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[THE TATA GROUP]
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THE TATA GROUP: The Tata Group is India’s best-known conglomerate in the private sector with a turnover of around US $11.2 billion (equivalent to 2.4 % of India’s GDP). Long known for its adherence to business ethics, it is India’s most respected private business group. With 210,443 employees across 85 major companies, it is also India’s largest employer in the private sector. Founded by Jamsetji Tata in the 1860s, the Tata Group’s early years were inspired by the spirit of nationalism. The Tata Group pioneered several firsts in Indian industry: India’s first private sector steel mill, first private sector power utility, first luxury hotel chain and first international airline, amongst others. In more recent times, the Tata Group’s pioneering spirit continues to be showcased by companies like Tata Consultancy Services (TCS), today Asia’s largest software and services company, and Tata Motors, the first car maker in a developing country to design and produce a car from the ground up. The scale of the Tata Group’s operations is increasingly turning global. Tata Tea is the first Indian MNC in the global tea industry and India's largest integrated tea company; Tata Chemicals is Asia’s largest manufacturer of soda ash; Titan is one of the world’s top six manufacturer-brands in the watch segment and Tata Motors is amongst the top six commercial vehicle manufacturers in the world. The Tata Group is increasingly focusing on new technology areas, and has the largest footprint in India’s new economy; besides being the largest software services provider in the country, it is also one of the leading private sector telecom service providers, and is also India’s largest international long distance and internet services provider. The Tata brand is recognised as the largest homegrown brand in India and the most respected brand across consumer segments. The Tata Group’s stable of brands also includes many national and some internationally renowned product and service brands, including Tata Indica, Tata Indigo, Tata Safari, Taj(Hotels, Resorts and Palaces), Voltas, Tata Tea, Tetley, Tata Salt, Titan, Tanishq, Westside, and the latest addition, Tata Indicom. The Tata Group has always believed in returning wealth to the society it serves. Thus, nearly two-thirds of the equity of Tata Sons, the Tata Group’s promoter company, is held by philanthropic trusts which have created a host of national institutions in community development, education and research centers, hospitals and scientific and cultural establishments. The Trusts also give substantial annual grants and endowments to deserving individuals and institutions in the areas of education, healthcare and social upliftment. By combining ethical values with business acumen, globalisation with national interests and core businesses with emerging ones, the Tata Group aims to be the largest
and most respected global brand from India whilst fulfilling its long-standing commitment to improving the quality of life of its stakeholders. JRD TATA’S MISSION & VISION:
J.R.D. Tata It is a measure of the man and the life he lived that long before his demise Jehangir Ratanji Dadabhoy Tata came to represent an exalted idea of Indianness: progressive, benevolent, ethical and compassionate. It did not really matter that the country itself failed this utopian test. JRD, as he was known to commoner and king, had by then transcended the frailties of his milieu. Nobody could have guessed this is how destiny would unfold when JRD was born, in Paris in 1904, to R. D. Tata, a business partner and relative of Jamsetji Tata, and his French wife Sooni. JRD, the second of four children, was educated in France, Japan and England before being drafted into the French army for a mandatory one-year period.JRD then set his mind on securing an engineering degree from Cambridge, but R. D. Tata summoned his son back to India. He soon found himself on the threshold of a business career in a country he was far from familiar with. This was a young man aware of his obligations to the family he belonged to. In a letter to his father on his 21st birthday in 1925, JRD wrote, "One more year has fallen on my shoulders. I have been looking back and also deep inside myself with the merciless eye of conscience, and have been trying to find out whether during this last year I have gained in experience or wisdom. I haven't found out much yet!" JRD entered the Tatas as an unpaid apprentice in December 1925. His mentor in business was John Peterson, a Scotsman. At 22, soon after his father passed away, JRD was on the board of Tata Sons, the group's flagship company. In 1932 Tata Aviation Service, the forerunner to Tata Airlines and Air India, took to the skies. The first flight in the history of Indian aviation lifted off from Drigh Road in Karachi with JRD at the controls of a Puss Moth. JRD nourished and nurtured his
airline baby through to 1953, when the government of Jawaharlal Nehru nationalised Air India. It was a decision JRD had fought against with all his heart. The Air India saga certainly hurt JRD, but he wasn't the kind to bear a grudge. Because Air India was never just a job for JRD; it was a labour of love. Tata executives would always be complaining — in private, undoubtedly — that their chairman spent more time worrying about the airliner than he did running all of the Tata Group. JRD's ardour for and commitment to Air India was what made it, at least while he was at the helm, a world-class carrier. Wrote Anthony Simpson in his book Empires of the Sky: "The smooth working of Air India seemed almost opposite to the Indian tradition on the ground. JRD could effectively insulate Air India from the domestic obligation to make jobs and dispense favours." When JRD was elevated to the top post in the Tata Group in 1938, taking over as chairman from Sir Nowroji Saklatvala, he was the youngest member of the Tata Sons board. Over the next 50-odd years of his stewardship the group expanded into chemicals, automobiles, tea and information technology. Breaking with the Indian business practice of having members of one's own family run different operations, JRD pushed to bring in professionals. He turned the Tata Group into a business federation where entrepreneurial talent and expertise were encouraged to flower.
