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Mergers and Acquisitions - TATA

CORUS DEAL
SYNOPSIS
Mergers and acquisitions in the recent times have emerged as the top strategic moves of
companies world over in the face of globalization. Not only survival and growth, such
strategies have now been the preferred options even for establishing and/or expanding
international presence of the forward looking corporate giants.
Tata Steel (part of the Tata Group based in India) acquired the Anglo-Dutch steel firm
Corus after a four month bidding war with Brazils CSN (Companhia Siderurgica Nacional
SA) for US$12.9 billionthis was the biggest acquisition by an Indian firm. Tatas
acquisition of Corus made it the fifth largest global steel producer with an annual capacity to
produce 25 million tons of steel.
The acquisition was intended to give Tata Steel access to European markets and to achieve
potential synergies in the areas of manufacturing, procurement, R&D, logistics, and back
office operations.
However, there have been serious doubts and apprehensions regarding whether the
acquisition has been beneficial for TATA or not. Since TATA has already lived the acquisition
for around three years by now, one is tempted to discover the hidden truth. In the present
paper, an attempt has been made to see how TATA has been affected by its acquiring of Corus
group. For this purpose the authors have analysed the pre and post-acquisition performance of
TATA with the help of the various financial ratios of the company.
INTRODUCTION
The Indian steel industry has come a long way since its humble beginnings. It entered into a
new development stage in 2005-06 and has been riding high on the resurgent economy and
rising demand for steel. Rapid increase in production has resulted in India becoming the 5th
largest producer of steel. India is the only country globally to record a positive overall growth
in crude steel production at 1.01 percent for the period January-March 2009. The National
Steel policy has forecasted the demand for steel would reach 110 million tons by 2019-2020.
Characteristics of the Steel industry
Steel industry is often considered to be an indicator of economic progress because of the
critical role played by steel in infrastructural and overall economic development
Steel is a global market
World steel production stood at 1,244 million metric tons in 2006 with 2005-06 growth of
9%
Steel prices are volatile mergers seen as response to lower breakeven levels
Undergoing consolidating in this decade with the merger of Arcelor-Mittal forming the
worlds largest steel company more than thrice the size of the second biggest

Some of the key suppliers of raw materials to the industry have already made moves toward
consolidation giving more strong reasons for consolidation (bargaining power)
About Corus Group
Europe's second largest steel producer with annual revenues of over 9.2 billion and a crude
steel production of 18.2 million tons in 2005
Steelmaking operations primarily in the UK and the Netherlands
Provides innovative solutions to the construction, automotive, packaging, mechanical
engineering and other markets worldwide
Worlds 9th largest steel producer in 2005
Lowest cost in Europe
About Tata Steel (Prior to Acquisition)
Tata Steel is one of the few steel companies in the world that is Economic Value Added
(EVA) positive
Ranked the "World's Best Steel Maker", for the third time by World Steel Dynamics in its
annual listing in February, 2006
Worlds 55th largest steel producer in 2005
Tata Steel is Indias largest private sector steel company with 2005/06 revenues of US$5.0
billion and crude steel production of 5.3 million tonnes across India and South-East Asia
Tata Sons, Tata Steel and other Tata companies had combined revenues in 2005/06 of
approximately US$22 billion
Second largest steel producer in India after SAIL
Acquired Singapore-based steel company, NatSteel for $486m in 2005
Acquired 67.5% in Thailand-based steel company, Millennium Steel in 2005
Acquisitions are core part of companys strategy for growth
The Tata-Corus Deal
The deal is a powerful combination of low cost upstream production in India with the high
end downstream processing facilities of Corus. The deal occurred through 9 rounds of
competitive bidding between Tata Steel and Brazilian Steel Maker CSN. The final deal
valued Corus at 607 pence per common share which was 67% higher than the price of Corus
before the deal was announced. It was an all-cash deal and financing was done by a mixture
of debt and equity.
The process has started on September 20, 2006 and completed on April 2, 2007. In the
process both the companies have faced many ups and downs. The details of this process has
described below.
September 20, 2006: Corus Steel has decided to acquire a strategic partnership with a
Company that is a low cost producer.
October 5, 2006: The Indian steel giant, Tata Steel wants to fulfil its ambition to expand its
business further.
October 6, 2006: The initial offer from Tata Steel is considered to be too low both by Corus
and analysts.
October 17, 2006: Tata Steel has kept its offer to 455p per share.
October 18, 2006: Tata still doesnt react to Corus and its bid price remains the same.

