CIA – 1 b

CORPORATE ACCOUNTING

Submitted By:
Pranathi Divakar Goli
1920244

BACHELOR OF BUSINESS ADMINISTRATION

DEPARTMENT OF MANAGEMENT STUDIES

NOVEMBER 2019
TATA- CORUS

A Dwarf Gobbles up a Giant – Tata Steel acquires Corus!

At a steel industry event in Paris in 2003, L.N. Mittal spoke about a world where a handful of
players would account for 80-100 million tonnes (mt) of capacity each and have a footprint across
all major continents. At that time, Mittal Steel itself produced less than 40 mt. Not many thought it
feasible then.
In less than three years, the dynamics have changed, and how. Mittal Steel has since become
Arcelor Mittal with a capacity of over 100 mt. The top five global steel players now have more than
20 per cent of global production (about 1.1 billion tonne). And Tata Steel, 56th in the pecking order,
has just picked up Corus, ranked No. 9, after outbidding the Brazilian Steel company, CSN’s final
bid of 605 pence per share with its bid of 608 pence. The deal amounted to $12.1 billion and the
combined entity of Tata-Corus is now No. 5 in the world steel sector.

The deal has triggered off a wave of reports on further consolidation. CSN, which lost out to the
Tatas, is not likely to give up its aspirations. Arcelor Mittal and Posco have held talks on possible
areas of co-operation, though Posco denied any merger. Nippon and Posco reportedly have a
white knight agreement, by which they have agreed to come to each other’s rescue in the event
of a predatory bid. Says Philippe Varin, chief executive, Corus: “This is a moving picture and is
changing very quickly.”

Now, consolidation is good economics in a fragmented market. But in steel, the imperatives to
consolidate are a little more. The suppliers to and buyers from steel makers are well- consolidated.
In iron ore supplies, the three major players — CVRD, Rio Tinto and BHP Billiton — have three-
fourths the market share and average margins of over 40 per cent. Auto makers, who buy a lot of
finished steel, are also well-grouped with 6-7 global players calling the shots. That leaves the steel
industry on the wrong side of the bargaining table, affecting earnings.

And this has hit the industry where it hurts most — valuations. Commodity industries like mining
and aluminium are trading at earnings multiples of at least 8-10, while steel trades at a multiple of
around six. Says B. Muthuraman, managing director, Tata Steel: “The market has not fully believed
what steel is capable of.” He should know. The Tata Steel stock has got a battering since it
announced its intention to take over Corus.

The consolidation equation is really simple. Greater consolidation means the industry will have
less price volatility and higher bargaining power. Hot-rolled coil prices are a good example of how
fragmentation has affected the industry.

Global Steel industry – An Overview

In 2005 World Crude Steel output at 1129.4 million metric tonne was 5.9% more than the previous
year.
China remained the world's largest Crude Steel producer in 2005 also (349.4 million metric tonne)
followed by Japan (112.47 million metric tons) and USA (93.89 million metric tons). India occupied
the 8th position (38.08 million metric tons). Global production of steel has surged around 7-8%
since 2002. China’s hunger for steel has pushed global prices sharply upward. In about 4 years –
from late 2001- to late 2005- prices rose dramatically. At the same time, strong price increases for
Steel’s raw materials- including iron ore
, coke, scrap and alloying material- contributed for a very high floor cost for steel. Two additional
factors have triggered this price increase:

- Temporary shortages of raw materials and steel making capacity

- Deliberate reduction in production by steel makers in the developed regions of the world.
The International Iron & Steel Institute (IISI) has confirmed the trend of recent years of an increase
in steel use in-line with general economic growth and with the fastest growth occurring in the
countries with the highest GDP growth such as India and China. Apparent world-wide Steel
Demand is forecast to grow to between 1,040 and 1,053 million tonnes in 2006 from a total of 972
million tonnes in 2004. This is a growth of 4-5% over the two year period. However, according to
IISI the cost of raw materials and energy would continue to represent a major challenge for the
world steel industry.

