DRIVERS AND IMPACT OF MERGERS AND ACQUISITIONS IN STEEL INDUSTRY

By Indresh Mishra

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ABSTRACT
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.

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Tax Argument 2.3.3. Market Power views and growth 2.6.1.6. Managerial Incentives 2. Agency problems 2.5.6.6 Post merger Performance Evaluation criteria 2.2. Diversification 2.3.4.2 Types of Mergers and Acquisitions 2.TABLE OF CONTENTS ABSTRACT ACKNOWLEDGEMENTS DEDICATION LIST OF FIGURES LIST OF TABLES iii iv v ix x CHAPTER 1: INTRODUCTION 1.3 Technological Progressiveness 5 5 6 7 7 8 9 10 10 11 11 12 14 16 16 17 18 vi .7.6.3.3.1 Accounting Return 2. Efficient and effective Synergies 2.3. Hubris 2.4 Financing an acquisition 2.5 Human Resource and Cultural factors 2.3 Causes of Corporate Acquisitions 2.3.3.2 Overview of the Dissertation 1 1 3 CHAPTER 2: REVIEW OF LITERATURE 2.2 Operational efficiency (cost advantage) 2.1 Definition 2.1 Background 1.

4 Data collection methods 4.1. Tata-Corus Case study 5.2 Growth of the industry 3.5 Synergies 46 46 47 47 48 50 vii .3 Background of Arcelor 5.5 Major Global steel companies 3.2.1.1.2.3 Economic trends 3.2.2 Case Study Methodology 4.1 Research question and objectives 4.CHAPTER 3: THE GLOBAL STEEL INDUSTRY 3.3 Company selection 4.1.1 Background of Mittal Steel 5.5 Hostile Takeover of Arcelor 5.1.1 Background of Tata Steel 5.2.1.1 Iron and steel making compliance history 3.2.2.1.4 Industry size and geographic distribution 3.1. Arcelor-Mittal Case study 5.4 Markets and Product range of Arcelor 5.3 Product range and Markets of Corus 5.6 Consolidation as a strategy in the global steel industry 19 19 19 22 23 24 25 CHAPTER 4: RESEARCH METHODOLOGY 4.6 Structure of the final Deal and Financing 5.4 Structure of the Deal and Financing 5.2 Markets and Product Range of Mittal Steel 5.2 Background of Corus 5.5 Analysis Strategies 27 27 28 29 30 31 CHAPTER 5: CASE STUDIES 5.7 Synergies 34 34 34 36 37 38 38 41 41 5.

2 Limitations of the Study 7.4.3 Operational Efficiency 6.1 Stock Price comparison 6.Corus and Arcelor.2.2.2 Accounting profit comparison 6.2 Swot analysis: 6.4 Comparison of Tata.CHAPTER 6: RESULTS AND ANALYSIS 6.1 Motives of Mergers and Acquisitions in steel industry 6.1 Financing of the Acquisitions 6.6 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 7.3.3 Margin picture & raw material self-sufficiency 6.2 Price paid for the acquisition 6.4.3.3 Post Acquisition Performance measurement: 6.4.4 Human Resource and Cultural Issues 6.5 Factors driving steel industry into consolidation 6.2 Arcelor Mittal 6.3 Recommendations for future research 79 79 81 82 REFERENCES 83 viii .1 Tata-Corus 6.Mittal 6.3.4.1 Implications of the Study 7.

24th Aug. America. 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. 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 . EU. China.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. 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 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 .

Most of the steel mills were partly or wholly owned by the state. Therefore. Since this topic is very broad it has been broken into several research questions: 1 . 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. According to the author. Soon after the 1980s. till then. the government realised that privatisation was required for the efficiency and competitive position of the industry. Hence. This was because the steel industry is key industry to the other industries. there wasn‟t much scope for M&A in the industry. 1980-2000 saw the era of privatisation. Since 2000. Even after the era of privatisation began in the industry. Therefore.CHAPTER 1: Introduction 1. high level of fragmentation and the cyclicality of the industry. and the remaining 67 percent is contributed by many integrated and small steel mill firms.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. many Mergers and Acquisitions have been noticed in the industry at both the top and bottom level. participants faced the challenges of overcapacity. 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 study focuses on mergers and acquisitions in the steel industry. and for this reason it had been under strict government control until the 1980s. The main purpose of this study is to find out the drivers and impact of recent mergers and acquisitions in the steel industry. M&A in steel industry has gone unnoticed by researchers.

What are the main payment methods used by these firms for Mergers and Acquisitions? 4. 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. each research question will be explained in detail. with respect to Human Resource and Cultural aspects of Merger & Acquisitions? 6. Does the acquiring steel firm gain from Mergers and Acquisitions activity? 3.1. Are the acquiring firms paying abnormally in order to rule out other competitive buyers? 5. What are the critical factors that are driving steel industry into Mergers and Acquisitions? 7. to create a size three times its nearest competitor. the author is focusing on two recent major acquisitions of steel companies: Arcelor by Mittal and Corus by Tata as case studies. Each case study has been studied in sufficient depth to comment on the objectives of the research. This Analysis will be done based on the study of Mergers and acquisitions theory in chapter 2. In the forthcoming study. What are the critical issues that steel companies will be dealing with. global steel industry in chapter 3 and Case studies in chapter 5. 2 . The significance of the former merger is that the largest steel company acquired the second largest steel producer of the world. What are the main motives that drive steel firms into Mergers & Acquisitions? 2. Will these Mergers &Acquisitions help in improving the returns on capital employed (ROCE) of the steel industry? In this study.

