Assignment

Of
Organizational change and development.

submitted to: submitted by:

Ms.priyanka chhibber simranmeet kour
Roll no: RT1903b44
Section: T1903
 Introduction:
The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate
strategy, corporate finance and management dealing with the buying, selling and combining of
different companies that can aid, finance, or help a growing company in a given industry grow
rapidly without having to create another business entity. An acquisition is the purchase of one
company by another company. Consolidation is when two companies combine together to form a
new company altogether. An acquisition may be private or public, depending on whether the
acquiree or merging company is or isn't listed in public markets. An acquisition may
be friendly or hostile.

Whether a purchase is perceived as a friendly or hostile depends on how it is communicated to

and received by the target company's board of directors, employees and shareholders. It is quite
normal for M&A deal communications to take place in a somnn, called 'confidentiality bubble'
whereby information flows are restricted due to confidentiality agreements (Harwood, 2005). In
the case of a friendly transaction, the companies cooperate in negotiations; in the case of a
hostile deal, the takeover target is unwilling to be bought or the target's board has no prior
knowledge of the offer. Hostile acquisitions can, and often do, turn friendly at the end, as the
acquiror secures the endorsement of the transaction from the board of the acquiree company.
This usually requires an improvement in the terms of the offer. Acquisition usually refers to a
purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire
management control of a larger or longer established company and keep its name for the
combined entity. This is known as a reverse takeover. Another type of acquisition is reverse
merger, a deal that enables a private company to get publicly listed in a 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.
Achieving acquisition success has proven to be very difficult, while various studies have shown
that 50% of acquisitions were unsuccessful.
Distinction between mergers and acquisitions
Although often used synonymously, the terms merger and acquisition mean slightly different
things. When one company takes over another and clearly establishes 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 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". The firms are often of about the same size. Both
companies' stocks are surrendered and new company stock is issued in its place. For example, in
the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when
they merged, and a new company, GlaxoSmithKline, 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 is technically an acquisition. Being bought out often
carries negative connotations, therefore, by describing the deal euphemistically as a merger, deal
makers and top managers try to make the takeover more palatable. An example of this would be
the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to as a merger at
the time.

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.
 Kurt Lewin
Change Management Model
Kurt Lewin emigrated from Germany to America during the 1930's. Lewin is recognised as the
"founder of social psychology" which immediately points to his interest in the human aspect of
change.

Unfreeze, Change, Freeze

Kurt Lewin proposed a three stage theory of change commonly referred to as Unfreeze, Change,
Freeze (or Refreeze). It is possible to take these stages to quite complicated levels but I don't
believe this is necessary to be able to work with the theory. But be aware that the theory has been
criticised for being too simplistic.

A lot has changed since the theory was originally presented in 1947, but the Kurt Lewin model is
still extremely relevant. Many other more modern change models are actually based on the Kurt
Lewin model. I'm going to head down a middle road and give you just enough information to
make you dangerous...and perhaps a little more to whet your appetite!

So, three stages. Unfreezing, Change, Freezing. Let's look at each of these.

Stage 1: Unfreezing
The Unfreezing stage is probably one of the more important stages to understand in the world of
change we live in today. This stage is about getting ready to change. It involves getting to a point
of understanding that change is necessary, and getting ready to move away from our current
comfort zone.

This first stage is about preparing ourselves, or others, before the change (and ideally creating a
situation in which we want the change).
The more we feel that change is necessary, the more urgent it is, the more motivated we are to
make the change. Right? Yes, of course! If you understand procrastination (like I do!) then you'd
recognise that the closer the deadline, the more likely you are to snap into action and actually get
the job started!

With the deadline comes some sort of reward or punishment linked to the job. If there's no
deadline, then the urge to change is lower than the need to change. There's much lower
motivation to make a change and get on with it.

Unfreezing and getting motivated for the change is all about weighing up the 'pro's' and 'con's'
and deciding if the 'pro's' outnumber the 'con's' before you take any action. This is the basis of
what Kurt Lewin called the Force Field Analysis.

Force Field Analysis is a fancy way of saying that there are lots of different factors (forces) for
and against making change that we need to be aware of (analysis). If the factors for change
outweigh the factorsagainst change we'll make the change. If not, then there's low motivation to
change - and if we feel pushed to change we're likely to get grumpy and dig in our heels.

This first 'Unfreezing' stage involves moving ourselves, or a department, or an entire business
towards motivation for change. The Kurt Lewin Force Field Analysis is a useful way to
understand this process and there are plenty of ideas of how this can be done.

Stage 2: Change - or Transition

Kurt Lewin was aware that change is not an event, but rather a process. He called that process a
transition. Transition is the inner movement or journey we make in reaction to a change. This
second stage occurs as we make the changes that are needed.

People are 'unfrozen' and moving towards a new way of being.

That said this stage is often the hardest as people are unsure or even fearful. Imagine bungey
jumping or parachuting. You may have convinced yourself that there is a great benefit for you to
make the jump, but now you find yourself on the edge looking down. Scary stuff! But when you
do it you may learn a lot about yourself.
This is not an easy time as people are learning about the changes and need to be given time to
understand and work with them. Support is really important here and can be in the form of
training, coaching, and expecting mistakes as part of the process.

Using role models and allowing people to develop their own solutions also help to make the
changes. It's also really useful to keep communicating a clear picture of the desired change and
the benefits to people so they don't lose sight of where they are heading.
Stage 3: Freezing (or Refreezing)
Kurt Lewin refers to this stage as freezing although a lot of people refer to it as 'refreezing'. As
the name suggests this stage is about establishing stability once the changes have been made. The
changes are accepted and become the new norm. People form new relationships and become
comfortable with their routines. This can take time.
It's often at this point that people laugh and tell me that practically there is never time for this
'freezing' stage. And it's just this that's drawn criticism to the Kurt Lewin model.

In todays world of change the next new change could happen in weeks or less. There is just no
time to settle into comfortable routines. This rigidity of freezing does not fit with modern
thinking about change being a continuous, sometimes chaotic process in which great flexibility is
demanded.

So popular thought has moved away from the concept of freezing. Instead, we should think about
this final stage as being more flexible, something like a milkshake or soft serv icecream, in the
current favourite flavour, rather than a rigid frozen block. This way 'Unfreezing' for the next
change might be easier.