Since the year 2000 scrap metal prices have increased by 171%, iron ore by 164% and coke by
69%. The margins of the mining companies have outstripped the margins of the steel companies
by two times. since 2001(over 40% versus 23%)

The consolidation equation is really simple. Greater consolidation means the industry will have
less price volatility and higher bargaining power. Hot-rolled coil prices are a good example of how
fragmentation has affected the industry. Take the CIS region. Between end-2004 and end-2006,
prices yo-yoed all the way from $580 to $370 and then again to just under $600. With fewer players,
the sharp dips in the cycle will ease, increasing earning multiples and, finally, valuations.

There are other strategic reasons for this, the main being resource geography, or as Tata Steel
calls it, the de-integrated method of steel-making, where you break up the supply chain and
produce parts of it where it makes most economic sense.

Consolidation can also come through another source. The major trend that will address the
cyclicality of steel is not management of the underlying demand (of late, steel markets have not
been softening due to a drop in demand but due to oversupply). Rather it will be the control of the
supply chain. Steel makers are already buying into mines and there were rumours of Mittal looking
at resource majors as his next target.

The Indian Steel Industry

History

The first Indian Steel plant was set up by Jamshetji N Tata in Jamshedpur in the eastern part of
India in the year 1907. The plant started production in 1912.

One hundred years ago Jamsetji N. Tata went to London to meet Lord George Hamilton, Secretary
of State for India under Queen Victoria, to request the cooperation of the government in his building
a steel plant for India. Today Tata Steel has won the bid to buy out the Anglo-Dutch steel giant
Corus.

The commissioning of Tata Iron & Steel Company's production unit at Jamshedpur, Jharkhand in
1911-12 heralded the beginning of modern steel industry in India. At the time of independence in
1947 India's steel production was only 1.25 Mt of crude steel. Following independence and the
commencement of five year plans, the Government of India decided to set up four integrated steel
plants at Rourkela, Durgapur, Bhilai and Bokaro. The Bokaro plant was commissioned in 1972.
The most recent addition is a 3 Mt integrated steel plant with modern technology at
Visakhapatnam.

After independence, successive governments placed great emphasis on the development of a

Indian steel industry. In FY 1991, the six major plants, of which five were in the public sector,
produced 10 million tons. The rest of India steel production, 4.7 million tons, came from 180 small
plants, almost all of which were in the private sector. India's Steel production more than doubled
during the 1980s but still did not meet demand in FY 1991, when 2.7 million tons were imported.
Steel Authority of India Limited (SAIL)
The steel sector was to propel the economic growth. Hindustan Steel Private Limited was set up
on January 19, 1954. The President of India held the shares of the company on behalf of the
people of India. Hindustan Steel (HSL) was initially designed to manage only one plant that was
coming up at Rourkela. For Bhilai and Durgapur Steel Plants, the preliminary work was done by
the Iron and Steel Ministry. From April 1957, the supervision and control of these two steel plants
were also transferred to Hindustan Steel. The registered office was originally in New Delhi. It
moved to Calcutta in July 1956 and ultimately to Ranchi in December 1959.

A new steel company, Bokaro Steel Limited, was incorporated in January 1964 to construct and
operate the steel plant at Bokaro. The 1 MT phases of Bhilai and Rourkela Steel Plants were
completed by the end of December 1961. The 1 MT phase of Durgapur Steel Plant was completed
in January 1962 after commissioning of the Wheel and Axle plant. The crude steel production of
HSL went up from .158 MT (1959-60) to 1.6 MT. The second phase of Bhilai Steel Plant was
completed in September 1967 after commissioning of the Wire Rod Mill. The last unit of the 1.8
MT phase of Rourkela - the Tandem Mill - was commissioned in February 1968, and the 1.6 MT
stage of Durgapur Steel Plant was completed in August 1969 after commissioning of the Furnace
in SMS. Thus, with the completion of the 2.5 MT stage at Bhilai, 1.8 MT at Rourkela and 1.6 MT
at Durgapur, the total crude steel production capacity of HSL was raised to 3.7 MT in 1968-69 and
subsequently to 4MT in 1972-73.
Million Tonnes/Yr. (Saleable
Steel)
Bhilai Steel Plant 3.153
Bokaro Steel Plant 4.5 (liquid Steel)
Durgapur Steel Plant 1.586
Rourkela 1.671
IISCO, Burnpur 0.426