THE TATA GROUP: The Tata Group is India’s best-known conglomerate in the private sector with a turnover of around US $11.2 billion (equivalent to 2.4 % of India’s GDP). Long known for its adherence to business ethics, it is India’s most respected private business group. With 210,443 employees across 85 major companies, it is also India’s largest employer in the private sector. Founded by Jamsetji Tata in the 1860s, the Tata Group’s early years were inspired by the spirit of nationalism. The Tata Group pioneered several firsts in Indian industry: India’s first private sector steel mill, first private sector power utility, first luxury hotel chain and first international airline, amongst others. In more recent times, the Tata Group’s pioneering spirit continues to be showcased by companies like Tata Consultancy Services (TCS), today Asia’s largest software and services company, and Tata Motors, the first car maker in a developing country to design and produce a car from the ground up. The business operations of the Tata Group currently encompass seven business sectors – Engineering Materials Energy Chemicals Consumer Products Services and Communications and Information Systems. The scale of the Tata Group’s operations is increasingly turning global.For example, Tata Tea is the first Indian MNC in the global tea industry and India's largest integrated tea company. Tata Chemicals is Asia’s largest manufacturer of soda ash. Titan is one of the world’s top six manufacturer-brands in the watch segment. Tata Motors is amongst the top six commercial vehicle manufacturers in the world. The Tata Group’s stable of brands includes many national and some internationally renowned product and service brands, including Tata Indica, Tata Indigo, Tata Safari,Tata Sumo etc. The Tata Group is increasingly focusing on new technology areas, and has the largest footprint in India’s new economy; besides being the largest software services provider in the country, it is also one of the leading private sector telecom service providers, and is also India’s largest international long distance and internet services provider. The Tata brand is recognised as the largest homegrown brand in India and the most respected brand across consumer segments., Taj (Hotels, Resorts and Palaces), Voltas, Tata Tea, Tetley, Tata Salt, Titan, Tanishq, Westside, and the latest addition, Tata Indicom.
The Tata Group has always believed in returning wealth to the society it serves. Thus, nearly two-thirds of the equity of Tata Sons, the Tata Group’s promoter company, is held by philanthropic trusts which have created a host of national institutions in community development, education and research centers, hospitals and scientific and cultural establishments. The Trusts also give substantial annual grants and endowments to deserving individuals and institutions in the areas of education, healthcare and social upliftment. By combining ethical values with business acumen, globalisation with national interests and core businesses with emerging ones, the Tata Group aims to be the largest and most respected global brand from India whilst fulfilling its long-standing commitment to improving the quality of life of its stakeholders.
Mission of the TATA group:
Consistent with the vision and values of the founder Jamsetji Tata, Tata Steel strives to strengthen India's industrial base through the effective utilisation of staff and materials. The means envisaged to achieve this are high technology and productivity, consistent with modern management practices. Tata Steel recognises that while honesty and integrity are the essential ingredients of a strong and stable enterprise, profitability provides the main spark for economic activity. Overall, the Company seeks to scale the heights of excellence in all that it does in an atmosphere free from fear, and thereby reaffirms its faith in democratic values.