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

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

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

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

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

which makes it cheaper way to grow [Emery et al. especially USA. mergers in the airline industry in late 1980s resulted in higher ticket prices. Depamphilis. PP-795]. A properly structured transaction may help target shareholders to defer any capital gain from the transaction. then seller would charge higher purchase price for the tax liability imposed from the transaction. But it becomes quicker by acquiring the firm which has already developed infrastructure. Even if the firm does not have the entire market. Emery et al. 2004. 2. reduction in competitors makes price control even easier.2. 2002 highlighted that in most of the countries. 2002. 2005. [Depamphilis. Tax Argument: Arnold. 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. a firm making loss in one year can be adjusted from the profits earned in the future. In most of the cases firms are bought at a price lesser than the cost of developing them. PP-875].under watch out of regulatory authorities. Bigger business is also perceived to be more reliable. On the other hand a bigger and merged business may also insist its customers to purchase product from other division as well. 2005 added to tax benefits stating that the taxable nature of the transaction is also the key determinant for the purchase price. 8 . PP-24] Arnold. It might also be beneficial for the suppliers because they are getting volume business. If a transaction is not tax free. For example. In order to set up new facilities or establish new distribution systems it takes time. and thus attracts customers [Arnold. 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.3.

leads to realizing financial economies of scale from lower interest rates or other securities costs [Depamphilis. PP-794].3. If the firms merged have unrelated cash flow i. (2005) also stated that operating synergy is improved by economies of scale or economics of scope. 2005. Economies of scale refer to reduction of average cost of the company with allocation of fixed costs over increased volume. PP-18] For Example. stating that the net cash flow of combined unit is more than the sum of the units separately. G further explained synergy as 2 + 2 = 5 effect. Depamphilis.Emery et al. 2005 suggested that there are two types of operating and financial synergies. 2004 added another point by stating that if a firm has large cash flow and that cash is distributed amongst the shareholders. But if the company acquires another company with that cash then shareholders have to pay no tax.e. operations or departments. Efficient and effective Synergies: Synergy is based on the notion that merger of two companies can create greater value than when operated separately.3. then they will have to pay taxes(unless shares repurchased are at a price lower than the shareholders purchase price). 2. “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. This 9 . Depamphilis. Uniliver ltd uses its marketing skills for a range of personal care as well as food and tea. 2004. The merged firms help in eliminating duplicate facilities. 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. one has excess cash and the other who does not have sufficient cash to fund investments. Financial Synergies refers to the impact of merger on the cost of capital of the acquiring firm or the combined firm.” [Depamphilis. 18]. Arnold. 2005.

Firm‟s bankruptcy may lead the managers to wind up the firm and consequently loose their job. managers act as agents for the shareholder in such a situation. Acquisition decisions may also be taken by the managers to satisfy their own objectives. Managers may lack shareholders‟ interest in order to promote their own interest. The reason for this is that managers are given opportunity to deploy their underused managerial talents and skills. Depamphilis.” The primary reason for 10 .5. Managers may acquire a firm whose cash flow is positively correlated thereby reducing overall variability of the combined entity‟s cash flow.is because combining activities results in cost savings or may also increase the volume with the same amount of input [Chiplin et al. 1987]. This overall variability minimizes that probability of financial distress or bankruptcy. status. 2004 states that diversification is one of the most important motives behind a conglomerate merger. 1995. So. Managerial Incentives In the modern business scenario. 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. [Sudarsanam. 2. there are large corporations with diffusion of ownerships. It is not necessary that the managers are the owners of the company. assuming that firm‟s size may reduce this threat. This may encourage managers to pay excessive bid premium or enter into hostile bid with high transaction costs. Managers may also undertake acquisition to avoid being taken over by another firm. PP-17] 2. Diversification: Emery et al. 2005 defined diversification as a “strategy of buying firms outside a company‟s primary line of business. [Arnold. PP880] Sudarsanam (1995) pointed out that managers also have job security motive. 1995. [Sudarsanam. power and remuneration.3.3.4. 2002.

2005.6.7. 2005 (PP-22) states that managers believe that their own evaluation of a target firm is superior to the market‟s evaluation. 1993]. 2. 2005 added that the acquirer company may attempt to achieve a higher growth rate by developing and acquiring new products. This occurs specially during the period when companies have had a few good years of growth and managers are very pleased with themselves. Hubris: One of the other important motives or causes of acquisitions is hubris. Arnold. Agency problems: Depamphilis. This theory leads to mergers to correct the situation between the managers and owner‟s interest. Mostly these companies become the target of other efficient companies and the shareholder support the merger to increase their own welfare [Berkovitch et al. They obtain a reduction in risk without a decrease in return. Since the cost of mismanagement is spread amongst large number of shareholders. This over-optimism of evaluating 11 . G.3. He also stated that this happens when managers own a very small number of company‟s share. unfamiliar to the present product. 2. He also included that reduced volatility reduces the position of the shareholders.3. 2005 explains that agency problems occur due to the differences in the interest of managers and shareholders. 2002 defined hubris as a means of weaning self confidence or arrogance. 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. Arnold. managers get inclined towards their job security and lavish lifestyle rather than shareholders value. 2002 explains that cash flow from a wide variety of businesses also reduces volatility of income stream.diversification is for firms to expand their product line and markets so that they can have high growth [Depamphilis. PP-20]. Depamphilis. and sell it in different or less risky markets. Depamphilis.

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

2003. 1993) showed that high leverage encourages managers to work hard and bond their promise to pay out future cash flows. management control issues. The reason must be the high costs of debt may lead to bankruptcy of the firm in long run. Grossman and hart (1982) as cited by (Maloney et al.Stock method: In payment through stock method the shareholders of the target become the shareholders of the bidder. The proportion of debt and equity depends upon the size of deal. Before making debt and equity decision it is important that bidder should check the dangers and benefits of leverage in the firm. 13 . 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. (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. This happened because of the high interest burden of the debt and their principal instalment burden. Acquisitions can also be paid using both stock and cash. These include tax considerations. On the other hand. which consequently affects the cash flow of the company and thus increases the chances of bankruptcy. further pointed out that debt helps in controlling the agency costs. He also stated that highly leveraged companies have very little opportunity to waste resources on unprofitable ventures. PP-382]. it can be combination of debt and equity. accounting treatment. financial returns to the shareholders and the existence of slack or unused financial resources. 2005] According to the study conducted by Hitt et al. It is also cost for the bidder because it is loosing opportunity of issuing those shares for cash [Mclaney. There are other several considerations as mentioned by Hitt et al (2001) for the selection of medium of financing. Maloney et al. type of the deal and market conditions.