Given today's pace of change this is a reasonable criticism. But it might help to get in touch with
what Kurt Lewin was actually saying. In 1947 he wrote:

A change towards a higher level of group performance is frequently short-lived, after a "shot in
the arm", group life soon returns to the previous level. This indicates that it does not suffice to
define the objective of planned change in group performance as the reaching of a different level.
Permanency of the new level, or permanency for a desired period, should be included in the
objective.
Kurt Lewin, "Frontiers of Group Dynamics", Human Relations, Volume 1, pp. 5-41 (I added the
emphasis)

Lewin's concern is about reinforcing the change and ensuring that the desired change is accepted
and maintained into the future. Without this people tend to go back to doing what they are used
to doing. This is probably what Kurt Lewin meant by freezing - supporting the desired change to
make sure it continues and is not lost.

More modern models of change, such as the ADKAR model, are more explicit about this step
and include Reinforcement as one of their phases. I've also read this final step of freezing
referred to as the lock-in effect. Establishing stability only happens when the new changes are
locked-in.

Thinking about change as a journey might make you think that a journey has a beginning ,
middle, and an end. While this is useful when thinking about the process of change the reality is
that this journey doesn't have an end. Lots of rest stops maybe! Some opportunities for settling
down for a while. But no end. So be careful about thinking that a change process has a definite
end, as the Lewin change management model might seem to suggest.

In what ways do you think this model might be useful for you?

I've found the Kurt Lewin model useful to frame a process of change for people that is quite easy
to understand. Of course each stage can be expanded to aid better understanding of the process.
Applying the concepts of Unfreezing, and especially the Force Field Analysis, at a personal level
can give us insight and help us better understand how we deal with change.
A Causal Model of Organizational Performance & Change
(Burke & Litwin Model)

Summary:

A Causal Model of Organizational Performance and Change, or the Burke & Litwin Model,
suggests linkages that hypothesize how performance is affected by internal and external factors.
It provides a framework to assess organizational and environmental dimensions that are keys to
successful change and it demonstrates how these dimensions should be linked causally to
achieve a change in performance.The causal model links what could be understood from practice
to what is known from research and theory. The model not only discusses how different
dimensions link with each other but also discusses how external environment affects the different
dimensions in organization. The model focuses on providing a guide for both organizational
diagnosis and planned, managed organization change, one that clearly shows cause-and-effect
relationships.

Outline of the Approach:

The model revolves around 12 organizational dimensions:

1. External environment
2. Mission and strategy
3. Leadership
4. Organizational culture
5. Structure
6. Management practices
7. Systems
8. Work unit climate
9. Task and individual skills
10. Individual needs and values
11. Motivation
12. Individual and organizational performance. The model also distinguishes between
transformational and transactional organizational dynamics in organizations.
The various merger and acquisitions that have occurred in the
organization in steel and aluminum industry:
HINDALCO - NOVELIS ACQUISITION: CREATING AN
ALUMINIUM GLOBAL

GIANT
ABSTRACT
HINDALCO - NOVELIS ACQUISITION: CREATING AN ALUMINIUM GLOBAL
GIANT
Last decade witnessed growing appetite for takeovers by Indian corporate across the globe as a
part of their inorganic growth strategy. In this chain Indian aluminium giant Hindalco acquired
Atlanta based company Novelis Inc, a world leader in aluminium rolling and flat-rolled
aluminium products. Hindalco Industries Ltd., acquired Novelis Inc. to gain sheet mills that
supply can makers and car companies. Strategically, the acquisition of Novelis takes Hindalco
onto the global stage as the leader in downstream aluminium rolled products. The transaction
makes Hindalco the world's largest aluminium rolling company and one of the biggest producers
of primary aluminium in Asia, as well as being India's leading copper producer.
The case study attempts to analyze the financial and strategic implications of this acquisition for
the shareholders of HINDALCO. The case explains the acquisition deal in detail and highlights
the benefits of the deal for both the companies. Followings are the main issues to be discussed
for critical review of this case:
 What is the strategic rational for this acquisition?
 Were the valuation for this acquisition was correct?
 What are financial challenges for this Acquisition?
 What is the future outlook of this acquisition?2

1. INTRODUCTION
Mergers and Acquisitions have been the part of inorganic growth strategy of corporate
worldwide. Post 1991 era witnessed growing appetite for takeovers by Indian corporate also
across the globe as a part of their growth strategy. This series of acquisitions in metal industry
was initiated by acquisition of Arcelor by Mittal followed by Corus by Tata’s. Indian aluminium
giant Hindalco extended this process by acquiring Atlanta based company Novelis Inc, a world
leader in aluminium rolling and flat-rolled aluminium products. Hindalco Industries Ltd.,
acquired Novelis Inc. to gain sheet mills that supply can makers and car companies.
Strategically, the acquisition of Novelis takes Hindalco onto the global stage as the leader in
downstream aluminium rolled products. The acquisition of Novelis by Hindalco bodes well for
both the entities. Novelis, processes primary aluminium to sell downstream high value added
products. This is exactly what Hindalco manufactures. This makes the marriage a perfect fit.
Currently Hindalco, an integrated player, focuses largely on manufacturing alumina and primary
aluminium. It has downstream rolling, extruding and foil making capacities as well, but they are
far from global scale. Novelis processes around 3 million tonnes of aluminium a year and has
sales centers all over the world. In fact, it commands a 19% global market share in the flat rolled
products segment, making it a leader.
Hindalco has completed this acquisition through its wholly-owned subsidiary AV Metals Inc and
has acquired 75.415 common shares of Novelis, representing 100 percent of the issued and
outstanding common shares AV Metals Inc transferred the common shares of Novelis to its
wholly-owned subsidiary AV Aluminium Inc. The deal made Hindalco the world's largest
aluminium rolling company and one of the biggest producers of primary aluminium in Asia, as
well as being India's leading copper producer. Hindalco Industries Ltd has completed its
acquisition of Novelis Inc under an agreement in which Novelis will operate as a subsidiary of
Hindalco.