To seize the opportunities of tomorrow and create a future that will make an EVA positive company:
Tata is on the lookout for and shape the opportunities to get the first-mover advantage and remain ahead of competition. The opportunities could exist in emerging technologies, new business models, value creation, customer service, new products, services or businesses, financing options etc. To mobilize all resources and efforts through value based management that will help Tata earn returns better than the cost of capital. Their resolve to become EVA positive is significant in the context of industry structure for steel business worldwide. There are few steel companies that have returned value consistently. Tata believe that Tata Steel can do so based on its strengths and new initiatives.
To continue to improve the quality of life of employees and the communities:
Tata Steel continues to be guided by the TATA group’s endeavor to improve the quality of life of the communities they serve (e.g. Customers, customers’ customers, suppliers, governments, shareholders, local community etc). The company has always tried to maintain a good quality of life for its employees. The company, ahead of any legislation, introduced provident fund, maternity leave, eight hour working etc. Hopefully, similar spirit will continue to guide their future efforts in improving the quality of life of the employees.
Revitalize the core business for a sustainable future:
The core business is sought to be revitalized by a comprehensive set of initiatives under the ASPIRE program. Aspirational initiatives will be taken in each area of the enterprise to reduce costs and enhance revenues coupled with finance prudence to galvanize the core business into an attractive investment option. By making the core business EVA positive Tata wish to ensure its long term sustainability. Venture into new businesses that will own a share of future: By the year 2007 Tata expect to enter into at least one major new business that would have grown comparable in size to the core business. They also expect to continuously evaluate and expand the new businesses to compliment the cyclical nature of the steel business. Diversification pattern of the Tata Group: Year Industry entered 1874 1902 1907 1910 1912 1917 1931 1932 1939 Printing and Publishing Aviation Chemicals Textiles Hospitality Steel Power Cement Soaps and Toiletries Industry exited
1940 1952 1953 1954 1958 1962 1968 1970 1984 1993 1994 1998 Pharmaceuticals 1999 2000 2001 2003
Consumer electronics Cosmetics Aviation Air-conditioning Pharmaceuticals Tea and Coffee Information Technology Locomotives Watches Financial services Auto components Telecom services Passenger cars Retail Cement Insurance Textiles Printing & publishing Cosmetics and Soaps and Toiletries
Uphold the spirit and values of TATAs towards nation building:
Even as the face of the new business may be fundamentally different from the existing core businesses what will bind them together will be the spirit and the values of TATAs. It is their belief that upholding these values will continue to be the reason for their enduring success and respectability.
Move from commodities to Brands:
To beat the industry trend in a situation of over-supply Tata need to move away from selling commodities by converting them into Brands. Even as they will continue to leverage and take to greater heights the value of TATA brand, there will be efforts to create new images and associations for their services and products in current as well as new businesses.
EVA Positive Core Business:
At the present level of investment, Tata requires a PBT of Rs. 800 to 1000 Cr (at MAT level of taxation the PBT requirement is at Rs. 800 Cr) to become EVA positive. We expect to complete this journey in about 3 years time.Their effort should be to maximize the present value of future EVA so that the investor confidence is restored and reinforced in the core business. In the context of industry structure, the company intends to make it possible through the ASPIRE program.
Continue to be lowest cost producer of steel:
Tata has acquired the status of the lowest cost producer of steel in 2001. The world outside is, however, changing fast and the lowest cost status is constantly under threat from new technologies, currency depreciation in other countries, cost escalation of raw material inputs, energy and labour etc. Maintaining the world benchmark will be one of the greatest challenges for the core steel business.
Value creating partnerships with customers and suppliers:
Tatas recognize the value of partnerships and so do customers and suppliers whom they have helped grow in the past. Tata respect these relationships and wish to carry them forward by creating mutually value-adding partnerships. They hope to build the new business models by forging alliances with our customers and suppliers to strengthen the value chain helping us reduce the system costs, improve service levels, reach and offer new products and services. Enthused & Happy employees: A lot is dependent on the individual spirit and enthusiasm of the employees to realize our vision.Tata will accelerate our efforts to provide a work environment that will
ensure a sense of purpose and personal growth for each individual. They wish to see the smile on every face every day.
