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Merger & acquisition report on TATA AND

CORUS COMPANY
July 13, 2021
9446
 
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Table of Contents
 Introduction
o Tata Steel industry
o The steel industry and the global scenario in the 2000s
o Corus Steel
o The process of Acquisition
o What went wrong with the deal?
 1. Bad economy
 2. The shadow of the Chinese market
 3. High energy costs
  4. Lack of control after the acquisition
 5. Lack of knowledge transfer
 6. Paying too much for the acquisition
 7. Failing to create the expected value
 8. Cultural issues
o Conclusion

Introduction
Mergers and acquisitions possess a great potential for integrating
resources from different parts of the world and building
something even bigger from it. On 2nd April 2007, India saw one
of the biggest acquisitions ever. Tata acquired Corpus steel, the
two steel giants together possessed a lot of potential for both the
Indian and global steel industry. It might have started with
brilliant plans and great expectations, instead turned out to be a
case study of a failed acquisition. Even though it was an obvious
thing to happen, experts are still researching the reason for its
failure. “This acquisition of Corus by Tata Steel represents a big
step forward in the company’s worldwide strategy and represents
an exciting prospect for the two companies,” said Ratan Tata,
President of Tata Steel and Corus.

Tata Steel industry

Tata Steel was established in 1907. During the year 2005/2006,
the steel giant had revenue of US $5 billion and crude steel
production of about 5.3 million tonnes. Being one of the most
profitable steel producing companies, tata steel was on its way to
expanding globally. In 2005, Tata steel purchased Natsteel Asia
in Singapore and acquired majority control of Millennium Steel in
Thailand.

The Indian steel industry has a pivotal role in the development of

the nation. It could be used as an important parameter to
measure the economic development of the country. The
production of finished steel in India increased from 1,1 million
tonnes in 1951 to 31,63 million tonnes in 2001-02. This can be
considered an outstanding example of India’s economic progress
where Tat Steel had made a significant contribution. As a result,
the consumption level of steel from 1990 to 2002 was
continuously increasing. In 2003, there was a dramatic reduction
in steel consumption and production. This happened mainly due
to the inconsistencies happening in the global market.

Thesteel industry and the global scenario in the

2000s
The world’s crude steel output increased by 7-8 per cent a year
from 2002-2006 owing to rapidly increasing Chinese auto
manufacturing, shipbuilding sectors and the major infrastructure
growth, including key projects, such as the Beijing Summer
Olympics facilities in 2008. After 2004, steel prices went up and
the global steel demand continued to rise until the emergence of
a global economic crisis. The costs of production depended mainly
on manufacturing and access to power and raw materials for
production. Steel industry all over the world was witnessing
mergers to pool their resources, especially that of raw materials
and manufacturing technology.

In the mid-2000s, rapid growth in China’s economy and other

developing countries, like that of India’s, also created a growing
steel demand. China was unwilling to depend on its domestic
supplies so it relied on international markets to satisfy their
growing demands for steel. During that time, China, the world’s
largest steel manufacturer, was expected to expand its steel
capacity, which could lead to lower global costs for steel. At the
time when Tata acquired Corus Steel, there weren’t many options
for steel companies other than to acquire companies or be the
target for acquisition. These mergers and acquisitions were made
so that they would create even bigger giants in the steel industry,
eventually resulting in instability in pricing and higher profits for
the companies that produced steel.
Corus Steel
Corus was the second-largest steel producer in Europe,
generating revenues of 9.2 billion pounds in 2005 (18
billion dollars and 18.2 million tonnes’ crude steel
production, mainly in the UK and Netherlands). Corus
offered innovative solutions in various sectors like
automobile, construction, manufacturing technology.
Corus had a workforce of 41,100 in more than 40
countries along with sales and service centres all over the
world. The brand depicted quality and strength due to its
global expertise and regional customer service.

The services offered by Corus were purchased by

customers in various industries, like military aerospace,
automobile, construction, manufacturing, defence
industries, as well as in the rail and shipbuilding
industries. In 2005, Corus Steel was the largest producer
of steel in the U.K £10,142 million of annual revenue and
a workforce of 50 000 employees. The company invested
over £6 million per year for the purchase of various
products and services such as iron ore, coal, and alloys,
to sustain production and distribution operations.

The process of Acquisition

The process of the acquisition began on September 20, 2006, and
ended on July 2, 2007. Both companies have experienced many
ebbs and flow throughout the process. On April 2, 2007, the
Court of Justice in England and Wales declared the finalised
transaction between the two companies to be effective and in
accordance with the Scheme of Arrangement made by Tata Steel.
This transaction was valued at £6.2 billion (US$12 billion). 
Tata Steel, the auction winner for Corus, declared a bid of 608
pence per share, which was higher than the final bid of 603 pence
per share from Brazilian steel company Companhia Siderurgica
Nacional (CSN). Tata Steel was required to deliver the
consideration within two weeks after the date of completion of
the proposed transaction according to the regulations in the
scheme. Tata Steel and Corus were interested in the M&A deal
before the start of the deal for a variety of reasons. According to
the official press releases made by both the companies, the
combined entity will set up to have a  crude steel production of
27 million tonnes in 2007, with 84,000 employees spread across
the globe and a joint presence in more than 40 countries. The
merger possessed a huge threat to its competitors. The world’s
crude steel output increased by 7-8 per cent a year from 2002-
2006 owing to rapidly increasing Chinese auto manufacturing,
shipbuilding sectors and the major infrastructure growth,
including key projects, such as the Beijing Summer Olympics
facilities in 2008.

What went wrong with the deal?