SWOT ANALYSIS OF THE INDUSTRY

The strengths, weaknesses, opportunities and threats for the Indian steel industry have been
tabulated below. The national steel policy lays down the broad roadmap to deal with all of them.

Strengths
1. Availability of iron ore and coal
2. Low labour wage rates
3. Abundance of quality manpower
4. Mature production base
Opportunities
1. Unexplored rural market
2. Growing domestic demand
3. Exports
4. Consolidation
Weaknesses
1. Unscientific mining
2. Low productivity
3. Coking coal import dependence
4. Low R&D investments
5. High cost of debt
6. Inadequate infrastructure
Threats
1. China becoming net exporter
2. Protectionism in the West
3. Dumping by competitors

Indian Market Scenario

 After liberalization, there have been no shortages of iron and steel materials in the
country.
 Apparent consumption of finished (carbon) steel increased from 14.84 Million Tonnes in
1991-92 to 39.185 million tonnes (Provissional) in 2005-06.
 Steel industry that was facing a recession for some time has staged a turnaround since
the beginning of 2002.
 Efforts are being made to boost demand.
 China has been an important export destination for Indian steel.
  The steel industry is buoyant due to strong growth in demand particularly by the demand
for steel in China.

Production

 Steel industry was delicensed and decontrolled in 1991 & 1992 respectively.
 Today, India is the 8th largest crude steel producer of steel in the world.
 The share of Main Producers (i.e SAIL, RINL and TSL) and secondary producers in the
total production of Finished (Carbon) steel was 36% and 64% respectively during the
period of April-November, 2006.

Pricing & Distribution

 Price regulation of iron & steel was abolished on 16.1.1992.

 Distribution controls on iron & steel removed except 5 priority sectors, viz. Defence,
Railways, Small Scale Industries Corporations, Exporters of Engineering Goods and North
Eastern Region.
 Allocation to priority sectors is made by Ministry of Steel.
 Government has no control over prices of iron & steel.
 Open market prices are generally on rise.
 Price increases of late have taken place mostly in long products than flat products.

DEVELOPMENT OF INDIAN STEEL SECTOR POST LIBERALISATION (SINCE 1991)

The economic reforms initiated by the Government since 1991 have added new dimensions to
industrial growth in general and steel industry in particular. Licensing requirement for
capacity creation has been abolished, except for certain locational restrictions. Steel industry
has been removed from the list of industries reserved for the public sector. Automatic
approval of foreign equity investment upto 100% is now available. Price and distribution controls
have been removed from January, 1992, with a view to make the steel industry efficient and
competitive. Restrictions on external trade, both in import and export have been removed.
Import duty rates have been reduced drastically. Certain other policy measures such as
reduction in import duty of capital goods, convertibility of rupee on trade account, permission to
mobilise resources from overseas financial markets and rationalisation of existing tax structure for
a period of time have also benefited the Indian Steel Industry.

Will de-integration work?

Steel majors are now eyeing a new model that involves dispersal of facilities in different regions.
Initiated by Tata Steel, the de-integration model is finding favour with other domestic players too.
Steel companies are thus considering mining the primary metal in countries rich in raw materials
and undertaking processing in growing markets. By adopting such a strategy, they are aiming at a
complementary presence in various low-cost manufacturing bases and high-growth markets.

Key challenges
Realising the importance of cutting down logistics costs, Tatas and Essars are investing in ports,
roads and rail infrastructure. As freight forms a substantial part of operating costs (12-15 per cent),
efficiency of steel companies in managing logistics is going to be crucial.