October 20, 2006: Corus accepts terms of 4.3 billion takeover bid from Tata Steel.
October 23, 2006: The Brazilian Steel Group CSN recruits a leading investment bank to
offer advice on possible counter-offer to Tata Steels bid.
October 27, 2006: Corus is criticized by the chairman of JCB, Sir Anthony Bamford, for its
decision to accept an offer from Tata.
November 3, 2006: The Russian steel giant Severstal announces officially that it will not
make a bid for Corus.
November 18, 2006: The battle over Corus intensifies when Brazilian group CSN
approached the board of the company with a bid of 475p per share.
November 27, 2006: The board of Corus decides that it is in the best interest of its will
shareholders to give more time to CSN to satisfy the pre- conditions and decide whether it
issue forward a formal offer.
December 18, 2006: Within hours of Tata Steel increasing its original bid for Corus to 500
pence per share, Brazil's CSN made its formal counter bid for Corus at 515 pence per share in
cash, 3% more than Tata Steel's Offer.
8 January 31, 2007: Britain's Takeover Panel announces in an e-mailed statement that after
an auction Tata Steel had agreed to offer Corus investors 608 pence per share in cash.
April 2, 2007: Tata Steel manages to win the acquisition to CSN and has the full voting
support form Corus shareholders
Reasons for Merger

Consistent with Tata Steel's stated objective of growth and globalization.


Creates worlds fifth largest steel company.
Tata Steels entry into European market.
Lowest cost position in two continents Western Europe and Asia.
Market presence in automotive, construction and packaging.
Growth through new, higher end-markets and a more sophisticated customer base.
Powerful combination of low cost upstream production in India with the high end
downstream processing facilities of Corus will improve the competitiveness of the
European operations of Corus significantly.
Combination will also allow the cross-fertilization of research and development
capabilities in the automotive, packaging and construction sectors and there will be a
transfer, from Europe to India, of technology, best practices and expertise of senior Corus
management.
Retain access to low cost raw materials and slab for the enlarged group.
Benefit from high growth in emerging markets and price stability in developed markets.
Belief of high degree of cultural compatibility.
Manufacturing will be organized so as to produce slabs/ primary steel in low-cost facilities
and produce high-end products in proximity to client base - in both Europe and India.
Utilize combined enlarged distribution network.

The merger of Tata steel and Corus will result to a saving of $400 million to the
company after 3 years of corporate integration.

Long term strategy


Strong base in India
De integrated manufacturing
Technology advantage

Economies of scale
To enter European mature market
Cost of acquisition is less than setting up a new industry
Acquiring the holding of Corus through patents and R & D facilities

TATA's reasons for buying CORUS


TATA had been a domestic player in Steel for almost a century. The decision to move into the
international market was a long term ambition. TATA chose the CORUS group as its
acquisition target because
Saturation in Domestic Market: Tata Steel had already expanded their capacity in India.
Any further growth had to be undertaken in other markets
Global ambitions: The acquisition placed Tata Steel from 55th position to 5th in global
steel production increasing brand value and reputation
Risk Mitigation: Steel is a highly cyclical industry and any steps to reduce market risks
go a long way in helping a firm gain strategic advantage. This kind of diversification
would have helped to reduce the risks and high value products would improve bottom
line.
Low Cost: Cost of acquisition was lower that setting a green field plant and distribution
and marketing channels in Europe.
Corus's Strength in the European Markets: Tata Steel was very interested to gain entry in
the mature markets of Europe where Corus had a very prominent presence
New Product Segment: Tata Steel was manufacturing low value long and flat steel
products whereas Corus produced high value stripped steel products.
Knowledge Acquisition: Corus had a strong R&D department. It also possessed a number
of patents for various processes of steel industry.
The main reasons for CORUS to be sold:
Increase in cost of production
Corus revenue was $18.06 billion, profit was only just $626 million but in case of Tata, the
total revenue is $4.84 billion and profit was $824 million
Target with low cost high quality raw material from India.
A chance to bailout of debt and financial distress