2. INDUSTRY OVERVIEW: GLOBAL

Globally, newer packaging applications and increased usage in automobiles is expected to keep
the demand growth for aluminium over 5% in the long-term. Asia will continue to be the high
consumption growth area led by China, which has been and is expected to continue to register
double-digit growth rates in aluminium consumption in the medium-term. With key consuming
industries forming part of the domestic core sector, the aluminium industry is sensitive to
fluctuations in performance of the economy. Power, infrastructure and transportation account for
almost 3/4th of domestic aluminium consumption. With the government focusing towards
attaining GDP growth rates above 8%, the key consuming industries are likely to lead the way,
which could positively impact aluminium consumption. Domestic demand growth is estimated to
average in the region of over 8% over the longer-term. Lowering of duties reduces the net tariff
protection for domestic aluminium producers. Aluminium imports are currently subject to a 3
customs duty of 5% and an additional surcharge of 3% of the customs duty. The customs duty
has been reduced in a series of steps from 15% in 2003 to 5% in January 2007. With reduction in
import duties, domestic realization of aluminium majors, namely Hindalco and Nalco, is likely to
be under pressure, as the buffer on international prices is reduced. Moreover, with greater
linkage to international prices, volatility in financials could increase. However, producers are
moving downstream to negate the higher volatility. [Exhibits 8-9]

3. INDUSTRY OVERVIEW: INDIA

The Indian aluminium sector is characterized by large integrated players like Hindalco and
National Aluminium Company (Nalco). The other producers of primary aluminium include
Indian Aluminium (Indal), now merged with Hindalco, Bharat Aluminium (Balco) and Madras
Aluminium (Malco) the erstwhile PSUs, which have been acquired by Sterlite Industries.
Consequently, there are only three main primary metal producers in the sector.
The per capita consumption of aluminium in India is only 0.5 kg as against 25 kg. in USA, 19kg.
in Japan and 10 kg. in Europe. Even the World’s average per capita consumption is about 10
times of that in India. One reason of low consumption in the country could be that consumption
pattern of aluminium in India is vastly different from that of developed countries. The demand of
aluminium is expected to grow by about 9 percent per annum from present consumption levels.
This sector is going through a consolidation phase and existing producers are in the process of
enhancing their production capacity so that a demand supply gap expected in future is bridged.
However, India is a net exporter of alumina and aluminium metal at present. In order to develop
a guideline for energy management policy for the plants comprising the aluminium industry, it
was decided to undertake a questionnaire survey that was followed up by plant visits.
Features of Indian Aluminium Industry.
 Highly concentrated industry with only five primary plants in the country.
 Controlled by two private groups and one public sector unit.
 Bayer-Hall-Heroult technology used by all producers.
 Electricity, coal and furnace oil are primary energy inputs.
  All plants have their own captive power units for cheaper and un-interrupted power
Supply.Energy cost is 40% of manufacturing cost for metal and 30% for rolled
products.Plants have set internal target of 1 – 2% reduction in specific energy
consumption in the next 5 – 8 years.
 Energy management is a critical focus in all the plants.
 Two plants have declared formal energy policy.
 Each plant has an Energy Management Cell4.
 Achievements in energy conservation are highlighted in the Annual Report of the
company.
 Energy targets are based on best energy figures achieved in their sector / region and by
the plant itself in the past.
 Generally, government policies were rated as conducive to energy management.
 Task Force’ formed by BEE in this sector to work as catalyst in promoting energy
efficiency.
 High cost of technology is the main barrier in achieving high energy efficiency

4. COMPANY OVERVIEW ( profile and company

structure):

4.1 HINDALCO INDUSTRIES LIMITED

Hindalco Industries Limited, a flagship company of the Aditya Birla Group, is structured into
two strategic businesses aluminium and copper with annual revenue of US $14 billion and a
market capitalization in excess of US $ 23 billion. Hindalco commenced its operations in 1962
with an aluminium facility at Renukoot in Uttar Pradesh. Birla Copper, Hindalco's copper
division is situated in Dahej in the Bharuch district of Gujarat. Established in 1958, Hindalco
commissioned its aluminium facility at Renukoot in eastern U.P. in 1962 and has today grown to
become the country's largest integrated aluminium producer and ranks among the top quartile of
low cost producers in the world. The aluminium division's product range includes alumina
chemicals, primary aluminium ingots, billets, wire rods, rolled products, extrusions, foils and
alloy wheels. It enjoys a domestic market share of 42 per cent in primary aluminium, 63 per cent
in rolled products, 20 per cent in extrusions, 44 per cent in foils and 31 per cent in wheels.
Hindalco has launched several brands in recent years, namely Aura for alloy wheels, Freshwrapp
for kitchen foil and ever last for roofing sheets. The copper plant produces copper cathodes,
continuous cast copper rods and precious metals like gold, silver and platinum group metal mix.
sulphuric acid, phosphoric acid, di-ammonium phosphate, other phosphatic fertilisers and
phospho-gypsum are also produced at this plant. Hindalco Industries Limited has a 51.0%
shareholding in Aditya Birla Minerals which has mining and exploration activities focused in
Australia. The company has two R&D centres at Belgaum, Karnataka and Taloja, Maharashtra.
They have been recognized by the Government of India's Department of Scientific and Industrial
Research (DSIR). [Exhibit 1] Year over year, Hindalco Industries Ltd. has been able to grow
revenues from 121.2B to 193.2B. Most impressively, the company has been able to reduce the
percentage of sales devoted to selling, general and administrative costs from 4.15% to 2.96%.
This was a driver that led to a bottom line growth from 15.8B to 26.9B. [Exhibit 2-7]

