Valuation of Steel Manufacturing Firms: Merger &

‘Valuation of Steel Manufacturing Firms: Merger & Acquisition Perspective’
A REPORT ON
“VALUATION OF STEEL MANUFACTURING FIRMS:

MERGER & ACQUISITION PERSPECTIVE”
By:
Pragita Gupta
07bs2891
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A Report
On
“VALUATION OF STEEL MANUFACTURING FIRMS:

MERGER & ACQUISITION PERSPECTIVE”
By:
Pragita Gupta
07bs2891
A report submitted in the partial fulfillment of the requirements of MBA

Program of ICFAI Business School
Distribution List:
Prof Rajnandan Patnaik
(MRP Guide)
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Acknowledgement
I express my sincere gratitude to my faculty guide, Prof Rajnandan Patnaik for his encouragement,
support and valuable guidance throughout the project duration. The project area was not much
known to me and required lot of knowledge and guidance. In spite of having his unending
engagements, he kept me motivating to try hard at all times and come out with this report.
I would also like to thank ICFAI Business School for providing me an opportunity to build my
knowledge in the area of Valuations and Merger & Acquisitions.
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Table of Contents
Topic Page No.
Chapter 1: Introduction, What is Merger & Acquisition 5
Chapter 2: Steel Industry Background 6
Chapter 3: The Indian Steel Industry & its Characteristics 9
Chapter 4: Literature Review 14
Chapter 5: Objectives of the Project, Research Question 20
Chapter 6: Methodology 21
Chapter 7: Data Ordering 22
Chapter 8: Deal undertaken for study <Tata - Corus (2007)> 27
Chapter 9: Valuation of Firms, Enterprise Value 37
Chapter 10: Conclusion, Scope for Further Research 41
Chapter 11: Limitations of the Research 42
Chapter 12: References 43
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Chapter 1:
Introduction-
Liberalization and globalization have ushered in an era of domestic and global competition in the
world. For surviving in the competitive market, firms have to resort to Mergers and Acquisitions
(M&A). Growth in the merger deals is picking up in Indian economy also. The value of M&A deals
in the country have grown at a compounded annual growth rate of around 28% between year
2002 and 2007. Total value of the deals has increased from $7.5 bn in 2004 to $21.7 bn in 2006
and $68.3 bn in 2007. Buoyant Indian economy, extra cash with Indian corporates and liberal
government policies have all contributed to this new acquisition trend. Restructuring of business
entities is expected to be on profitable lines so that shareholder wealth can be maximized. This
consolidation is also being witnessed in the Indian steel industry in the form of merger and
acquisition (M&A).
The recent boom in merger and acquisitions suggest that the organizations are spending a
significant amount of time and money either searching for firms to acquire or worrying about
whether some other firm will acquire them.
What is Merger and Acquisition (M&A)?

A merger is a combination of two corporations in which only one corporation survives and the
merged corporation goes out of subsistence. Alternatively, in merger two corporations combine
and share their resources in order to accomplish mutual objectives and both companies bring
their own shareholders, employees, customers and the community at large.
Acquisition takes place when one firm purchases the assets or shares of another company or
change in management of the company.
The reason of M&A activity is that acquiring firms seeks improved financial performance in term
enhance shareholder value. Any of the following motive(s) can be reason for M&A activity:
Synergies
Increased revenue or market share
Cross selling
Economies of Scale
Diversification
Resource transfer
Horizontal/ Vertical integration
Empire building
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Chapter 2:
Steel Industry Background-
Steel is an alloy of iron and carbon containing less than 2% carbon and 1% manganese and small
amounts of silicon, phosphorus, sulphur and oxygen. Steel is the most important engineering and
construction material in the world. It is used in every aspect of our lives, from automotive
manufacture to construction products, from steel toecaps for protective footwear to refrigerators
and washing machines and from cargo ships to the finest scalpel for hospital surgery.
Most steel is made via one of two basic routes:

Integrated (blast furnace and basic oxygen furnace).
Electric arc furnace (EAF).
The integrated route uses raw materials (that is, iron ore, limestone and coke) and scrap to create
steel.
The EAF method uses scrap as its principal input. The EAF method is much easier and faster since
it only requires scrap steel. Recycled steel is introduced into a furnace and re-melted along with
some other additions to produce the end product.
Steel can be produced by other methods such as open hearth. However, the amount of steel
produced by these methods decreases every year.
Of the steel produced in 2005, 65.4% was produced via the integrated route, 31.7% via EAF and
2.9% via the open hearth and other methods.
At a steel mill, the crude steel production process turns molten steel into ingots, blooms, billets or
slabs. These are called semi-finished products. Semi-finished products are solid blocks of steel,
usually with a square or rectangular cross section. Finished steel products are forged from semi-
finished products. They are classified as follows:
⋅ Cold-finished bars and flats (bright bars)

⋅ Cold-finished sections including forged and cold-formed sections
⋅ Cold-rolled narrow strip
⋅ Cold-rolled plate and sheet in coil and lengths
⋅ Deformed reinforcing bars
⋅ Drawn wire Forged bars, etc
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A flat steel product is typically made by rolling steel through sets of rollers to produce the final
thickness. There are two types of flat steel products:
⋅ Plate products: Vary in thickness from 10 mm to 200 mm. Plate products are used for ship
building, construction, large diameter welded pipes and boiler applications.
⋅ Strip products. Can be hot or cold rolled and vary in thickness from 1 mm to 10 mm. Thin
flat products are used in automotive body panels, domestic white goods (for example,
refrigerators and washing machines), steel (or tin) cans, and a number of other products
from office furniture to heart pacemakers.
A long product is a rod, a bar or a section. Typical rod products are the reinforcing rods used in
concrete, engineering products, gears, tools etc. are typical of bar products and. Sections are the
large rolled steel joists (RSJ) that are used in building projects. Wiredrawn products and seamless
pipes are also part of the long products group. Supply of raw materials is a key issue for the world
steel industry. IISI manages projects which look at the availability of raw materials such as iron
ore, coking coal, freight and scrap.
Scrap iron is mainly used in electric arc furnace steelmaking. As well as scrap arising in the making
and using of steel, obsolete scrap from demolished structures and end-of life vehicles and
machinery is recycled to make new steel. About 500 million tons of scrap are melted each year.
Iron ore and coking coal are used mainly in the blast furnace process of iron making. For this
process, coking coal is turned into coke, an almost pure form of carbon which is used as the main
fuel in a blast furnace. Typically, it takes 1.5 tons of iron ore and about 450kg of coke to produce a
ton of pig iron, the raw iron that comes out of a blast furnace. Some of the coke can be replaced by
injecting pulverized coal into the blast furnace. Iron is a common mineral on the earth’s surface.
Most iron ore is extracted in opencast mines in Australia and Brazil, carried to dedicated ports by
rail, and then shipped to steel plants in Asia and Europe. Iron ore and coking coal are primarily
shipped in capesize vessels, huge bulk carriers that can hold a cargo of 140,000 ton or more. Sea
freight is an area of major concern for steelmakers today, as the high demand for raw materials is
causing backlogs at ports, with vessels delayed in queues.
Since the World War II, the steel industry has experienced three distinct phases- growth (1950-
73), stagnation (1974-2001) and boom (2002-2006). The demand for steel grew at an annual rate
of 5.8% during 1950-73 as the industrializing nations were building their civil infrastructure. The
oil shocks of 1973 through 1979 slowed consumption in the second phase. The production of
crude steel grew at 0.6% p.a. over the entire period. Steel prices declined by 2-3 % p.a. During
1999-2001 the industry’s overcapacity hovered near 25% globally. Only a few companies were
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able to sustain.
Since 2002, the annual steel production has grown at 7-8% driven almost entirely by the double
digit growth in China. The huge demand from china has caused a commensurate leap in steel
prices. The industry has experienced a drop in the over capacity from 23% in 2001 to about 17%
from 2003-2005. But the demand from China has also witnessed a structural change. From 2002-
2004 China’s capacity for producing crude steel increased on average by 55%. By 2005 China
became a net exporter of steel. In the first half of 2006 China overtook Japan, Russia and the EU 25
to become the world’s largest steel exporting country. Exhibit 3 provides a list of Global Steel
Manufacturers and a brief description of top five steel companies. Exhibit 4 provides a comparison
of financial indicators of major steel firms.
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Chapter 3:
The Indian Steel Industry & its Characteristics-
The Indian Steel industry is regarded as the most important component for the development of
nation, because steel industry (heavy industry) is considered as a very important and influential
parameter for the development of any modern economy. The finished steel production in India
has grown from 1.1 million tones in 1951 to 31.63 million tones in 2001-02, which can be
regarded as a remarkable example of India’s development in economic activities. As a result the
consumption level of steel from 1990 to 2002 was continuously in an increasing order, but in
2003 it was not like earlier. In respect to the per capita income and consumption of steel it is very
less in India with compare to other countries.
India is currently the seventh largest steel-producing nation in the world with production of over
52 million tonnes (MT). It has also emerged as the second largest steel producer in terms of
growth rate in Asia after China. In terms of steel consumption, India ranks at fifth position in the
world, although it has a per capita consumption of steel of only around 40kg as against 242kg in
China and an average of over 400kg in the developed countries.
FY 2007 was the fifth consecutive year of impressive performance for the Indian steel industry.
Domestic consumption increased by over 12% YoY (nearly 44 MT) from about 39 MT last fiscal.
Exports registered a growth of 6% YoY. Production growth was marginally lower at 11% YoY,
nearly touching the 53 MT mark. Thus, with the sustenance of the strong performance by the
domestic steel industry for the fifth straight year, steel production has grown at a compounded
rate of 10% during the period FY 03 to FY 07.
Growth in Steel Production in India
(Source: Central Statistical Org.)
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• Massive capacity addition