Further, executing projects of this magnitude calls for greater discipline and strict monitoring. Cost
and time over-runs have affected the viability of steel projects in the past. We believe the execution
risk remains high for the projects announced by SAIL and Jindal group.

Apart from the above, the ability to successfully integrate global operations and fund expansions
at low cost and minimum risk will also prove challenging.
The parties Involved

TATA STEEL

Overview: Tata Steel is India's 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.
It is a vertically integrated manufacturer and is one of the world's most profitable and value creating
steel companies. Tata Sons, Tata Steel and other Tata companies had combined revenues in
2005/06 of approximately US$22 billion. Tata Sons'current investments are valued at
approximately US$50 billion.

CORUS
Overview: Corus is Europe's second largest steel producer with revenues in 2005 of £9.2 billion
and crude steel production of 18.2 million tonnes, primarily in the UK and the Netherlands. It is the
fifth largest global steel producer with pro forma crude steel production of 23.5 million tonnes in
2005.

Company business
The company’s business activities are organized into fits segments: mining, steel
making, infrastructure and cement.

Company facilities
The company’s facilities include a cold-rolling and galvanizing facility in the US, a steel mill in
Portugal in which it holds a 50% interest, two galvanizing plants in Brazil, GalvaSud and CSN
Paraná, and Presidente Vargas Steelworks located in Volta Redonda.

Three major expansions were undertaken at the Presidente Vargas Steelworks during the 1970s
and 1980s. The first, completed in 1974, increased installed annual production capacity to 1.6
million tons of crude steel. The second, completed in 1977, raised capacity to 2.4 million tons of
crude steel. The third, completed in 1989, increased capacity to 4.5 million tons of crude steel. IT
was privatized through a series of auctions held in 1993 and early 1994, through which the
Brazilian government sold its 91% interest in its company. In 1993, IT adopted a capital
improvement program, which was revised and extended in 1995.

Company business strategy

Its mission is to increase value for its shareholders, maintaining its position as one of the world's
lowest-cost steel producers while maintaining a high EBITDA margin. With this in mind, IT intend
to strengthen its position as a global player, optimizing its infrastructure assets (its mines, ports
and railways) and their competitive cost advantages.
To achieve this goal, IT has adopted strategies in each of its fits business segments

It has the following competitive advantages over its Brazilian competitors:

• Its focus on selling high margin products, such as tin plate, pre-painted, galvalume and
galvanized products, in its product mix.
• Its ownership of iron ore reserves, compared to its domestic competitors that purchase their iron
ore requirements mainly from CVRD.
• Its thoroughly developed logistics infrastructure, from its iron ore mine to its steel mill to, finally,
its ports.
• Its self-sufficiency in energy, through its interests in hydroelectric plants of Itá and Igarapava,
and its own thermoelectric plant inside the Volta Redonda mill.
• GalvaSud, which provides material for exposed auto parts, using hot-dip galvanized steel and
laser-ITlded blanks, a trend in this industry. This, together with its hot-dip galvanizing process
know-how, should allow us to increase its sales to the automotive
segment.
• CSN Paraná, gives us additional capacity to produce high-quality galvanized, galvalume and
pre-painted steel products for the construction and home appliance industries.

It competes on a global basis with the world's leading steel manufacturers. It has positioned itsselves
in the world market with a product mix characterized by high margin, high demand steel products such
as tin mill and galvanized. IT has relatively low-cost labor available and own high- grade iron ore
reserves that more than meet its production needs.

Its sales and profits growth over past few years is shown below.

1400

1200

1000

800
Adj. EBITDA in
600 millions of US $

400

200

0
2000 2001 2002 2003 2004
Factors leading for the sale:
Reasons for corus:

Total debt of corus was 1.6 billion GBP for which it needed a backing. After undertaking the
turnaround it made more sense for it to go scouting for being acquired by a buyer. Corus needed
supply of raw materials at lower cost. Its operations were not very profitable. Though corus had
revenues of $ 18.06 billion its profit was just $626 million, whereas TATA Steel’s profit was $824
million for a revenue of just $4.84 billion.