4.2 COMPANY OVERVIEW: NOVELIS

Novelis is the world leader in aluminium rolling, producing an estimated 19 percent of the
world's flat-rolled aluminium products. Novelis is the world leader in the recycling of used
aluminium beverage cans. The company recycles more than 35 billion used beverage cans
annually. The company is No. 1 rolled products producer in Europe, South America and Asia,
and the No. 2 producer in North America. With industry-leading assets and technology, the
company produces the highest-quality aluminium sheet and foil products for customers in high
-value markets including automotive, transportation, packaging, construction and printing.
Our customers include major brands such as Agfa -Gevaert, Alcan, Anheuser-Busch, Ball,
Coca-Cola, Crown Cork & Seal, Daching Holdings, Ford, General Motors, Lotte Aluminium,
Kodak, Pactiv, Rexam, Ryerson Tull, Tetra Pak, ThyssenKrupp and others. Novelis represents a
unique combination of the new and the5 old. Novelis is a new company, formed in January
2005, with a new velocity, a new philosophy and a new attitude. But Novelis is also a spin-off
from Alcan and, as such, draws on a rich 90-year history in the aluminium rolled product market
place . Novelis has a diversified product portfolio, which serves to the different set of industries
vis-à-vis it has a very strong geographical presences in four continents. Novelis was always a
problem child. It was born in early 2005 as a result of a ‘forced’ spin-off from its parent, the $
23.6-billion aluminium giant and Canada-based Alcan. In 2003, Alcan won a hostile offer to
wed French aluminium company Pechiney. But the marriage produced an unwanted child —
Novelis. Both Alcan and Pechiney had bauxite mines, facilities to produce primary aluminium,
and rolling mills to turn the raw metal into products such as stock for Pepsi and Coke cans and
automotive parts. But the US and European anti-trust proceedings ruled that the rolled products
business of either Alcan or Pechiney had to be divested from the merged entity. Alcan cast out
its rolled products business to form Novelis. It is now the world’s leading producer of
aluminium-rolled products with a 19 per cent global market share. But in the spin-off process,
Novelis ended up inheriting a debt mountain of almost $2.9 billion on a capital base of less than
$500 million. That was just the beginning of its troubles.The situation is worse now. Though it
marginally reduced debt, it made some losses too. On a net worth of $322 million, Novelis has a
debt of $2.33 billion (most of it high cost). That’s a debt-equity ratio of 7.23:1.Soon, the
unwanted child stumbled into another crisis. Novelis has a simple business model. It buys
primary aluminium, processes it into rolled products like stock for soft drink cans, automotive
parts, etc., and sells it to customers such as Coke and Ford. But the management took a wrong
call on aluminium prices. In a bid to win more business from soft drink manufacturers, it
promised four customers not to increase product prices even if raw material aluminium prices
went up beyond a point. A few months after Novelis signed those contracts, aluminium prices
shot up 39 per cent (between 30 September 2005 and 2006). To these four customers, Novelis
was forced to sell its products at prices that were lower than raw material costs. These four
account for 20 per cent of Novelis’s $9-billion revenues. But the management’s wrong
judgement led to losses of $350 million (in 2006). For long, Novelis’s former CFO Geoffrey P.
Batt, former controller Jo-Ann Longworth and the finance team didn’t quantify these losses.
After the complicated spin-off from Alcan — this involved extensive operations in over 35
plants in 11 countries and four continents — the finance team also struggled to file quarterly and
annual results on time. Many of the numbers it managed to file on time were wrong and were
later re-stated. The board stepped in. First, it replaced its CFO and controller (in December
2005). When that didn’t help much, it replaced CEO Brian W. Sturgell in August 2006. (It is still
looking for a full-time CEO.) There are many more reasons for the distress in Novelis. More o
all that later. Now, enter the suitor. More recent expansions were made through both acquisitions
and modernization of existing mills, which increased Alcan’s can stock, sheet and foil rolling
capabilities. Novelis was spun off to carry on most of the aluminum rolled products businesses
operated by Alcan with an approach to business that is more focused on helping our customers
perform and on transforming new ideas into practical product solutions. Novelis inherited its
assets, know-how and structure from Alcan. In 1902, the Canadian subsidiary of the Pittsburgh
Reduction Company (later re-named Alcoa) was first chartered as the Northern Aluminum
Company, Limited. When Alcoa divested most of its interests outside the United States in 1928,
Alcan was formed as a separate company from Alcoa to assume control of most of these
interests. In the following years Alcan expanded globally, building or acquiring hydroelectric
power, smelting, packaging and fabricated product facilities run by approximately 88,000
employees in 63 countries. The first Alcan rolling operation began in 1916 6 in Toronto, Canada,
with an 84-inch hot mill and three finishing mills. Over the years Alcan constructed a number of
mills, including several that are among the largest aluminum rolling operations in each of the
geographic regions in which Novelis operates:
 Oswego, United States (1963) - the hot mill began operations and is now a major
producer of can stock and industrial sheet.
 Norf, Germany (1967) - a joint venture, owned at 50%, operates the world’s largest
aluminum rolling mill in terms of capacity.
 Saguenay Works, Canada (1971) – the largest continuous caster in the world in terms of
capacity.
 Pindamonhangaba, Brazil (1977) – the only South American plant producing beverage
can body and end stock. The company had 36 operating facilities in 11 countries as of
December 31, 2005. The tables below present Net sales and Long-lived assets by
geographical area (in millions). Net sales are attributed to geographical areas based on the
origin of the sale. Long-lived assets are attributed to geographical areas based on asset
location. In 2005, 2004 and 2003, 40%, 41% and 39%, respectively, of our total Net
sales were to our ten largest customers. [Exhibit 11]

5 position after merger and acquisition:

Organic and inorganic both strategies have worked for companies worldwide. But in the process
of global expansions inorganic growth strategies has always been the first preference for the
companies globally. As a part of its inorganic growth strategy of global expansion. The
following points highlight the important points about this acquisition of Hindalco for this
acquisition:
 The acquisition of Novelis by Hindalco was in an all-cash transaction, which
values Novelis at enterprise value of approximately US $6.0 billion, including
approximately US $2.4 billion of debt.
 This merger of Novelis into Hindalco will establish a global integrated aluminium
producer with low-cost alumina and aluminium production facilities combined
with high -end aluminium rolled product capabilities.
 After merger Hindalco will emerge as the biggest rolled aluminium products maker and
fifth-largest integrated aluminium manufacturer in the world.
 As Novelis is the global leader in aluminium rolled products and aluminium can
recycling, with a global market share of about 19%. Hindalco has a 60% share in the
currently small but potentially high-growth Indian market for rolled products.
 Hindalco's position as one of the lowest cost producers of primary aluminium in the
world is leverageable into becoming a globally strong player. The Novelis acquisition
will give the company immediate scale and strong a global footprint.
 Novelis is a globally positioned organization, operating in 11 countries with
approximately 12,500 employees. In 2005, the company reported net sales of US
$8.4 billion and net profit of US $90 million.
 The company reported net sales of US $7.4 billion and net loss of US $170 million in
nine months during 2006, on account of low contract prices. Some of these contracts are
expected to continue for next Years also.
 Novelis is expecting the full year loss to be US $263 million in 2006, however the
company is expecting to be in black with US $68 million profit in 2007. The7 total free
cash flow is expected to be US $175 million in 2006.
 By January 1, 2010, all the sales contracts will get expired and p r o f i t a b i l i t y will
increase substantially from then onwards.
 Novelis will work as a forward integration for Hindalco as the company is expected to
ship primary aluminium to Novelis for downstream value addition.
  Novelis has a rolled product capacity of approximately 3 million tonne while Hindalco at
the moment is not having any surplus capacity of primary aluminium.
 Hindalco’s greenfield expansion will give it primary aluminium capacity of
approximately 1 million tonne, but this will take a minimum 3-4 years to all the
capacities to come into operation. Novelis profitability is adversely related to
aluminium prices and higher aluminium prices on LME in near future can’t be ruled out.
However, we expect the aluminium prices to be softening in long term and this would be
positive for Novelis.
 Considering these factors, Hindalco’s profitability is expected to remain under pressure
and this will bounce back in 2009-10. The profitability will be accretive only in 2010-11.
 The debt component of Novelis stood at US $2.4 billion and additional US $2.8

billion will be taken by Hindalco to finance the deal. This will put tremendous pressure on
profitability due to high interest burden. Hindalco’s existing expansion will cost Rs. 25,000 crore
and as a result debt and interest burden of the company will increase further.
 CRISIL has placed its outstanding long-term rating of ‘AAA/Stable’ on Hindalco
Industries Limited (Hindalco), on ‘Rating Watch with Negative Implications’. The short
term rating of ‘P1+’ has been reaffirmed. This would lead to higher interest rate for the
company.