The main reason for the failure of the operations lies in
the failure to pass the high cost of raw materials with the
customers due to the weak steel demand. During the five
years after the deal, Tata Steel has invested in iron ore
and coal mines in various countries like Canada, Africa
and Australia, to resist the inconsistencies with the input
costs in Europe. These steps were taken to insulate the
loss and to increase the profit margins over time. To
complete the acquisition, Tata steel incorporated an
indirect subsidiary called Tata Steel UK.

Corus’ aluminium and chemical business were some of

the promising assets which were sold off by Tata Steel.
The reverse integration moves by Tata Steel to secure
iron ore led to a win back gain. The addition of domestic
capacity was a key step to improve the insulation for 
Tata Steel against the fluctuations in the cost of raw
materials.

When the deal was entered into, there were several

advantages in favour of Tata Steel and the international
steel industry was highly bullish due to the Chinese
consumption. There were many benefits to Tata Steel
when the transaction was concluded, and Chinese
consumption led the international market to be highly
bullish. Things have not worked out as expected and the
global market entered into a spiralling recession. There
are various internal and external reasons that made the
deal a mistake. Let us take a look at some of them.

1. Bad economy
Since the takeover, European Tata Steel operations had been stagnant.
Steel manufacture in the UK collapsed in July 2011 with a flat line in the
seven months. Steel production in the Netherlands was increasing and
recovered much faster from the fluctuations of the market. Further, the
demand from the regional user industries such as automobile, consumer
durables and capital goods decreased. All these were reflected in the
financial performance of the company.

2. The shadow of the Chinese market

Cheaper Chinese steel flooded the European market, causing global market
conditions to be distorted and stress was placed on steel producers in the
UK. China’s steel industry has witnessed massive growth, supplying about
48% of the world’s steel consumption. Whereas the European Union
contributed only 12 %. Growth in the Chinese economy and government
investment in the business sector during the high growth phase were the
main reasons for the rise in demand for steel. The slowdown reduced this
demand sharply and thus China was left with more steel than it required .

3. High energy costs

High energy costs in the UK have adversely impacted energy-intensive
businesses like steel mills in comparison to other neighbouring countries. In
2015 these companies had to pay around 9.55 ppm a kilowatt-hour,
compared to a low of 6.7 pence an hour per kilowatt-hour in 2010. The
environmental policies of the UK along with the green tax substantially
increased energy costs for heavy manufacturing sectors since 2010.

4. Lack of control after the acquisition

The success of any merger or acquisition could be ensured only after taking
control of the new entity. There must be a plan to take control and sustain
the business operations as a going concern. Tata continued its activities in
Europe with Philippe Varin, Chief Executive Officer of Corus since 2003.
Corus recorded a loss of £458 million in 2002 only a few weeks before his
arrival.

After the acquisition of a company, the parent company must analyse the
problems and solve them with their employees. They must be present, not
only as an advisor but also as an executive authority.

5. Lack of knowledge transfer

Mergers and acquisitions provide scope for enhancing the core skills,
improve synergy and meet the needs of customers by exchanging valuable
information. A proper transfer of knowledge gives the companies a
competitive edge and helps them to sustain the business. In this case, there
was a lack of proper knowledge transfer which affected the synergy and
incurred losses to the company.

6. Paying too much for the acquisition

Tata’s acquisition of Corus, like many of its earlier purchases, was motivated
by a desire to execute bigger deals, although it could not add much value
due to the huge cost of acquisition. Tata paid far more than Corus was worth
in the transaction. Tata paid 608 pence per share in cash for Corus, which
was 34% more than the previous offering of 455 pence per share. The total
settlement amount was $12 billion, with $6 billion being a debt.

The reason Tata’s acquisition was overvalued is simply that the transaction
was far too lucrative at the time, and Tata’s management went along with
the spirit of competition and paid more than they’d like. They overlooked the
fact that the connection between both the cost and the performance was
proportional. The right price for the purchase is subjective, which means
there cannot be a single right price for any transaction. When its competitors
were already acquiring companies, Tata would have expected that the
acquisition would place them ahead in the game. Tata, on the other hand,
lacked the self-discipline to not spend any money more than it could afford. 

7. Failing to create the expected value

In this acquisition, the created value was less than the expected value.  By
two years, the profitability of Corus steel started to decline. After a month of
its release, the share price started to reduce to 20%. This indicated that the
shareholders believed that the acquisition would damage the value rather
than increasing them.

8. Cultural issues
Corus steel is a company based in the UK and Tata steel is an Indian
company. To get the best results from the acquisition, the cultural dilemma
which would impede the integration of the company has to be fixed. These
cultural difficulties are deeply embedded in the management of a company
but have been complicated due to the cultural differences between the
countries.  These issues had to be addressed before any integration.

Conclusion
The Tata Corus acquisition was the largest private-sector transaction
conducted by an Indian company outside of India. At one point the merged
entity became the fifth most revenue-generating steel company all over the
world. This acquisition may have resulted in a variety of benefits. Tata Steel
was one of the world’s most lucrative steel businesses, and the acquisition
gave space for a lot of research and learning space. English being one of the
most common languages in India has aided the process of integration.

Tata Steel had done many successful cross border acquisitions in the past.
Unfortunately, the merger did not turn out to be successful and incurred
losses. The storey of Tata’s acquisition of Corus ended on a sad note.  It is
important to analyse the reasons and understand where it went wrong.
Being a better provider of capital investment, offering excellent management
supervision and transferring valuable knowledge are the most important
conclusions that could be drawn from the mistakes. The various concerns
raised need to be taken care of while companies go for acquiring companies
across borders much bigger than them.