By Indresh Mishra


Driven by slow growth, inability to make sustainable profits and volatility in the steel industry, companies in steel industry have joined the starting wave of mergers and acquisitions. Mergers and Acquisitions have become distinctive trend in steel industry worldwide since the beginning of the 21st century. This dissertation examines the results on drivers and impact of recent mergers and acquisitions (M&A) in steel industry on case study approach. The case study focused on two recent major acquisitions of Arcelor by Mittal Steel and Corus by Tata Steel during the recent mergers and acquisitions wave of 2000s.

The important findings of this study is that synergies, overcapacity, extreme fragmentation, concentration amongst suppliers and better buying power of customers are some of the other major factors that are driving steel industry into mergers and acquisitions.

The impact of mergers and acquisitions differed between case studies. In both the case studies, improvement in post acquisition stock performance of the combined entity was noticed. In the first case study tremendous increase in post acquisition accounting profit and operating efficiency was also noticed. It has been predicted that M&A in steel industry will have positive impact on return on capital employed (ROCE). In the first case it was found that the company had paid fair price for the acquisition to gain in short term as well as in long term, while in the second case short term gain seems doubtful. First case may face issues related to corporate governance, while second may face compensation related issues. Moreover, in the results of this project the future structure of steel industry has also been predicted.



Hubris 2.2. Market Power views and growth 2.4. Diversification Technological Progressiveness 5 5 6 7 7 8 9 10 10 11 11 12 14 16 16 17 18 vi .TABLE OF CONTENTS ABSTRACT ACKNOWLEDGEMENTS DEDICATION LIST OF FIGURES LIST OF TABLES iii iv v ix x CHAPTER 1: INTRODUCTION 1.6. Managerial Incentives 2. Tax Argument 2.6 Post merger Performance Evaluation criteria 2.6.3 Causes of Corporate Acquisitions 2. Efficient and effective Synergies 2.3.4 Financing an acquisition Types of Mergers and Acquisitions 2.2 Overview of the Dissertation 1 1 3 CHAPTER 2: REVIEW OF LITERATURE Background 1. Agency problems 2.3.1 Definition 2.6.2 Operational efficiency (cost advantage) 2.3.5 Human Resource and Cultural factors 2.7.1 Accounting Return 2.

3 Company selection 4.CHAPTER 3: THE GLOBAL STEEL INDUSTRY 3.2.7 Synergies 34 34 34 36 37 38 38 41 41 5. Arcelor-Mittal Case study 5.3 Product range and Markets of Corus 5.4 Data collection methods 4.1.2 Growth of the industry 3.2.6 Consolidation as a strategy in the global steel industry 19 19 19 22 23 24 25 CHAPTER 4: RESEARCH METHODOLOGY 4.1.4 Industry size and geographic distribution Synergies 46 46 47 47 48 50 vii . Tata-Corus Case study 5.3 Economic trends Structure of the Deal and Financing Background of Mittal Steel 5.1 Research question and objectives 4.2 Background of Corus 5.1.2 Case Study Methodology 4.1 Iron and steel making compliance history 3.1.5 Hostile Takeover of Arcelor 5.6 Structure of the final Deal and Financing 5.4 Markets and Product range of Arcelor 5.5 Major Global steel companies 3.2 Markets and Product Range of Mittal Steel 5.1 Background of Tata Steel 5.5 Analysis Strategies 27 27 28 29 30 31 CHAPTER 5: CASE STUDIES 5.3 Background of Arcelor 5.2.

1 Financing of the Acquisitions 6.4.2 Arcelor Mittal 6.1 Tata-Corus 6.3 Post Acquisition Performance measurement: 6.3.6 Future Structure of the Steel Industry 55 55 57 57 59 62 62 63 64 65 65 66 67 70 71 74 CHAPTER 7: CONCLUSION 7.Corus and Arcelor. Implications of the Study 7.1 Stock Price comparison 6.2 Limitations of the Study 7.3 Recommendations for future research 79 79 81 82 REFERENCES 83 viii .3 Operational Efficiency 6.1 Motives of Mergers and Acquisitions in steel industry 6.2.3 Margin picture & raw material self-sufficiency 6.Mittal 6.2 Accounting profit comparison 6.CHAPTER 6: RESULTS AND ANALYSIS 6.4 Human Resource and Cultural Issues 6.4 Comparison of Tata.5 Factors driving steel industry into consolidation Price paid for the acquisition 6.2 Swot analysis: 6.

EU. America. Asia & Worldwide Figure 23: Expected share of top 5 steel producers Figure 24: Cost of production country wise for Hot rolled coil (USD) Figure 25: Prediction of Future Crude Steel consumption Figure 26: Graph showing relation between Consolidated Industries and ROCE 6 21 23 37 43 44 44 45 48 49 51 51 53 53 54 62 63 67 69 72 73 75 75 77 77 78 ix . 2006 . 2007) Figure17: Price chart of Arcelor Mittal at NYSE from (Aug 2005 –Aug 2007) Figure 18: Graph showing world crude steel production and iron ore price trend Figure 19: Iron ore mine assets of Arcelor Mittal Figure 20: Concentration amongst supplier Figure 21: Graph showing number of independent automotive manufacturers Figure 22: Shares of Top five players in N. marketing and manufacturing synergies of Arcelor-Mittal Figure 8: Raw material self sufficiency and internal distribution centres Figure 9: Product Mix of Corus for 2005 Figure 10: Holding company format of Corus Figure 11: Tata Corus Combined steel production Figure 12: Proforma Combination (figures as per FY 2005) Figure 13: Global Presence and customer reach of Tata-Corus Figure 14: Combined markets of Tata-Corus Figure 15: Cultural fit of Tata-Corus Figure 16: Price chart of Tata Steel at BSE from (28th Aug.LIST OF FIGURES Figure1: Types of takeover Figure 2: Year wise world steel output in form of graph Figure 3: Country wise steel output in 2006 Figure 4: Product Portfolio of Mittal Steel based on 2004 Figure 5: Geographical breakdown of 2006 production Figure 6: Shipments by products in 2006 Figure 7: Purchasing.24th Aug. China.

LIST OF TABLES Table1: Definitions of various performance measurement ratios Table 2: List of companies privatised Table 3: Year wise world steel production Table 4: Major steel companies around the world on the basis of output Table5: Major Mergers and Acquisitions in Steel Industry Table 6: Mittal Steel‟s Acquisitions prior to Arcelor Table 7: Markets of Mittal Steel Table 8: Mittal Steel and Arcelor Pro forma 2005 Key Financials Table 9: Major Production Facilities of Corus Table 10: Long term Arrangement of funds by the Tata Steel Board Table 11: Destination of Iron ore consumption 17 20 21 24 25 35 36 42 47 50 69 x .

high level of fragmentation and the cyclicality of the industry. Hence. Since this topic is very broad it has been broken into several research questions: 1 . M&A in steel industry has gone unnoticed by researchers. Therefore. Therefore.CHAPTER 1: Introduction 1. Top 15 players in the steel industry contribute to just 33 percent of the total output. and that can have several impacts on the steel firms and the steel industry as whole. This threat from the cyclicality of the industry has created considerable pressure on all the industry participants to merge with or acquire other participants in order to reduce the cyclicality of the industry and earn sustainable earnings. till then. This was because the steel industry is key industry to the other industries. Soon after the 1980s. there wasn‟t much scope for M&A in the industry. and for this reason it had been under strict government control until the 1980s. many Mergers and Acquisitions have been noticed in the industry at both the top and bottom level. According to the author. the government realised that privatisation was required for the efficiency and competitive position of the industry. participants faced the challenges of overcapacity. 1980-2000 saw the era of privatisation. this study focuses on mergers and acquisitions in the steel industry.1 Background: Although Mergers and Acquisitions (M&A) has been widely researched topic in several businesses and industries. Steel Industry has huge potential for consolidation. Most of the steel mills were partly or wholly owned by the state. Even after the era of privatisation began in the industry. The main purpose of this study is to find out the drivers and impact of recent mergers and acquisitions in the steel industry. Since 2000. and the remaining 67 percent is contributed by many integrated and small steel mill firms.

This Analysis will be done based on the study of Mergers and acquisitions theory in chapter 2. The significance of the former merger is that the largest steel company acquired the second largest steel producer of the world. Does the acquiring steel firm gain from Mergers and Acquisitions activity? 3. to create a size three times its nearest competitor. 2 . Each case study has been studied in sufficient depth to comment on the objectives of the research. with respect to Human Resource and Cultural aspects of Merger & Acquisitions? 6. What are the critical factors that are driving steel industry into Mergers and Acquisitions? 7. What are the main payment methods used by these firms for Mergers and Acquisitions? 4. What are the critical issues that steel companies will be dealing with. The significance of the Tata Corus deal is that the 55th largest company took over the 8th largest company to become the 5th largest company in the world. In the forthcoming study. Will these Mergers &Acquisitions help in improving the returns on capital employed (ROCE) of the steel industry? In this study. global steel industry in chapter 3 and Case studies in chapter 5. Are the acquiring firms paying abnormally in order to rule out other competitive buyers? 5. each research question will be explained in detail.1. What are the main motives that drive steel firms into Mergers & Acquisitions? 2. the author is focusing on two recent major acquisitions of steel companies: Arcelor by Mittal and Corus by Tata as case studies.

Consolidation has recently been used as a major strategy in the steel industry and therefore. These measurements are important because they help in deciding whether the merger or acquisition has been successful or not. Arcelor Mittal and Tata-Corus. investors return. Analysis strategies for the results and discussion were important to mention in this chapter because they state the method in which analysis of the literature and case studies would be carried out. Both qualitative and quantitative data collection method has been discussed and has been used in this study. Chapter 3 discusses the brief history. operational efficiency and technological progressiveness have been discussed as the main post. diversification.e. The different methods of financing have also been discussed. managerial incentives. This section also discusses why the case study method has been chosen and reasons for choosing particular companies. markets and product portfolio of both acquiring and acquired companies have been studied. agency problems and Hubris have been discussed as the main causes for mergers and acquisitions.2 Overview of the Dissertation: This dissertation consists of six additional chapters.merger performance evaluation criteria. and payment method used by the acquiring firm has also been studied.1. Information regarding Human resource and cultural factors has been examined as well. growth and economic trends of the steel industry. Industry size. Accounting return. taxation issues. Background. Mergers and Acquisitions theory in Chapter 2 covers definition and types of mergers and acquisitions. details of the major Mergers and Acquisitions in the industry have been provided. geographic distribution and details of major global steel firms have also been mentioned. and how conclusions would be drawn. Market power. Chapter 5 includes cases of the two large acquisitions that have been made in the history of steel industry i. This chapter has been used to give the reader an idea about the scenario in the steel industry before getting into the complexity of the topic. Lastly all the 3 . Structure of the deal. effective synergies. Chapter 4 shows the research methods used for the study.

Main payment methods used. It was also found that mergers and acquisitions have a positive impact on steel firms as well as on the steel industry as a whole. the impact of consolidation in steel industry on return on capital employed has been commented on. concentration amongst suppliers and better buying power of customers were the most important drivers behind mergers and acquisitions in the steel industry. Furthermore. Each company has been provided with the information depending on the availability. the motives behind mergers and acquisitions have been and operational synergies expected by the acquiring company and research analysts have been placed. Furthermore. HR and cultural issue to be faced and pricing factors have been explained in this chapter. Chapter 7 discusses the limitation and conclusion of this study. As the Mergers and Acquisitions grow in the industry higher return on capital employed can be seen in the future. SWOT analysis and post acquisitions performance measurement has been performed in this chapter to get an idea of benefits that steel firms derive from mergers and acquisitions. The case studies have been designed in such a way that the research questions can be solved and analysed. This section also includes the limitations of this study. Future research recommendations of this study have been mentioned as well. Finally. 4 . In Chapter 6 findings of the study are analysed and discussed. In this chapter analysis has been done on the basis of the analysis strategies mentioned in chapter 4. The results will also serve the future structure of steel industry. It was found that the cyclicality of the industry.

consolidation and takeovers are words often used interchangeably but they have different meanings.S (1995) explained that a takeover is similar to an acquisition and implies that the acquirer is larger than the acquired.1 Definition: Mergers. P. Takeover happens with obtaining of the stock or assets of another company.CHAPTER 2: Mergers and Acquisition Theory 2. [Ross. [Ross. acquisitions. PP-797] A takeover refers to the transfer of control of firm from one to another. But when the acquired is bigger than the acquirer then it is called „reverse takeover‟. Sundrasanam. In acquisition of assets one firm acquires another firm by buying all of its assets. The acquisition of stock may start with a private offer from the management of one firm to another. proxy contests and going private transactions. He further described that the dominating firm retains its identity and all the assets of dominating company is acquired by it. This method may be costly because of the additional transferring costs of assets. PP-799] 5 . Depamphilis. Westerfield and Jaffe (2005) defined a merger as the absorption of one firm by another. Takeover can occur by acquisition. 2005. Ross. 2005. Sometimes tender offer or public offer to buy shares of a target firm is made directly to the shareholders of the target firm. (2005) explained that an acquisition occurs when a company takes controlling stake or selected assets of the acquired company and the latter becomes the subsidiary of the acquirer.