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

legal. These are either imposed by law or societal expectations. heritage. He also explained that in a global corporate acquisition there can be difference in law. religion. language. There can be many other issues which may cause trouble for the acquiring company. Krogh et al (1994) mentioned that there can be three types of cultural difference those are organizational. He further mentioned that there is cultural risk to integration of merger or acquisition. 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. Krogh et al (1994) pointed that there is always cultural difference between an acquiring firm and acquired firm. law. Mismatch in of values. Every country has its beliefs. In other words. nature of the economy. 15 . professional and national culture. customs and practice. engineering culture. belief. beliefs or priorities or assumptions on each side of two merged companies then these effects the performance of the combined entity. ways of thinking and values. language. government culture. ways of doing business. business culture. socio cultural background. values. and so on. 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. Lees (2003) explained that culture concept is related to myths. legal culture and medical culture. management styles. values. political context. symbolism. 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. history of the country. 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. rituals. customs and practices. These basic assumptions also exist outside and inside the firm. attitudes.hearts and minds of the employee is the immediate necessity of any acquisition.

1 Accounting Return: Accounting Return is generally measured in terms of Gross profit margin (GPM). Becher et al. Cochran and wood (1984) as cited by Fowler & Schmidt (1988) states that financial performance measurement falls in two categories i. But many authors defined these terminologies in their own ways. 2. Operating Profit Margin (OPM). whereas on the other hand Return on Equity (ROE) measures both. Normally Earnings before tax is used for calculating ROE but Pilloff. 1996 as cited by Becher et al.6 Post merger Performance Evaluation criteria: After the acquisition. 1990 recommended Return on Capital Employed (ROCE) and Return to Shareholders (RSH). Fowler et al. it is important that the acquiring company utilizes the synergetic advantages properly improving the overall performance of the firm. Net Profit Margin (NPM). 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.2. 1988 explained that although there are numerous organizational performance measures but financial measures is the most popular method. accounting returns and investor returns. how well assets have been managed to generate profits as well as how assets have been financed. 2005 used operating income before provisions to calculate and found no change in post merger ROE. Fowler & Schmidt. Return on Equity (ROE) and Return on Assets (ROA).6.e. Where ROCE = Earnings before tax / Capital Employed 16 .

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. 17 .And. 1989 2.2 Operational efficiency (cost advantage): Operational efficiency includes operational synergy within the combined firm. Some of the other ratios mentioned by Cooperman et al. Table1: Definitions of various performance measurement ratios. 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. 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.6.

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

This process was very expensive method of extraction was difficult [Bhaskaran. During 1960-1990 was the period of nationalization and increase in state control because of the excess capacity and inefficiency. This process is being used by all modern steelworks. In 1855 the blast furnace process was invented by Henry Bessemer at his steel plant in England.1 Iron and steel making compliance history: In ancient times. This was a much more modified version of steel production process.CHAPTER 3: The Global Steel Industry 3. During 1950-1970. 3. This so because the process used for manufacturing was work intensive and time consuming.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 known as „cementation process‟. automobiles and capital goods [Bhaskaran. 2006]. Till 1980s most of the steel plants were state owned either partly or wholly. Further down in 1952. This led to many new investments in big integrated steel plants. steel industry was highly subsidized. After the invention of this process steel extraction became less expensive and started being used for construction. In this period steel was manufactured by reverse process and adding carbon to the carbon free wrought iron. Voest-Alpine introduced „basic oxygen furnace‟. 1980s to 2000 was the era of re-privatisation of the steel 19 . 2006]. This process was a new way to produce steel and first less expensive industrial process for mass production. 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. exempted and received many other favours from the national government.

Some of them have been included in the table below [Reynolds. For example. 2006 Even After re-privatisation steel industry was controlled by government.industry. 2006]. 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. 2007]. This consequently lifted global steel industry to a new height [Rasheeda. Many steel companies were privatised. Whereas Chinese government introduced number of subsidies in order to boost its steel industry. US government imposed an import tariff of 30 percent in order to protect its domestic steel industry. Subsidies and tariffs were tools that government used in order to control and protect the domestic steel industry. in March 2001. 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. 20 .

Table 3: Year wise world steel production Years 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 World 1.069 970 904 850 848 789 777 799 755 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.244 1. 2006 (www.org) Figure 2: Year wise world steel output in form of graph Source: International Iron and Steel Institute.worldsteel.142 1.worldsteel.org) 21 . 2006 (www.

5 percent to 1244 in 2006. This led reduction in demand from these major steel consuming countries as compared to the supply. construction and automobiles showed recovery [Bhaskaran. Even sectors like housing. demand from the developing countries started increasing but was not sufficient to meet the supply [Rasheeda. During this time. cycle of 25 years can be noticed in the steel industry. 1950-1975 has been noticed as uptrend and 1975-2000 as downtrend in demand. steel industry grew from 189 million metric tonnes to 684 million metric tonnes in just 25 years. In order to fight this recession. In figure 2. as these countries were growing and focused on infrastructure development. American and Japanese economy stabilised which led to the flattening of demand. steel industry grew from just 28 million tons (MT) to 789 MT as shown in the Table 3 above. This led to the imbalance between demand and supply. 2007]. This happened due to increase in demand from China and other South Asian countries like India. the European. As shown in the figure 2. 2006]. 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. steel industry was ignited with mergers and acquisitions since 1997. 22 . [Bhaskaran.3. The steel industry has always been a cyclical business. 2006] Steel industry again showed a sign of recovery in 2002.3 Economic trends During the 20th century. The highest growth has been noticed in the period between 1950 and 1975 as shown in figure 2. Steel prices went down 20 year low in this period and new capacities became uneconomical. In this period capacity utilisation was fluctuating between 70 to 80 percent. Most of the steel companies in the period of 2002 to 2006 have shown recovery and growth in profits. But in 1975. Many of the steel companies in Asia pacific regions have added capacity in this boom period. Uptrend again started in the industry in year 2002 and in just span of 4 years capacity increased by about 27.