Due to fast growth in the industry, the Indian steel companies are on massive capacity expansion
spree with strong demand outlook from both as a producer and a consumer. Infrastructure,
construction, urbanization, automobile industry and corporate capex program are likely to be
some of the key growth areas for the sector. As a norm, for developing economies like India,
demand for steel consumption grows at about 1.3 times of GDP growth rate. This means that if the
economy is to grows over 7% p.a. for the next few years, steel consumption has to grow over 9%
p.a. Apart from the domestic makers, foreign players too are staking high on this thriving sector to
rake in the profits.
Sector-wise Steel Demand -

Sectors Total Demand (%)
Construction & Infrastructure 59
Manufacturing 13
Automobiles 11
Others 17
(Source: JPG)
• Availability of Factors of Production

The Indian steel sector enjoys advantages of domestic availability of raw materials and cheap
labour. Iron ore is also available in abundant quantities. This provides major cost advantage to the
domestic steel industry, with companies like Tata Steel being one of the lowest cost producers in
the world. The two states of India, Jharkhand and Orissa are emerging as the most potential steel
producing destinations. These two states, due to multiple reasons, are attracting increasing
number of steel projects. The research counts several big steel projects that have been inked by
the Indian government and prominent steel producers.
However, Indian steel companies have to bear additional costs pertaining to capital equipment,
power and inefficiencies (low per employee productivity). This has resulted in the erosion of the
edge they would have otherwise enjoyed due to availability of cheap labour and raw materials.
The basic import duty on steel has been consistently brought down. This has made the industry
vulnerable to international competition. On the positive side, domestic prices now track the global
prices more closely.
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Steel Industry Analysis using Porter’s Five Competitive Forces Model-
Michael Porter "five forces model" concept involves a relationship between competitors within an
industry, potential competitors, suppliers, buyers and alternative solutions to the problem being
addressed.
I have used the five-forces model as a basic structure to explain the forces that have impact on the
performance of the Steel industry.
Using the above model parameters, we now analyse the Indian Steel industry in terms of Porter’s
five forces:
Supply With trade barriers having been lowered over the years, imports play an
important role in the domestic markets, thus affecting the sales of the
domestic players.
Demand The demand is derived from sectors that include infrastructure, consumer
durables and automobiles.
Barriers to entry High capital costs, technology and economies of scale
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Bargaining power The government’s different moves on railway freight costs and grid
of suppliers power costs determine the final price of the metal.
Bargaining power High, presence of a large number of suppliers and access to global
of customers markets.
Competition High, presence of a large number of players in the unorganized and

fragmented steel sector.
Consolidation in the Steel Industry-

The Indian Steel Industry is under consolidation phase due to following reasons-
Surge in demand of steel from various sectors like infrastructure, automobiles,

construction, consumer goods, oil & gas industry, etc. Demand can be bridged in two
ways i.e either through setting up of new plants (Greenfield investment) or through
acquisition of other companies (Brownfield investment). Setting up Greenfield
investment takes up lot of time and capital to be fully operational and hence, Indian
companies are taking the comparative shorter route of M&A to capture the growing
demand. Hence, growth in the merger and acquisition deals in Indian Steel sector is
picking up.
Secondly, the cyclical nature of the industry means that low-volume, high-cost
producers have to generate sufficient cash or create a strong enough borrowing
position during market peaks to survive the market troughs. The sector is still very
fragmented and cannot, therefore, control its raw materials costs or the price of its
finished goods. Hence, the only way to counteract the situation is to acquire other
steelmakers and become a larger player on the global scene, thereby obtaining
greater bargaining power with suppliers and customers, and increased operating
flexibility. It will ultimately ensure they are better able to survive, even if iron ore
prices keep soaring.
Thirdly, the concern with respect to new steel capacities cropping up across the
globe have become common, as this development would lead to significant pressure
on steel prices going forward. So in order to arrest the spiraling prices, there is
increase in M&A activity.
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Fourthly, the biggest disruption in the growth pattern in the industry could be from
an expected slowdown in Chinese steel consumption, which would make available a
good amount of excess steel for world consumption. It will lead to import of steel in
India and other markets and thus, hitting the margins of the local Indian companies.
Since the companies have realized the threat of excess supply, they are looking at
M&A option to retain market share and improve margins.
Fifthly, India’s major market for steel and steel items include USA, Canada,
Indonesia, Italy, West Asia, Nepal, Taiwan, Thailand, Japan, Sri Lanka and Belgium.
The major steel items of export include HR coils, plates, CR and galvanized products,
pipes, stainless steel, wire rods and wires. With the fall in prices along with
depressed domestic demand, India has been increasing exports to overcome the
excess supply situation. This has resulted in antidumping actions being taken by
developed countries like USA, EU and Canada. The trade action by some countries
against Indian steel industry has, to some extent, affected India’s exports to these
countries. The Indian steel producers are taking inorganic route of M&A for growth
and combating such actions.
The M&A activity is not only limited to acquisition of one Indian company by another but
acquisition of companies overseas by the Indian corporate. The Tata Group has led the pack in this
activity also. It acquired Singapore’s Natsteel in year 2004 with enterprise value of Rs 1313 crore
and then acquired Anglo-Dutch steel major, Corus for a whopping sum of $12.1 billion in the year
2007, an highest ever price paid by an Indian company for overseas acquisition.
Valuation of a firm is important aspect of M&A activity as it is an investment decision that

influences both the acquiring firm and the target firm, which is to be acquired. Any organization
cannot make that crucial decision without incisive analysis by financial planners and corporate
managers. The acquiring firm must correctly value the firm to be acquired and the acquired firm
must get the returns for the goodwill they have created over the years in the market.
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Chapter 4:
Literature Review-
Mergers and acquisitions is one of the actively researched topics in finance. Especially,
performance issues have been subject to various academic studies. The vast majority of these
studies, however, focus on take-over of big, listed companies and these studies examine the impact
of take-over announcements on stock market returns. Share price event studies however are not
the only approach to assess the acquisition effects. A second source of statistical evidence derives
from companies’ annual reports. Both methodologies have their advantages and disadvantages.
Below mentioned is the summary of research papers studied by me:
Pramod Mantravad and A Vidyadhar Reddy (2007), “Mergers and Operating

Performance: Indian Experience”, The Icfai Journal of Mergers & Acquisitions, Vol. IV, No.
4, 2007 52
This research study aimed to study the impact of mergers on the operating performance of
acquiring corporates in different periods in India, after the announcement of industrial reforms,
by examining some pre and post-merger financial ratios, with chosen sample firms, and all
mergers involving public limited and traded companies of the nation between 1991 and 2003. The
ratios undertaken for the study were:
Profit Margin (Profit before Interest and Tax/Net Sales)

Net Profit Margin (Profit after Tax/Net Sales)
Return on Net worth (Profit after Tax/Networth)
Return on Capital Employed (Profit before Interest and Tax (PBIT)/Capital Employed)
Debt-equity Ratio (Book value of Debt/Book value of Equity)
The pre-merger (for three years prior to merger) and post-merger (for five years after the
merger) averages of the above financial ratios were compared and tested for differences, using
paired ‘t’ test for two samples.
An analysis of pre and post-merger abovementioned operating performance ratios for the entire
sample set of mergers showed that while there was no change in the mean operating profit margin
and gross profit margin ratios, there was significant decline in the net profit margin, return on net
worth and return on capital employed after the merger. These results corroborated the general
research results on post-merger operating performance in other countries, that suggested that the
operating performance either stagnates or declines after mergers, for acquiring firms.
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Results of the analysis for different time intervals showed that the impact of mergers on operating
performance of acquiring companies in India had differed in different periods of occurrence of the
mergers. For merging firms that took place in the period 1991-95, returns on networth and capital
employed had significantly declined post-merger, while profit margins were maintained at pre-
merger levels. This seemed to indicate that the consolidation strategy was adopted by merging
firms to strengthen their balance sheets during the period.
For mergers during 1996-99, operating performance of acquiring firms, in terms of both
profitability and returns on capital/assets, had declined following the mergers. The increase in the
leverage of acquiring firms suggested that acquiring firms had raised more debt to restructure
operations following the merger, thus increasing interest costs that reflected in decline of net
profit margin also.
For mergers during 2000-03, both profitability ratios and returns ratios were unchanged, in the
post-merger period. The results showed that Indian companies had become more mature in
making merger deals, and did not overpay to target firms. Whereas for mergers between the same
group companies, there was a significant decline in net profit margin due to the likely increase in
interest costs, while other profitability ratios, remained unchanged. The significant declines in
returns on networth and capital employed suggested that the mergers were not motivated by
efficiency enhancement possibilities, but were aimed at consolidating the asset base by merging
assets of various group companies to emerge larger than before.
Tine De Langhe, Hubert Ooghe, “Are Acquisitions Worthwhile?”, Proceedings of the