Horizontal mergers may tend towards monopoly 6 . The shares of the firm are delisted from the stock exchanges and can no longer be transacted in the open market.Figure1: Types of takeover Takeover Acquisition Proxy contest Going private Merger or Consolidation Acquisition Of stock Acquisition of assets Source: Ross. vertical and conglomerate mergers. PP-799] 2. PP-799] In going private all the shares of the firm are acquired by the internal management or the group of investors. A proxy gives the proxy holder the power to vote on all matters of shareholders. Arnold. Westerfield and Jaffe (2005). Westerfield and Jaffe (2005). westerfield & Jaffe (2005) Takeovers can also occur with proxy contests.2 Types of Mergers and Acquisitions: From an economic perspective mergers may be classified as horizontal. [Ross. This occurs when a group of shareholders vote a new director in the company in order to gain controlling seat in the board of directors. In a horizontal merger two companies are engaged in the same industry or similar lines of activity. [Ross. 2002 added that motives of horizontal merger are to achieve economies of scale and market power resulting from reduction in competition. For example: Oracle and Peoplesoft in business application software and oil giants such as Exxon and Mobil.

These motivations are follows: 2. He also explained that this kind of mergers can also be done for product line extension or geographic market extension of the firm. 2. For example. where both had different business areas. 2002 stated that market power is one of the most important forces driving mergers and acquisitions. communication. A conglomerate merger is one in which a combined company is the result of the merger of two unrelated businesses.1. US steel acquired Marathon oil in 1980‟s.which may attract attention of the government and regulatory authorities. In this section we will discuss the most important and common motivations of the in greater details.3 Causes of Corporate Acquisitions: There is numerous number of theories on the causes or motives of the corporate acquisitions. Arnold. He also stated that if a firm has large share of market it gets the ability to exercise some degree of control over the price. in a particular line of business.” For example. contracting and coordination of production as well increase certainty of supply of raw materials and finished goods. [Arnold. in basic steel industry. backward integration can include mining of iron ore or coal for raw material supply and cost reduction. 2002 PP-870 & Depamphilis. On the other hand. Market Power views and growth: Arnold. Arnold. 2002 mentioned that vertical integration reduces costs of advertising. metal distribution to the consumer includes forward integration. This may also be 7 .3. Firms in a concentrated market may agree amongst themselves to charge the customers a higher price. 2002 explained that conglomerate mergers happen to reduce risk through diversification or by the opportunity of cost reduction and improved efficiency. 2005 PP-6] Emery et al (2004) explains “a vertical merger involves integrating forward towards consumer or backward toward the source of supply.

2004 stated that firms can grow more quickly and cheaply by acquiring firms than through internal development. 2002 also stated that a conglomerate can also pressurize its suppliers for price and credit period. [Depamphilis.3. Emery et al. Depamphilis. especially USA. 2.2. a firm making loss in one year can be adjusted from the profits earned in the future. If a transaction is not tax free. PP-875]. But it becomes quicker by acquiring the firm which has already developed infrastructure. On the other hand a bigger and merged business may also insist its customers to purchase product from other division as well. Bigger business is also perceived to be more reliable. Even if the firm does not have the entire market. PP-24] Arnold. and thus attracts customers [Arnold. In most of the cases firms are bought at a price lesser than the cost of developing them. It might also be beneficial for the suppliers because they are getting volume business. 2002 highlighted that in most of the countries. Tax Argument: Arnold. then seller would charge higher purchase price for the tax liability imposed from the transaction. mergers in the airline industry in late 1980s resulted in higher ticket prices. 2002. which makes it cheaper way to grow [Emery et al. PP-795]. 2004.under watch out of regulatory authorities. 8 . A properly structured transaction may help target shareholders to defer any capital gain from the transaction. 2005. 2005 added to tax benefits stating that the taxable nature of the transaction is also the key determinant for the purchase price. He added to that saying that past losses of the acquired company can also be adjusted from the current profits of the acquirer and hence the company is saved from paying taxes. reduction in competitors makes price control even easier. In order to set up new facilities or establish new distribution systems it takes time. For example.

This 9 . 2005 suggested that there are two types of operating and financial synergies. G further explained synergy as 2 + 2 = 5 effect. Economies of scale refer to reduction of average cost of the company with allocation of fixed costs over increased volume. PP-794]. Arnold. “Economies of scope refer to using a specific set of skills or an asset currently employed in producing a specific product or service to produce related products or services. 2004 added another point by stating that if a firm has large cash flow and that cash is distributed amongst the shareholders. stating that the net cash flow of combined unit is more than the sum of the units separately.3.3. Financial Synergies refers to the impact of merger on the cost of capital of the acquiring firm or the combined firm. Efficient and effective Synergies: Synergy is based on the notion that merger of two companies can create greater value than when operated separately. If the firms merged have unrelated cash flow i. Uniliver ltd uses its marketing skills for a range of personal care as well as food and tea. leads to realizing financial economies of scale from lower interest rates or other securities costs [Depamphilis. The merged firms help in eliminating duplicate facilities. 2004. 18]. Depamphilis. PP-18] For Example. operations or departments. But if the company acquires another company with that cash then shareholders have to pay no tax. then they will have to pay taxes(unless shares repurchased are at a price lower than the shareholders purchase price). In order to achieve operating efficiencies when companies are likely to be in same line of business (horizontal merger) or are involved in forward or backward integration in a particular line of business [Emery.e. 2. Depamphilis. one has excess cash and the other who does not have sufficient cash to fund investments. (2005) also stated that operating synergy is improved by economies of scale or economics of scope.” [Depamphilis.Emery et al. 2005. 2005.

So. [Arnold. PP880] Sudarsanam (1995) pointed out that managers also have job security motive. PP-17] 2. Managers may acquire a firm whose cash flow is positively correlated thereby reducing overall variability of the combined entity‟s cash flow. 1987]. Diversification: Emery et al.3. 1995. managers act as agents for the shareholder in such a situation. PP-15] Arnold (2002) pointed out that the management team of the acquiring firm gets the advantage of having higher responsibility leading to higher authority. Depamphilis.4. [Sudarsanam. assuming that firm‟s size may reduce this threat. [Sudarsanam.” The primary reason for 10 . 1995.5. 2. It is not necessary that the managers are the owners of the company. Managers may also undertake acquisition to avoid being taken over by another firm. there are large corporations with diffusion of ownerships. status. power and remuneration. 2002. Managers may lack shareholders‟ interest in order to promote their own interest. Firm‟s bankruptcy may lead the managers to wind up the firm and consequently loose their job. Managerial Incentives In the modern business scenario. This overall variability minimizes that probability of financial distress or because combining activities results in cost savings or may also increase the volume with the same amount of input [Chiplin et al. 2004 states that diversification is one of the most important motives behind a conglomerate merger. 2005 defined diversification as a “strategy of buying firms outside a company‟s primary line of business. Acquisition decisions may also be taken by the managers to satisfy their own objectives. The reason for this is that managers are given opportunity to deploy their underused managerial talents and skills. This may encourage managers to pay excessive bid premium or enter into hostile bid with high transaction costs.3.

Agency problems: Depamphilis.diversification is for firms to expand their product line and markets so that they can have high growth [Depamphilis.3. Depamphilis. and sell it in different or less risky markets.7. This strategy is also used when the present product of the firm is in decline phase and the firm wants to shift their core business. This occurs specially during the period when companies have had a few good years of growth and managers are very pleased with themselves. Since the cost of mismanagement is spread amongst large number of shareholders. unfamiliar to the present product. This over-optimism of evaluating 11 . 2005 explains that agency problems occur due to the differences in the interest of managers and shareholders.6. 2005. Depamphilis. 1993]. Arnold. 2005 (PP-22) states that managers believe that their own evaluation of a target firm is superior to the market‟s evaluation. Hubris: One of the other important motives or causes of acquisitions is hubris. He also stated that this happens when managers own a very small number of company‟s share. G. He also included that reduced volatility reduces the position of the shareholders. 2005 added that the acquirer company may attempt to achieve a higher growth rate by developing and acquiring new products. They obtain a reduction in risk without a decrease in return. PP-20]. managers get inclined towards their job security and lavish lifestyle rather than shareholders value.3. This theory leads to mergers to correct the situation between the managers and owner‟s interest. 2. 2. 2002 defined hubris as a means of weaning self confidence or arrogance. 2002 explains that cash flow from a wide variety of businesses also reduces volatility of income stream. Arnold. Mostly these companies become the target of other efficient companies and the shareholder support the merger to increase their own welfare [Berkovitch et al.

Cash Acquisition: In cash acquisition the shareholders of the target company gets cash for the value of their shares.4 Financing an acquisition: “If a company takes debt to make an acquisition and the deal goes sour.merger activities leads to error in the evaluation and they tend to a pay higher price for the target company.Unwise acquisitions abound in the market. 2003]. investment bankers and law firm advice the bidder for the acquisition. Bidder may avail cash by public issue. as exchange of stock or with the combination of both stock and cash. Berkovitch et al. The bidder has to select a method that is agreed by both the target‟s shareholders and bidder itself [Mclaney. receipt of cash may be charged as capital gains tax and thus shareholders may not welcome a cash acquisition. it runs into financial trouble and the executives are replaced. loan stock for cash or other short term or long term borrowing [Mclaney. On the other hand.” ----Michael H. 2003]. Lubatkin and Peter J. 2001. 2005 also suggested that senior managers may become very competitive and their self importance and desire to not loose may lead to excess payment of the auctioned company. 1993 state that hubris activity leads to no gains from the acquisition because managers commit errors in estimating the gains. Depamphilis. But if an equity-backed deal goes wrong. 12 . PP-31] Acquisitions are mainly financed through cash purchase. 2. There are various methods through which bidder can finance the acquisition. Target shareholders may not wish to hold the bidders‟ share because it may incur cost and effort to turn it into cash. Lane Cited by [Hitt et al. the stock price simply underperforms and nobody can be sure why? One thing is certain. Consultants. Sometimes investment bankers themselves arrange and help in raising funds required for the acquisition.

He also stated that highly leveraged companies have very little opportunity to waste resources on unprofitable ventures. It is also cost for the bidder because it is loosing opportunity of issuing those shares for cash [Mclaney. PP-382]. Acquisitions can also be paid using both stock and cash. which consequently affects the cash flow of the company and thus increases the chances of bankruptcy. management control issues. Maloney et al. Grossman and hart (1982) as cited by (Maloney et al. There are other several considerations as mentioned by Hitt et al (2001) for the selection of medium of financing. 13 . it can be combination of debt and equity. further pointed out that debt helps in controlling the agency costs. This happened because of the high interest burden of the debt and their principal instalment burden.Stock method: In payment through stock method the shareholders of the target become the shareholders of the bidder. 2003. type of the deal and market conditions. The reason must be the high costs of debt may lead to bankruptcy of the firm in long run. accounting treatment. Before making debt and equity decision it is important that bidder should check the dangers and benefits of leverage in the firm. (1993). (2001) 83 percent of the successful acquisitions had low to moderate leverage while 92 percent of the unsuccessful acquisitions had high or extraordinary leverage. 1993) showed that high leverage encourages managers to work hard and bond their promise to pay out future cash flows. Bidder has benefit adopting stock method because of not raising cash for acquisitions and thus it doesn‟t have to increase leverage and bear the burden of interest payment. In other words. “Total leverage = Total debt/ (Total Debt + Market Value of equity + Preferred stock)” [Jandik. The proportion of debt and equity depends upon the size of deal. On the other hand. 2005] According to the study conducted by Hitt et al. financial returns to the shareholders and the existence of slack or unused financial resources. These include tax considerations.

PP-193] 2. This shows that there is role of HRM to adjust according to the degree of localization of market economic type in HRM practices. It is generally warrant convertible into common stock as per the maturity period agreed upon. This is because they are willing to take higher risk. Aguilera (2004) also noticed that in many acquisitions internally HRM practices were altered. 2005. PP-193] Venture capital firms sometimes also play very important role in acquisitions funding and business start-ups. Some of the practices like pay for performance systems are mostly common at a broader level. Many researchers in the past have discussed about the effect of an acquisition on Human resource policies and culture.The other kind of financing mentioned by Depamphilis (2005) is mezzanine financing. [Depamphilis. [Depamphilis. It is very difficult to receive funds from VC firms. 2005. The only advantage of VC firms is that they are sometimes willing to lend when traditional sources like banks. This kind of financing gets priority at the time of liquidation of the company over common stockholders. Hunt et al (1992) states that there is much more to HRM than just personal issues like salaries. That is. Winning of 14 . These firms demand a large equity stake in the firm in exchange of the low price per share.5 Human Resource and Cultural factors: In mergers and acquisitions retention and integration of Human Resource is prime importance for successful Merger or acquisition. It is generally unsecured debt with fixed coupon rate and maturity period. insurance companies and pension funds are not. Aguilera (2004) explained that there are many variations in the policies of the Human Resource not only globally but also within the country. the processes of social interactions over the time between the acquiring and the acquired company employees in order to see the long term interventions. benefits and pensions which most of the HRM managers tends to neglect. But there might some minor differences that HRM will have to manage.