6. FUNDING STRUCTURE FOR THE DEAL

The funding structure of this deal is remarkably different from the leveraged buyout model that
Tata Steel used to fund the Corus buy. The Tatas are to buy 100 per cent of Corus’ equity for
$12.1 billion. Only $4.1 billion of this is being raised by the Tatas. The remaining $8 billion will
be raised (as debt) and repaid on the strength of the Corus balance sheet. Effectively, the Tatas
are paying only a third of the acquisition price. This was possible because Corus had relatively
low debt on its balance sheet and was able to borrow more. But that is not the case with Novelis.
With a debt-equity ratio of 7.23:1, it can’t borrow any more. So, the Birlas were unable to do a
leverage buyout. To buy the $3.6 billion worth of Novelis’s equity, Hindalco is now borrowing
almost $2.85 billion (of the balance, $300 million is being raised as debt from group companies
and $450 million is being mobilised from its cash reserves). That is almost a third of the Rs
2,500 crore net profit Hindalco may post in 2006-07. (It has reported a net profit of Rs 1,843
crore for the first three quarters of this year.) The second part of the deal is the $2.4-billion debt
on Novelis’s balance sheet. Hindalco will have to refinance these borrowings, though they will
be repaid with Novelis’s cash flows

Problems in merger and acquisition:

The case study attempts to analyze the financial and strategic implications of this acquisition for
the shareholders of hindalco. The case discusses the acquisition of US-Canadian aluminium
company Novelis by India-based Hindalco Industries Limited (Hindalco), a part of Aditya 8
Vikram Birla Group of Companies, in May 2007. The case explains the acquisition deal in detail
and highlights the benefits of the deal for both the companies. Followings are the main issues to
be discussed for critical review of this case:
 What is strategic rationale for this acquisition?
 Were the valuation for this Acquisition was correct?
 What are financial Challenges for this Acquisition?
 What is future outlook for this acquisition?

7.1 STRATEGIC RATIONALE FOR ACQUISITION( reason for

success of the merger):
This acquisition was a very good strategic move from Hindalco. Hindalco will be able to ship
primary aluminium from India and make value-added products.'' The combination of Hindalco
and Novelis establishes an integrated producer with low-cost alumina and aluminium facilities
combined with high-end rolling capabilities and a global footprint. Hindalco’s rationale for the
acquisition is increasing scale of operation, entry into high—end downstream market and
enhancing global presence. Novelis is the global leader (in terms of volume) in rolled product
with annual production capacity of 2.8 million tonnes and a market share of 19 per cent. It has
presence in 11 countries and provides sheets and foils to automotive and transportation, beverage
and food packaging, construction and industrial, and printing markets. Hindalco’s rationale for
the acquisition is increasing scale of operation, entry into high—end downstream market and
enhancing global presence. Novelis is the global leader (in terms of volumes) in rolled products
with annual production capacity of 2.8 million tonnes and a market share of 19 per cent. It has
presence in 11 countries and provides sheets and foils to automotive and transportation, beverage
and food packaging, construction and industrial, and printing markets. Acquiring Novelis will
provide Aditya Birla Group's Hindalco with access to customers such as General Motors Corp.
and Coca-Cola Co. Indian companies, fueled by accelerating domestic growth, are seeking
acquisitions overseas to add production capacity and find markets for their products. Tata Steel
Ltd. spent US $12 billion last month to buy U.K. steelmaker Corus Group Plc. Novelis has
capacity to produce 3 million tonne of flat- rolled products, while Hindalco has 220,000 tonne ..
``This acquisition gives Hindalco access to higher-end products but also to superior technology,''
Hindalco plans to triple aluminium output to 1.5 million metric tonne by 2012 to become one of
the world's five largest producers. The company, which also has interests in telecommunications,
cement, metals, textiles and financial services, is the world's 13th-largest aluminium maker.
After the deal was signed for the acquisition of Novelis, Hindalco's management issued press
releases claiming that the acquisition would further internationalize its operations and increase
the company's global presence. By acquiring Novelis, Hindalco aimed to achieve its long-held
ambition of becoming the world's leading producer of aluminium flat rolled products. Hindalco
had developed long-term strategies for expanding its operations globally and this acquisition was
a part of it. Novelis was the leader in producing rolled products in the Asia-Pacific, Europe, and
South America and was the second largest company in North America in aluminium recycling,
metal solidification and in rolling technologies worldwide. The benefits from this acquisition can
be discussed under the following points:
 Post acquisitions, the company will get a strong global footprint.
 After full integration, the joint entity will become insulated from the fluctuation of
LME Aluminium prices.9
 The deal will give Hindalco a strong presence in recycling of aluminium business.
As per aluminium characteristic, aluminium is infinitely recyclable and recycling it
requires only 5% of the energy needed to produce primary aluminium.
 Novelis has a very strong technology for value added products and its latest
technology ‘Novelis Fusion’ is very unique one.
 It would have taken a minimum 8-10 years to Hindalco for building these facilities,
if Hindalco takes organically route.
 As per company details, the replacement value of the Novelis is US $12 billion,
so considering the time required and replacement value; the deal is worth
for Hindalco.
Novelis being market leader in the rolling business, has invested heavily in developing various
production technology. One of such technology is a fusion technology that increases the
formability of aluminium. This means that it can be better used formed into the design
requirement by the car companies. All raw aluminium is processed so that it can be used in
products. Fourty percent of the products are rolled products and Novelis is in leader in rolling
business with a market share of 20%. Any change in the raw material price is directly passed on
to the customers who range from coca cola to automobile companies like aston martin. The
current revenue of hindalco is very much dependent on the aluminium prices and when the prices
are high they make a larger margin, this not the case with rolling business which usually has a
constant margin. For Hindalco to develop such technology will take a lot of time. According to
Standard and Poors it would take 10 years and $ 12 billion to build the 29 plants that Novelis has
with capacity of close to 3 million tonnes. The takeover of Novelis provides Hindalco with
access to the leading downstream aluminium player in western markets. The purchase
structurally shifts Hindalco from an upstream aluminium producer to a downstream producer.
This is reflected in Novelis’ downstream product capacity of 3.0 mt compared to Hindalco’s
existing primary capacity of 500 kt. Even with Hindalco’s expansion plans to take primary
production to 1.5 mt by 2011, the group will remain a downstream aluminium producer. Novelis
shareholders are required to approve the deal which the companies expect to be completed by
2007.