China emerged as the biggest producer in the world with the production of 220 million metric tonnes. www.org].4 Industry size and geographic distribution In 2003.worldsteel. China produced approximately 350 million metric tonnes. an increase of 25 percent as compared to last year. China France Spain Mexico Canada United Kingdom Belgium Source: International Iron and Steel Institute.org) 23 .6 million tonnes [International Iron and Steel Institute.worldsteel. 2006 (www. 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. The other top producing countries of 2006 were Japan with 116. In 2006 China produced 34 percent of the world steel production. China also imported 43 million metric tonnes of steel in that period.3.2 million tonnes and US with 98. During 2005.

0 Nippon Steel 30.5 Riva 16.5 Major Global steel companies: The table 4 shown below shows all the major companies of steel in the world as per the figure of 2005.1 Tangshan 13.5 ThyssenKrupp1 16.7 Gerdau 13.2 Corus Group 17.7 Arcelor 32.3 United States Steel 18.3.org) 24 .4 Nucor 18.5 POSCO 29.7 Baosteel 19. 2006 (www.worldsteel.9 Evraz 13.6 Severstal Source: International Iron and Steel Institute.0 Mittal Steel 46.9 JFE 22. 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.

which started its business in Indonesia in 1976. Mexico. Mergers and Acquisitions strategy was one of the surviving strategies for some of the large companies. Germany. 2001] In the span of just 15 years it became the largest steel producer in the world after the acquisition of ISG for $4. M&A helps the companies to reduce costs and getting better price from their customers. It had no global player during this time [Sinha. Ireland and USA. 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 . There was capacity mismatch and consequently the prices reached the lowest ever. But since the late 1990‟s the rise in consolidation has been noticed in the steel industry. This excess capacity had put too much pressure on the steel companies globally. [Ghoshal et al.3. During this period steel industry was highly fragmented and competitive. During 1990s Mittal steel. 2006 (A)]. Booming Chinese economy lead China to become leading consumer as well as producer of steel and consequently booming the steel industry business cycle [Rasheeda. 2006]. Some of the major steel industry acquisitions data has been shown in the Table given below. had bought 8 companies around the world including Trinidad.6 Consolidation as a strategy in the global steel industry Steel industry has had its worst time in the 1990s.8 billion in 2004.

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. 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). 2007] 26 .1 billion. there has been tremendous rise in demand and consolidation has been noticed. 2006 & The Hindu Business line. [Business standard. The other recent major acquisition has been made by Tata‟s buying CORUS for $12. 2007 & Business Standard.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 In today‟s scenario.7 billion.

Questionnaires. To identify the main payment methods used by these firms for mergers and acquisitions. Some of those include Surveys. All the research questions have already been mentioned in chapter 1. 13]. 2003. Each Strategy has its merits and demerits depending on three conditions [Yin. 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. Histories. Experiments and case studies.CHAPTER 4: Research Methodology This chapter describes the research methods used for the study. 1. 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. 27 . 4. To enquire if acquiring steel firm get benefits from the Mergers and Acquisitions activity.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. There are several methods of doing research on management issues. To investigate whether steel companies are paying appropriate price for the acquisitions.

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

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

Both the companies are playing the role in consolidating the highly fragmented steel industry. The largest steel producer acquired second largest steel producer of 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. Studies of different companies with different backgrounds were conducted. Both the acquisitions are considered to be one of the biggest deals in the history of steel industry. The other criteria‟s for selection of cases has been cross boarder acquisitions to focus on the HR and cultural issues. It will be interesting to know about the company‟s motives and their roles in doing so. 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. [Neuman. [Neuman.4 Data collection methods: There are two kinds of data collection methods: Quantitative research method and Qualitative research method. hypothesis testing and statistical methods and there less variations across a range of different research projects. Both the methods are commonly used in research and are chosen depending upon the study. which is considered to the largest deal of all time in the history of steel industry. 4. 2006. 1994] It is highly developed and builds on applied mathematics. 1994] further explained that researchers choose from standardized set of data analysis techniques. 30 . The first case study is Mittal Steel‟s Acquisition of Arcelor in June.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. The second case study that will be used is Tata Corus deal. hypothesis and variables. The main purpose for search of quantitative data is to determine the quantity or extent of some phenomenon in form of numbers. It was also explored that the case study should contain sufficient information to fulfil the objectives of the research. It makes use of statistics. Neuman. It was observed that most of the mergers and acquisitions were ignited after 2002.

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. study on financial accounts and stock prices of the companies and other M&A related data. [Hussey & Hussey. consolidation in the industry. 1997] One of the strengths of this kind of research is that one can begin analysing early in a research project. In order to carry on this Quantitative data will include collection of statistics of steel industry. corporate websites. books and internet. Data will be collected from journals. qualitative data will also be useful with the in-depth analysis of M&A in steel industry. news. case study and lastly in-depth analysis of mergers and acquisitions in steel industry. In this research statistics and numerical data is rarely used. research can be based on both the qualitative and quantitative methods. In Mergers and acquisitions. consisting of transcription of interviews or discussions.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. 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. The 31 . even while collecting data. The research will be started with the literature review and collection of information related overview of steel industry. The first objective of the study is to indicate/ highlight the motives of steel companies behind Mergers & Acquisitions. This objective has been solved by analysing the combined motives of both the companies from the data available in the case study. On the other hand qualitative research tends to be unstructured and text based. 4. With the use of both the methods qualitative research can provide detailed description along with numerical description that quantitative research provides. articles. 1994]. field notes or other written documents. 1994].

with respect to Human Resource and Cultural aspects of Cross Boarder 32 . The second objective is to enquire if steel companies are benefiting from Mergers and Acquisitions. However the above calculation will not be enough to comment on the pricing issue. Weaknesses. Enterprise value per ton (EV per ton) and Enterprise value per EBDIT (EV per EBDIT) values will be compared. post acquisition performance measurement criteria that will be discussed in literature review will be used in practice. In order to know the appropriate price paid for the acquisition. The third objective is to identify the main medium of financing used for these mergers and acquisitions. For this purpose case study has been studied and the main financing method used has been distinguished in both the cases. In order to solve the purpose of this objective SWOT (Strength. Enterprise value is total value of the company includes the equity and total debt of the company. Those criteria‟s are stock price comparison. So. The fourth objective is to investigate if steel companies are paying appropriate price for these mergers and acquisitions. Conclusion will be drawn based on the comparison. In order to get even better picture of the benefits.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 of the company is to identify the issues that steel companies will be dealing with. Accounting profit comparison and operational efficiency. iron ore mining assets of TataCorus will be compared with Arcelor-Mittal. 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. 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.