These basic assumptions also exist outside and inside the firm. rituals. He describes that as soon as individual enter any organization they socialise in their national culture and frequently socialise in their professional culture which includes academic culture. government culture. there should be socially constructed processes in the organization for the integration and solving the problems of individual‟s dilemmas that are formed with the acquisitions. Mismatch in of values. In other words. values. language. nature of the economy. values. Krogh et al (1994) mentioned that there can be three types of cultural difference those are organizational. ways of doing business. Lees (2003) explained that culture concept is related to myths. engineering culture. beliefs or priorities or assumptions on each side of two merged companies then these effects the performance of the combined entity. He also explained that in a global corporate acquisition there can be difference in law. political context. law. and so on.hearts and minds of the employee is the immediate necessity of any acquisition. 15 . customs and practices. He further mentioned that there is cultural risk to integration of merger or acquisition. There can be many other issues which may cause trouble for the acquiring company. history of the country. ways of thinking and values. customs and practice. socio cultural background. language. management styles. legal. Lack of cultural fit may lead to acquisition failure and this happens mostly due to the regime imposed by the acquiring firm on the acquired firm. These are either imposed by law or societal expectations. business culture. heritage. professional and national culture. Every country has its beliefs. Krogh et al (1994) pointed that there is always cultural difference between an acquiring firm and acquired firm. attitudes. He further suggests that a firm should learn about a target firm‟s organizational culture before acquisitions and prepare proper strategies to tackle cultural issue which are likely to happen. legal culture and medical culture. symbolism. religion. belief.

6. 1996 as cited by Becher et al. Normally Earnings before tax is used for calculating ROE but Pilloff. whereas on the other hand Return on Equity (ROE) measures both. Net Profit Margin (NPM). Where ROCE = Earnings before tax / Capital Employed 16 . Operating Profit Margin (OPM). how well assets have been managed to generate profits as well as how assets have been financed. Return on Equity (ROE) and Return on Assets (ROA). accounting returns and investor returns. 1988 explained that although there are numerous organizational performance measures but financial measures is the most popular method. 2005 emphasised on Return on assets (ROA) stating that it helps in judging how well the assets have been managed to generate profits but does not consider how those have been financed.1 Accounting Return: Accounting Return is generally measured in terms of Gross profit margin (GPM). Fowler & Schmidt. Cochran and wood (1984) as cited by Fowler & Schmidt (1988) states that financial performance measurement falls in two categories i.2. Fowler et al.6 Post merger Performance Evaluation criteria: After the acquisition. 2. 1990 recommended Return on Capital Employed (ROCE) and Return to Shareholders (RSH). it is important that the acquiring company utilizes the synergetic advantages properly improving the overall performance of the firm. 2005 used operating income before provisions to calculate and found no change in post merger ROE. But many authors defined these terminologies in their own ways.e. Becher et al.

Some of the other ratios mentioned by Cooperman et al.6. 1989 to measure financial performance of the firm have been shown in the table below. Operational efficiency also includes managerial synergy where bidding and target firm work together towards the achievement of common goals. 17 . Capital Employed = Total Assets – Current Liabilities RSH = (Firm‟s Annual Dividend + Annual per share increase or decrease in the average price of the stock) / Previous years average share price. 1989 2. Table1: Definitions of various performance measurement ratios.And. Performance Ratios Return on Equity Return on Assets (ROA) Net Profit Margin (NPM) Asset Turnover (ATO) Debt Equity Ratio Gross Profit Margin (GPM) Operating Profit Margin (OPM) Fixed Asset Turnover (FAT) Current Asset Turnover Definitions Earnings before tax (EBT) / Equity EBT/Assets EBT/ Total Sales Revenue/Assets Total Debt/ Equity Gross Profit/ Total Sales Operating Profit / Total Sales Total Sales/Fixed Assets Total Sales/Current Assets Source: Cooperman et al.2 Operational efficiency (cost advantage): Operational efficiency includes operational synergy within the combined firm.

joint R&D initiatives and programs of the combined entity will help improve the technological performance leading to better scale and scope effects. 2000 are operating income to operating revenue (operating margin) and net income to operating revenue (net margin). In horizontal M&A. For conglomerate or unrelated mergers. it is very difficult to find the technological synergies because these mergers mostly focus on financial synergies. 2002 argues that increasing control over the company in M & A environment cannot be the only aim of the company. For vertical M&A. rather it should look for new opportunities to grow.6. Hagedoorn & Duysters. He further stated that the increased size of the firm is positively related to the long term technological performance.Some of the financial measures may be used to measure firm‟s efficiency performance. the integration of downstream and upstream helps to identify the new technological requirements. The post merger performance is compared with the pre merger performance in order to determine the operational efficiency of the combined firm. Cost reduction by integration can be reinvested in the new technology programs. 18 . Therefore. 2002 also stated that technological performance of the M&A activity also depends on the type of the acquisition. Some of these mentioned by Sun & Tang. in order to improve performance of the combined company and to grow it has to take initiative towards technological progress of the combined entity.3 Technological Progressiveness: Hagedoorn & Duysters. 2.

automobiles and capital goods [Bhaskaran. This process was very expensive method of extraction was difficult [Bhaskaran. 3. Further down in 1952. 2006]. Voest-Alpine introduced „basic oxygen furnace‟. After the invention of this process steel extraction became less expensive and started being used for construction. In 1855 the blast furnace process was invented by Henry Bessemer at his steel plant in England. This led to many new investments in big integrated steel plants. 1980s to 2000 was the era of re-privatisation of the steel 19 . This process was known as „cementation process‟. During 1950-1970.1 Iron and steel making compliance history: In ancient times.2 Growth of the industry: Since 19th century to early 20th centuries major steel demand was from munitions and was controlled by wealthy steel dynasties with political influence. This process was a new way to produce steel and first less expensive industrial process for mass production. This was a much more modified version of steel production process. During 1960-1990 was the period of nationalization and increase in state control because of the excess capacity and inefficiency. Till 1980s most of the steel plants were state owned either partly or wholly. steel industry was highly subsidized. This so because the process used for manufacturing was work intensive and time consuming.CHAPTER 3: The Global Steel Industry 3. steel was only used for very high value products like swords and precision instruments because it was produced in small quantities because of production in very small quantities. This process is being used by all modern steelworks. 2006]. exempted and received many other favours from the national government. In this period steel was manufactured by reverse process and adding carbon to the carbon free wrought iron.

20 . Subsidies and tariffs were tools that government used in order to control and protect the domestic steel industry. 2007].industry. This was done in order to improve the efficiency and competitive position of the steel companies and to fund economic reforms and improve the financial scenario. Some of them have been included in the table below [Reynolds. in March 2001. Many steel companies were privatised. 2006]. Whereas Chinese government introduced number of subsidies in order to boost its steel industry. For example. Table 2: List of companies privatised Company British Steel SSAB (Sweden) Ilva (Italy) Usinor-sacilor (France) SN (Portugal) Voestalpine (Austria) Aceralia (Spain) Privatisation Year 1987 1989 1992-1995 1995 1995-1996 1995-2003 1997 Source: Reynolds. US government imposed an import tariff of 30 percent in order to protect its domestic steel industry. This consequently lifted global steel industry to a new height [Rasheeda. 2006 Even After re-privatisation steel industry was controlled by government.

142 1.worldsteel. 2006 (www.069 970 904 850 848 789 777 799 755 Years 1995 1990 1985 1980 1975 1970 1965 1960 1955 1950 World 756 775 721 717 644 595 456 347 270 189 Source: International Iron and Steel Institute.Table 3: Year wise world steel production Years 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 World 1.244 Figure 2: Year wise world steel output in form of graph Source: International Iron and Steel 21 . 2006 (www.

steel industry grew from 189 million metric tonnes to 684 million metric tonnes in just 25 years. Another difficult phase for the steel industry was between 1997 to 2001 due to financial crisis in Asia and severe recession in the global economy. 22 . Even sectors like housing. The steel industry has always been a cyclical business. This led to the imbalance between demand and supply. Many of the steel companies in Asia pacific regions have added capacity in this boom period. This led reduction in demand from these major steel consuming countries as compared to the supply. Steel prices went down 20 year low in this period and new capacities became uneconomical. 2006]. This happened due to increase in demand from China and other South Asian countries like India. 1950-1975 has been noticed as uptrend and 1975-2000 as downtrend in demand. As shown in the figure 2. 2006] Steel industry again showed a sign of recovery in 2002. In figure 2. steel industry grew from just 28 million tons (MT) to 789 MT as shown in the Table 3 above. The highest growth has been noticed in the period between 1950 and 1975 as shown in figure 2. cycle of 25 years can be noticed in the steel industry. American and Japanese economy stabilised which led to the flattening of demand. the European. In this period capacity utilisation was fluctuating between 70 to 80 percent. construction and automobiles showed recovery [Bhaskaran. 2007]. demand from the developing countries started increasing but was not sufficient to meet the supply [Rasheeda. Most of the steel companies in the period of 2002 to 2006 have shown recovery and growth in profits. Uptrend again started in the industry in year 2002 and in just span of 4 years capacity increased by about 27. as these countries were growing and focused on infrastructure development.3 Economic trends During the 20th century. In order to fight this recession.5 percent to 1244 in 2006. During this time. But in 1975. [Bhaskaran.3. steel industry was ignited with mergers and acquisitions since 1997.

In 2006 China produced 34 percent of the world steel production. During 2005. China also imported 43 million metric tonnes of steel in that]. The other top producing countries of 2006 were Japan with 116. an increase of 25 percent as compared to last year. Figure 3: Country wise steel output in 2006 Country-wise Steel production in 2006 450 400 350 300 250 200 150 100 50 0 countrie s China Japan United States Russia South Korea Germany India Ukraine Italy Brazil Turkey Taiwan. 2006 (www.6 million tonnes [International Iron and Steel Institute.2 million tonnes and US with 98. China produced approximately 350 million metric 23 .worldsteel.worldsteel. China emerged as the biggest producer in the world with the production of 220 million metric tonnes. www. China France Spain Mexico Canada United Kingdom Belgium Source: International Iron and Steel Institute.4 Industry size and geographic distribution In 2003.

org) 24 .worldsteel. Table 4: Major steel companies around the world on the basis of output Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Mmt (2005) Company 63.2 Corus Group 17.1 Tangshan 13.0 Nippon Steel 30.5 Riva 16.3.5 ThyssenKrupp1 16. 2006 (www.6 Severstal Source: International Iron and Steel Institute.3 United States Steel 18.5 POSCO 29.0 Mittal Steel 46.7 Arcelor 32.7 Baosteel 19.9 Evraz 13.9 JFE 22.4 Nucor 18.5 Major Global steel companies: The table 4 shown below shows all the major companies of steel in the world as per the figure of 2005.7 Gerdau 13.

2001] In the span of just 15 years it became the largest steel producer in the world after the acquisition of ISG for $4. Mergers and Acquisitions strategy was one of the surviving strategies for some of the large companies. Some of the major steel industry acquisitions data has been shown in the Table given below. which started its business in Indonesia in 1976. had bought 8 companies around the world including Trinidad. This excess capacity had put too much pressure on the steel companies globally. But since the late 1990‟s the rise in consolidation has been noticed in the steel industry. M&A helps the companies to reduce costs and getting better price from their customers. Ireland and USA. Germany.3.6 Consolidation as a strategy in the global steel industry Steel industry has had its worst time in the 1990s. Mexico. It had no global player during this time [Sinha. Booming Chinese economy lead China to become leading consumer as well as producer of steel and consequently booming the steel industry business cycle [Rasheeda. During this period steel industry was highly fragmented and competitive.8 billion in 2004. [Ghoshal et al. There was capacity mismatch and consequently the prices reached the lowest ever. 2006]. Table5: Major Mergers and Acquisitions in Steel Industry Year 1997 1998 Companies Consolidated Krupp AG + Thyssen Inland steel company (USA) + Ispat International NV 1999 British steel (UK) + Koninklijke Hoogovens (Netherlands) Company Formed ThyssenKrupp Ispat Inland Inc (Subsidiary of Ispat International NV) Corus 25 . During 1990s Mittal steel. 2006 (A)].