The acquisition by Tata amounted to a total of 608 pence per ordinary share or 6.2 billion
(US $ 12 billion) which was paid in cash. First of all, the general assumption is that the
acquisition was not cheap for Tata. The price that they paid represents a very high 49%
premium over the closing mid-market share price of Corus on 4 October, 2006 and a
premium of over 68% over the average closing market share price over the twelve month
period. Moreover, since the deal was paid for in cash automatically makes it more expensive,
implying a cash outflow from Tata Steel in the amount of 1.84 billion. Tata has reportedly
financed only $4 billion of the Corus purchase from internal company resources, meaning
that more than two-thirds of the deal had to be financed through loans from major banks. The
day after the acquisition was officially announced Tata Steels share fell by 10.7 percent on
the Bombay stock market. Despite its four times smaller size and smaller capacity, Tata
steels operating profit for 2006, earning $840 million on sales of 5.3 million tonnes, were

very close in amount to those generated by Corus ($860 million in profits on sales of 18.6
million tons). Tatas new debt amounting to $8 billion due to the acquisition, financed with
Corus cash flows, is expected to generate up to $640 million in annual interest charges (8%
annual interest cost). This combined with Corus existing interest debt charges of $400
million on an annual basis implies that the combined entitys interest obligation will amount
to approximately $725 million after the acquisition. The debate whether Tata steel has
overpaid for acquiring Corus is most likely to be certain, since just based on the numbers
alone it turns out that at the end of the bidding conflict with CSN Tata ended up with paying
approximately 68% above the average price of Corus Shares. In view of the above it is
interesting to find out whether Tatas buy of Corus was a wise decision.

Strategic Viewpoint
Tata Steel's expansion strategy has been to look for ways to source raw materials and
energies, in addition to looking at acquisitions in countries where raw materials were not
available. Such countries may either have developed, mature, or growing markets. This
involves making primary metal in markets close to raw materials and establishing finishing
(value-adding) facilities in the end-user markets.
Tata Steel's buying NatSteel and Millennium Steel were a step in action to get more of
branding and distribution in addition to finding current solutions & construction solutions and
finally to look at logistics and how to reduce its cost.
The initiatives that they took to look at Corus and to make it a part of Tata Steel is in line with
these objectives. Europe acted as a mature market that gave TATA the latest technologies for
value additions at reduced costs in the middle of the value chain as well as a very strong
distribution channel in the end of the value chain.
Synergies Expected
This deal because of the nature of the parties involved, a Value-Added steel producer and a
champion of low cost production, was bound to have a lot of synergies as well as mutual
opportunities for both the enterprises. The synergies can be outlined as follows:
Tata had a strong retail presence and distribution network in SE Asia and India. Tata has been
a major supplier to the Indian automobile industry and the demand for value added steel
products has been growing in this market. Hence there is a powerful combination of high
quality and developed market along with low cost & high growth markets. Tata was also
among the lowest cost steel producers in the world and was self-sufficient in raw material.
Corus was suffering from operational difficulties as well as raw-material crunch. A
consolidation was bound to help the merged entity tide over these and volatility concerns in
the market.
The companies specialized in different areas of the value chain. Combining them would give
them a sustainable and highly profitable operation. There was also a strong culture fit
between the two organizations both of which highly emphasized on continuous improvement
and ethics.

All of the reasons above seem to suggest that there was a very high potential for synergy
between the two companies.
Valuing the acquisition
Tata purchased Corus at an EV/EBITDA multiple of 12 paying US$13.7bn. So it seems that
Tata Steel overbid for Corus and paid a higher price for the acquisition. A few reasons behind
the Tata Steel bidding such a high price could be:
Tata Steel's confidence in the post-acquisition synergies: In the annual report of 2007-08 they
estimated that the acquisition would lead to low production costs, reduction in duplication of
marketing efforts etc. which would result in a saving of $350 million in three years.
Steel industry has shown highly cyclical trends accompanied with huge price volatility. The
industry was near the peak of the cycle at the time the deal was struck.
Another argument from Tata Steel's perspective is that Steel industry being cyclic in nature is
a difficult to value resulting in a flawed estimation of Enterprise Value.
Financing the acquisition
Tata financed the acquisition using a mix of both debt and equity which affected it's balance
sheet quite a bit. It took US$8.8bn debt and financed the rest (US$4.9bn) through equity. It
contained fresh issue of equity as well as use of its own cash reserves. The table below
explains it further.
BENEFITS FROM MERGER:
To Tata Steel:

Tata Steel will leapfrog from the fifty-sixth largest steel producer in the world to the
fifth position.