European Financial Management Association Conference, June 2001 in Lugano, Switzerland
and at the VVE day, October 2001, Diepenbeek, Belgium.
This paper evaluated the post-take-over performance of the acquiring company by using the
standard approach in take-over research, i.e., the before-after analysis of the take-over. The study
led to several conclusions with respect to the financial characteristics and performance of the
acquiring companies.
Firstly, take-over have a negative impact on the acquirer’s profitability. However, the results are
almost never statistically significant. One year prior to take-over, the combined entity of the
acquirer and its target reaches its highest profit margins. This is caused by a sharp rise in the
acquirer’s sales margin one year prior to take-over. In the first post-take-over years, a significant
decline in profit margins is noticed. A similar result is found with respect to the net return on total
assets: the higher the net return on assets realized by the acquirer in year (-1), the higher the
weighted averages. However, in the post-take-over years the acquirer is not able to sustain these
high profitability levels. The two possible explanations given by paper for the apparent decrease
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in profitability, following the take-over were ‘managerial control loss problems’ and some kind of
‘mean reversion’ in accounting rates of return. It states that acquirers experience unexpected
problems in managing and integrating their acquisitions. As the combined organization becomes
more complex, the acquiring management loses its control and is no longer able to manage its
organization efficiently, which results in declining profits. On the other hand, a decrease in
profitability may reflect the tendency for abnormal rates of return to regress over time toward
‘normal’ levels.
The authors also found out that acquirers reach their top profitability level one year prior to the
take-over, perhaps stimulating them towards a take-over. Therefore, a decline in profitability has
little to do with the take-over itself, but may be merely a logical decline after a period of very high
profits in the acquirer’s history.
Changes in the solvency position was also analyzed the after take-over. Here also similar
conclusions were obtained i.e in the first two years after the acquisition the solvency improves,
but from year (+2) on we observe a sharp decline in the financial independence and the cash flow
coverage of debt, which is at variance with the rise in the acquirer’s solvency in the pre-take-over
years. The acquirers are thus more leveraged in the post-take-over years, compared with their
debt levels in year (-1).
Thirdly, changes in liquidity position after acquisition was also investigated. Here again, the take-
over has a significant negative impact on the acquirer’s liquidity.
In addition some more ‘fundamental’ performance measures were also judged to evaluate the
overall economic performance of companies, involved in take-overs. We find a sharp increase of
the acquirer’s gross added value per employee that suggested that take-over has a positive impact
upon the acquirer’s labour productivity. However, two remarks were made with respect to this
conclusion. First, the increased productivity after take-over was generally due to the improvement
in gross added value. Second, it could also be due to the restructuring activities, accompanied by a
reduction of the number of employees.
Derek Oler, Assistant Professor of Accounting, Kelley School of Business, Indiana University
and Kevin Smith, Assistant Professor of Accounting, University of Kansas School of Business
University of Kansas (2008), “The Characteristics and Fate of Take-Me-Over Firms”
This paper examines the phenomenon of TMOs (“Take-Me-Over” firms). It mentions that TMO
announcements are more likely to occur when acquirers are growing scarce and hence the TMO
“wave” lags behind the acquisition “wave” – that is, TMO announcements are more likely to occur
in the year following a year of high acquisition activity, when the number of potential acquirers is
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tapering off. TMO firms show signs of financial distress in terms of both fundamental performance
and debt management. Their financial distress appears to be sufficient for the firms’ managers to
risk losing their jobs in an acquisition. TMO managers also appear to be motivated by private
knowledge of bad news that the market generally does not impound into the TMO firm’s market
price around the announcement period, because 1-year ahead returns for TMO firms are
significantly negative. Although TMO managers may be motivated to inflate earnings, no
substantial evidence of aggressive accounting in the form of abnormally high discretionary
accruals is found out during the study. This is because aggressive accounting could ruin a potential
deal should an acquirer materialize and the due-diligence process uncover earnings manipulation.
The study further reveals that in spite of the positive and negative signals (increased likelihood of
being taken over, vs. implication of future bad news) inherent in a TMO announcement, the
market’s average response to the TMO announcement is positive. The market response to a TMO
announcement where the firm is subsequently dropped from its exchange within a year is
significantly negative (the 1-year ahead returns for dropped firms are also significantly negative,
suggesting that the market gets the direction of the signal right but not the magnitude). In cases
where the TMO firm continues trading but is not acquired, the announcement period response is
significantly positive but the long run response is significantly negative. The delayed negative
response for most TMO firms may also be explained by investors unwilling to risk short selling the
firm in the period immediately following the TMO announcement. Current shareholders are also
reluctant to sell rather than risk regret at having lost out on the premium associated with a
takeover offer. This is consistent with Eisinger’s (2006) observation that the TMO announcement
buys time for the TMO managers to possibly work through their firm’s difficult situation (ideally,
by locating a buyer for the firm). Another explanation for the delay is the small size of most TMO
firms: D’Avolio (2002) reports that smaller firms are often more difficult (and perhaps impossible)
to short, restricting the ability of short-sellers to affect market price.
Ryo Kawahara and Fumiko Takeda (2007), “Mergers and Acquisitions and Corporate
Performance in Japan”, The Icfai Journal of Mergers & Acquisitions, Vol. IV, No. 3, 2007 36
The paper investigated whether mergers and acquisitions affected the corporate performance
after three years of their implementation based on abnormal operating performance using a non
parametric test, Wilcoxon singed-rank tests.
By using the abnormal performances of 162 listed Japanese companies for three years after
mergers and acquisitions from 2001 to 2003, Wilcoxon singed-rank tests revealed that the overall
effects of mergers and acquisitions on corporate performance are statistically insignificant,
compared to the corporate performance of other companies in the same industry with similar pre-
acquisition performance. Abnormal operating performance was also observed industry wise. It
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showed significantly positive abnormal performances were observed for pharmaceuticals, iron
and steel, and wholesale trade, while significantly negative abnormal performances for chemicals
and retail trade.
Regression analysis was also done to investigate what factors affected post acquisition abnormal
performance. The factors examined were financing methods, years, pre-acquisition performance,
firm size, industry growth, and asset growth. The results showed eight coefficients out of total
nine were negatively correlated, indicating that lower the pre-acquisition performance, the better
is the post-acquisition performance.
In sum, the study gave evidence that the overall effects of mergers and acquisitions on corporate
performance are statistically insignificant, compared to the corporate performance of other
companies in the same industry with similar pre-acquisition performance. It further proved that
complete acquisitions, smaller size, and restructuring efforts may improve post-acquisition
performance of acquiring companies.
Fulbag Singh and Monika Mogla (2008), “Impact of Mergers on Profitability of Acquiring
Companies”, The Icfai University Journal of Mergers & Acquisitions, Vol. V, No. 2, 2008 60
The research paper studies the impact of mergers on corporate performance in India. It compares
the pre-merger and post-merger operating performance of merged companies. The aim was to
identify the reasons behind the mergers. The various motives of merger discussed in the paper are
profitability, size, liquidity, leverage, relatedness and group mergers. Three kinds of financial
operating ratios were used to compare corporate performance. These were profitability, liquidity
and leverage ratios.
For ascertaining the motives of acquisitions, the various abovementioned characteristics of the
firms were analyzed by comparing the average pre-merger performance with the average post-
merger performance. Both mean values and standard deviations were considered for making
comparisons. The focus was upon five pre-merger and five post-merger years. Year (0) was
excluded from the analysis since Year (0) figures are affected by one-time merger costs, incurred
during that year, making it difficult to compare them with the results for other years. T-test was
used to make pre and post merger comparison of ratios. To find out the significant factor affecting
the profitability most after merger, regression analysis was carried out.
Results of the research showed significant decline in profitability following the merger in terms of
ROCE, RONW and PM. The positive impact of merger is noticed in interest coverage ratio and size.
Both show significant increase after the merger. The other parameters of the study—current ratio,
quick ratio and debt equity ratio—recorded insignificant decline after the merger. When the same
parameters were tested for a comparable set of matching firms, profitability trends remained the
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same. All the measures of profitability reflected significant decline indicating that the decline in
profitability in the case of sample firms cannot be attributed to merger. Similar decline in
performance is observed for matching firms. Thus, the decline in the performance of merging
firms cannot be attributed to merger alone, rather it seems to be economy specific. But in future,
there are strong prospects of improvements in profitability. Group and unrelated firms may
improve when compared to non-group and related firms in terms of RONW, while ROCE would
improve in related and group firms. Interest coverage is a better predictor of profitability than
debt-equity ratio. Overall, the paper stated that with the passage of time the profitability of
merged firms would improve as indicated by the significantly positive coefficients of constant and
age.
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Chapter 5:
Objectives of the Project-
To find out the change in the value of the Acquirer firm due to Merger & Acquisition activity by
doing Pre and Post-valuation of the acquirer firm using discounted cash flow model.
Research Question-
The main question what we are going to answer through the research paper is does the merger
and acquisition lead to enhancement in the value of the acquirer firm or not.
Ho = Merger and acquisition activity does not lead to enhancement in value to the acquirer
firm. If this is true, what are the other factors that lead to enhancement in value of the firm.
Ha = Merger and acquisition activity leads to enhancement in value to the acquirer firm
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Chapter 6:
Methodology-
Pre and Post-Valuation of the Acquirer Firm will be done by using Discounted Cash Flow
Model.
The detail of the model is discussed herein below:
Discounted Cash Flow Model