This combination of world‟s largest and second largest steel producers would contribute towards 10 percent of the world steel output (approximately 110 million tonnes). [Business standard. 2007] 26 .2001 Arbed (Luxembourg) + Usinor (France) + Aceralia (Spain) Arcelor 2002 LTV (US) + International Steel Group (US) International Steel Group (US) 2003 2003 Kawaswaki Steel (Japan) + NKK Corp (Japan) International Steel Group (US) + Bethelem Steel (US) JFE Steel International Steel Group 2004 Ispat International NV + LNM Holdings (Netherlands) Mittal Steel company NV 2004 Mittal Steel Company NV (Netherlands) + International Steel Group (US) Mittal Steel Company NV (Mittal Steel) Arcelor Mittal Steel Arcelor-Mittal Tata Corus 2005 2005 2006 2007 Dofasco(US) + Arcelor Kryvorizhstal (Ukraine) + Mittal Steel Mittal Steel + Arcelor Tata Steel + Corus (UK) Source: Compiled by Author from Rasheeda. 2006 & The Hindu Business line. 2006 In today‟s scenario.7 billion.1 billion. The biggest step towards consolidation in the history of steel industry was taken by Mittal steel‟s acquisition of its biggest competitor Arcelor for $33. The other recent major acquisition has been made by Tata‟s buying CORUS for $12. there has been tremendous rise in demand and consolidation has been noticed. 2007 & Business Standard.

Histories. 27 . Each Strategy has its merits and demerits depending on three conditions [Yin. 4. The type of research question The control an investigator has over actual behavioral events The focus on contemporary as opposed to past phenomenon Amongst all the above points Research Question is the most important. There are several methods of doing research on management issues. To identify the main payment methods used by these firms for mergers and acquisitions.CHAPTER 4: Research Methodology This chapter describes the research methods used for the study. Experiments and case studies. To investigate whether steel companies are paying appropriate price for the acquisitions.1 Research question and objectives: The main purpose of this research is to find out the drivers and impact of recent mergers and acquisitions in steel industry on the acquiring firms and the steel industry as a whole. Research Objectives: Research objectives have been derived from the research questions and the objectives are: To indicate/ highlight the motives of steel companies behind Mergers & Acquisitions. 13]. 1. Questionnaires. Some of those include Surveys. To enquire if acquiring steel firm get benefits from the Mergers and Acquisitions activity. 2003. All the research questions have already been mentioned in chapter 1.

but that would have limited the depth of the study. Finally the process of analysis will be outlined.” Case studies rely on multiple sources of evidence. 2003. the boundaries between this phenomenon and real life context has to be studied. The main purpose of the study is to analyse the factors driving steel industry into Mergers and Acquisitions and determine how far mergers and acquisitions can reduce the cyclicality of steel industry. case study selection criteria and data collection methods will be discussed. To achieve this case study research has been adopted. Case study research method was adopted for in-depth analysis of the background and synergies of the firms involved in the mergers and acquisitions activity. To discuss whether Mergers and Acquisitions will help in improving the returns on capital employed (ROCE) of the steel industry.13 &14]. with respect to Human Resource and Cultural aspects of Merger & Acquisitions. It also covers logic of design. p. 4. 28 . data collection techniques and specific approaches to data analysis [Yin.To identify the issues that steel companies will be dealing with. theory of Mergers and acquisition of steel industry is the phenomenon and it has to be investigated with reference to the real life example or context. A questionnaire survey would have been appropriate in this case. In the following sections the theory related to case study. especially when the boundaries between phenomenon and context are not clearly evident. In this. To determine the critical factors driving steel industry into Mergers and Acquisitions.2 Case Study Methodology: Yin (2003) defined case study as “an empirical enquiry that investigates a contemporary phenomenon within its real-life context.

3 Company selection: Yin. p. 47 & 53]. Case studies may be further classified into: Exploratory.5]. An exploratory case study defines questions and hypothesis of a subsequent study or determines the feasibility of the desired research procedures.41. 2003.Case study includes single or multiple-case study selection criteria: Criticality of theory being tested Topical relevance to the case Feasibility and access 29 . Analytic conclusions will be more powerful in multiple cases. Single case study focuses on a single case only whereas multiple case studies focus on two or more cases within the common study. explanatory since drivers of mergers and acquisitions is the cause and mergers and acquisition is the effect and hence establishes cause-effect relationship. Moreover. In this research the approach to the case study will be both explanatory and descriptive. 1993 explains three important . In multiple case studies. Descriptive because it enables the study has to be within the research context. All the three methods can also be used while doing multiple case studies to provide better replication to the research question [Yin (1993). they require less resources and time than multiple case studies. Each approach has advantages and disadvantages. Descriptive and Explanatory case study. 4. each case should serve the purpose of the overall scope of study. p. Single cases represent the critical test of a significant theory. A descriptive case study describes a phenomenon within its context. This is more appropriate when unique. bearing on cause-effect relationships. typical or rare cases are studied. An explanatory case study focuses on data. since there is the possibility of direct replication and context of cases differ from each other [Yin.

which is considered to the largest deal of all time in the history of steel industry. [Neuman. 2006. The first case study is Mittal Steel‟s Acquisition of Arcelor in June. 1994] further explained that researchers choose from standardized set of data analysis techniques. Both the methods are commonly used in research and are chosen depending upon the study. The main purpose for search of quantitative data is to determine the quantity or extent of some phenomenon in form of numbers. Studies of different companies with different backgrounds were conducted. The other criteria‟s for selection of cases has been cross boarder acquisitions to focus on the HR and cultural issues. The second case study that will be used is Tata Corus deal. Both the companies are playing the role in consolidating the highly fragmented steel industry. It will be interesting to know about the company‟s motives and their roles in doing so. 30 . The largest steel producer acquired second largest steel producer of the world. It was observed that most of the mergers and acquisitions were ignited after 2002. 4. 1994] It is highly developed and builds on applied mathematics. hypothesis and variables. The importance of Tata Steel‟s acquisition of Corus is that world‟s 55th largest bought the 8th largest steel producer of the world to become 5th largest company in the world. size of the deal to indicate the effect of the merger or acquisition on the whole industry and relevant comparison of the case studies and the most importantly availability of data being little researched topic. Both the acquisitions are considered to be one of the biggest deals in the history of steel industry.For this particular project the history of steel industry was researched to find out the major Mergers and Acquisitions that have taken place as discussed in chapter 3.4 Data collection methods: There are two kinds of data collection methods: Quantitative research method and Qualitative research method. Neuman. [Neuman. It was also explored that the case study should contain sufficient information to fulfil the objectives of the research. hypothesis testing and statistical methods and there less variations across a range of different research projects. It makes use of statistics.

field notes or other written documents. Data will be collected from journals. 1997] One of the strengths of this kind of research is that one can begin analysing early in a research project. consisting of transcription of interviews or discussions. corporate websites. research can be based on both the qualitative and quantitative methods. On the other hand qualitative research tends to be unstructured and text based. This objective has been solved by analysing the combined motives of both the companies from the data available in the case study.5 Analysis Strategies: Results and Analysis is designed in such a way that purpose of each research objectives (that has been mentioned in the first section of this chapter) is served one by one. The 31 . consolidation in the industry. news. The first objective of the study is to indicate/ highlight the motives of steel companies behind Mergers & Acquisitions. In order to carry on this Quantitative data will include collection of statistics of steel industry. 4. In this research statistics and numerical data is rarely used. books and internet. A weakness that researchers find is that qualitative data analysis analyses small number of cases which can have more than one meaning and at the same time reduces the validity of the results [Neuman. Moreover. qualitative data will also be useful with the in-depth analysis of M&A in steel industry. study on financial accounts and stock prices of the companies and other M&A related data. With the use of both the methods qualitative research can provide detailed description along with numerical description that quantitative research provides. articles. case study and lastly in-depth analysis of mergers and acquisitions in steel industry. In Mergers and acquisitions. [Hussey & Hussey. The research will be started with the literature review and collection of information related overview of steel industry. even while collecting data. 1994]. 1994].The main disadvantage of this method is that data analysis could not be started until all the data has been collected and been condensed into numbers [Neuman.

The second objective is to enquire if steel companies are benefiting from Mergers and Acquisitions. The third objective is to identify the main medium of financing used for these mergers and acquisitions. However the above calculation will not be enough to comment on the pricing issue. Raw materials costs contribute to more than 40 percent of the total costs of the steel industry and being self sufficient is a big competitive edge.synergies that the companies and analysts are expecting from the combined company have been reviewed in depth and thoughts have been generated for this reason. The fourth objective is to investigate if steel companies are paying appropriate price for these mergers and acquisitions. In order to know the appropriate price paid for the acquisition. In order to get even better picture of the benefits. iron ore mining assets of TataCorus will be compared with Arcelor-Mittal. The fourth objective of the company is to identify the issues that steel companies will be dealing with. Conclusion will be drawn based on the comparison. post acquisition performance measurement criteria that will be discussed in literature review will be used in practice. In order to solve the purpose of this objective SWOT (Strength. with respect to Human Resource and Cultural aspects of Cross Boarder 32 . Enterprise value per ton (EV per ton) and Enterprise value per EBDIT (EV per EBDIT) values will be compared. Weaknesses. Those criteria‟s are stock price comparison. For this purpose case study has been studied and the main financing method used has been distinguished in both the cases. Opportunities and Threats) analysis will be performed for the combined firm in both the case studies so that both the flaws and benefits of the merger or acquisition can be analysed. Accounting profit comparison and operational efficiency. Enterprise value is total value of the company includes the equity and total debt of the company. So.

33 . The sixth and main objective of this research is to find out the critical factors driving Steel industry into mergers and acquisitions. cost structure and consumption & production structure.Merger & Acquisitions. This purpose will be served by studying the HR &cultural fit of both the organisations and generating the issues. This structure of the industry will determine the consolidation structure. The seventh and last objective of the research is to discuss whether M&A will reduce the cyclicality of the steel industry. This purpose will be solved by studying the global steel scenario as shown in Chapter 3 and case study in chapter 5 and analysing the difficulties or challenges that the steel companies have been facing in present scenario. In order to serve this purpose the structure of the steel industry will be studied all around the world and future structure will be predicted on the basis of the past trends and momentum of the M&A in steel industry. Thoughts will also be generated on how mergers and acquisitions can help in minimising those challenges. conclusion will be drawn thereafter. If these challenges can be minimised by mergers and acquisitions then those challenges are the determined factors which are driving steel industry in consolidation. Once the structure is determined steel industry will be positioned and compared with the other metal and mining industries in terms of consolidation and return on capital employed (ROCE).

which have been mentioned in Table 6 [Gayathri. India. 5. 2006 & Mathew. The first company that has been studied is Arcelor-Mittal. Over the years he bought many more government and privately owned steel enterprises.2 million tonnes of crude steel production.1. Its steel production accounted for 6 percent to the total steel market of the world.e.2 billion in 2005. whose combination created the largest steel company in the world. Synergies expected by combined company will be stated. Arcelor-Mittal Case study: 5. Then structure and payment method used by the deal will be discussed. first background of acquiring and acquired company will be studied in both the case study. This is very unusual combination. [Gayathri. and revenues of USD 31.1. we will use real life example of two companies to and the company selection criteria has already been studied in chapter 4. The significance of the second company i. He doubled its output and brought it in profit. In 1989 he made his first acquisition of government-owned steel firm at Trinidad and Tobago and turned it around. three times the size of its nearest competitor. Further.1 Background of Mittal Steel: Mittal Steel has been one of the most successful steel companies in the world with 49. 2006]. 2006] Mittal Steel was started by its Chairman and CEO Lakshmi Niwas Mittal. 2006 & Mathew. visualising the opportunity in the steel industry he moved on to Indonesia to set up a steel company and founded Ispat Indo. Tata-Corus is that the 55th largest company bought 8th largest company to become 5th largest company in the world. He started his career working in his father‟s Steel Company during his college times at Calcutta. In this chapter. 34 .CHAPTER 5: CASE STUDIES In this chapter. In 1976.