7.2 success of the merger:

The big concern is Novelis’s valuation. Analysts believe the Birlas are paying too high a price
for a company that incurred a loss of US $170 million for the nine months ended 30 September
2006. In its latest guidance, the Novelis management has indicated a loss of US $240 million 285
million for the whole of 2006. Even in 2005, when Novelis had made a US $90-million net
profit, its share prices never crossed US $30. Financial numbers show that novelis is not a good
choice by Hindalco at least at the price that they paid for the company. The imediate effect of the
merger is that Hindalco would achieve its target of doubling its turnover to $ 20 billion three
years in advance. Novelis fits well in the long term strategy of Hindalco. Novelis is not a dying
company looking for a savior, Hindalco approached Novelis because they believed that Novelis
can give them some business advantage.So, why is Hindalco paying US $44.93 a share for a
loss-making company? In its guidance, the Novelis management has indicated a pre-tax profit of
US $35 million-100 million for 2007. Going by the optimistic end of the guidance, the price
Hindalco paid translates to a market capitalization/profit before tax (PBT) multiple of 36 on
Novelis’s 2007 forecast. That appears to be high. [Exhibit 13]
Hindalco has long held an ambition to become a leading (top 10) player across its 2 key business
segments, aluminium and copper. The acquisition of Novelis should achieve part of this goal by
10 propelling Hindalco to the world’s leading producer of aluminium flat rolled products. With
capacity of nearly 3.0 mt of flat rolled aluminium products, Novelis takes Hindalco down the
value chain to become a downstream aluminium producer, versus its current upstream focus. At
a price of US $44.93/share and assuming US $2.4 bn of debt, Novelis is not coming cheaply.
Based on Novelis’ guidance and consensus forecasts for 2007, we estimate that Hindalco is
paying 11.4x EBITDA, 20.7x EBIT or 53.4x PE. At a total enterprise value of US $ 6 billion,
Novelis is nearly 50% larger than Hindalco’s current market capitalization. The concern is the
severity of the earnings and value dilution that will result. Assuming synergies are minimal and
based on Novelis’ guidance for 2007; we calculate that Hindalco’s EPS will be diluted by 18%.
At Novelis long term annual free cash flow target of US $400m (using a real WACC of 9%), we
estimate the acquisition will destroy value by INR60/share. To put it another way, we estimate
Hindalco will need to improve annual free cash flow by 35% to US $540m for the acquisition to
be value (NPV) neutral. Perhaps the greatest issue with the Novelis acquisition is Hindalco’s
balance sheet position post acquisition. Having already committed to significant expansion
projects, Novelis will push Hindalco’s high gearing levels even further. We calculate that
Hindalco’s gearing (ND/E) will reach 236%, with its Net Debt / EBITDA ratio reaching over

7.3 FINANCIAL CHALLENGES FOR THE ACQUISITION

The acquisition will expose Hindalco to weaker balance sheet. Besides the company will move
from high margin metal business to low—margin downstream products business. The acquisition
will more than triple Hindalco’s revenues, but will increase the debt and erode its profitability.
The deal will create value only after the Hindalco’s expansion completion, and due to its highly
leveraged position, expansion plans may get affected. Some of the customers of Novelis are
significant to the company’s revenues, and that could be adversely affected by changes in the
business or financial condition of these significant customers or by the loss of their business.
(The company’s ten largest customers accounted for approximately 40% of total net sales in
2005, with Rexam Plc and its affiliates representing approximately 12.5% of company’s total
net sales in that year). Novelis profitability could be adversely affected by the inability to pass
through metal price increases due to metal price ceilings in certain of the company’s sales
contracts. Adverse changes in currency exchange rates could negatively affect the financial
results and the competitiveness of company’s aluminium rolled products relative to other
materials. The Company’s agreement not to compete with Alcan in certain end-use markets may
hinder Novelis ability to take advantage of new business opportunities. The end-use markets for
certain of Novelis products are highly competitive and customers are willing to accept substitutes
for the company products. Though the Hindalco-Novelis acquisition had many synergies, some
analysts raised the issue of valuation of the deal as Novelis was not a profitmaking company and
had a debt of US $ 2.4 billion. They opined that the acquisition deal was over-valued as the
valuation was done on Novelis' financials for the year 2005 and not on the financials of 2006 in
which the company had reported losses. 11

7.4 FUTURE OUTLOOK

High prices and buoyant demand outlook in the domestic as well as international markets
prompted aluminium companies to undertake huge expansion plans. Huge quantity of aluminium
will come into the market in the coming years. All the three major companies Nalco, Hindalco
and Vedanta group have drawn up plans to increase Capacities. At the end of January 2007,
investment in hand in the aluminium anti aluminium products sector amounted to Rs.59,81800
million and are spread across 35 projects. Most of the major projects, amounting to over 60 per
cent of the aggregate investment in value terms, are under implementation. If all the projects are
successfully implemented, aluminium smelting capacity will increase from 11.8 lakh tonnes to
18 lakh tonnes. Of this, about 1.6 lakh tonnes will come on stream in 2007—08 and five lakh
tonnes each in 2009 and 2010. Hindalco has undertaken aggressive plans to increase its
capacities through capacity expansion as well as by setting up greenfield plants. Hindalco
increased its capacity at Hirakud plant by 35,000 tonnes to one lakh tonne. When Hindalco
completes all its project, smelting capacity will increase by about 10 lakh tonnes. Along with
smelting capacities, the companies are expanding alumina capacities and setting up captive
power plants. Domestic alumina capacity is set to increase by 9.5 million tonnes when all the
outstanding projects are completed. In 2007—0 itself about 1.23 million tonnes of capacity will
come on stream, catapulting aggregate capacity to 4.23 million tonnes. Large alumina capacities
will not only feed captive aluminium smelters, but also leave surplus alumina to be exported to
lucrative markets like China. Currently Hindalco's production is tied up with clients. Also
Novelis has similar contracts with its suppliers. But after 3-4 years it would start the operation of
new plants. Then it can source excess capacity to the Novelis plants located in south east asian
countries. The merger looks not bad if the current financial valuations are ignored. Also we need
to keep in mind that Hindalco is a very aggressively growing company, for it to build
infrastructure that can match Novelis is very difficult.
 2) Tata steel-natsteel merger and acquisition:
NatSteel Holdings Pte Ltd, or NatSteel in short, is a wholly-owned subsidiary of Tata
Steel — the world’s top ten largest steel producer. NatSteel is one of the top steel providers in
the Asia-Pacific with over 3,500 employees in Singapore, Australia, China, Malaysia,
Philippines, Thailand and Vietnam.
A new beginning
Tata Steel acquired the steel business of NatSteel Ltd in 2005. This marked a new beginning for
the steel division, which is today known as NatSteel Holdings Pte Ltd. Headquartered in
Singapore, NatSteel is the Asia-Pacific hub which supports regional operations in production,
engineering development, logistics, procurement, and environment and safety programmes. Steel
Production. As a group with steel production capacity of more than 2 million tonnes per year,
NatSteel serves Asia’s construction industry and targets to triple its growth by 2010. With its
continuous growth within the region, NatSteel is on track to attaining its goal.
As the only steel mill in Singapore, having integrated melting-rolling-fabricating facilities, the
company played an important part in building Singapore in its early years. Today, its full array of
steel products is used for commercial buildings and residential housing, as well as infrastructure
works such as tunnels, bridges and the Mass Rapid Transit system.
The upstream operation melts scrap steel in an 80-tonne electric arc finger shaft furnace and
casts the molten steel into billets. These are processed into wire rods and reinforcement bars,
which are fabricated into the final shapes and forms tailored to the specific needs of each job-site
customer. NatSteel’s downstream facility boasts one of the largest single cut and-bend operations
in the region.