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. The seventh and last objective of the research is to discuss whether M&A will reduce the cyclicality of the steel industry.Merger & Acquisitions. cost structure and consumption & production structure. 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). This purpose will be served by studying the HR &cultural fit of both the organisations and generating the issues. If these challenges can be minimised by mergers and acquisitions then those challenges are the determined factors which are driving steel industry in consolidation. 33 . 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. This structure of the industry will determine the consolidation structure. conclusion will be drawn thereafter. Thoughts will also be generated on how mergers and acquisitions can help in minimising those challenges. The sixth and main objective of this research is to find out the critical factors driving Steel industry into mergers and acquisitions.

2006 & Mathew. Arcelor-Mittal Case study: 5. 2006 & Mathew. Tata-Corus is that the 55th largest company bought 8th largest company to become 5th largest company in the world. whose combination created the largest steel company in the world. 5. Further. 2006] Mittal Steel was started by its Chairman and CEO Lakshmi Niwas Mittal. first background of acquiring and acquired company will be studied in both the case study. In this chapter.CHAPTER 5: CASE STUDIES In this chapter. [Gayathri. 34 . He started his career working in his father‟s Steel Company during his college times at Calcutta. and revenues of USD 31. 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. Its steel production accounted for 6 percent to the total steel market of the world. Then structure and payment method used by the deal will be discussed. visualising the opportunity in the steel industry he moved on to Indonesia to set up a steel company and founded Ispat Indo. Synergies expected by combined company will be stated. which have been mentioned in Table 6 [Gayathri. In 1989 he made his first acquisition of government-owned steel firm at Trinidad and Tobago and turned it around.1.1. In 1976. India.2 million tonnes of crude steel production.1 Background of Mittal Steel: Mittal Steel has been one of the most successful steel companies in the world with 49.e. three times the size of its nearest competitor. 2006]. Over the years he bought many more government and privately owned steel enterprises. He doubled its output and brought it in profit. The first company that has been studied is Arcelor-Mittal. This is very unusual combination.2 billion in 2005.

9 3.3 1.2 N/A 20 7.8 3. Sinha.4 2.5 1 3. 2006] 35 . exploiting economies of scale and selling higher-value products. 2006. [Gayathri.5 billion.4 1. Mittal steel came into highlight when he merged its companies Ispat International and LNM Holdings and bought International steel group in 2005 for USD 4.8 2. 2006 (A) Mittal succeeded largely from turning around state owned loss making firms by cutting costs.9 N/A 0. 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.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. 2006 & Mathew.7 N/A Source: Compiled by Author from Gayathri. 2006 & Mittal Steel.8 5.

in January 2006 Mittal Steel completely changed the scenario of the Steel industry by placing bid for Arcelor. Table 7: Markets of Mittal Steel Source: Mittal Steel. Asian and African market. [Gayathri. Still it had very appropriate mix of long and flat products. Mittal Steel was market leader in Eastern and central Europe. 2006 & Mathew. Moreover.8 billion (initial bid amount USD 2. Mittal bought Kryvorizshtal which produced approximately 20 percent Ukraine‟s Output.In 2005. 2006] 5. 2006 (B)].8 billion) for this deal because of the presence of competitor Arcelor. Mittal paid USD 4. This might have prompted Mittal Steel to takeover Arcelor.1. 36 . 2006 (C) The product portfolio of Mittal as shown in the Figure 4 consisted of mostly low value products.2 Markets and Product Range of Mittal Steel Mittal Steel had strong presence in North America. 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.

Arcelor also used the strategy of growing through acquisitions. Aceralia of France and Usinor of Spain.6 percent stake. In early 2006. it bought Poland‟s Lucchini Group and expanded its operations in Eastern Europe. 2006] In 2005.Figure 4: Product Portfolio of Mittal Steel based on 2004 Source: Mittal Steel. Arcelor had crude steel capacity of 43 million tonnes and was the second largest steel producer after Mittal steel. 2006] As of 2005. the Canadian steel producer and hoped to establish its market in North America as well.3 Background of Arcelor: Arcelor was formed in 2002 as a result of the merger of Arbed of Luxembourg. 2006 (B) 5. [Agarwal.1. Arcelor comprised 371 fully consolidated companies and 180 companies that were consolidated by distributing the equity. In February 2006. Arcelor had 84. [Gayathri. which overtook Arcelor in 2004 as the largest producer 37 . The three companies joined together in order to create the largest Iron and Steel company in the world in 2002. for Rmb 2. Laiwu Steel Group (capacity of 7 million tonnes).39% shares with the public in the open market and the largest stakeholder being the state of Luxembourg with 5.1 billion. Arcelor acquired 38 percent stake in China‟s largest producer of sections and beams. In 2005. it acquired Dofasco.

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.

38

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.

39

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.