The company will have better geographical mix. Tata steel will have access to 40
countries across the globe, transforming it into a major global player from a domestic
player.

It will also achieve access to high-developed markets and premium customer base.

There will be a transfer, from Europe to India, of technology, and expertise, research
and development capabilities in the automotive, packaging and construction sectors,
increased procurement knowledge and in effect, a better bargaining power.

To Corus, the primary benefit:


Corus does not have any significant mining interest or asset since the second half of 2002,
when it sold off its minority holding in Avesta Polarit to Outokumpu. On the other hand, the
link-up with a low-cost producer with access to raw materials will enable Corus to compete
on a global scale.

POST ACQUISITION TATA STEEL:


Tata Steel has formed a seven-member integration committee to spearhead its union with
Corus group. While Ratan Tata, chairman of the Tata group, heads the committee, three of the
members are from Tata Steel and the other three are from Corus group. The acquisition by
Tata amounted to a total of 608 pence per ordinary share or 6.2 billion (US $12 billion)
which was paid in cash. First of all, the general assumption is that the acquisition was not
cheap for Tata. The price that they paid represents a very high 49% premium over the closing
mid market share price of Corus on 4 October, 2006 and a premium of over 68% over the
average closing market share price over the twelve month period. Moreover, since the deal
was paid for in cash automatically makes it more expensive, implying a cash outflow from
Tata Steel in the amount of 1.84 billion. 22
Tata has reportedly financed only $4 billion of the Corus purchase from internal company
resources, meaning that more than two-thirds of the deal has had to be financed through loans
from major banks. The day after the acquisition was officially announced, Tata Steel's share
fell by 10.7 percent on the Bombay stock market. Despite its four times smaller size and
smaller capacity, Tata Steel's operating profit for 2006, earning $840 million on sales of 5.3
million tones, were very close in amount to those generated by Corus ($860 million in profits
on sales of 18.6 million tons). Tata's new debt amounting to $8 billion due to the acquisition,
financed with Corus' cash flows, is expected to generate up to $640 million in annual interest
charges (8% annual interest cost). This amount combined with Corus' existing interest debt
charges of $400 million on an annual basis implies that the combined entity's interest
obligation will amount to approximately $725 million after the acquisition. The debate
whether Tata Steel has overpaid for acquiring Corus is most likely to be certain, since just
based on the numbers alone it turns out that at the end of the bidding conflict with CSN Tata
ended up paying approximately 68% above the average price of Corus 'shares. Another
pressing issue resulting for this deal that has created a dilemma between experts and analysts
opinions is whether this acquisition for the right move for Tata Steel in the first place. The
fact that Tata has managed to acquire a British steel maker that has been a symbol of Britain's
industrial power and at the same time its dominion over India has been perceived as quite
ironic. Only time will show whether Tata will be able to truly benefit from the many expected
synergies for the deal and not make the typical mistakes made in many large M&A deal
during this beginning period.

Post-acquisition issues facing TATA steel


Tata Steels acquisition of Corus was not without controversy. There were substantial issues
raised during and after the acquisition that require a more comprehensive discussion,
especially in light of the turn of events witnessed in the two years following the acquisition.
The current industry woes (in December 2008 global steel production declined by 23.4%) are
seen by some experts as an opportunity for expansion and strengthening of the industry in
India
(Anonymous, 2008, October 7 Indiaserver.com).

DID TATA OVERBID FOR CORUS?