Company History( profile and structure):

Tata Iron & Steel Company Ltd. (TISCO) is the iron and steel production company associated
with the Tata group of some 80 different industrial and other business enterprises in India,
founded by members of the Tata family. TISCO operates as India's largest integrated steel works
in the private sector with a market share of nearly 13 percent and is the second largest steel
company in the entire industry. Its products and services include hot and cold rolled coils and
sheets, tubes, construction bars, forging quality steel, rods, structural, strips and bearings, steel
plant and material handling equipment, ferro alloys and other minerals, software for process
controls, and cargo handling services. Through its subsidiaries, TISCO also offers tinplate, wires,
rolls, refractoriness, and project management services.

Tata's Early Beginnings in the 1800s

The story of TISCO is the story of one family or, more accurately, one man whose vision and
determination to give India a modern industrial economy helped provide a platform for the
country's independence half a century after his death. At the same time, he helped create what
was by 1970 India's biggest nonpublic enterprise. Jamsetji Nusserwanji Tata was born into a
well-to-do family of Bombay Parsees in 1839. The Parsees, a religious minority group, had
carved a niche for themselves in business, in this case in the economy of Victorian India, which
was dominated by British interests and was being developed as a client imperial economy. Tata's
father was a successful merchant with interests in the cotton trade to Britain. Tata joined the
family business after an education at Elphinstone College in Bombay and was sent to Lancashire,
England, in 1864 to represent the firm there. This was to be the first of many travels in Europe,
North America, and the Far and Middle East during which he formulated his ideas on the best
strategy to realize his own ambitions for success in business and to contribute to the economic
development of India. Tata's own background was in cotton production. He believed that mills
could function successfully in India in close proximity to the cotton-producing areas in the west
of the country, thereby putting them in a strong position to undercut their Lancashire
competitors. He obtained air conditioning equipment from suppliers in the United States and the
latest cotton spinning machinery installed to provide the optimum climatic conditions for
spinning. His early ventures showed promise and in 1874 he founded his first company, the
Central India Spinning, Weaving and Manufacturing Company. Three years later, on the same
day that Queen Victoria was declared empress of India, he opened the Empress mill in Nagpur.
As Tata was taking his first steps toward establishing a viable cotton spinning business, Indian
nationalism also was beginning to find a focus for its aspirations through the Indian National
Congress. Tata was present at its inaugural meeting and his devotion to the cause of an
independent India was undoubtedly a motivating factor in his own drive for success in business.
Cotton was only a start. From his travels in other industrialized nations he had come to identify
three essential elements for a modern industrial economy: steel production, hydroelectric power,
and technical education. Although he did not live to see any of his schemes in these areas come
to fruition, he laid the foundations on which his sons, and then later generations of his family,
were able to build to realize his ambitions.

Tata Steel was established by Indian Parsi businessman Jamsetji Nusserwanji Tata in 1907 (he
died in 1904, before the project was completed). Tata Steel introduced an 8-hour work day as
early as in 1912 when only a 12-hour work day was the legal requirement in Britain. It
introduced leave-with-pay in 1920, a practice that became legally binding upon employers in
India only in 1945. Similarly, Tata Steel started a Provident Fund for its employees as early as in
1920, which became a law for all employers under the Provident Fund Act only in 1952. Tata
Steel's furnaces have never been disrupted on account of a labour strike and this is an enviable
record. Steel has set an ambitious target to achieve a capacity of 100 million tonne by 2015.
Managing Director B. Muthuraman stated that of the 100 million tonne, Tata Steel is planning a
50-50 balance between greenfield facilities and acquisitions.

 Overseas acquisitions have already added up to 21.4 million tonne, which includes Corus
production at 18.2 million tonne, Natsteel production at two million tonne and Millennium
Steel production at 1.2 million tonne. Tata is looking to add another 29 million tonnes
through the acquisition route

 Tata Steel has lined up a series of greenfield projects in India and outside which includes

1. 6 million tonne plant in Orissa (India)

2. 12 million tonne in Jharkhand (India)
3. 5 million tonne in Chhattisgarh (India)
4. 3-million tonne plant in Iran
5. 2.4-million tonne plant in Bangladesh
6. 5 million tonne capacity expansion at Jamshedpur (India)
7. 4.5 million tonne plant in Vietnam (feasibility studies underway)
Success of the merger:
Corporate Social Responsibility (CSR)
 Community Initiatives
Having pledged $1 million over three years to community initiatives, NatSteel is committed to
serving the community in which it operates. It has also launched a CSR leave for staff,
enabling them to reach out to the target underprivileged groups.
 Environment Commitment
To do its part in corporate social responsibility, NatSteel has invested no less than S$20 million
in plant equipment that protects the environment through energy conservation, recycling, and
pollution and waste reduction.
 Human Capital Commitment
NatSteel has achieved many national accolades in recognition of its commitment to employees. It
achieved the People Developer Standard in recognition of its quality people development
practices. The company also won both the Work-Life Excellence Award and the Singapore
Health Award (Gold) for three consecutive years

Tata steel and corus merger:

The company is facing increasing criticism that the drive for growth and profits is completely
overshadowing its once famed philanthropy, and causing lasting social and environmental
damage at various locations. In response, Tata cites its programs for environment and resource
conservation, including reduction in greenhouse emission, raw materials and water consumption.
The company has increased waste re-use and re-cycling, and reclaims land at its captive mines
and collieries through forestation. Tata Steel's chief, environment and occupational health, says,
"Our capital investment in pollution-abatement solutions was in the vicinity of Rs 400 crore in
2003-04.".