40

2 percent earlier.6 Structure of the final Deal and Financing: After 5 months of hostility. 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 33.1. Arcelor chairman Joseph Kinch would become the chairman of Arcelor Mittal and Lakshmi Mittal would become the president of the Board [The Tribune.55 in cash for each share of Arcelor. on June 25. Mittal Steel decided to raise its offer to 1. Mittal Steel also offered 13 Mittal Steel shares and Euro 188. 2006].084 Mittal Shares and Euro 12.June 20: Severstal revised its terms and raised the bid and agreed to settle on the 25 percent rather than 32.7 billion [BBC news. 2006]. 2006.4 per Arcelor share. Arcelor shareholders received 69 percent of offer in shares of Mittal Steel and balance 31 percent in cash. Mittal on terms also agreed to limit his holdings to below 45 percent. 2006 & The Tribune. 2006 Arcelor board recommended shareholders merger with Mittal Steel. 2006]. June 23: Arcelor and Mittal decided to meet on June 25. This was done so reduce the control of Mittal family in the combined enterprise [The Tribune. 5. This made total of Euro 40. After the merger Mittal would hold 43 percent stake in the merged company.42 for every 12 convertible bonds of Arcelor.

2006 (B)]. 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. This combination accelerates this process and leaves us uniquely positioned to benefit from the opportunities created. 2006 (B) 42 . The combined company will have 61 pants in 27 countries with 320000 employees and an annual turnover of USD 69 Billion [Agarwal. The combined company will generate financial synergies.Laxmi Niwas Mittal. 2006 (B)]. The other financial synergies are that the company will also benefit from lower cost of capital. Table 8: Source: Mittal Steel.1.5.” . improved cash flow and improved access to capital markets [Sinha.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. as shown in Table 8. 2006 & Sinha. Chairman and CEO.

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

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

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

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. B.1 Background of Tata Steel: Tata Group was formed in 1868 by Jamsetiji Nusserwanji Tata. and primarily manufacturing facilities where manufacturing is competitive” [Bhaskaran. globalisation is a method by which you put the right part of the value chain in its right place in the world. Also. EBDIT of USD 1815 million and Net Profit of USD 961 million in financial year 2006-07 (excluding Corus). Tata Steel was formed in 1906 celebrating its 100th year in 2006 [Rasheeda.93 million tonnes (India) of crude steel and sold 4. [Tata Steel. Tata Steel is fully integrated across its value chain. and link it up properly-finishing facilities where customers exist. Tata steel has been in the process of building a global company. Tata Steel. Over all Tata Steel has a capacity of 8.2. 2006]. 2006 & Bhaskaran.79 million tonnes. Tata-Corus Case study 5. Muthuraman.2. 200607] From last few years.8 Million tons. It is 100 percent self-dependent as far as raw materials like iron ore and coal are concerned. Tata Steel Managed turnover of USD 6311million. Nat steel and Millennium Steel (Thailand). On the other hand. Managing Director of Tata Steel said “In my view. This includes the two subsidiaries. Therefore it acquired Nat Steel (Singapore) in 2004 and Millennium steel (Thailand) in 2005. It also produced 4. 2006]. it has huge expansion plans in India in years to come.5. Annual Report. it has its own distribution networks and centres all over India. 46 .

Table 9: Major Production Facilities of Corus Source: Corus. In this merger British Steel and Hoogovens had 61. Distribution and building systems division. Annual Report.5.8 Million tonnes of steel for the year.3% share respectively. 2005]. It had manufacturing facilities in UK. 2006 & Gupta. Netherlands. 47 .2. France. in the new company. It was formed with the merger of British steel and Dutch Royal Hoogovens in late 1999. It produced 18. Germany. Long products. Annual Report. Norway and Belgium with installed capacity of 21. In 2006.2 Background of Corus: Corus Group is the 2nd largest steel producer in Europe and 9th largest producer of steel in the world. 2006 5. ending 30th December 2006.4 million tonnes per annum.2.3 Product range and Markets of Corus: Product Range: Corus manufactured a large variety of steel products from different division strip products.7 % and 38. Corus had a turnover of GBP 9733 million with operating profit of GBP 457 million [Corus.

2005 In 2006.4 Structure of the Deal and Financing: In order to drive globalisation strategy Tata Steel made $8. mechanical. The product mix of Corus has been shown in figure 9 [Corus. 2006] 5. 2006 for Anglo-Dutch Steelmaker Corus Group. On 20th October. Packaging. Long products contribute around 21% in the product mix. North American. This deal was at a price of 455p per Corus share. plates. Annual Report. [Corus. electrical engineering. Tata Steel also got approval of Corus Group for 48 . Automotive. Annual Review. UK.1 Billion offer on 17th October.2. engineering steels or wire rod.Figure 9: Product Mix of Corus for 2005 Source: Corus. 2006]. metal goods and oil and gas industries. Europe is the main market for CORUS contributing to 53 percent of the total turnover in 2006. Asian markets follow with 27%. Principal markets for Corus group‟s steel products are construction. 9% and 8% respectively. Annual Report. Corus has sales office in 30 countries and has a world wide trading network. 65 percent of these coils being used for further processing into sections. Hot rolled Coil production was about 60 percent of the total crude steel produced. For this reason.

49 . which was invested by the way of equity in Tata Steel UK ltd. 2006-07 Initially the acquisition was funded by Tata steel in a mixture of cash resources and syndicate loans.5 billion and mezzanine loan of USD 0. 2006. 2006 & Goldstein.7 billion was transferred to Tata Steel Asia Holdings Pte Ltd (TSAH). CSN in made another offer 515p in December. 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. 2007.1 billion [Tata Steel. Annual Report. 2006-07]. An auction process was held on 30th January and number of bids went between Tata and CSN. TSAH raised bridge loans of USD 2. Tata Steel made final bid for the company of 608p per share or $12. Rasheeda. But a twist happened when CSN (Brazilian company) offered 475p higher than Tata Steel on November 17th 2007. As the process was extending the UK panel on takeover and Mergers set a deadline on 30th January. 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. 2006. Figure 10: Holding company format of Corus Source: Tata Steel. 2007]. Annual Report.6 billion was raised by Tulip UK Holdings. Tata Steel revised its offer to 500p per share. This amount of USD 2.the acquisition.9 Billion and was declared winner to acquire Corus [Tata Steel Annual Report.