3 1.7 N/A Source: Compiled by Author from Gayathri. Mittal steel came into highlight when he merged its companies Ispat International and LNM Holdings and bought International steel group in 2005 for USD 4.5 billion.5 1 3. 2006. 2006 & Mittal Steel.9 3.2 N/A 20 7. 2006] 35 .9 N/A 0. exploiting economies of scale and selling higher-value products.4 1.4 2. [Gayathri. 2006 & Mathew. Mittal got access to US markets and thereby began getting orders from automobile and appliance industries for high margin metal sheets and hence improved company margins.8 2.Table 6: Mittal Steel’s Acquisitions prior to Arcelor Year Company and Country Capacity (million tonnes per annum) 1989 1992 1994 1995 1995 1998 1999 2001 2001 2003 2004 2004 2004 2005 2005 2005 Iron and Steel Company of Triniad & Tobago Sibalsa (Mexico) Sidbec-Dosco (Canada) Hanburger Stahlwerke (Germany) Karmet (Kazakhstan) Inland Steel Company (USA) Unimetal (France) ALFASID (Algeria) Sidex (Romania) Nova Hut (Czec Republic) Polski Huty Stali (Poland) BH Steel (Bosnia) Macedonian facilities from Balkan Steel ISG (USA) Kryvorizshtal (Ukraine) Stelco subsidiaries (Canada) 0.8 5. 2006 (A) Mittal succeeded largely from turning around state owned loss making firms by cutting costs.8 3. Sinha.

which was the second largest steel company with 4 percent of the world‟s steel market. This shows that Mittal steel had right mix of developed and developing markets [Sinha. Asian and African market. [Gayathri.8 billion (initial bid amount USD 2.1.8 billion) for this deal because of the presence of competitor Arcelor. Mittal Steel was market leader in Eastern and central Europe. Mittal bought Kryvorizshtal which produced approximately 20 percent Ukraine‟s Output. in January 2006 Mittal Steel completely changed the scenario of the Steel industry by placing bid for Arcelor. 36 . This might have prompted Mittal Steel to takeover Arcelor.2 Markets and Product Range of Mittal Steel Mittal Steel had strong presence in North America. 2006 & Mathew. 2006] 5. 2006 (B)].In 2005. Table 7: Markets of Mittal Steel Source: Mittal Steel. 2006 (C) The product portfolio of Mittal as shown in the Figure 4 consisted of mostly low value products. Moreover. Still it had very appropriate mix of long and flat products. Mittal paid USD 4.

6 percent stake. it acquired Dofasco. Arcelor acquired 38 percent stake in China‟s largest producer of sections and beams. the Canadian steel producer and hoped to establish its market in North America as well.Figure 4: Product Portfolio of Mittal Steel based on 2004 Source: Mittal Steel.1 billion. Aceralia of France and Usinor of Spain. it bought Poland‟s Lucchini Group and expanded its operations in Eastern Europe. for Rmb 2. Arcelor also used the strategy of growing through acquisitions. Arcelor had crude steel capacity of 43 million tonnes and was the second largest steel producer after Mittal steel.3 Background of Arcelor: Arcelor was formed in 2002 as a result of the merger of Arbed of Luxembourg. Arcelor had 84. The three companies joined together in order to create the largest Iron and Steel company in the world in 2002.39% shares with the public in the open market and the largest stakeholder being the state of Luxembourg with 5. In early 2006. 2006] As of 2005. 2006 (B) 5. [Gayathri. [Agarwal. 2006] In 2005. In February 2006. In 2005.1. which overtook Arcelor in 2004 as the largest producer 37 . Laiwu Steel Group (capacity of 7 million tonnes). Arcelor comprised 371 fully consolidated companies and 180 companies that were consolidated by distributing the equity.

of Steel in the World with capacity of 63 million tonnes. Arcelor had been declared the „Corporate jewels of Europe‟. That‟s why Mittal‟s bid for Arcelor created turmoil in some European countries (especially France and Luxembourg) [Gayathri, 2006].

5.1.4 Markets and Product range of Arcelor:

Arcelor had very rich product mix and 70 percent of the output consists of flat product and Stainless steels. These occupies higher price per tonne as compared to the normal steel product [Mathew, 2006]. The company was also market leader in high valued steel produced for European car makers, construction, household appliances, packaging and general industrial applications. [Gayathri, 2006]

Arcelor had a strong presence in the European Union, with 71% of its sales coming from the latter. This made it the market leader. North America, South America and rest of the world accounted for 9%, 11% and 9 % respectively [Agarwal, 2006]. Its plants were located mainly in Western Europe with two plants in France, one in Belgium and one in Spain [Gayathri, 2006].

5.1.5 Hostile Takeover of Arcelor: On 27th January, 2006 Lakshmi Nivas Mittal, the founder and chairman of Mittal Steel (worlds largest Steel Company) launched a hostile bid worth Euro 18.6 billion for Arcelor, the second largest steel company in the world. The combined entity would be the Mittal‟s vision to create the world largest steel company in the history of steel industry, three times the size of its nearest competitor Nippon Steel. It was also considered to be one of the largest hostile bids in the European History.


Time line of the Hostile Takeover: The timeline of the acquisition has been given below [Compiled by Author from Gayathri, 2006, Sinha, 2006 (A) & The Hindu Business Line, 2006]

Jan. 27:

Mittal Steel announced the open offer for all the Arcelor ordinary shares and convertible bonds for Euro 18.6 billion (US$ 22.6 billion). The primary offer was mixed cash and share offer for Arcelor Shares. The deal consisted of 0.8 Mittal Shares and Euro 7.05 for each Arcelor share.

Jan. 30:

The hostile acquisitions offer of Mittal Steel shocked Europe. Luxembourg, France, Belgium and Spain government opposed the move stating that proposed bid may put thousands of employees at risk. Guy Dolle, CEO of Arcelor, ruled out the proposal by commenting that deal price was very low and they had a different target market culture. He also pointed to Mittal Steel‟s corporate governance, stating that it is completely a Mittal family- run enterprise.

Feb 16: Arcelor declares 85 percent dividend hike disregard Mittal‟s bid.

April 4:

Arcelor unveils some more takeover defences. Arcelor declared payment of US$ 6 billion to the shareholders and proposed to make recently acquired Dofasco as an independent Dutuch Foundation control over the unit.


April 28: Some of the institutional shareholders opposed Arcelor‟s opposition to the Mittal Steel‟s bid.

May 15 2006:

Mittal sweetened the deal going through severe criticism by Arcelor Board by increasing the bidding price to Euro 25.8 billion (US$ 33 billion). Arcelor Board studied the revised offer and commented that all decisions will be made protecting the interest of the shareholders.

May 16, 2006:

The market regulators in France, Belgium, Luxembourg and the Netherlands cleared the bid.

May 26, 2006:

Arcelor announced a Euro 13.6 billion merger proposal with severstal, leading steel company of Russia. The proposed merger would have made it number one steel maker, dislodging Mittal Steel. In this deal, Mardashov (Chairman of Severstal) will own 32.2% stake and 68.8 % by existing Arcelor shareholders.

June 6:

European Commission approved the merger of Arcelor and Mittal.


Mittal Steel also offered 13 Mittal Steel shares and Euro 188. 2006]. 2006]. Mittal on terms also agreed to limit his holdings to below 45 percent.4 per Arcelor share. 2006 & The Tribune. 2006 Arcelor board recommended shareholders merger with Mittal Steel.1.55 in cash for each share of Arcelor.084 Mittal Shares and Euro 12.6 Structure of the final Deal and Financing: After 5 months of hostility. This was done so reduce the control of Mittal family in the combined enterprise [The Tribune. 2006. 41 . The post merger 18 member board will consist of 12 existing board members of Arcelor and six Mittal nominees. The total offer came to USD 33. Mittal Steel decided to raise its offer to 1. 5. 2006]. Arcelor chairman Joseph Kinch would become the chairman of Arcelor Mittal and Lakshmi Mittal would become the president of the Board [The Tribune. June 23: Arcelor and Mittal decided to meet on June 25. This made total of Euro 40.June 20: Severstal revised its terms and raised the bid and agreed to settle on the 25 percent rather than 32.2 percent earlier. Arcelor shareholders received 69 percent of offer in shares of Mittal Steel and balance 31 percent in cash. After the merger Mittal would hold 43 percent stake in the merged company.7 billion [BBC news. on June 25.42 for every 12 convertible bonds of Arcelor.

as shown in Table 8. The other financial synergies are that the company will also benefit from lower cost of capital.5. The combined company will generate financial synergies.7 Synergies: “ Mittal and Arcelor have both been at forefront of the consolidation in steel sector in the last 10 years. Mittal Steel as cited by Sinha. improved cash flow and improved access to capital markets [Sinha. The combined company will have 61 pants in 27 countries with 320000 employees and an annual turnover of USD 69 Billion [Agarwal.1.” . Chairman and CEO. 2006 (B)]. This combination accelerates this process and leaves us uniquely positioned to benefit from the opportunities created. 2006 (B) 42 . 2006 (B) The combination of Arcelor and Mittal Steel will create a company that will account to 10 percent of the global steel production with capacity of 110 million tonnes per annum. Table 8: Source: Mittal Steel.Laxmi Niwas Mittal. 2006 & Sinha. 2006 (B)].

[Sinha. NAFTA. 2006 (B)] Figure: 5 Source: Mittal. construction. L. 2006]. Central Europe and Africa. The combined assets of the company will give them good combination of developed and developing markets. packaging. 43 .[Sinha. The merger would allow the company to expand its product portfolio and help winning orders from automotive. 2007 According to some of the analysts it will create „one stop shop‟ for the customers. 2006 (B)] The product portfolio offered by the combined company in 2006 has been shown in Figure 6. This would help the company to be leader in five main markets i.N.This combination will enable to create an unmatched geographic presence with very limited geographic overlapping as shown in figure 5. European Union. appliances. This is so because Arcelor‟s market and high value steel will be complimented by Mittal‟s market and low cost commercial steel [Mathew. South America. oil and gas spread across different regions.e.

manufacturing and shipping as shown in figure 7. Figure 7: Purchasing marketing and manufacturing synergies of Arcelor Mittal Source: Mittal Steel. L. 2007 The Merger wouldn‟t give synergies in Marketing and product range but also purchasing. 2006. 2006]. This synergy is expected to be around USD 1 billion till year 3. (B) 44 .N.Figure 6: Source: Mittal. Analysts expect that the combined company will give ability to change the impact of cyclical fluctuations in the economy [Mathew.

2006] Figure 8: Raw material self sufficiency and internal distribution centres Source: Mittal.Other synergy is that significant amount can be saved on use of in-house raw materials of Mittal Steel. 45 . Ukraine. Whereas.sufficient with 45 percent of iron ore requirement as shown in figure 8. Mittal steel has reserves of iron ore (one of the major raw material for steel production) in Kazakhstan. 2007 The combination of Arcelor and Mittal will also give some synergies in marketing and trading as the group will have 38 percent of the total distribution by internal centres as shown in figure 8. [Mathew. The combined company will make it self. North America and Bosnia.N. L. Arcelor does not have much of reserve like Mittal but have reserves of Dofasco.

Tata Steel Managed turnover of USD 6311million.79 million tonnes. Tata-Corus Case study 5. Tata Steel was formed in 1906 celebrating its 100th year in 2006 [Rasheeda. Tata Steel. EBDIT of USD 1815 million and Net Profit of USD 961 million in financial year 2006-07 (excluding Corus). Nat steel and Millennium Steel (Thailand). Muthuraman. Annual Report. 46 . B. 200607] From last few years. Managing Director of Tata Steel said “In my view. It is 100 percent self-dependent as far as raw materials like iron ore and coal are concerned. It also produced 4.5. one of the main companies of Tata group is India‟s largest private sector steel company and had been one of the lowest cost steel producers in the world. and primarily manufacturing facilities where manufacturing is competitive” [Bhaskaran.2. Also. Tata steel has been in the process of building a global company.1 Background of Tata Steel: Tata Group was formed in 1868 by Jamsetiji Nusserwanji Tata. This includes the two subsidiaries.93 million tonnes (India) of crude steel and sold 4. globalisation is a method by which you put the right part of the value chain in its right place in the world.8 Million tons. 2006]. it has huge expansion plans in India in years to come. 2006]. it has its own distribution networks and centres all over India. Tata Steel is fully integrated across its value chain. and link it up properly-finishing facilities where customers exist. [Tata Steel. Over all Tata Steel has a capacity of 8. Therefore it acquired Nat Steel (Singapore) in 2004 and Millennium steel (Thailand) in 2005. 2006 & Bhaskaran. On the other hand.2.

2. France. It was formed with the merger of British steel and Dutch Royal Hoogovens in late 1999.2 Background of Corus: Corus Group is the 2nd largest steel producer in Europe and 9th largest producer of steel in the world.5.8 Million tonnes of steel for the year.7 % and 38.3% share respectively. 2006 & Gupta. Corus had a turnover of GBP 9733 million with operating profit of GBP 457 million [Corus. Norway and Belgium with installed capacity of 21. Distribution and building systems division. 47 . Annual Report. Table 9: Major Production Facilities of Corus Source: Corus. It had manufacturing facilities in UK. In 2006. Netherlands. Annual Report.3 Product range and Markets of Corus: Product Range: Corus manufactured a large variety of steel products from different division strip products. ending 30th December 2006. In this merger British Steel and Hoogovens had 61. 2005]. 2006 5. in the new company. Long products.2.4 million tonnes per annum. Germany. It produced 18.

mechanical.4 Structure of the Deal and Financing: In order to drive globalisation strategy Tata Steel made $8. Tata Steel also got approval of Corus Group for 48 . 2006 for Anglo-Dutch Steelmaker Corus Group. Automotive. Principal markets for Corus group‟s steel products are construction. Asian markets follow with 27%. North American. 65 percent of these coils being used for further processing into sections. The product mix of Corus has been shown in figure 9 [Corus. Long products contribute around 21% in the product mix. Annual Review. This deal was at a price of 455p per Corus share. 2006] 5. Corus has sales office in 30 countries and has a world wide trading network. plates. Annual Report.Figure 9: Product Mix of Corus for 2005 Source: Corus. engineering steels or wire rod. [Corus.2. Europe is the main market for CORUS contributing to 53 percent of the total turnover in 2006. 2006]. For this reason.1 Billion offer on 17th October. On 20th October. Annual Report. Hot rolled Coil production was about 60 percent of the total crude steel produced. 9% and 8% respectively. metal goods and oil and gas industries. 2005 In 2006. UK. Packaging. electrical engineering.