Reasons for TATA steel to bid:

To enable de integration of the steel plant, by locating raw materials near the mines and the
finishing factories near the market for obtaining operational efficiencies. It would also provide
access to the advanced R & D and technology of Corus and market higher end products in Europe.
Further cost of acquisition is far lower than setting up an equivalent green field plant which would
take a longer gestation period around 15 years.

ANALYSIS:

TATA-CORUS: STRATEGIC FIT

Tata Steel has won the race to acquire Corus Group. The bidding war between Tata Steel and
Brazilian company CSN was riveting and ended in a rapid- fire auction. Initial reactions to the deal
were highly diverse and retail investors were completely puzzled by the market reaction.

Going by the stock market reaction, the acquisition seemed a big blunder. The stock tanked 10.5
per cent after the deal was announced and another 1.6 per cent later. Investors were worried about
the financial risks of such a costly deal.

Media reaction to the deal has been just the opposite. Almost all the reports were adulatory while
editorials praised the coming of age of Indian industry. A prominent financial daily presented the
deal almost as revenge of the natives against the old colonial masters with a picture of London
covered in our national colors.

Its editorial warned the market 'not to bet against Tata', citing the previous instances when skeptics
were proved wrong by the group. Official reaction has been no different and the finance minister
even offered all possible help to the Tata Group.

The last few years were some of the best ever for the global steel industry as robust demand from
emerging economies like China pushed up prices. Profits of steel manufacturers across the globe
swelled and their market capitalizations have multiplied many times.

Global Steel output

(in million tonnes)
Country 2005 2006 % change
China 355.8 418.8 17.7
Japan 112.5 116.2 3.3
US 94.9 98.5 3.8
Russia 66.1 70.6 6.8
South Korea 47.8 48.4 1.3
Germany 44.5 47.2 6.1

India 40.9 44.0 7.6

Ukraine 38.6 40.8 5.7
 Italy 29.4 31.6 7.5
Brazil 31.6 30.9 (2.2)
World production 1,028.8 1,120.7 8.9

Tata Steel believes the steel cycle is in a long-term up trend and the risk of a downturn in prices is
low.

The massive post-war infrastructure build-up in Western countries led to the sustained steel
demand growth in that period. The coming decades would see similar infrastructure spending in
emerging economies and steel demand would continue to grow, according to this view.

The International Iron and Steel Institute (IISI), a respected steel research body, corroborates this
in its outlook. The growth in demand for global steel would average 4.9 per cent per year till 2010
according to the IISI. Between 2010 and 2015, demand growth is expected to moderate to 4.2 per
cent per annum according to IISI forecasts. Much of this demand growth would come from China
and India, where the IISI estimates growth rates to be 6.2 per cent and 7.7 per cent annually from
2010 to 2015.

Global Steel Ranking

Company Capacity (in million

tonnes)
Arcelor - Mittal 110.0
Nippon Steel 32.0
Posco 30.5
JEF Steel 30.0
Tata Steel - Corus 27.7
Bao Steel China 23.0
US Steel 19.0
Nucor 18.5
Riva 17.5
Thyssen Krupp 16.5

As the industry consolidates further, Tata Steel - even with its planned greenfield capacity additions
- would have remained a medium-sized player after a decade. This made it absolutely vital that
the company did not miss out on large acquisition opportunities. Apart from Corus, there are not
many among the top-10 steel makers, which would become possible acquisition targets in the near
future.