Moreover this Tata Steel will gain from the economies of scale. The combination will make the acquirer the sixth largest steel company in the world with the Crude steel production of 23. 2006-07 The company will contribute USD 4. This will comprise of USD 700 million from internal resources. Annual Report. 5.1 billion as equity finance. Annual Report. USD 500 million from foreign issue of equity and USD 1 billion from rights issue of convertible preference share [Tata Steel.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.Table 10: Long term Arrangement of funds by the Tata Steel Board Source: Tata Steel. USD 500 million of external borrowings. USD 640 millions from preferential issue of equity shares.5 million tonnes and capacity of 28 million tons as shown in figure 11 [Tata Steel. Annual Report. USD 862 million from rights issue to equity shareholders. 50 . enhanced R&D capabilities and distribution networks in high end markets.2. 2006-07]. 2006-07]. greater production facilities.

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

2006-07]. Tata Steel also has plans to set up huge capacity Greenfield projects in India [Tata Steel. 2007]Corus has dominant market share in UK. As shown in figure 13. This is so because Corus has high skilled 950 researchers in contrast to 88 researchers in Tata Steel. 2006-07]. with 51 percent market share of carbon steels in 2006 [Corus. Tata Steel expects to send low cost slab produced in India for high end finishing at 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.” For the above reasons Tata Steel expects synergies of 350 million to be attained in third year of merger. Annual Report. 53 percent market of Corus in Europe will give Tata Steel direct access to the European High end steel markets.Corus have very little access to the mines. Annual Report. 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. 52 . The R&D department of Corus has been very successful with introducing new products for automobile and construction industries [Rasheeda. 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. 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. The other synergy is that Tata Steel will be able to get is the benefits of the R&D capabilities of Corus. 2007] Being Corus in the developed market and Tata Steel in developing market will create a powerful combination. An industry Analyst Rakesh Arora as cited by Rasheeda. [Rasheeda.

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. Figure 14: Combined Markets of Tata-Corus Source: Tata Steel. 2006 53 .Figure 13: Global Presence and customer reach of Tata-Corus Source: Tata Steel. 2006 Moreover.

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

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

56 . which will help them earn sustainable earnings in the long run. 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. 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. the steel industry has been highly fragmented. This has also been steel companies‟ primary motive. It will also enable the steel companies to carry combined research and development with their consumers. Furthermore. 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. On the other hand. Strength to face down turn: When steel companies turn big. This may enable both the companies to work together towards R&D and new product development. and a small group of customers for the steel thus produced. The reason for this is the small number of raw material suppliers to the steel industry. The motive is to win orders and gain competitive advantage against their competitors. and come up with the newer products. 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. they have better strength to face the downturn of the industry.Proportionate negotiation power with the suppliers and customers: Steel industry has been the victim of disproportionate negotiation power with its suppliers and customers. behind getting into mergers and acquisitions. Sinha. More and more acquisitions in the industry will lead to consolidation. in the steel industry the top 5 players account for only 20 percent of steel production. This is so because the combined entity has better cash flow and a wider range of market than their competitors. Since both the companies have global presence Arcelor Mittal can supply steel to all Ford plants globally.

Economies of scale: Economies of scale is one of the important motives of both the companies to gain manufacturing and R&D synergies. 57 .2 SWOT Analysis: In this section SWOT (Strengths. opportunities. 6. The combination will provide them with enhanced product portfolio. Threats) Analysis of the both the companies will be done. Weaknesses. 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. 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 13.1 Tata-Corus: Strengths: The combination of Tata and Corus will make Tata Steel the 5th largest steel maker in the world. 6. 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. It will enable Tata to utilise the distribution network of CORUS to get better price for the products produced in India. Economies of scale enable companies to invest more in research and development. 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.

The cost of raw materials constitutes approximately 40% of the total cost of steel production.75 percent of operating margin in 2005.It will be able to enhance its R&D capabilities with the highly efficient R&D of Corus. Opportunities: In terms of financing. Tata-Corus does not have enough raw materials to source for Corus‟ plants in the short term. The former can do this by listing in London Stock Exchange. If further consolidation happens in the industry. Corus specialises in carbon steel. On the other hand.cost producer with 10. Corus is a high. Tata steel stands a good chance of raising funds on Corus‟s goodwill.cost producers of steel in the world. While Tata Steel has expertise in construction steel. Combining both the margins. with 28.13 percent operating margin in 2005 as mentioned in figure12. Tata Steel is one of the lowest. Weaknesses: Since the Tata-Corus deal is leveraged buyout. debt burden will lead to increase in interest costs and affect debt-equity ratio. the overall margin will reduce drastically. which might help it in getting a better price for its share. 58 . which may lead to better profits for Corus plants. there is possibility of reduction of cyclicality of the steel industry. This may lead to conflict in the interest of the two companies.

This combined company may itself become a victim of hostile takeover by other big companies like Arcelor Mittal and Severstal. along with the wide product range of the Arcelor.1 Arcelor Mittal: Strengths: The combined entity will control 10 percent of the global steel market. Although Tata Steel. If this happens. This is because of their global presence as discussed in the above-mentioned case study.Mittal 59 . and the insufficiency of raw materials. The combination of low value steel produced by Mittal Steel and high value steel produced by Arcelor. leading with 3 times of its nearest competitor. The Arcelor Mittal combination will allow them to win customer orders from the global automakers and construction companies.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. it is possible that industry cycle changes and goes in downturn. Threats: Due to the cyclicality of the steel industry. 6. If Tata Steel wipes some of its debts with equity dilution.burden caused by leveraged buyout. Corus plants might get into trouble because of interest. to feed Corus‟ plants. Nippon steel.2. has gained size with Corus‟s acquisition.