This approach describes a method of valuing a company or asset using the concepts of the time
value of money. All future cash flows are estimated and discounted to give them a present value. The
arrived value is what an acquirer is willing to pay today in order to receive the anticipated cash
flow in future years of the target company. The discount rate is based on the level of risk of the
business and the opportunity cost of capital. The appropriate rate for discounting the company’s
cash flow stream is the weighted average of the costs of debt and equity capital.
Advantages of DCF Approach
The discounted cash flow method is preferred because it can be more accurate than other
methods. Its accuracy and complexity are due to the fact that it:
The technique uses cash flows that can be fairly projected taking into account the ups and
downs in the revenues of the company over a period of time.
The approach helps in predicting values even when cash flows are fluctuating.
The technique discounts the cash flows, in other words, it adjusts the cash flows by a rate
that is acceptable to the investor to account for risk and the time the investor must wait for
a return.
Drawbacks of DCF Approach

The complexity in using this method is that a target company’s future cash flow depends on
the method of acquisition and the purchase price as the target company’s future cash flows
are directly impacted by the taxes it will pay. The taxes it will pay depend on the company’s
taxable income. The taxable income will depend, in part, on its taxable deductions for
depreciation and the amortization of intangible assets. Such deductions depend on the
target’s tax basis for its assets, which in turn depend directly on the purchase price paid for
the business.
Projections about the future cash flows involve an element of speculation.
Selection of the discount rate is also subjective.
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Chapter 7:
Data Ordering-
The data collected for doing valuation of the merger deals undertaken for the research study is
secondary in nature. No primary source of data collection has been used in the research. For doing
the valuations, we need to first do financial forecasting of the Income Statement and Balance Sheet
of the companies. Then, on the basis of these forecasted figures, future cash flows will be
calculated and then discounted at appropriate cost of capital.
The data has been sourced from following sources:
Valuation of companies: Financial statements of the companies and Prowess database have
been taken (reproduced below)
To know about the major events of the company: respective company website will be used.
Apart from all these, various other websites and financial web portals will be used.
Published research papers will be studied to analyze the developments in the sector.
Other magazines and journals will be used to substantiate the study.
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Tata Steel Limited - Consolidated Income Statement

Mar 2007 Mar 2006 Mar 2005 Mar 2004 Mar 2003
(Rs. Millions )
Net Sales/ Income from operations 175,520.20 151,393.90 144,989.50 107,023.90 87,213.20
Total Expenditure (105,787.50) (92,078.80) (84,535.90) (72,069.80) (64,193.40)

Operating Profit 74,069.40 61,862.70 61,933.90 36,359.20 23,019.80
Other Income 4,336.70 2,547.60 1,480.30 1,405.10 503.90
Interest (1,739.00) (184.40) (1,868.00) (1,221.70) (3,048.20)
Depreciation (8,192.90) (7,751.00) (6,187.80) (6,251.10) (5,554.80)
PBT and Exceptional items 64,137.50 52,927.30 53,878.10 28,886.40 14,920.70
Exceptional Items:
Employee compensation and Seperation (1,521.00) (527.70) (905.30) (2,226.80) (2,295.70)
Tax (20,395.00) (17,335.80) (18,231.20) (9,197.40) (2,618.80)
Net Profit/(Loss) 42,221.50 35,063.80 34,741.60 17,462.20 10,006.20
Paidup Equity Capital (FV Rs10/share) 5,806.70 5,536.70 5,536.70 3,691.80 3,679.70
Res. Excluding Revaluation Reserves 133,684.20 - 73,266.70 - -
Basic and Diluted EPS Rs 73.76 Rs 63.35 Rs 62.77 Rs 47.32 Rs 27.43
Aggregate of Public Shareholding:

No. of Shares 403,316,773 405,186,773 406,463,440 271,966,962 270,653,105
% of Shareholding 69.48 73.21 73.44 73.71 73.59
Source: Tata Steel Annual Reports, 2004-07
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Tata Steel Limited - Consolidated Balance Sheet

Mar 2007 Mar 2006 Mar 2005 Mar 2004 Mar 2003
(Rs. Millions )
Sources of Funds:
Total Share Capital 5,806.70 5,536.70 5,536.70 3,691.80 3,691.80
Total Equity Capital 5,806.70 5,536.70 5,536.70 3,691.80 3,691.80
Preference Share Capital - - - - -
Reserves 133,684.20 92,016.30 65,062.50 41,466.80 28,163.00
Revaluation Res. - - - - 5.40
Net Worth 139,490.90 97,553.00 70,599.20 45,158.60 31,860.20
Secured Loans 37,589.20 21,917.40 24,681.80 30,101.60 36,676.30
Unsecured loans 58,864.10 3,244.10 2,715.20 3,720.50 5,579.80
Total Debt 96,453.30 25,161.50 27,397.00 33,822.10 42,256.10
Total Liabilities 235,944.20 122,714.50 97,996.20 78,980.70 74,116.30
Application of Funds:
Gross block 160,294.90 154,071.70 131,792.60 125,058.30 121,927.10
Less: Accumulated Dep. 74,863.70 66,998.50 59,396.80 54,116.20 48,499.90
Net Block 85,431.20 87,073.20 72,395.80 70,942.10 73,427.20
Capital WIP 24,974.40 11,577.30 18,726.60 7,636.40 2,010.80
Investments 61,061.80 40,699.60 24,326.50 21,941.20 11,945.50
Inventory 23,329.80 21,747.50 18,724.00 12,490.80 11,529.50
Sundry Debtors 6,316.30 5,394.00 5,818.20 6,513.00 9,584.70
Cash & Bank bal. 76,813.50 2,883.90 2,467.20 2,507.40 3,731.20
Total Current Assets 106,459.60 30,025.40 27,009.40 21,511.20 24,845.40
Loans & Advances 40,259.50 19,944.60 21,606.30 15,080.00 20,000.80
Total Current Assets & Advances 146,719.10 49,970.00 48,615.70 36,591.20 44,846.20
Deferred Credit - 0.10 0.90 1.60 -
Fixed Deposit 209.80 334.10 553.20 1,016.70 1,146.30
Current Liabilities 53,892.20 45,523.90 42,972.40 39,000.00 35,942.30
Provisions 30,375.40 23,614.40 25,244.20 20,689.90 22,171.10
Total CL & Provisions 84,267.60 69,138.30 68,216.60 59,689.90 58,113.40
Net Current Assets 62,451.50 (19,168.30) (19,600.90) (23,098.70) (13,267.20)
Misc. Expenses 2,025.30 2,532.70 2,148.20 1,559.70 -
Total Assets 235,944.20 122,714.50 97,996.20 78,980.70 74,116.30
Contingent Liabilities 50,729.60 22,094.50 19,111.20 15,080.10 13,162.20
Book Value (Rs) 240.22 176.19 127.51 122.32 86.54
Source: Tata Steel Annual Reports, 2004-07
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CORUS - Consolidated Income Statement

2006 2005 2004
(£ millions)
Group Turnover 9,733.00 9,155.00 9,332.00
Total Operating Costs (9,276.00) (8,512.00) (8,750.00)
Group Operating Profit/Loss 457.00 643.00 582.00
Finance Cost (202.00) (127.00) (123.00)
Finance Income 34.00 31.00 12.00
Share of Post Tax profits of JV & Associates 24.00 1.00 21.00
PBT 313.00 548.00 527.00
Taxation (119.00) (116.00) (119.00)
PAT from Continuing Operations 194.00 432.00 408.00
PAT from Discontinued Operations 35.00 19.00 33.00
PAT 229.00 451.00 441.00
Attributable to:
Equityholders of the parent 223.00 452.00 447.00
Minority Interest 6.00 (1.00) (6.00)
229.00 451.00 441.00
EPS:
From Continued Operations
-Basic EPS 21.01p 48.14p 46.40p
-Diluted EPS 20.38p 46.21p 43.48p
From Discontinued Operations

-Basic EPS 3.91p 2.70p 3.94p
-Diluted EPS 3.72p 2.49p 3.65p
Source: Corus Annual Reports, 2006
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CORUS - Balance Sheet

2006 2005 2004
(£ millions)
Non-Current Assets 3,668.00 3,496.00 3,577.00
Goodwill 72.00 83.00 85.00
Other Tangible Assets 58.00 56.00 39.00
P roperty, P lant & Equipm ent 2,758.00 2,820.00 2,793.00
Equity accounted Investm ents 89.00 95.00 109.00
other Investm ents 62.00 113.00 66.00
Retirement Benefit Assets 451.00 157.00 311.00
Deferred Tax Assets 178.00 172.00 174.00
Current Assets 4,412.00 4,446.00 3,714.00