Tata Steel – Corus Capacity

Corus Group (in UK and The Netherlands) 19

Tata Steel - Jamshedpur 5
NatSteel - Singapore 2
Millennium Steel - Thailand 1.7
 Aggregate present capacity 27.7
Tata Steel – Corus : Projected capacity

Corus Group (in UK and The 19

Netherlands)

Tata Steel – Jamshedpur 10

Tata Steel - Jharkhand 12
Tata Steel - Orissa 6
Tata Steel - Chattisgarh 5
NatSteel - Singapore 2
Millennium Steel - Thailand 1.7
Aggregate projected capacity 55.7

Neat strategic fit

Corus, being the second largest steelmaker in Europe, would provide Tata Steel access to some
of the largest steel buyers. The acquisition would open new markets and product segments for
Tata Steel, which would help the company to de-risk its businesses through wider geographical
reach.

A presence in mature markets would also provide Tata Steel an opportunity to go further up the
value chain as demand for specialised and high value-added products in these markets is high.
The market reach of Corus would also help in seeking longer-term deals with buyers and to explore
opportunities for pushing branded products.

Corus is also very strong in research and technology development, which would add to the
competitive strength for Tata Steel in future. Both companies can learn from each other and
achieve better efficiencies by adopting the best practices.

But at what cost ?

The enterprise valuation of Corus at around $13.5 billion appears too steep based on the recent
financial performance of Corus. Tata Steel is paying 7 times EBITDA of Corus for 2005 and a
higher 9 times EBITDA for 12 months ended 30 September 2006. In comparison, Mittal Steel
acquired Arcelor at an EBITDA multiple of around 4.5. Considering the fact that Arcelor has much
superior assets, wider market reach and is financially much stronger than Corus, the price paid by
Tata Steel looks almost obscenely high.

Tata Steel's B Muthuraman has defended the deal arguing that the enterprise value (EV) per tonne
of capacity is not very high. The EV per tonne for the Tata-Corus deal is around $710 is only
modestly higher than the Mittal-Arcelor deal. Besides, setting up new steel plants would cost
anywhere between $1,200 and $1,300 per tonne and would take at least five years in most
developing countries.

Financial performance of Corus would dent the hopes of Tata Steel shareholders even further.
EBITDA margins, after adjusting for one-time incomes, have steadily declined over the last 3 years.
For the 9-month period ended September 2006, EBITDA margins of Corus were barely 8 per cent
as compared to around 40 per cent for Tata Steel.

Corus Financials
Year 2004 2005 Jan-Sep 2006
Revenues 18.32 19.91 14.10
EBITDA 1.91 1.86 1.12
EBITDA Margin (%) 10.44 9.34 7.96
Operating Profits 1.30 1.17 0.75
Operating Profit Margin (%) 7.09 5.89 5.29
Net Profit 0.87 0.72 0.25
Net Profit Margin (%) 4.73 3.63 1.77
Figures in $ Billion

The price of an asset is more a factor of its future earnings potential than its past earnings record.
Operating margins of Corus can be significantly improved if Tata Steel can supply slabs and billets.
Tata Steel is targeting consolidated EBITDA margins of around 25 per cent as and when it starts
supplying crude steel to Corus.

In the Tata-Corus deal, Tata Steel will use this to inorganically grow, gaining market access to
some big steel buyers in Europe, who are on Corus’ customer list. It can also benefit from the UK-
Dutch steel major’s ability to work higher up in the value chain. It’s said that Tata Steel could send
its steel to Corus to produce more refined products with which it can then access the Western
markets. If the Tatas are bringing low-cost production to the table, Corus is offering the technology
and processes to manufacture more refined products. Many feel that the Tatas have managed to
get a good deal. Some say they have offered too low a price. Standard Life, the largest shareholder
with a 7.9 percent stake in Corus has accused its management of accepting a much too low £4.3
billion offer.

Valuation :

Taking the replacement cost approach of $1100-1300 per mmt the valuations have been justified
as the amount paid comes to only around $710 per mmt. Further this also provides speed to market
as gestation period of setting up a green field plant would take around 15 years.Though it can be
argued that the plant is old and may need some capital expenditure, this argument cannot be totally
wished away. Keeping in view if the steel upcycle extends the valuations could scale much high
comparatively on the time line.