Rasheeda. Tata Steel revised its offer to 500p per share. An auction process was held on 30th January and number of bids went between Tata and CSN. 2007.9 Billion and was declared winner to acquire Corus [Tata Steel Annual Report. which was invested by the way of equity in Tata Steel UK ltd. Figure 10: Holding company format of Corus Source: Tata Steel. TSAH raised bridge loans of USD 2. Annual Report. The details given below in Table 10 is the long term arrangement of funds approved by the Board of Tata Steel on 17th April 2007. Tata Steel made final bid for the company of 608p per share or $12.6 billion was raised by Tulip UK Holdings.1 billion [Tata Steel. 2006-07 Initially the acquisition was funded by Tata steel in a mixture of cash resources and syndicate loans. 2006. This amount of USD 2. The balance of the consideration was raised through Tulip Finance Netherlands (wholly owned subsidiary of Tata Steel UK ltd) via Senior Debts of USD 4 billion and Mezzanine bridge of USD 3.5 billion and mezzanine loan of USD 0. 2006 & Goldstein.the acquisition. 2007]. 2006-07]. CSN in made another offer 515p in December. 49 .7 billion was transferred to Tata Steel Asia Holdings Pte Ltd (TSAH). Annual Report. 2006. As the process was extending the UK panel on takeover and Mergers set a deadline on 30th January. But a twist happened when CSN (Brazilian company) offered 475p higher than Tata Steel on November 17th 2007.

USD 500 million from foreign issue of equity and USD 1 billion from rights issue of convertible preference share [Tata Steel. 5. Annual Report. This will comprise of USD 700 million from internal resources. 2006-07].Table 10: Long term Arrangement of funds by the Tata Steel Board Source: Tata Steel. 2006-07 The company will contribute USD 4. USD 862 million from rights issue to equity shareholders. 2006-07]. enhanced R&D capabilities and distribution networks in high end markets. Annual Report. USD 500 million of external borrowings. USD 640 millions from preferential issue of equity shares.5 Synergies: The Strategic Combination of Tata and Corus is very unusual combination since the acquirer ranked 55th while the acquired company ranked 8th in world steel production. 50 .5 million tonnes and capacity of 28 million tons as shown in figure 11 [Tata Steel. The combination will make the acquirer the sixth largest steel company in the world with the Crude steel production of 23. greater production facilities. Annual Report.1 billion as equity finance.2. Moreover this Tata Steel will gain from the economies of scale.

the primary driver for the Tata-Corus deal apart from being a good fit. This is. Executive director of Pricewaterhouse coopers. 2006 51 . a huge scale company will be created. the combination of Tata steel and Corus will help the combined entity to increase its sales. Net Income and crude steel production tremendously. Figure 12: Pro forma Combination (figures as per FY 2005) Tata Steel Corus Combined Source: Tata Steel.” As we can see in figure 12. said “The primary reasons for outbound deals appear to be the necessary scale and size to be globally competitive. EBITDA. 2006 On this matter. 2006).Figure 11: Tata Corus Combined steel production Source: Tata Steel. Sanjeev Krishnan as cited by (Rasheeda. Hence. in fact.

2006-07]. An industry Analyst Rakesh Arora as cited by Rasheeda. The other synergy is that Tata Steel will be able to get is the benefits of the R&D capabilities of Corus. This is so because this will give Tata Steel would have an advantage to access markets in both High end developed markets of Europe and low cost manufacturing facilities of Asia as shown in figure 13. Annual Report. with 51 percent market share of carbon steels in 2006 [Corus. which is the main reason for the EBITDA margin of around 9 percent in comparison to the average 14 percent of the European steel makers. Tata Steel also has plans to set up huge capacity Greenfield projects in India [Tata Steel.Corus have very little access to the mines.” For the above reasons Tata Steel expects synergies of 350 million to be attained in third year of merger. [Rasheeda. 53 percent market of Corus in Europe will give Tata Steel direct access to the European High end steel markets. 2007]Corus has dominant market share in UK. 52 . As shown in figure 13. 2006 stated that “It‟s a good mix of developed and developing country – You have the stability of a developed country and growth of a developing country. This is so because Corus has high skilled 950 researchers in contrast to 88 researchers in Tata Steel. 2007] Being Corus in the developed market and Tata Steel in developing market will create a powerful combination. The R&D department of Corus has been very successful with introducing new products for automobile and construction industries [Rasheeda. Tata Steel expects to send low cost slab produced in India for high end finishing at Corus. 2006-07]. It‟s a win/win situation for both companies – Corus has been burdened by high raw material costs and Tata steel can provide raw materials very effectively. Annual Report.

2006 53 . Figure 14: Combined Markets of Tata-Corus Source: Tata Steel.Figure 13: Global Presence and customer reach of Tata-Corus Source: Tata Steel. the combined market of Tata-Corus will provide them wide variety of markets and appropriate mix of mature markets of Europe and growing markets of Asia as shown in figure 14. 2006 Moreover.

The other advantage that there is cultural compatibility of both the companies as shown in figure 15. 2006 54 .Tata-Corus deal is considered to be a friendly transaction and initiation of global partnerships [Tata Steel. 2006]. Figure 15: Cultural fit of Tata-Corus Source: Tata Steel. code of ethics and world class governance. Both the companies has same continuous improvement programme.

This was the key strategy of Mittal Steel.CHAPTER 6: Results and Analysis This chapter is based on the study of the last four chapters. Market Share and Global Presence: Both the companies focused on expanding their operations globally and grabbing the market world wide. First we will start the discussion with the motives behind Mergers and Acquisitions. We found that government owned many steel plants were privatised and the era of consolidation in steel industry begun in 2002. It has not set up any Brownfield project and has grown only by acquiring several steel companies.e. Here the Author analyses and discusses the main objectives of the research. Improved product portfolio: Tata Steel and Mittal Steel both had acquired companies in order to improve their product portfolio. 55 . Inorganic growth: It takes at least 5 years to set up an integrated steel plant as quoted by Wharton (2007). i. slow growth in developed markets or mature markets and high growth in developing markets. That is why it has become very important to analyse the motives that is driving steel companies into mergers and acquisitions. It would also take years to fix the market and win customers over their competitors.1 Motives of Mergers and Acquisitions in steel industry: The history of the steel industry has already been discussed in the Global steel industry chapter. It also included the right mix of markets. 6. Growing inorganically enables the steel companies to expand their capacity immediately and capture the market along with it. All the research questions have been answered in this section. Getting the proper mix of low value and high end steel products to serve the wider range of markets has been one of the main motives of Steel companies.

in the steel industry the top 5 players account for only 20 percent of steel production. This may enable both the companies to work together towards R&D and new product development.Proportionate negotiation power with the suppliers and customers: Steel industry has been the victim of disproportionate negotiation power with its suppliers and customers. For example: Ford Motors can tie up with Arcelor-Mittal to provide them with all the steel related products like metal sheets and other special steel products. More and more acquisitions in the industry will lead to consolidation. and a small group of customers for the steel thus produced. This is so because the combined entity has better cash flow and a wider range of market than their competitors. 2006 stated that three Iron ore major companies control 75 percent of the supply of Iron ore and top ten auto companies account for 95 percent of automobile production. 56 . The reason for this is the small number of raw material suppliers to the steel industry. Sinha. The motive is to win orders and gain competitive advantage against their competitors. they have better strength to face the downturn of the industry. which will help them earn sustainable earnings in the long run. the steel industry has been highly fragmented. This has also been steel companies‟ primary motive. On the other hand. Furthermore. Strength to face down turn: When steel companies turn big. and come up with the newer products. It will also enable the steel companies to carry combined research and development with their consumers. Better Service to the Customers: One of the other important reasons for steel companies‟ interest in M&A is to provide integrated service to the consumers and help in global procurement. behind getting into mergers and acquisitions. Since both the companies have global presence Arcelor Mittal can supply steel to all Ford plants globally. Both the companies (Tata Steel and Mittal Steel) have expected their purchasing and marketing synergies to improve by reducing the negotiation power of its suppliers and customers.

The combination will allow Tata to produce low cost slabs in India and send those slabs for finishing in the CORUS plants in long term.2 SWOT Analysis: In this section SWOT (Strengths. Threats) Analysis of the both the companies will be done. 6.Economies of scale: Economies of scale is one of the important motives of both the companies to gain manufacturing and R&D synergies. SWOT Analysis has been chosen so that it can measure the benefits as well as the drawbacks that company is likely to face in long term and short term. Economies of scale enable companies to invest more in research and development. 57 .1 Tata-Corus: Strengths: The combination of Tata and Corus will make Tata Steel the 5th largest steel maker in the world. opportunities. The combination will provide them with enhanced product portfolio. It will have access to the high end market of Europe and will be able to cater wide variety of markets as shown in figure 13. It will enable Tata to utilise the distribution network of CORUS to get better price for the products produced in India. 6. The benefit for them is that they will have lesser per ton R&D cost and the expertise of both the companies would be available for the development of better products.2. Weaknesses.

Combining both the margins. Tata steel stands a good chance of raising funds on Corus‟s goodwill. The cost of raw materials constitutes approximately 40% of the total cost of steel production.It will be able to enhance its R&D capabilities with the highly efficient R&D of Corus.75 percent of operating margin in 2005. This may lead to conflict in the interest of the two companies. which might help it in getting a better price for its share. Corus specialises in carbon steel. with 28. Opportunities: In terms of financing. Corus is a high.cost producers of steel in the world. The former can do this by listing in London Stock Exchange. On the other hand.13 percent operating margin in 2005 as mentioned in figure12. debt burden will lead to increase in interest costs and affect debt-equity ratio. Tata-Corus does not have enough raw materials to source for Corus‟ plants in the short term.cost producer with 10. which may lead to better profits for Corus plants. the overall margin will reduce drastically. If further consolidation happens in the industry. there is possibility of reduction of cyclicality of the steel industry. Weaknesses: Since the Tata-Corus deal is leveraged buyout. Tata Steel is one of the lowest. While Tata Steel has expertise in construction steel. 58 .

1 Arcelor Mittal: Strengths: The combined entity will control 10 percent of the global steel market. leading with 3 times of its nearest competitor. to feed Corus‟ plants.Mittal 59 . If Tata Steel wipes some of its debts with equity dilution.Tata Steel has an opportunity to turnaround Corus plants in the long run by acquiring other mining companies abroad and using the raw materials thus acquired. Nippon steel. Although Tata Steel. If this happens. has gained size with Corus‟s acquisition. This is because of their global presence as discussed in the above-mentioned case study.burden caused by leveraged buyout. The Arcelor Mittal combination will allow them to win customer orders from the global automakers and construction companies. 6.2. The combination of low value steel produced by Mittal Steel and high value steel produced by Arcelor. This combined company may itself become a victim of hostile takeover by other big companies like Arcelor Mittal and Severstal. it is possible that industry cycle changes and goes in downturn. Threats: Due to the cyclicality of the steel industry. along with the wide product range of the Arcelor. Corus plants might get into trouble because of interest. and the insufficiency of raw materials.

Recently Mittal steel was accused of monopoly in United States and South Africa for charging excess pricing. This might also affect on the combined entity and consequently affect the business in long run. 60 . with the Mittal family owning 88 percent stake. and enable it to further grow along the down-stream supply chain. The Arcelor-Mittal combination has become a truly global company. By virtue of having a combined entity.combination. Therefore even the combined entity may lack shareholders value. the company will be more exposed globally and may get into conflict with several competition tribunals across the world. Although both the companies had almost the same size. [la tribune. which would help in reducing the combination‟s costs. Weaknesses: Arcelor has been a very innovative company and had thousands of patents. Mittal Steel did not have much interest in R&D. 2006] Mittal Steel had till now been a family-controlled enterprise. the Mittal family owns 43 percent stake. Mittal Steel itself can meet 45 percent of Arcelor-Mittal‟s iron ore requirements. would give the company competitive advantage over business rivals. Even in Arcelor-Mittal. on the other hand Mittal had only 20 odd patents.