Inventories 1,890.00 1,954.00 1,732.00
Debtors 1,683.00 1,512.00 1,363.00
Current Tax Assets 7.00 21.00 19.00
Other Financial assets - 85.00 -
Short Term Investments 8.00 - 11.00
Cash & Short Term Deposits 823.00 871.00 589.00
Assets held for sale 1.00 3.00 -
Total Assets 8,080.00 7,942.00 7,291.00
Current Liabilities (2,348.00) (2,467.00) (2,397.00)

Short Term Borrowings (159.00) (384.00) (379.00)
Trade & other Payables (2,017.00) (1,844.00) (1,742.00)
Current Tax liabilities (89.00) (79.00) (117.00)
Other Financial Liabilities - (38.00) -
Retirement Benefits O bligations (2.00) (5.00) (18.00)
Short Term Provisions and other Liabilities (81.00) (117.00) (141.00)
Non Current Liabilities (1,798.00) (2,097.00) (1,836.00)

Long term borrowings (1,236.00) (1,308.00) (1,063.00)
Deferred Tax Liabilities (123.00) (126.00) (137.00)
Retirement Benefits O bligations (210.00) (436.00) (455.00)
P rovosions for liabilities & charges (94.00) (116.00) (122.00)
Other Non-current liabilities (70.00) (46.00) (26.00)
Deferred Income (65.00) (65.00) (33.00)
Total Liabilities (4,146.00) (4,564.00) (4,233.00)

Net Assets 3,934.00 3,378.00 3,058.00
Equity
Called Up Share Capital 1,725.00 1,697.00 1,696.00
Share Premium account 389.00 173.00 168.00
Statutory Reserves - - 2,338.00
Other Reserves 331.00 283.00 201.00
Consolidated Reserves 1,485.00 1,199.00 (1,378.00)
Equity Attributable to Equityholders of the Parents 3,930.00 3,352.00 3,025.00
M inority Interest 4.00 26.00 33.00
Total Equity 3,934.00 3,378.00 3,058.00
Source: Corus Annual Reports, 2006
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Chapter 8:
Deal undertaken for study <Tata - Corus (2007)>
Tata Steel- Background

Tata Steel has established by Indian Parsi Businessman ,Jamshedji Tata in 1907, exactly in the year
when British American Tobacco (BAT) has started its first factory in India. But it started operating
in the year 1912. Tata Steel holds a very vital place in Indian business history, because it has
introduced some of the unique concepts like 8-hour working days, leave with pay and pension
system for the first time in India and the first player to start rapid industrialization process. In the
later part the concepts invented and implemented by Tata became lawful and compulsory practice
for the Indian employees. From Tata Steel, Tata has started investing in various other businesses
like; Oil mills, Airlines, Publishing, Motors, Consultancy services etc in a short span of 30 years. In
the year 1945 Tata entered into tea business by the name of Tata Tea, which was called as Tata
Finlay earlier. Tata also entered into exports as Tata Exports, which is the most successful and the
largest export house in India. During the entire business in India Tata has seen many ups and
downs, in different fields of business. If we will look at the company’s financial status/condition, it
will give some idea about the condition and performance of the company across the years.
Tata Steel is the largest, flagship company of the Tata Group of companies, headquartered in
Mumbai, India2. The Tata Group is the oldest, largest, most respected industrial house in India. At
last count, it had 96 operating companies categorized into 7 businesses, and include India’s largest
companies in the fields of steel, automobiles, chemicals, hotels, software.
Established in 1907, Tata Steel is Asia's first and India's largest private sector steel company. Tata
Steel is among the lowest cost producers of steel in the world and one of the few select steel
companies in the world that is EVA-positive (Economic Value Added). Concerns over the
availability of iron ore and coal, and the resultant volatility in prices, meant that most Indian steel
producers had to integrate backwards in order to have greater access and pricing power over
these commodities. Tata Steel has its own iron ore, coal and chrome mines and reserves (on long
term leases from the Government of India), and hence is largely self-sufficient in most critical raw
materials. However, it does not have the right to export the ores and coal outside India.
Its captive raw material resources and the state-of-the-art 5 MTPA (million tonne per annum)
plant at Jamshedpur, in Jharkhand State, India gives it a competitive edge. Determined to be a
major global steel player, Tata Steel has recently included in its fold NatSteel, Asia (2 MTPA) and
Millennium Steel (1.7 MTPA) creating a manufacturing network in eight markets in South East
Asia and Pacific Rim countries. The Jamshedpur plant is expected to expand its capacity from 5
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MTPA to 7 MTPA by 2008. The Company plans to enhance its capacity, manifold through organic
growth and investments. The Company's wire manufacturing unit in Sri Lanka is known as Lanka
Special Steel, while the joint venture in Thailand for limestone mining is known as Sila Eastern.
Tata Steel's products are targeted at the quality conscious auto sector and the burgeoning
construction industry. With wire manufacturing facilities in India, Sri Lanka and Thailand, the
Company plans to emerge as a major global player in the wire business. Tata Steel's products
include hot and cold rolled coils and sheets, galvanised sheets, tubes, wire rods, construction
rebars, rings and bearings. In an attempt to 'decommoditise' steel, the company has introduced
brands like Tata Steelium (the world's first branded Cold Rolled Steel), Tata Shaktee (Galvanised
Corrugated Sheets), Tata Tiscon (re-bars), Tata Bearings, Tata Agrico (hand tools and
implements), Tata Wiron (galvanised wire products), Tata Pipes (pipes for construction) and Tata
Structura (contemporary construction material). The company has launched the Customer Value
Management initiative with the objective of creating complete understanding of customer
problems and finding solutions jointly. The company's Retail Value Management addresses the
needs of distributors, retailers and end consumers. The company has also launched India's first
steel retail store – steel junction - for making steel shopping a happy and memorable experience.
Tata Steel’s profitability ranks among the best in the industry. It posted comparatively good
results for the year ended March ’06. Consolidated sales grew at 26% to Rs 20,244 crore.
Operating margins were a robust 31% in fiscal 2006. Consolidated profits for the year stood at Rs
3,721 crore, an increase of 4%. It bought NatSteel in 2004 for Rs 1,313 crore and Millennium Steel
for Rs 675 crore in 2005.
In 2006 Tata Steel was ranked once again the best steel making company in the world by World
Steel Dynamics Inc. USA (WSD) based on a study of 22 world class steel makers -consecutively for
the second time. The WSD report of February 2006 covered the study of all the leading steel
manufacturing companies across the globe including POSCO, Arcelor, Nippon Steel, Bao Steel,
Thyssen Krupp on 20 different parameters. Emerging out of the study, Tata Steel was ranked first
with a weighted average score of 8.51 as against a score of 8.11 in 2005. POSCO of South Korea
followed in the second place with 8.41. Tata Steel has been continuously marching towards
becoming a global steel enterprise and aspires to become a 15 MT steel producer by 2010. It is
also developing a deep-sea port in Orissa along with Larsen & Toubro to facilitate the flow of
inbound and outbound commodities.
Apart from the main steel division, Tata Steel's operations are grouped under strategic profit
centres like tubes, growth shop (for its steel plant and material handling equipment), bearings,
ferro alloys and minerals, rings, agrico and wires.
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Tata Steel's products include hot and cold rolled coils and sheets, tubes, wire rods, construction
bars, structurals, forging quality steel, rings and bearings. In an attempt to 'decommoditise' steel,
the company has recently introduced brands like Tata Steelium (India's first branded cold rolled
steel), Tata Shaktee (galvanised corrugated sheets), Tata Tiscon (re-rolled bars), Tata pipes, Tata
bearings, Tata Wiron (galvanised wire products) and Tata Agrico (hand tools and implements).
Tata Steel is also exploring opportunities in the ferro-chrome and titanium businesses.
Tata Steel has numerous joint ventures and subsidiaries. Among them are: Tinplate Company of
India Tayo Rolls Tata Ryerson Tata Refactories Tata Sponge Iron Tata Metaliks Tata Pigments
Jamipol TM International Logistics mjunction services TRF Jamshedpur Utility and Service
Company (JUSCO) The Indian Steel and Wire Products(ISWP), Lanka Special Steel, Sila Eastern
Company, etc
SWOT Analysis of Tata Steel for Corus acquisition:
Strengths Opportunities
•Lowest Cost Producer in world •Consolidation trend in Steel Industry
•Experience of TATA group in doing global •CSN’s tarnished image after failure of
acquisitions 2002 negotiations
•Stable balance sheet( Low debt to equity •To get exposed to the global steel
ratio) market ( will save time and learning
space for them)
Weaknesses Threats
•Corus was triple the size of TATA steels in •Brazilian player CSN
terms of production •Russian player Severstal
•No committed financers to support the
possible deal
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Corus and Steel Production in the UK:

Corus Group plc was formed on 6th October 1999, through the merger of two companies, British
Steel and Koninklijke Hoogovens, following the privatization of many steelworks companies by
the U.K. government. The company consists of four divisions which include: Strip Products, Long
Products, Aluminum and Distribution and Building Systems. With headquarters in London, Corus
operates as an international company, satisfying the demand of many steel customers worldwide.
Its core business comprises of manufacturing, development and allocation of steel and aluminum
products and services. The company has a wide variety of products and services which comprise
of the manufacturing of electrical steel, narrow strip, plates, packaging steel, plated steel strip,
semi finished steel, tube products, wire rod and rail products and services. However, the company
is also engaged in providing a variety of services including design, technology and consultancy
services.
Corus’ products and services are acquired by customers from diverse fields such as commercial
and military aerospace ventures, the automotive, construction, engineering, defense and security,
as well as the rail and shipbuilding industry. In terms of performance, the company is regarded as
the largest steel producer in the UK with £10,142 million of annual revenue (for 2005) and a work
force of 50 000 employees. In order to sustain and run its global steelmaking, processing and
distribution operations the company makes annual investments of over £6 million for the
purchase of various goods and services, such as iron ore and coal, alloys, refractory, rolls and
paint. Looking at the financial status of the company from 1996-2005, a degree of fluctuation
between the years can be seen. But irrespective of all these factors Corus continue the business as
it was continuing.
In 1990, the Hoogovens group had five divisions; Steel, Aluminum, Technical Services,
Subcontracting, and the newly formed Steel Processing and trading. In 1999, the trend towards
greater rationalization in the European steel industry led to the merger discussions with British
Steel. At that time Hoogovens had 17 business units with a turnover of 4.9 b Euro. The British
Steel Corporation was formed from the UK’s 14 main steel producing companies. In 1987, the UK
government formally announced its intention to privatize the British Steel Corporation.
The British Steel Act 1988 transferred the assets of the corporation to British Steel, a company
registered under the Companies Act. The early 1990s saw reduced demand and it was not until
1993 that growth in the UK economy gradually gathered pace and was reflected in a partial
recovery in steel demand and prices. The trend continued into 1994 and helped by continuing
efficiency and productivity gains, British Steel returned to profit. On October 6, 1999, the merger
of Hoogovens with British steel to form Corus came into effect.
Corus has manufacturing operations in many countries with major plants located in the UK, The
Netherlands, Germany, France, Norway and Belgium. The company produced around 18 million
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tonnes of crude steel in 2005, which represented approximately 10% of total EU production and
positioned the company as the 9th largest steel producer in the world and the 2nd largest
producer in Europe. Corus produces carbon steel by the basic oxygen steelmaking method in the
UK at Port Talbot, Teesside and Scunthorpe and in The Netherlands at IJ muiden. In addition,
carbon steel is produced by the electric arc furnace method in the UK at Rotherham. Corus has
approximately 50% of the UK carbon steels market and around 11% of the European (including
UK) carbon steels market.
In 2005, Corus generated turnover of £9.1 billion and produced 19 million tonnes of steel and
delivered over 0.6mt of aluminum. At the end of December 2005 Corus had 47,300 employees.
From October 2003 Corus has been structured into four main divisions: Strip Products, Long
Products, Aluminium and Distribution and Building Systems.Corus has a strategy focused around
carbon steel, with the intention of: Ensuring that upstream steelmaking facilities are optimized
and that the leading position of its I J muiden site is maintained. Pursuing selective growth of
downstream businesses seeking opportunities to participate in the ongoing consolidation of the
world's steel industry. Following his appointment as Chief Executive of Corus with effect from 1
May 2003, Philippe Varin carried out an intensive and detailed review of the Group's activities. As
a result a number of key initiatives were launched, known as the 'Restoring Success' initiatives.
These focus on introducing new leadership and instilling a new corporate culture across the
Group, aligning the financial resources available to the Group with its future strategic needs, and
returning all parts of the Group to acceptable levels of profitability. The latter will be done by
building on our 'Restoring Success' initiatives -existing cost reduction programmes, implementing
restructuring proposals for the UK asset base and initiating Group-wide efficiency measures.
Global Steel Industry at the time of Deal:

In global steel industry the consumption of steel has been decreased drastically in 2007, in
comparison to 2006. According to International Iron and Steel Institute (IISI) till 2010 the average
demand for steel would be 4.9 per cent per year. But during 2010 and 2015 the growth is expected
to be 4.2 per cent. In fact IISI forecasts the global steel demand would be 1.32 billion tones by
2010 and 1.62 billion tones by 2015.
Much of this demand growth is expected to be generated from countries like China and India.
Among the major steel producing countries the production of steel has increased from 2005-2006
except Brazil.
China is the highest steel producing country in the world with a production of 355.8 million tons
in 2005 and 418.8 million tones in 2006. And for this increasing demand of steel market it is not
possible for a single company to capture the market alone.
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In that production process Tata may play a vital role. For that reason IISI is giving its opinion in
favor of Tata. For 2007, S&P projects GDP growth of 2.4%, versus GDP growth of 3.3% in 2006.
Through April 2007, motor vehicle sales fell 3.0% while motor vehicle production declined 5.5%.
In 2006, motor vehicle sales fell 2.6%, while production was down 2.8%. As predicted, lower sales
for all of 2007 will lead to reduced demand from this key end market for steel. Presumably, car
manufacturers will be working to reduce unsold car inventory and will be cutting production,
which will reduce demand for steel.
According to the numerical data, through May, 2007 the S&P Steel Index increased 35.1%,
compared to a 6.6% increase for the S&P 1500 Index and a 14.9% rise in the S&P Materials Index.
In 2006, the S&P Steel Index increased 58.2%, versus a 13.3% increase for the 1500 and a 16.6%
increase in the S&P Materials Index. In the long term, there is a strong possibility for the industry
to benefit from greater pricing power resulting from further expected consolidation, a lower cost
structure, and a continuation of the cyclical decline of the U.S. dollar.
Competition: US, Europe and Emerging Markets

In the past, industry consolidation contributed to reduced cyclicality. The top 10 steel makers
represent about 28% of global production. Besides Arcelor Mittal, four of the top 10 are in Asia,
three in Europe and two in the U.S. In addition to China’s plan for consolidation many of the
leading steel producers have ambitious growth plans that will entail further consolidation.
Lakshmi Mittal, the CEO of Arcelor Mittal stated in June 2006 that winning companies in the steel
industry will have somewhere between 150m-200m tons of annual capacity by 2015 and that
scale is crucial in the pursuit of value. Shanghai Baosteel, which, although founded in 1998, is
already the world’s fifth largest steel maker producing 22.7 m tons in 2005. The potential
acquisition of Corus by Tata Steel would create a new entity with a production volume close to
Baosteel’s.
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The Deal:
The deal (between Tata & Corus) was officially announced on April 2nd, 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’s 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
compared to Tata, the company was valued less than Tata (at approximately $6 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. Corus has supported the Tata acquisition due to different motives. However with the Tata
acquisition, Corus has gained a great and profitable opportunity to make an exit, as the company
has been looking out for a potential buyer for quite some time.
The total value of this acquisition amounted to ₤6.2 billion (US$12.9 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.
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 tones 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 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. According the Scheme regulations, Tata Steel is required to deliver a
consideration not later than 2 weeks following the official date of the completion of the
transaction. The process has started on September 20, 2006 and completed on July 2, 2007. In the
process both the companies have faced many ups and downs.
Structuring and Pricing of the Deal:
Financing Structure: Financing India's largest leveraged buyout comprised of a $4.90

billion equity contribution from Tata Steel, a fully underwritten non-recourse debt package
of $6.14 billion, and a bridge loan of $2.66 million raised by Tata Steel Asia (Tata Steel’s
Singapore SPV).
As per the acquisition plan, a special purpose vehicle, a wholly owned subsidiary, called
Tata Steel UK would be set up by Tata Steel. The acquisition was proposed to be effected
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under section 425 of the English Companies Act 1985 and upon approval from the Corus
shareholders. Tata Steel UK would offer a price of 455 pence per Corus share valuing Corus
at $7.6 bn. This price represented a multiple of 7.6 times the EBITDA of Corus from
continuing operations for the twelve months to July 1, 2006. The acquisition was to be
structured as a 100 percent leveraged buyout funded through cash resources and loans
raised by Tata Steel and the SPV. Under the plan Tata Steel UK would arrange a loan of £1.6
b ($3056m), a revolving credit facility and a bridge loan and the rest would come from Tata
Steel (to the SPV).
Tata Steel appointed Credit Suisse, ABN Amro and Deutsche Bank to arrange financing. Of
the £6.14 billion of financing being raised at the SPV level, Credit Suisse would provide
45% and ABN AMRO and Deutsche 27.5% each. The $1.8 billion bridge debt being raised at
the Tata Steel level in India would be shared between Standard Chartered and ABN AMRO.
Integration Efforts: One of the biggest concerns Tata executives had was whether the
inevitable cultural conflicts between the organizations would pose significant operating
problems. Integrating a large company that operated on a different continent with diverse
cultures and operating environments was going to be no small task. Exacerbating this
problem was the fact that Corus itself was formed by the merger of an English and a Dutch
company that had different cultures and profitability. In line with the Tata Group’s
approach to acquisitions, Tata Steel announced its intention to continue with the senior
management of Corus. Appointments to the Tata Steel and Corus were to provide common
platform for strategy and integration. According to the plan, Ratan Tata would be the
chairman of both Tata Steel and Corus and Jim Leng would serve as deputy chairman of
Tata Steel and Corus. Three board members (including the CEOs) of each company would
serve on the other company’s board. A strategic and integration committee comprising of
Ratan Tata, the CEOs and senior management professionals of both companies was formed
to develop and execute the integration plan and further growth plans. Appropriate cross
functional teams were to be formed to execute the integration plan.
Synergies from the Deal:

Most experts were of the opinion that the acquisition did make strategic sense for Tata Steel. After
successfully acquiring Corus, Tata Steel became 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 larger player with a significant presence in value
added steel segment and a strong distribution network in Europe.
Amongst the benefit to Tata Steel was a 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. Another area
Pragita Gupta
07bs2891 Page 34
– an obvious come out of large scale consolidation – would be the synergies of joint procurement.
Economies of scale would give more strength during raw material purchase negotiation and also
while implementing product price changes. All these synergies, was expected to increase the
merged entities profitability further.
Tata Steel optimism regarding the synergies that could be generated after merger with Corus was
strong. B Muthuraman, MD, Tata Steel said, “In terms of synergies, we see synergies in
improvement of operating practices in many areas. We have had a reasonably good look at in the
limited time, that we had with Corus. We see synergies in procurement of materials, market place,
in shared services, in improvements of our operations In India using what Corus has in some areas
better than us. In terms of total synergies, we believe it is roughly about US$ 300-350 mn per year,
which is something, which we will be able to bring to the bottom line of the combined entity. It
will take a little bit of time; it will start at a lower value for the first one or two years. From the
third year onwards, we expect to realize the full synergies.”
According to industry experts, Tata Steel would have two options with regard to steel production
after the acquisition, The first option would be to continue with its primary steel production close
to its iron ore deposits, and the ship semi-finished steel for finishing at Corus’s plant that were
close to foreign consumer markets. The second option would be to shift a part of Corus’
steelmaking capacity to India, where Tata Steel was already planning a massive expansion to cater
to the rapidly growing demand of steel in the country. Corus’ expertise in making better grades of
steel used in automobiles and in aerospace could be used to boost Tata Steel’s supplies to the
growing Indian automobile market.
Corus consultancy services based in New Port, South Wales, provided iron, steel, and metal related
consultancy, right from the stage from core mining to that of marketing the finished products. It
was planned that this would be synergized with an automation unit that Tata had in India.
Muthuraman sais, “Apart from steel, there are a lot of other strength Corus has, that can be tapped
by Tata Steel in consultancy and other areas. We will try to increase these synergies.”
Post Acquisition Tata Steel:

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, deputy managing 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.
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Critical Analysis of the Deal:

The acquisition by Tata amounted to a total of 608 pence per ordinary share or ₤6.2 billion (US
$13.7 billion) which was paid in cash. 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 Steel’s share fell by
10.7 percent on the Bombay stock market. Despite its four times smaller size and smaller capacity,
Tata Steel’s operating profit for 2006, earning $840 million on sales of 5.3 million tones, were very
close in amount to those generated by Corus ($860 million in profits on sales of 18.6 million tons).
Tata’s 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 entity’s interest obligation will amount to approximately $725 million
after the acquisition.
The debate whether Tata Steel has overpaid for acquiring Corus is most likely to be certain, since
just based on the numbers alone it turns out that at the end of the bidding conflict with CSN Tata
ended up paying approximately 68% above the average price of Corus’ shares. Another pressing
issue resulting for this deal that has created a dilemma between experts and analysts opinions is
whether this acquisition for the right move for Tata Steel in the first place. The fact that Tata has
managed to acquire a British steel maker that has been a symbol of Britain’s industrial power and
at the same time its dominion over India has been perceived as quite ironic. Only time will show
whether Tata will be able to truly benefit from the many expected synergies for the deal and not
make the typical mistakes made in many large M&A deal during this beginning period.
Pragita Gupta
07bs2891 Page 36
Chapter 9:
Valuation of Firms-
Valuation of Tata Steel and Corus was done to find the enterprise value of the companies
individually as well valuation of Tata Steel after acquisition of Corus plc.
The following data was used to do the valuation of companies:
Tata Corus Tata-Corus

Expected Growth Rates – next five years 9% 6% 12%
Expected Growth Rates – after five years 7% 7% 9%
Beta next five years 1.5 1.15 -
Beta after five years 1 1 -
Tax Rate 33.9% 27% 33.9%
Risk-free Rate 8.07% 5.5% 8.07%
Market Return 15% 10% 15%
Post tax Cost of Debt 5.29% 6% 5.29%
Using the above data, we arrive at cost of equity by using CAPM formula:
Tata (for first five years) – 20%
Corus (for first five years) – 10.68%
Tata (next five years) – 16%
Corus (next five years) – 10%
Assumptions:
1. Growth Rates-
a. Tata Steel Ltd:
On studying the growth rates in sales of the company for the past five years, it comes to 19%. Steel
sector being the core sector an economy and having a dependent demand from other
infrastructure and automobiles sector, it is assumed that the company will grow at pace at which
steel industry grows. The Indian steel industry has registered an average growth rate of more than
10% CAGR in output in the last five years (Source: Ministry of Steel). Considering the buoyancy in
the steel production in India, the company is assumed to grow at 9% per annum for the first five
years after the merger.
But consistent growth in top line revenues of the company @ 9% is unlikely as the consolidation
in the Indian steel industry would have taken shape and is assumed to grow at 7%.
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b. Corus Plc:
The sales of the company for the past year have grown @ 6% pa. As per PWC report (2007) on
European Steel Industry, the industry is expected to grow @ 7% for the next five years. Assuming
that the company’s production will be in line with the whole industry and taking a conservative
approach, it has been assumed that for the next five years, the company’s revenues will grow @
6% pa. Whereas in the long term i.e after five years, the company is expected to grow @ 7% due to
its efforts to integrate company’s plan with develop partnership with emerging market companies
to access newer markets.
c. Tata-Corus:
Due to the merger of the two companies, it is estimated by the management of the two companies
that both the companies will be able to take benefit of the expected synergies due to merger i.e
fulfill the ambitious plan of doubling its profit and size in the next five years by playing on their
combined strengths of scale and global reach and cultural fit and hence, revenues are expected to
grow @ 12% first five years of merger. Secondly, merger of companies will result into access to
low steel manufacturing and high growth markets in Asia and Europe. There can be higher growth
in the revenues also, but conservative view has been taken for the purpose of the valuation of the
two companies.
After five years of merger, it is assumed that Tata will be able to realize the full synergies out of
the merger and the high growth period of the company will come down to normal levels i.e its
revenues will stabilize and will grow at the rate of industry, that is forecasted to be @9%.
Discount Rates:
a. Tata Steel Ltd:
Based on financial data from the company annual reports, the post-tax cost of debt works out to be
5% for the past five years. It is assumed that there will be no change in the financial leverage and
its rate for the company. Hence, these figures are used for valuation purpose in the project.
Cost of equity is calculated using Capital Asset Pricing model (CAPM) works out to be 20%.
Dividend Discount Model is not used to calculate cost of equity because the rate differs based on
the share price and different growth rate assumptions. Whereas this discrepancy is not
encountered in CAPM model as risk free rate and market return are based on historical data,
leaving no scope for subjectivity.
Weightage Cost of Capital (WACC) is calculated based on the proportion of debt and equity in the
capital structure of the company, which is 25% debt and 75% equity as per Balance Sheet for
Financial Year 2006.
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b. Corus Plc
Based on financial data from the company annual reports, the post-tax cost of debt comes out to
be 6% for the past five years and cost of equity is calculated using Capital Asset Pricing model
(CAPM) works out to be 10.68%. It is assumed that there will be no change in the financial
leverage of the company and rate will also be the same. Hence, these figures are used for valuation
purpose in the project.
Weightage Cost of Capital is calculated based on the proportion of debt and equity in the capital
structure of the company, which is 25% debt and 75% equity as per Balance Sheet for Financial
Year 2006.
c. Tata-Corus
The cost of debt and equity for the combined firm is calculated by taking the weightage averages
of the individual’s firm cost of debt and equity for the period under study. The weights are based
on the relative market values of debt and equity of the two firms.
Weighted Average Cost of Capital (WACC):

WACC for individual companies = (Proportion of Debt * Cost of Debt) + (Proportion of Equity * Cost of
Equity)
WACC for combined entity = (WACC for Corus for first five years * Present Value of Corus) + (WACC
for Tata for first five years * Present Value of Tata) / Value of Combined firm without synergy
Components of Capital Structure: Tata Corus

Equity 75.10% 75.06%
Debt 24.90% 24.94%
WACC:
Tata Corus Tata-Corus
First Five Years 16.32% 9.46% 12.25%
Next five Years 13.32% 8.96% 12.44%
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Enterprise Value:
The following formula is used to calculate the Enterprise value of the entities-
{EBIT(1-t) - (Capex-Depreciation)-Changes in Working Capital} *{1+g} / {1+ WACC}n
Year Tata Steel Corus Tata-Corus