There are two very different viewpoints that are presented in the case. Most financial analysts
familiar with the acquisition felt that Tata Steel overpaid for Corus and acquired significant
debt along the way. They felt that there were too many ifs along the way for this acquisition
to be successful in the long run. Tatas initial offer of $8 billion at 455 pence per share ended
with a final offer of $12 billion at 608 pence per share. Tata Steel also picked up the
responsibility of ensuring that the pension funds of over 47,000 Coruss employees were
adequately funded. The opposing view is that of Tata Steels executives, who felt that they
paid a fair price for acquiring Corus Steel. Through this acquisition, they added 19 million
tons of production capacity vaulting the new entity to become the fifth largest steel maker in
the world. According to Ratan Tata, starting a greenfield venture in Europe and building a
strong brand name would have been more expensive that the current Corus production cost of
$710 per ton. Tata Sons, the holding company was going to infuse $4.1 billion in capital
through a mixture of debt and equity. Tata Steels executives always felt that Coruss cash
flows were more than sufficient to meet the debt incurred due to the acquisition and that due
to synergies and cost savings they would be able to realize a savings of $350 million. The real
answer as to whether Tata Steel overpaid for Corus may lie in the long-term value of the
merger to Tata. Having been unable to predict the global drop in demand for steel that began
shortly following the merger, Tata has since found itself facing questions of survival that
center around issues of viabilities of economies and international competitiveness. It could be
argued that the merger with Corus, which resulted in a marked boost in the companys
revenues, has contributed to the long-term viability of the firm. It resulted in bolstering Tata
Steels reputation, putting the company on the Fortune 500 list, and increasing the likelihood
that Tata will be able to sustain itself during the economic downturn.
WILL TATA STEELS ACQUISITION OF CORUS BE VIABLE IN THE LONGTERM?
There are many points that support the viability of this acquisition in the long-term. First, the
acquisition was part of a well thought and articulated strategy; Ratan Tata had emphasized the
need to go global for all companies that were part of the Tata Group. Tata Steel was one of
the lowest cost steel producers in the world and had access to abundant supplies of iron-ore.
Tata Steel was seeking access to well established European markets. Corus Steel was a wellestablished brand name in Europe but was not cost-effective in its operations. Having
acquired Natsteel and Millenium Steel, the Corus acquisition was part of Tata Steels longterm strategy to achieve a global presence to service global buyers in multiple locations.
Second, the proposed long term synergies involve the low cost resources of Tata Steel
combined with the high-tech research aspects of Corus. The potential cross-fertilization of
research and development capabilities with transfer of technology and best practices from
Europe will help Tata Steel operations. The access to low cost raw materials and exposure to
high growth in emerging markets should have combined with price stability in developed
markets. The acquisition will position the combined group as the fifth largest steel company
in the world by production output and will provide a meaningful presence in both Europe,
where Corus is a well-established brand name, and Asia, where Tata is a well-established
brand name. Tata Steel quickly formed teams to work on synergies in areas of manufacturing,
procurement, logistics, marketing, iron and steel making. The fifteen to eighteen teams

consist of 3-4 members from both companies. Each team worked on realizing potential
synergies by sharing know-how, adopting best practices, and information to develop efficient
practices to aid cost reduction. Third, Tata Steel paid attention to the cross cultural issues that
had led to less than successful mergers previously. Tata Group had learned from their
overseas acquisition experiences the importance of managing cultural issues to enhance trust
between the European and Indian sides. The teams formed to work on synergies should avoid
potential cultural difficulties that could emerge from the dynamics of cross-border
integration. Many of the Corus top managers have been retained to work with integration
issues. Effective in May, Tata Steel appointed four key executives of Corus to its board of
directors. One indicator contrary to long-term viability is the encumbrance of Coruss pension
fund which Tata Steel had to assume during the merger. That financial obligation may prove
to be corrosive as equity markets continue to decline.
WHAT ARE THE EMERGING TRENDS IN THE WORLDWIDE STEEL
INDUSTRY? HOW DID THESE TRENDS POTENTIALLY AFFECT TATA STEELS
BID FOR CORUS?
The worldwide steel industry experienced a great deal of global consolidation due to a few
key factors that included a desire amongst the key players to gain efficiencies resulting from
Tata Steels Acquisition, to obtain access to new and growing markets, and to enhance
purchasing power with respect to suppliers and buyers. Worldwide demand for steel
continued to increase and steel prices were on an upward trend from 2004 to 2007.
Production costs depended on having access to power and raw material and on manufacturing
technology. Steel companies increasingly had to decide whether to be an acquirer or an
acquisition target. The latest rounds of mergers and acquisition activity were expected to
eventually result in a handful of worldwide global giants in the steel industry. The key
consolidation in the two years prior to the Tata/Corus merger was Mittals merger with
Arcelor to create the largest steel company in the world. Major Russian steelmakers Evraz
Group and Severstal and Swedish steelmaker SSAB made acquisitions in North America and
elsewhere and were pursuing more. Pressure on Tata Steel to maintain a competitive major
global presence and extend its influence in new and growing markets in view of increasing
consolidation in the steel industry necessitated the merger.
WILL THIS ACQUISITION HAVE AN IMPACT ON OTHER INDIAN FIRMS THAT
ARE INCREASINGLY SEEKING AN INTERNATIONAL PRESENCE?
Judging from the reaction of the popular press in India, Tata Steels acquisition of Corus was
hailed as a bold and visionary move. Many Indian business men and women considered this
acquisition as symbolic of Indias growing ascendancy in the international business arena.
The fact that India was once a British colony seems to have given this acquisition a different
flavour-- the colonizer is now being acquired by the colony! This acquisition did a lot to
bolster the confidence levels of not only reputed larger sized Indian firms like Wipro and
Infosys to seek overseas targets; it spawned a whole new breed of entrepreneurs who are
ready to engage in takeovers of firms in emerging economies like Kazakhstan and other
central Asian countries.
OBJECTIVE
The objectives of the present study are as follows:

To know the pre-acquisition financial performance of TATA and CORUS.


To know the post-acquisition financial performance of TATA.
To compare the pre and post-acquisition ratios of TATA Steel in order to find out whether the
acquisition has been beneficial.
CONCLUSIONS
Important learnings from this Acquisition
Since the steel industry is very fragmented producers have very little power to control the
price of steel products and also that of raw materials. The only way to counteract the situation
is to acquire other steelmakers, thereby obtaining greater bargaining power with suppliers and
customers, and increased operating flexibility. It will ultimately ensure they are better able to
survive, should iron ore prices keep soaring.
Further, there are parts of the world, which have surplus steel production and other parts of
the world, which do not have adequate production capacities. The need to consolidate, reduce
over capacity and to secure greater market clout will only accelerate the process of mergers
and acquisitions in the steel industry.
Tata Steel's Corus deal offers the promise of access to high-end European markets combined
with low-cost Indian manufacturing. It was the very same logic of shipping low-cost steel
slabs to finishing plants overseas guided its purchase of NatSteel in Singapore and its
purchase of a 67% stake in Thailand's Millennium Steel over the past two years.
But tough questions that won't die in a hurry are being asked about the deal's high price, the
durability of the steel industry's current boom phase, and the role of China as both a buyer
and producer of steel, among other issues.
Key generic learnings
The timing of International expansion is very crucial. In this case Tata acquired Corus when
the industry was at its peak. As such valuation was generally on high side and Tata ended up
paying a P/E multiple of 9 when industry average was near to 5.
Level of synergy that exists between the two companies. We could see the various synergies
existed in this acquisition. The product, market and operational synergies.
Overseas expansion done for the sake of increasing the market share generally fails. Longterm strategy should always be kept in the mind while deciding on short-term goals.
For Tata steel, it was acquiring a company that served different markets. As such the markets
were complimentary to each other and would result in opening up of new markets for Tata
Steel.

Also products offered by Corus were at the upper end of the value chain, as such there was
very less chance of cannibalization
Operationally Tata was the lowest cost steel producer in the world. And Corus had very well
developed R&D department.
Prior experience in handling of overseas operations is always very useful. Tata Group has
successfully acquired companies in the past
Care should be taken while predicting the future movement of the industry. In this case, Tata
betted on the rising prices but there was an economic slowdown which pulled the steel
industry down with it.
Bigger the expansion greater is the time required for synergies to materialize.
Another important factor is how the post expansion integration is carried out. Tata adopted a
light integration policy initially but due to economic slowdown had to take some strict steps.
Management of human resources is very important. In fact it one the most important reasons
of failure of internationalization attempts. Till now it seems that Tata have done reasonably
well on this front but it would be too early to predict anything.
In the end we can say that it's too early to predict whether the Tata have successfully
integrated Corus but the strategic intent was very correct. Since the steel industry is going
through a downturn now, it would be interesting to see how Tata Steel uses Corus capabilities
in the future up cycle.