Therefore. the cyclicality of the steel industry cannot be reduced. Although the Steel industry is in the process of consolidation. This may help in reducing the cyclicality of the industry. with most of its board members belonging to the Mittal family. Mittal Steel was more of a family-run organisation.Opportunities: In the era of consolidation. Nicor and POSCO are playing a leading role in consolidating the steel industry. 61 . Both the companies have had a history of acquisitions but there was a difference in culture. government may intervene on price and on further acquisitions. 70 percent of the industry is still highly fragmented. Iron and steel Industry being the key industry for other industries. On the other hand. Many other companies like Severstal. despite the process of consolidation having begun. there is a threat of mismatch of management culture in Arcelor-Mittal. Downturn in the industry may lead to drastic reduction in profit margins. the company can acquire some more government owned steel units or other steel companies. and expand their operations in other countries. Due to this existing high rate of fragmentation. Arcelor being more professional had 12 members in their board. Threats: The deal of Arcelor-Mittal was opposed by the government of France and Luxembourg. Tata Steel.

Corus deal normally and was considered to be an over priced deal.Corus and Arcelor-Mittal share price movement will be observed. 2007 in BSE Source: India Info line. Both Tata. But seeing the demand of steel and the consequent 62 . As we can see in the graph shown above in Figure 16.Mittal because Tata. We will compare the stock price performance of both the companies. Figure16: Price chart of Tata Steel from 28th August. 6. stock price went down slightly but recovered in April due to high demand of steel.3. and draw a conclusion based on that. 2007 Tata Steel stocks dropped 10 percent on the news of Tata Steel buying Corus on 31st January 2007 (Thiagarajan. Accounting return and operational performance will be measured only for Arcelor. This shows that market did not take This shows that the stock market did not take the Tata. 2006 to 24th August.6. We will use those criteria to measure the performance of both the companies. 2007).3 Post Acquisition Performance measurement: We have already discussed some of the post acquisition performance measurement criteria in the literature review.Corus is still in the process of merger and has not come out with any results.1 Stock Price comparison: In this measurement criterion we will observe the stock market reaction to the merger till date.

This reason is preventing the Tata Steel stock prices from crumbling. Net profit margin has increased from 7.3. Earnings per share increased from $2. Figure17: Price chart of Arcelor Mittal at NYSE from (August 2005 –August 2007) Source: Reuters. 6.6 percent in the half yearly reports of June 2007. The stock price almost doubled in just one year of the merger. to 9. Gearing (net debt to equity) increased from 35 percent to 42 percent (Market watch. 2007 As is evident in the graph above (figure 17).6 per share. It will be interesting to see its results when it comes out. 2007).rise in the price of steel may make this deal worthwhile in the long term. 63 . comparing the half yearly results of June in 2007 and 2006. This shows that stock market reacted positively on this merger.9 percent in half yearly reports of June 2006.2 Accounting profit comparison: Tata Steel is still in the process of integration and current acquisition.47 to $3. The uptrend indicates that the company has been performing very well. there has been an uptrend in the share price of Arcelor-Mittal since the merger.

as reflected in the half yearly result of June 2007. The company claims that this improvement in the performance has been due to the high demand of steel and higher selling prices for all the major segments. Depreciation. But overall profitability of the company has increased tremendously as compared to the gearing.3. The EBIDTA amount has increased to US$ 9672 million. This shows that the combined entity has financially benefited from this acquisition.9 percent.3 Operational Efficiency: EBIDTA (Earnings before Interest.9 percent to 14. Operating Income for the same half yearly June 2007 has increased by 50 percent and reached US$ 7687 million. 64 . This constitutes the perfect example of achieving efficiency and higher price for the products through Mergers and acquisitions.The ratios calculated above show that although the profits of the company have increased. as compared to pro forma half yearly result of June 2006. the gearing of the company has also increased. 6. Taxation and Amortisation) of ArcelorMittal increased by 42 percent. Operating margin for the period was increased from 11. There has been a tremendous improvement in the operating profit as compared to the last half yearly operating profit of the combined firm.

In conclusion. because of which they were not under pressure to arrange cash. it did not have enough market capitalisations to pay by shares. Tata was a much smaller player in terms of capacity and hence. which would make it difficult for the company to face a downturn in the steel industry.4. the company plans to raise capital not only through debt but also equity dilution. 69%of the acquisition has been paid for by shares.4 Comparison of Tata.6. Tata Steel had no other option but to use debt financing initially and later convert into shares. it is considered to be a leveraged buyout by many analysts. On the other hand. Therefore. for they had almost the same capacity. while 31 percent has been paid in cash.Mittal deal was among companies that were almost at par with each other. The further equity dilution would increase the risk for Tata steel of being Hostile Takeover. Thus.equity ratio to face the cyclicality of the steel industry.1 Financing of the Acquisitions: As in the case of Arcelor-Mittal. Mittal Steel paid majority by shares. Tata Steel bought Corus in hard cash. price paid for the acquisitions. 65 . 6. On the other hand.Corus and Arcelor. The rest of US$ 4 billion will be contributed as equity finance and from internal resources. Arcelor Mittal deal will not face the burden of debt and will have a normal debt. More than $ 8 billion of the fund will be raised by leveraging Corus assets. Corus being a leveraged buyout would lead to a consequent increase in Tata-Corus‟ interest burden. On the other hand. Being an all cash deal for Tata Steel. The board has planned to convert the loans into equity in the long run. raw material self-sufficiency and human resource & cultural issues. The other point is that the Arcelor.Mittal: This section will compare both the case studies mentioned in chapter 5 in terms of financing.

21. 2007] It can be easily concluded from the above discussion that Tata Steel paid price much higher than what Mittal Steel paid.85 billion. One of the main criteria in the steel industry today is self. On the basis of EV per ton. On the other hand. It would have taken Tata Steel years to build such a huge capacity and develop such a big market for steel. being a leveraged buyout. stressing on the raw material sufficiency and other operating synergies.6. In short term. the enterprise value came to USD 751 per ton and calculation has been based on the actual crude production of 2006 (18. which Tata Steel paid for Corus. 2006-07] On the other hand. However. the Mittal Steel deal was prior to that of Tata Steel and with the expected consolidation in the industry the Enterprise value and market capitalisation of steel companies has gone sky high. the deal may face some difficulty. just paying higher price than the competitor does not mean that company has overpaid for its acquisition.sufficiency with raw materials. EV/EBDIT (Enterprise Value / Earnings before Depreciation.e. This price will look cheaper if any other deal takes place with Enterprise value per ton of $ 1000.2 (based on FY05) as compared to more than 8 (based on FY06). Enterprise value per ton paid by Mittal Steel for Arcelor was $ 586 per ton of actual steel capacity [Rediff. [Steelworld. Quality of assets and synergies are also very important criteria. This is because raw materials costs include 40 percent of the cost and sometimes even more.2 Price paid for the acquisition: The Enterprise Value (EV) of Corus was around USD 13. 2006]. in the following section further comment on the pricing issue will be made. [Tata Steel.3 million tons) and USD 649 per ton based on the crude steel capacity i. Therefore. Annual Report. If we consider it in that perspective then certainly Tata‟s acquisition looks viable in the long run.75 billion which includes debt of USD 0. 66 . Interest and Tax) paid by Mittal steel for Arcelor was just 6.1 million tons.4.

in order to be competitive in the industry it is very important for steel companies to be self. Corus imported 25 million tonnes of iron ore from Australia. South Africa and South America (Brazil). But it does not have enough raw materials to feed the plants in Corus.cost producers of steel in the world. Canada. Most of the raw materials requirements of Corus are purchased from the international markets. 2007 Tata Steel being one of the lowest. It also imported 11 Million tonnes of metallurgical coal 67 . So. iron ore prices have been soaring as the production has been increasing as shown in figure 18. as discussed in chapter 3.4. iron ore and coking coal prices have surged by 71 % and 111 %. As shown in figure 18. in 2005. Although the steel industry has been in its best shape since 2002.sufficient in raw materials.6. Corus does not own any iron ore or coal blocks around the world to source its raw material requirements. it has sufficient iron ore and coking coal mines in India to feed its plants in India. Figure 18: Graph showing world crude steel production and iron ore price trend Source: Mukherjee.3 Margin picture & raw material self-sufficiency: Iron ore and Metallurgical coal are the two major raw materials for steel industry. respectively.

predominantly from Australia. and the growing market of India. Annual Report. On the other hand. In fact. Corus buy out has to be a long term strategy of Tata Steel because it will take time to turn around Corus. Availability of iron ore and coking coal mines. These prices are mostly driven by hike in oil prices and insufficient UK gas supply [Corus. and on the supply capacity of the miners. Besides this. and is thus will be unable to manage low. For example: South African mines can feed the plants of Arcelor-Mittal in South Africa. Tata steel is a 100 year old company. most of the depreciation has already been diluted. 68 . Therefore. cheap labour in India. Canada and USA. Tata Steel also plans to convert part of its debt into equity in the long term. The hard coking coal price decreased by 8% compared to 2005. Tata Steel might have calculated the synergies but neglected the costs for realising those synergies. This gives the company competitive advantage by allowing it to use the resources closest to the production facility. makes Tata Steel one of the lowest-cost producer of steel in the world.cost production. The purchase price of these raw materials is completely dependant on the demand of other international steel producers. location advantage (proximity to port for export and import of coking coal. 2006]. neglecting the interest costs that Tata Steel will have to bear in the short term. and Ukraine ore can be used in the production facility at Ukraine. Arcelor-Mittal has iron ore mining assets all over the world as shown in figure 19. there was also a rise in worldwide energy and natural gas prices. The destination of consumption of iron ore has been shown in Table 11. In other words. There was 19% increase in iron ore prices `between 2005 and 2006. Short term gains or improvements in case of Tata steel seem ambiguous. and to mines of iron ore). Tata Steel expects synergies of $ 350 Million for Corus‟ acquisition. Corus does not enjoy all these advantages together.

Currently Mittal Steel is self sufficient in 45% of its iron ore requirement. 2007 Iron ore is essential to be competitive in the steel industry.Figure 19: Iron ore mine assets of Arcelor Mittal Source: Mukherjee. 2007 Table 11: Destination of Iron ore consumption Source: Mukherjee. This helps the company to be less reliable or 69 .

It also shows that the management of the two companies wants to understand each other‟s management culture better. 2006]. though it might do well in the long term. Tata Steel paid almost 40 percent higher prices than Mittal steel.4. This has been calculated on the basis of 36 million tons of raw material import and 18 million tons of crude steel production in 2006. while Tata-Corus has mines on a single location in India. Suppliers of iron ore in the industry have been dictating terms because of concentration among them as shown in figure 20 further. This approach would enable the combined entity to negotiate the 70 . Along with selfsufficiency. Arcelor. 2006.Mittal will be more viable than TataCorus.4 Human Resource and Cultural Issues: Tata Steel plans to keep management of Corus intact and just induct senior executives to sit on each others board [Wharton. Mittal Steel paid fair price to make profits and achieve synergies in short term as well as long term. In conclusion. Furthermore.sufficiency of 45 percent. which are just enough to feed its plants in India. In order to be more efficient Tata-Corus will have to acquire some more mines abroad and grow along the supply chain. With self. at Corus‟ plants. It seems to be a very justifiable way to do things slowly and in a manageable way. taking into account raw material self-sufficiency Tata steel‟s short term achievement of synergies looks ambiguous. as mentioned in the Annual report of Corus. This is because the latter would have to have to purchase and import 2 tons of raw materials to produce one ton of steel. 6. coking coal and other raw materials.Mittal has the supply of ore all around the world. Arcelor. Moreover. before making any changes.dependent on the suppliers. Arcelor-Mittal‟s large production capacity around the world can bring huge purchasing synergies in iron ore.

Those challenges are as follows: 71 . while Mittal steel was more focused on profits and produced products that can earn good return.added products. Arcelor had focused on value.5 Factors driving steel industry into consolidation: This section describes the factors that are driving steel industry as a whole towards consolidation.differences in the respective management culture of the two companies. The Human Resource issue that Tata steel is likely to face is that employees of Tata Steel are paid salaries and given perks according to the Indian standard. Corus Employees are paid according to the British Standard. These factors are basically the challenges can be minimised by mergers and acquisitions. There might be dissatisfaction among the Indian employees on the fact that the acquired company‟s employees are getting better salary than the acquiring company. post-acquisition the salary expectations of Tata‟s employees in India might increase. Arcelor had 18 members on its board comprising of six nationalities. and would help Tata-Corus chart out a mutually accepted management culture for the combined venture. This huge difference in management culture may lead to conflict between the management of Arcelor and Mittal Steel. 2006). On the other hand Mittal Steel may also face enormous cultural differences. On the other hand. The same dissatisfaction might arise among members of Tata‟s top management. On the other hand the Mittal family held 88% stake in Mittal steel and its board members belonged mostly to the Mittal family. with no single organisation holding large stake in it. Mathew argues that Arcelor was a highly technical company and focused more on research and development. 6. while Mittal steel was a more commercial company and stressed less on R&D (Mathew. British Standard salary is at least 4 times that of Indian Standard. Thus.