Without Synergies With Synergies
0 427.00 375.95
1 465.43 398.51 863.94 899.30
2 507.32 422.42 929.74 967.61
3 552.98 447.76 1000.74 1041.30
4 602.75 474.63 1077.37 1120.83
5 656.99 503.11 1160.10 1206.66
Terminal Value 11123.13 13339.93 24463.06 38234.23
Present Value 6987.62 10198.22 17185.84 25143.03
Value of Synergy 7957.20
(Figures in million pounds)
After doing the valuations of both the entities with synergy and without synergy, we arrive at a
positive value of synergy. This leads us to the conclusion that M&A activity, incase of Tata Corus
deal will lead to enhancement in the value of the acquirer firm.
Thus, in the project, we reject our Null Hypothesis i.e. M&A activity does not lead to
enhancement in value to the acquirer firm and accept Alternate hypothesis i.e. M&A activity
leads to enhancement in value to the acquirer firm.
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Chapter 10:
Conclusion-
In the project, an attempt was made to figure out the impact of M&A activity on the value of the
firm i.e whether the activity leads to value enhancement or value erosion. We did the analysis of
the objective by studying the Tata’s acquisition of Corus plc in the year 2007.
As per our study, we found out that the activity should lead to value enhancement because of the
various synergies and economies of scale and scope that will operate after the merger.
But this is not the case always as various other issues like social and cultural integration,
understanding of the acquired firm’s market and regulatory environment, also play a major role in
success after completion of M&A activity. Secondly, macroeconomic factors assumed for the
research are dynamic, hence valuation of companies at different times can vary.
Scope for further Research-

The current research was done to find out whether the M&A activity leads to value enhancement
or result in synergies in the merged entities. Since the Tata Corus deal was given effect in the year
2007, so further research in the area could be done to analyze the pre and post operating
performance of the company through ratio analysis, trend analysis and other statistical models.
Pragita Gupta
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Limitations of the Research-

1. Data collection for the project is done from secondary sources. The source of data is
assumed to be authentic and will be disclosed properly in the report.
2. Valuation done in this research is based on financials upto year 2006 and various
assumptions are taken as per the macroeconomic factors prevailing at the time of the
entering of the deal. Since economic factors are dynamic and keep changing, so valuation
different times can also vary.
3. Valuation depends on the various estimates taken by different analyst. Hence, subjectivity
creeps in the valuation and comes up with different figures.
Pragita Gupta
07bs2891 Page 42
References-
1. Report on “Globalisation In The Steel Industry: Industry Restructuring Mergers And
Acquisitions - Recent Developments And Outlook”, Joint India/OECD/IISI Workshop, New
Delhi (India), 16-17 May 2006 (Date of Viewing: 20.06.08)
2. Pramod Mantravad and A Vidyadhar Reddy (2007), “Mergers and Operating Performance:
Indian Experience”, The Icfai Journal of Mergers & Acquisitions, Vol. IV, No. 4, 2007 52
(DoV: 20.10.08)
3. Tine De Langhe, Hubert Ooghe, “Are Acquisitions Worthwhile?”, Proceedings of the

European Financial Management Association Conference, June 2001 in Lugano, Switzerland
and at the VVE day, October 2001, Diepenbeek, Belgium (DoV: 20.10.08)
4. Derek Oler, Assistant Professor of Accounting, Kelley School of Business, Indiana University
and Kevin Smith, Assistant Professor of Accounting, University of Kansas School of
Business University of Kansas (2008), “The Characteristics and Fate of Take-Me-Over
Firms” (DoV: 24.10.08)
5. Ryo Kawahara and Fumiko Takeda (2007), “Mergers and Acquisitions and Corporate
Performance in Japan”, The Icfai Journal of Mergers & Acquisitions, Vol. IV, No. 3, 2007 36
(DoV: 25.10.08)
6. Fulbag Singh and Monika Mogla (2008), “Impact of Mergers on Profitability of Acquiring
Companies”, The Icfai University Journal of Mergers & Acquisitions, Vol. V, No. 2, 2008 60
(DoV: 25.10.08)
7. Lubatkin M (1983), “Mergers and Performance of the Acquiring Firm”, Academy of

Management Review, Vol. 8, No. 2, pp. 218-225. (DoV: 25.11.08)
8. Aloke Ghosh (2001), “Does Operating Performance Really Improve Following Corporate
Acquisitions?” Journal of Corporate Finance, Vol. 7, pp. 151-178. (DoV: 25.11.08)
9. Anup Agrawal J, Jaffe F and Mandelker G N (1992), “The Post-merger Performance of

Acquiring Firms: A Re-examination of an Anomaly”, Journal of Finance, Vol. XLVII, No. 4, pp.
1605-1621. (DoV: 20.12.08)
10. http://www.researchandmarkets.com/reports/c61964 (DoV: 20.12.08)

11.
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07bs2891 Page 43
13. http://www.dilanchian.com.au/content/view/166/56/ (DoV: 06.01.09)
14. http://www.bus.ucf.edu/weaver/BV%20&%20Litigation%20Support%20Articles/articles
/businessvaluationtechniques.htm (DoV: 09.02.09)
15. http://www.ustyleit.com/Valuation_Best_Practices.htm (DoV: 09.02.09)
16. http://www.tatasteel.com/newsroom/corus-transcripts.asp (DoV: 09.02.09)
17. http://niladriroy.blogspot.com/2007/03/tata-corus-deal-expert-opinion.html (DoV:

09.02.09)
18. http://www.redorbit.com/news/business/962938/the_indian_steel_industry_is_character
ised_by_fragmentation_particularly_in/index.html(DoV: 01.03.09)
19. http://www.redorbit.com/news/business/1261211/indian_steel_industry__porters_five_f
orces_strategy_analysis_available/index.html(DoV: 01.03.09)
20. http://www.redorbit.com/news/business/991816/the_indian_steel_industry_is_one_of_th
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21. http://www.redorbit.com/news/entertainment/726001/the_indian_steel_industry_is_pois
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22. http://www.equitymaster.com/research-it/sector-info/steel.html(DoV: 03.03.09)
23. http://www.indiainfoline.com/sect/stee/ch02.html(DoV: 03.03.09)
24. http://www.economywatch.com/business-and-economy/steel-industry.html(DoV:
03.03.09)
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-------------------
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‘Valuation of Steel Manufacturing Firms: Merger & Acquisition Perspective’

“VALUATION OF STEEL MANUFACTURING FIRMS:

“VALUATION OF STEEL MANUFACTURING FIRMS:

A report submitted in the partial fulfillment of the requirements of MBA

Topic Page No.

Chapter 1: Introduction, What is Merger & Acquisition 5

Chapter 2: Steel Industry Background 6

Chapter 3: The Indian Steel Industry & its Characteristics 9

Chapter 4: Literature Review 14

Chapter 5: Objectives of the Project, Research Question 20

Chapter 7: Data Ordering 22

Chapter 8: Deal undertaken for study <Tata - Corus (2007)> 27

Chapter 9: Valuation of Firms, Enterprise Value 37

Chapter 10: Conclusion, Scope for Further Research 41

Chapter 11: Limitations of the Research 42

Chapter 12: References 43

What is Merger and Acquisition (M&A)?

Most steel is made via one of two basic routes:

⋅ Cold-finished bars and flats (bright bars)

Growth in Steel Production in India

(Source: Central Statistical Org.)

• Massive capacity addition

Sector-wise Steel Demand -

• Availability of Factors of Production

Steel Industry Analysis using Porter’s Five Competitive Forces Model-

Barriers to entry High capital costs, technology and economies of scale

Competition High, presence of a large number of players in the unorganized and

Consolidation in the Steel Industry-

Surge in demand of steel from various sectors like infrastructure, automobiles,

Valuation of a firm is important aspect of M&A activity as it is an investment decision that

Pramod Mantravad and A Vidyadhar Reddy (2007), “Mergers and Operating

Profit Margin (Profit before Interest and Tax/Net Sales)

Tine De Langhe, Hubert Ooghe, “Are Acquisitions Worthwhile?”, Proceedings of the

The detail of the model is discussed herein below:

Discounted Cash Flow Model

Drawbacks of DCF Approach

The data has been sourced from following sources:

Tata Steel Limited - Consolidated Income Statement

Total Expenditure (105,787.50) (92,078.80) (84,535.90) (72,069.80) (64,193.40)

Aggregate of Public Shareholding:

Tata Steel Limited - Consolidated Balance Sheet

CORUS - Consolidated Income Statement

From Discontinued Operations

CORUS - Balance Sheet

Current Assets 4,412.00 4,446.00 3,714.00

Current Liabilities (2,348.00) (2,467.00) (2,397.00)

Non Current Liabilities (1,798.00) (2,097.00) (1,836.00)

Total Liabilities (4,146.00) (4,564.00) (4,233.00)

Tata Steel- Background

SWOT Analysis of Tata Steel for Corus acquisition:

Corus and Steel Production in the UK:

Global Steel Industry at the time of Deal:

Competition: US, Europe and Emerging Markets

Structuring and Pricing of the Deal:

Financing Structure: Financing India's largest leveraged buyout comprised of a $4.90

Synergies from the Deal:

Post Acquisition Tata Steel:

Critical Analysis of the Deal:

The following data was used to do the valuation of companies:

Tata Corus Tata-Corus

Weighted Average Cost of Capital (WACC):

Components of Capital Structure: Tata Corus

{EBIT(1-t) - (Capex-Depreciation)-Changes in Working Capital} *{1+g} / {1+ WACC}n