriting. After a lot of attempts he was able to write one.
Whereas, he could smoothly and in beautiful hand writing wrote the
winning speech. During the final rounds of bidding, the top
management team of the Tatas Including Ratan Tata, Muthuraman,
Kaushik Chaterjee and their key support staff were in a secluded
location that was inaccessible to others. Further, all their
communication devices were changed in order that the competitors of
the bidding or the rivals had any access to the discussion of the
negotiating team of the Tatas.
The official declaration of the completed transaction between the
two companies was announced to be effective by Court of Justice in
England and Wales and consistent with the Scheme of Arrangement of
the Tata Steel Scheme on April 2, 2007. The total value of this
acquisition amounted to 6.2 billion (US$12 billion). Tata Steel the
winner of the auction for Corus declares a bid of 608 pence per
share surpassed the final bid from Brazilian Steel maker Companhia
Siderurgica Nacional (CSN) of 603 pence per share.
According the Scheme regulations, Tata Steel was required to
deliver a consideration not later than 2 weeks following the
official date of the completion of the transaction.
Prior to the beginning of the deal negotiations, both Tata Steel
and Corus were interested in entering into an M&A deal due to
several reasons. The official press release issued by both the
company states that the combined entity will have a pro forma crude
steel production of 27 million tons in 2007, with 84,000 employees
across four continents and a joint presence in 45 countries, which
makes it a serious rival to other steel giants.
The deal between Tata & Corus was officially announced on April
2 nd, 2007 at a price of 608 pence per ordinary share in cash.This
deal is a 100% acquisition and the new entity will be run by one of
Tata steel subsidiaries. As stated by Tata, the initial motive
behind the completion of the deal was not Corus revenue size, but
rather its market value. Even though Corus is larger in size as
compared to the Tatas, the company was valued less than Tata (at
approximately $6.2 billion) at the time when the deal negotiations
started.
But from Corus point of view, as the management has stated that the
basic reason for supporting this deal were the expected synergies
between the two entities. What were the various motivations for
Corus to have upported the acquisitionby the Tatas? Was it because
of better price offered by the Tatas? Was this deal the best way
for the shareholders of Corus to exit from the loss making steel
business?
First of all, the general assumption is that the acquisition was
not cheap for Tata. The price that they paid represents a very high
49% premium over the closing mid market share price of Corus on 4
October, 2006 and a premium of over 68% over the average closing
market share price over the twelve month period. Moreover, since
the deal was paid for in cash automatically makes it more
expensive, implying a cash outflow from Tata Steel in the amount of
1.84 billion.
Tata has reportedly financed only $4 billion of the Corus purchase
from internal company resources, meaning that more than two -
thirds of the deal has had to be financed through loans from major
banks. The day after the acquisition was officially announced, Tata
Steels share fell by 10.7 percent on the Bombay stock market. Tatas
new debt amounting to $8 billion due to the acquisition, financed
with Corus cash flows, is expected to generate up to $640 million
in annual interest charges (8% annual interest cost). This amount
combined with Corus existing interest debt charges of $400 million
on an annual basis implies that the combined entitys interest
obligation will amount to approximately $725 million after the
acquisition.The complexity of the deal especially from the
financial implications of the acquisition has gripped
many.