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

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

6.Corus and Arcelor-Mittal share price movement will be observed. This shows that market did not take This shows that the stock market did not take the Tata.6. 2007). We will compare the stock price performance of both the companies. and draw a conclusion based on that.Mittal because Tata. 2006 to 24th August. 2007 Tata Steel stocks dropped 10 percent on the news of Tata Steel buying Corus on 31st January 2007 (Thiagarajan. 2007 in BSE Source: India Info line.Corus is still in the process of merger and has not come out with any results. Figure16: Price chart of Tata Steel from 28th August.Corus deal normally and was considered to be an over priced deal. As we can see in the graph shown above in Figure 16.3 Post Acquisition Performance measurement: We have already discussed some of the post acquisition performance measurement criteria in the literature review. But seeing the demand of steel and the consequent 62 . stock price went down slightly but recovered in April due to high demand of steel. Both Tata. We will use those criteria to measure the performance of both the companies. Accounting return and operational performance will be measured only for Arcelor.1 Stock Price comparison: In this measurement criterion we will observe the stock market reaction to the merger till date.3.

9 percent in half yearly reports of June 2006.3. 63 .47 to $3.rise in the price of steel may make this deal worthwhile in the long term. to 9. Gearing (net debt to equity) increased from 35 percent to 42 percent (Market watch.6 per share. Earnings per share increased from $2. 2007 As is evident in the graph above (figure 17).2 Accounting profit comparison: Tata Steel is still in the process of integration and current acquisition. Net profit margin has increased from 7. 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. This reason is preventing the Tata Steel stock prices from crumbling. This shows that stock market reacted positively on this merger.6 percent in the half yearly reports of June 2007. comparing the half yearly results of June in 2007 and 2006. It will be interesting to see its results when it comes out. 2007). The stock price almost doubled in just one year of the merger. Figure17: Price chart of Arcelor Mittal at NYSE from (August 2005 –August 2007) Source: Reuters. 6.

Operating margin for the period was increased from 11. Operating Income for the same half yearly June 2007 has increased by 50 percent and reached US$ 7687 million. as reflected in the half yearly result of June 2007. Depreciation. There has been a tremendous improvement in the operating profit as compared to the last half yearly operating profit of the combined firm. as compared to pro forma half yearly result of June 2006.3 Operational Efficiency: EBIDTA (Earnings before Interest. 64 . Taxation and Amortisation) of ArcelorMittal increased by 42 percent. But overall profitability of the company has increased tremendously as compared to the gearing.3. 6.The ratios calculated above show that although the profits of the company have increased. This shows that the combined entity has financially benefited from this acquisition.9 percent to 14. the gearing of the company has also increased. This constitutes the perfect example of achieving efficiency and higher price for the products through Mergers and acquisitions. 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.9 percent. The EBIDTA amount has increased to US$ 9672 million.

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

4. stressing on the raw material sufficiency and other operating synergies. This is because raw materials costs include 40 percent of the cost and sometimes even more.6. 66 . In short term.75 billion which includes debt of USD 0. On the other hand. 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. Enterprise value per ton paid by Mittal Steel for Arcelor was $ 586 per ton of actual steel capacity [Rediff.85 billion. This price will look cheaper if any other deal takes place with Enterprise value per ton of $ 1000.e.1 million tons. Annual Report. Interest and Tax) paid by Mittal steel for Arcelor was just 6. 2006-07] On the other hand. 21. 2007] It can be easily concluded from the above discussion that Tata Steel paid price much higher than what Mittal Steel paid. [Tata Steel.2 Price paid for the acquisition: The Enterprise Value (EV) of Corus was around USD 13. However. 2006]. Therefore.3 million tons) and USD 649 per ton based on the crude steel capacity i. One of the main criteria in the steel industry today is self. If we consider it in that perspective then certainly Tata‟s acquisition looks viable in the long run. EV/EBDIT (Enterprise Value / Earnings before Depreciation. just paying higher price than the competitor does not mean that company has overpaid for its acquisition.2 (based on FY05) as compared to more than 8 (based on FY06). It would have taken Tata Steel years to build such a huge capacity and develop such a big market for steel. Quality of assets and synergies are also very important criteria. in the following section further comment on the pricing issue will be made. [Steelworld. being a leveraged buyout. On the basis of EV per ton. which Tata Steel paid for Corus. the enterprise value came to USD 751 per ton and calculation has been based on the actual crude production of 2006 (18.sufficiency with raw materials.

3 Margin picture & raw material self-sufficiency: Iron ore and Metallurgical coal are the two major raw materials for steel industry. Corus imported 25 million tonnes of iron ore from Australia. respectively. iron ore and coking coal prices have surged by 71 % and 111 %. It also imported 11 Million tonnes of metallurgical coal 67 . in 2005. in order to be competitive in the industry it is very important for steel companies to be self. Figure 18: Graph showing world crude steel production and iron ore price trend Source: Mukherjee. South Africa and South America (Brazil).sufficient in raw materials.cost producers of steel in the world. iron ore prices have been soaring as the production has been increasing as shown in figure 18. So. Most of the raw materials requirements of Corus are purchased from the international markets. As shown in figure 18. Although the steel industry has been in its best shape since 2002. it has sufficient iron ore and coking coal mines in India to feed its plants in India. as discussed in chapter 3. Corus does not own any iron ore or coal blocks around the world to source its raw material requirements. 2007 Tata Steel being one of the lowest. Canada.4. But it does not have enough raw materials to feed the plants in Corus.6.

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

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

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

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

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

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

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

Asia & Worldwide Source: Tata Steel. Annual Report.4 75 . This boosted economy allowed the regional players to expand their capacity.6 4 1 .9 2 2 . Only in China has it been noticed that the share of top 5 players have decreased from 35. EU.7 percent in 2000 to 19.7 percent in 2005. while cross boarder consolidation was initiated in 2004-06. This has happened due to many new capacities being added in the last few years due to the economic boom in China. It is expected that the industry will see many global companies being formed between 2007 and 2015. 2006-07 The industry saw regional consolidation in 2002-03.9 2 1 7. China. 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 95 9 2000 2005 Y ear 201 0 201 5 1 .Figure 22: Shares of Top five players in North America.

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

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

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

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

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

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

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

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