Figure 20: Concentration amongst supplier Source: Mittal Steel. which may lead them to go out of business as it happened between 1975 and 2002. only 17. Therefore. Buying power with the customers: Steel industry being fragmented. This has caused imbalance in the negotiation power. Wharton states that Steel industry customers. customers (Automobile manufacturers) have huge dominance because of the concentration in automobile industry. On the other hand. 2006 (B) Consolidation in steel industry will allow the steel companies to have proportionate negotiation power with their suppliers. especially the 72 .9 percent steel was produced by the top 5 producers of steel. they can form a cartel during the downturn. the raw material suppliers keep on increasing the iron ore and coking coal price as shown in figure20. Top 3 companies controlled 70 percent of the iron ore supply and top 5 companies controlled 58 percent of the coking coal market in 2005. If handfuls of producers dictate the steel market.Threat from cyclicality of the industry: There is possibility that steel companies are trying to consolidate the steel industry because of the threat of falling prey to the cyclicality of the industry. Concentration amongst supplier: A few suppliers alone are responsible for providing raw materials to the steel industry.

2006 (B) As the industry consolidates. had been purchasing from steel suppliers at rates that had driven the steel industry‟s profit margins to unsustainable levels. Steel producers would enjoy better negotiation power. High competition and Extreme fragmentation: Steel industry has been highly fragmented throughout the world. Figure 21: Graph showing number of independent automotive manufacturers Source: JD power cited by Mittal Steel. 73 . and would be able to provide integrated service to their customers. Consolidation will also help the steel companies in acquiring mining resources for their backward integration. 2007). and between smaller steel players within countries.6 percent of the total steel production in 2000. Figure 22 shows that steel industry was fragmented to such an extent that the top five players controlled only 14. So there was pressure from global companies as well as many local companies. From the beginning there has been high competition between steel players worldwide.Automobile industry. Concentration amongst Automotive manufacturers has been shown below in figure 21 (Wharton.

6 Future Structure of the Steel Industry: Steel Industry has always been a very fragmented industry because of the several restrictions imposed on the industry by the state. Overcapacity: Steel industry has been suffering with over capacity for a long time.9 percent in 2005. and the different policies of each state. Over capacity leads to higher costs (due to lower capacity utilisation) and price imbalance. 74 . The cost of production differed across the world because of the different economic and political situations of the country. Consolidation in steel industry will create big players with global presence and would reduce the price differentials in different parts of the world. thereby affecting the profitability of the European firms. there would more global producers of steel.With consolidation. Latin America and Asia have gone through major consolidation. 6. it has been observed that the industry is going through the period of consolidation. This competitive advantage enables China to sell at a lower price. This would help in reducing the number of competitors in the industry. Consolidation will reduce this problem. Since 2002. 2005]. For example: the cost of production is lower in China than in developed countries because of low labour costs [Regani. This is one of the reasons that the steel industry went through depression in the period from 1975 to 2002. On the other hand top five players in the world produced 14. Geographic Price differences: Steel industry has always been a victim of geographical price differences. if top few players form a cartel and manage the capacity effectively. As shown in the figure 22. the share of top five players in North America. as shown in figure2.6 percent of the steel in 2000 as compared to 17.

It is expected that the industry will see many global companies being formed between 2007 and 2015.4 75 . Annual Report. This boosted economy allowed the regional players to expand their capacity.6 1 2 . Figure 23: Expected share of top 5 steel producers Expe cte d s har e of top 5 s te e l pr oduce r s 35 30 30 25 20 1 5 1 0 5 0 1 995 2000 2005 Y ear 201 0 201 5 1 4 .Figure 22: Shares of Top five players in North America. This has happened due to many new capacities being added in the last few years due to the economic boom in China.7 percent in 2000 to 19. while cross boarder consolidation was initiated in 2004-06. Asia & Worldwide Source: Tata Steel. China. Only in China has it been noticed that the share of top 5 players have decreased from 35. 2006-07 The industry saw regional consolidation in 2002-03.9 2 2 . EU.9 1 7.7 percent in 2005.

there is a huge potential for consolidation in the rest of the 66 percent. As Wharton discusses. 2007). It is expected that this inclination towards consolidation in the industry would not remain restricted to the top level alone. This will reduce the cost tremendously. it is predicted that more consolidation will take place in the next five years. Slowly steel producers can shift the production of low end products to low cost countries and finish these close to the markets of developed countries. as compared to 1995 and in 2005 by 22 percent compared to 2000. even in China there are around 125 integrated steel producers. The share of the top 5 companies is bound to increase by 25 percent every 5 years. Brazil. 76 . Consequently it is expected that market share of the top 5 steel producers would increase to 30 percent till 2015. it also has a huge appetite for steel which makes it viable. As we can see in figure 24. India and China (BRIC countries) because of cost advantage and resource availability. but would also reach the lower levels as well. Since only 33 percent of world steel is produced by the top 15 producers of the world. All the finishing facilities can be near the market.Figure23 shows the growth of share of the top five steel companies in the last 10 years and predicted future growth by the author for next 10 years. so that the product can be finished according to the customer‟s specification. more downstream production will shift to the countries like Russia. there is huge opportunity for Chinese companies to consolidate China‟s production (Wharton. for instance. Thus. With the momentum that Mittal Steel and Tata Steel have brought in the consolidation of the industry. either developed or developing. In 2000 the top 5 players‟ market share increased by 13 percent. Although China has a higher cost of production than rest of the BRIC countries.

but these economies also constitute potential markets for steel. As shown in figure 25. 2007 Figure 25: Prediction of Future Crude Steel consumption Source: IISI cited by Chaudhary. International Iron and steel institute (IISI) has predicted that the production capacity of emerging economies will 77 .Figure 24: Cost of production country wise for Hot rolled coil (USD) Source: Chaudhary. 2007 Not only are the costs lower in the developing economies.

This is because per capita consumption in these countries is very low as compared to that of developed countries. as shown in figure 26. the important question that arises is whether this would help in reducing the cyclicality of the steel industry and increasing the returns in the steel industry. 2007 Studying the patterns of different commodities. one may conclude that consolidated industries boast of a better return on capital. Figure 26: Graph showing relation between Consolidated Industries and ROCE Source: Chaudhary. from 51 percent in 2004.catapult to 65 per cent of total production by 2020. Although initiatives are taken by the leading steel companies to consolidate the industry. 78 . the cyclicality will reduce with time and Return on Capital Employed will increase drastically. It can be observed in the figure that most of the future capacity additions and growth has been expected in developing countries. If the Industry consolidates in the way being predicted in figure 23. So. as the steel industry will be moving towards the left of the graph (figure 26) and become more consolidated. the steel industry might be able to earn a return of more than 10 percent on capital employed. vis-à-vis consolidation and its consequent impact on the return on Capital employed.

provide quality service to the customers and get economies of scale. 79 . the key implications and contributions of this research has been presented. improve market share. it was noticed that economies of scale. better product portfolio. High interest and debt burden on Tata steel. grow inorganically. and Mittal Steel‟s corporate governance are the main weaknesses that the respective companies are likely to face. The core objective of this is to find out the motives and impact of mergers and acquisitions in steel industry. some thoughts were also generated by the author during the development of this project. Apart from the theory and analyst‟s suggestions. enhanced R&D capabilities and proper mix of markets were some of the important benefits that the combined entities enjoyed. It is found that steel firms are acquiring companies in order to improve their product portfolio. The second objective of the company was to enquire if the acquiring firm gets any benefits from the mergers and acquisitions activity.1 Implications of the Study: In this chapter. In SWOT Analysis. gain strength to face downturn. achieve global presence. For this purpose SWOT Analysis was performed. Better funding in Tata Steel and further growth through acquisitions by Arcelor Mittal are the opportunities that the respective companies may avail of in the future. There are certain threats like downturn in the industry and increase of government intervention which may be faced by both the companies in future. There are several other objectives related to the core objective of the project which will be concluded one by one. in this research. gain proportionate negotiation power with the suppliers and customers. The first objective of the company was to highlight the motives that drive steel companies into mergers and acquisitions.CHAPTER 7: CONCLUSION 7.

While measuring post-acquisition performance. However. Mittal Steel paid fair price for the deal to get immediate returns. The third objective of the research was to identify the main payment methods used by steel firms for mergers and acquisitions. On the other hand. The fourth objective of the research was to investigate whether steel companies are paying appropriate price for the acquisitions. while Arcelor. It was found that the Tata Steel‟s Indian employees might get dissatisfied on the fact that Corus‟s employees are getting better salary. high demand in steel has helped the stock price to recover since April. Tata-Corus deal will result in increase in debt and consequent interest burden on the company. The fifth objective of the research was to identify the issues that steel companies will be dealing with. it may be said that fair price was paid for Corus‟ Acquisition. On the other hand. it was noticed that Mittal steel is a family-owned commercial company with profit 80 . 2007.Mittal will enjoy a normal debt to equity ratio. 2007. This was so because the combined entity will have 45 percent Self sufficiency in iron ore and less interest burden (compared to Tata Steel) on the company. though the combined entity might face hard times in the short term. On the other hand. It was found that Mittal Steel has used the mix of shares and cash reserves to fund Arcelor‟s acquisition. It was also found that Merger and acquisition had a positive impact on accounting profit and operating efficiency. It was found out that Tata Steel paid 40 percent higher price than Mittal Steel. it was observed that Tata Steel‟s stock prices dropped by 10 percent on the news of Tata buying Corus on 31st January. Corus‟ buyout being leveraged is a long term strategy adopted by Tata steel. Mittal Steel‟s stock price doubled within one year. This shows a perfect example of achieving efficiency and effectiveness through Mergers and Acquisitions. On the other hand. because of which the company would enjoy benefits of higher return in short term as well as long term. Tata Steel has made a leveraged buyout by leveraging Corus‟s assets. with respect to Human Resource and Cultural aspects of Merger & Acquisitions. and it will take time to turn Corus around. From a long term perspective.

Due to these reasons. 7. it has been observed that consolidated industries get better ROCE. Extreme fragmentation. from 20 percent currently.2 Limitations of the Study: However. The seventh objective of the company was to discuss whether Mergers and Acquisitions will help in improving the returns on capital employed (ROCE) of the steel industry. with its consolidation. It was predicted that the share of top 5 steel producers will be 30 percent by 2015. it would be too early to confidently comment on the impact of mergers and acquisitions on steel firms. It was found that the threat posed by the industry‟s cyclicality. High competition. while Arcelor was a highly technical public company with no one owner. the data available is very recent. The sixth objective was to determine the critical factors driving steel industry into Mergers and Acquisitions. India and China) countries due to expected increase in demand of steel and low cost advantage of BRIC. it is very important to mention the difficulties and limitations that have been faced during the study. Thus. the steel industry might be able to earn a return of more than 10 percent on capital employed. Studying the relation between the consolidation in industries and ROCE (Return on Capital Employed). 81 .maximisation as its main motive. concentration amongst suppliers. It has also been predicted that crude steel production in the future will shift to BRIC (Brazil. The most crucial limitation of the project is that only a limited number of companies have been studied. geographic price differences. in the future. and above all overcapacity and high buying power of the customers. The second limitation of this research is the unavailability of sufficient data on the topic. the phase of mergers and acquisitions has but begun in the steel industry. for. were the main factors pressurising steel industry to consolidate further. Russia. Furthermore.

Arcelor Mittal and Tata Corus. More study can be performed on the impact of these mergers and acquisitions taking the aforementioned case into account. as mentioned in Table 5. 7. POSCO of South Korea. This study has neglected the consolidation happening in the bottom level of steel industry. Baosteel of china. There is huge potential for research in BRIC countries as they are considered to be the low cost producers and future markets of steel. Nevertheless. It would be interesting to know the impact of mergers and acquisitions at bottom level of the steel industry. Study can be conducted on the evolving steel companies in these countries. and the project is up to date. Nippon steel of Japan. do not represent the common players in the industry.Lastly. and therefore. 82 .3 Recommendations for future research This study can be extended to see the performance impact on the Tata and Corus merger. Further study can be done on the major companies like CSN. US steel. what is positive about this study is its potential to constitute the basis for further research in mergers and acquisitions in the steel industry. This study also takes into account all the recent data available on the subject. Severstal. It would also be interesting to know if Tata would be able to turn Corus around. It is expected that this wave of mergers and acquisitions in steel industry will last for long. the companies studied are the two biggest deals in the steel industry. Study can also be conducted to ascertain the potential buyers and seller in the steel industry. and if Mittal-Arcelor would be facing any corporate governance issues in the future. These companies are expected to play a major role in consolidation of the steel industry. This study had focused on the mergers and acquisitions at the top level of the steel industry. There have been many other mergers and acquisitions.

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