On 20 October 2006 the board of directors of Anglo-Dutch steelmaker Corus accepted a $7.6
billion takeover bid from Tata Steel, the Indian steel company. The following months saw a lot
of negotiations from both sides of the deal. Tata Steel's bid to acquire Corus Group was
challenged by CSN, the Brazilian steel maker. Finally , on January 30, 2007, Tata Steel
purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal,
cumulatively valued at USD 12.04 Billion. The deal is the largest Indian takeover of a foreign
company and made Tata Steel the world's fifth-largest steel group.

Company’s profile and structure:

'Tata Steel', formerly known as TISCO (Tata Iron and Steel Company Limited), was the
world's 56th largest and India's 2nd largest steel company with an annual crude steel capacity of
3.8 million tonnes. It is based in Jamshedpur, Jharkhand, India.[1][2] It is part of the Tata Group of
companies. Post Corus merger, Tata Steel is India's second-largest and second-most profitable
company in private sector with consolidated revenues of Rs 1,32,110 crore and net profit of
over Rs 12,350 crore during the year ended March 31, 2008.[3][4]. The company was also
recognized as the world's best steel producer by World Steel Dynamics in 2005. The company is
listed on BSE and NSE; and employs about 82,700 people (as of 2007).

Corus was formed from the merger of Koninklijke Hoogovens N.V. with British Steel Plc on
6 October 1999. It has major integrated steel plants at Port Talbot, South
Wales; Scunthorpe,North Lincolnshire; Teesside, Cleveland (all in the United Kingdom)
and IJmuiden in the Netherlands. It also has rolling mills situated at Shotton, North
Wales (which manufacturesColorcoat products), Trostre in Llanelli, Llanwern in Newport, South
Wales, Rotherham and Stocksbridge, South Yorkshire, England, Motherwell, North
Lanarkshire, Scotland, Hayange,France, and Bergen, Norway. In addition it has tube mills
located at Corby, Stockton and Hartlepool in England
and Oosterhout, Arnhem, Zwijndrecht and Maastricht in the Netherlands. Group turnover for the
year to 31 December 2005 was £10.142 billion. Profits were £580 million before tax and £451
million after tax.

Reasons for merger:

There were a lot of apparent synergies between Tata Steel which was a low cost steel producer in
fast developing region of the world and Corus which was a high value product manufacturer in
the region of the world demanding value products. Some of the prominent synergies that could
arise from the deal were as follows :

 Tata was one of the lowest cost steel producers in the world and had self sufficiency in
raw material. Corus was fighting to keep its productions costs under control and was on the
look out for sources of iron ore.

 Tata had a strong retail and distribution network in India and SE Asia. This would give
the European manufacturer a in-road into the emerging Asian markets. Tata was a major
supplier to the Indian auto industry and the demand for value added steel products was
growing in this market. Hence there would be a powerful combination of high quality
developed and low cost high growth markets

 There would be technology transfer and cross-fertilization of R&D capabilities between

the two companies that specialized in different areas of the value chain

 There was a strong culture fit between the two organizations both of which highly
emphasized on continuous improvement and ethics. Tata steel's Continuous Improvement
Program ‘Aspire’with the core values :Trusteeship,integrity,respect for individual, credibility
and excellence. Corus's Continuous Improvement Program ‘The Corus Way’ with the core
values : code of ethics, integrity, creating value in steel, customer focus, selective growth and
respect for our people. In November 2006,Brazilian steel marker Companhia Siderúrgica
 Nacional (CSN)challenged Tata Steel's proposal for acquisition. They countered Tata Steel's
offer of 455 pence per share by offering 475 pence per share of Corus.

Need of the change:

On January 31, 2007, following the lack of agreement on an offer, an auction process was
triggered. Following the conclusion of the auction process (at an unprecedented length of nine
rounds) conducted by the Panel in accordance with Rule 32.5 of the Code (the "Auction"), Tata
Steel announced the proposed acquisition of Corus Group at 608p per share, that being 5p more
than CSN's top offer of 603p. The final valuation of Corus was thus put at $12.04 Billion.

Problems faced by the company while merging:

Tata surprised the credit default swap segment of the derivative markets by deciding to raise
$6.17bn of debt for the deal through a new subsidiary of Corus called 'Tata Steel UK', rather than
by raising the debt itself. Tata's security credit rating is investment grade, whereas the new
subsidiary may not be. The higher risk associated with raising debt through a subsidiary with a
lower credit rating prompted Fitch Ratings to downgrade its rating of the credit swap risks in the
takeover to 'negative'. Fitch also stated that Corus' responsibility for the debt may lead to Corus'
own unsecured debt rating being downgraded. This does not affect the rating of bonds issued by
Corus which are secured debt.

Success of the merger:

 $3.5–3.8bn infusion from Tata Steel ($2bn as its equity contribution, $1.5–1.8bn through
a bridge loan)
 $5.6bn through a LBO ($3.05bn through senior term loan, $2.6bn through high yield
loan)

A new board was formulated with representation from both the companies to provide a common
platform for strategy and integration.

 Mr. R.N. Tata will be the Chairman of Tata Steel and Corus
 Mr. Jim Leng will be the deputy chairman of Tata Steel and Corus
  Mr. B Muthuraman, Mr. Ishaat Hussain and Mr. Arun Gandhi to join the Corus board

Strategic and Integration Committee

A 'Strategic and Integration Committee' was formulated to develop and execute the integration
and further growth plans. Appropriate cross functional teams were formed under this committee
to look into specific issues.
References

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Tatasteel.com. Retrieved 2010-09-28.
2. "The 20 largest companies in India - Rediff.com Business". Rediff.com. Retrieved
2010-12-10.
3. "Fortune Global 500 2010 Rankings - Tata Steel". Money.cnn.com. Retrieved
2010-10-26.
4. "Tata Steel Annual Report 2008-09". Tatasteel.com. Retrieved 2010-10-26.
5. "World Steel Association". Worldsteel.org. Retrieved 2010-09-28.
6. "Company Profile". Tatasteel.com. Retrieved 2010-10-26.
7. 27 Jun, 2008, 01.17AM IST,ET Bureau (2008-06-27). "Tata Steel plans pooling
of raw materials- Steel-Ind'l Goods / Svs-News By Industry-News-The Economic
Times". Economictimes.indiatimes.com. Retrieved 2010-10-26.