Brokerage house First Global further estimates that a $50 fall in global steel prices could lead to a
$414-million loss from the acquisition in FY08 (see ‘Price Impact’). If there is a $75 fall, the losses
could climb to $846 million. This does not seem to be just a street view. “The world steel
consumption growth is expected to slow down from 8.9 per cent in 2006 to 5.2 per cent in 2007
and 4.2 per cent in 2010,” an ICRA industry monitor said.

However, in terms of leverage, Corus has a relatively low net debt-equity ratio of 0.25 times. So,
while Corus has room on its balance sheet to take on more debt, it may come under pressure on
debt servicing, if steel prices head in the wrong direction.
 In addition to the $ 12.1billion for equity shareholders,TATA has also entered into an arrangement
with the pension funds with a commitment to pay the deficit contribution of GBP 126 million upfront
along with increasing the contribution from 10 to 12% and assured support till 2009 which adds to
the cost of acquisition.

The stock markets has reacted negatively to the deal. Tata Steel has lost a billion dollars in market
capitalisation since it first announced its intention to buy Corus in October last year. (The BSE
Sensex rose 18 per cent during the same period.) The market perception is that the Tata Group
paid too much for this acquisition.

Funding woes:
But tying up the funding is the immediate priority. The financial strength of the Tata Group is not
in doubt. But the funding puzzle is yet to be solved. The $4.1-billion equity component is the first
bit of the jigsaw. The second piece in the puzzle is the $8 billion-debt being raised by the SPV.
The Corus acquisition is being routed through a special purpose vehicle (SPV) called Tata Steel,
UK. The Tatas have indicated that group holding company Tata Sons will pump in $4.1 billion as
equity into the SPV. The balance $8 billion will be raised by junk bonds and senior term loans (part
of it has been tied up with banks like ABN Amro, Deutsche Bank and CSFB). These loans are
expected to be serviced out of Corus’s profits; Tata Steel need not repay this. This has effectively
ring-fenced Tata Steel shareholders.

However this appears to be a cause for concern. Given Corus’s EBITDA margins of only 8 per
cent, compared to Tata Steel’s 30 per cent, the UK-based firm’s ability to service the additional
debt of $8 billion is under scrutiny.

Post Merger Issues

There is no doubt that Tata has pulled off a coup — Corus makes nearly four times more steel
than Tata Steel. Together, the combine becomes the fifth largest producer in the world and the
second in Europe. But to make the most of the deal, Tata has to manage several variables
including steel prices, raw material supplies and interest costs on the $8-billion debt that is being
raised to fund the deal. Soon he may also have to deal with the sensitive issue of possible job cuts
in Corus’s manufacturing plants. There are also the usual set of integration challenges that come
with such large buyouts.

An estimate suggests that 70% of all failed M&As have come apart due to cultural issues. The
high-profile merger of Compaq and Digital Equipment Corp failed because Compaq's high-
volume, fast-to-market focus didn't merge with Digital's long sales cycles. Peter
Killing, professor of strategy at IMD says, "This gets even more complex because Corus itself is
the result of a cross-border merger. They already have a mix of Dutch and English culture and now
add an Indian element to it as well."

Considering that there aren't too many overlaps between Tata Steel and Corus, a "light-handed
integration" makes more sense, wherein the Tatas bring in some changes, but don't do a complete
overhaul of how Corus is run. So they can bring in the accounting systems they use, the balanced
scorecard method, EVA, etc, but do not replace the top management overnight. If they do so, they
are bound to encounter huge amounts of resistance.

Conclusion:
Going by the skepticism and fortune telling going on in the industry by different analysts, it appears
that TATAs have preferred to ride on the wave of consolidation undergoing in the industry not only
to broaden their horizons but also ensure sustainability and survival in the long run. Happen what
may in future, this acquisition is surely a landmark which would provide an excellent study in times
to come.