Tata wish grow but intend to temper their ambitions for growth with financial prudence to ensure a long-term sustainable future. While they will be willing to experiment and take the risk with new business models and ideas, they wish to fuel their growth ambition on conservative financials. Strategy: Manage Knowledge: Tata recognize and endorse the importance of knowledge as a source of innovation and competitive advantage. Tata wish to leverage all their associations within and outside the company to harness the ideas and provide the means for exchanging and growing knowledge. Company has started the efforts to create an atmosphere where free exchange of knowledge is amongst its 46000 plus employees and has created the infrastructure to enable this exchange. Outsource Strategically: The non-core activities and the activities that could help Tata grow by leveraging their brand image without parting with sources of competitive advantage would be selectively outsourced. Encourage Innovation and Allow the Freedom to Fail: Value based management to make the core business EVA positive will be highly dependent on innovation. Active and visible encouragement for innovation seeking behaviour will be provided to one and all. A culture of taking calculated risks will be nurtured by allowing the Freedom to take those risks without the fear of reprimand for failure. Excel at TBEM: The TATA Business Excellence Model, which lays stress on Results through the processes of Customer & Market Focus, Strategic planning, Information & Ananlysis, Human Resource Development, Partnerships etc would be Tatas guiding model for business excellence. They will continue to leverage the model’s strengths by insisting on benchmarking, Evaluation & Improvement cycles and the core values of the model to break new barriers of excellence. Unleash people’s potential and create leaders who will build the future: The entrepreneurial spirit of individuals and their inherent potential will find expression in the opportunities provided by adequate stretch and nurturing.
Development of individuals who can create and lead the businesses of tomorrow will be emphasized through sustained talent identification and development programs. Invest in attractive new Businesses: Tatas will actively seek attractive new business opportunities that will expectedly have the characteristics different from the core business. The new opportunities may have less Asset intensive nature, shorter payback period or a different business cycle that can compliment steel. The opportunities may or may not be related to steel or processing industry. Ensure Safety & Environmental Sustainability: Safety is a key priority area for Tatas current business. It will continue to be their priority for the new businesses as well. Using suitable processes, technology and work ethic will reinforce concern for environment and the desire to conserve the natural resources. Divest, Merge, Acquire: Strategic divestments from non-core or chronically under-performing businesses, Mergers & alliances for synergistic growth and acquisitions for accelerated growth will be an important pillar of strategy to maximize the present value of future EVA. International operations of the Tata Group & Tie-ups: The Tata Group has a cluster of companies operating as the international arms of its businesses. Presented here are brief descriptions of their activities.: Tata International: Established in 1962, Tata International offers value-added services in international trading. Focused on leather and engineering, it uses its well-integrated worldwide network to source globally, leverage some of its key international alliances to deliver world-class quality and work with global brands. The company and its subsidiaries worldwide have taken on various value-added roles and have stakes in a cross section of businesses. It has stakes in a five-star hotel, bus-body building and trailer manufacture, distributorships, and IT ventures; it has customer support facilities for Tata vehicles and design studios for leather. The company exports to more than 100 countries. Tata Limited: Established in London in 1907 as the Tata Group's representative in Europe, the company today operates as an agent for the global procurement of goods and services for the entire Tata Group. It offers comprehensive and highly specialised services that cover almost every type of industry and activity. Tata Incorporated: This company was established in 1945 as the representative office of the Tata Group in the United States, Canada and Latin America. Headquartered in New York, it specializes in all facets of global trading as well as the information and financial flows related to its lines of business. Besides, Tata Inc sources capital goods, machinery, spares and operating consumables for Tata companies in India.
Tata Precision Industries: Established in 1972, Tata Precision Industries was promoted by Tata Motors, Tata International AG and the Development Bank of Singapore. The company specialises in high-precision machining, precision fine blanking, engineering plastic moulded parts and tool design. Tata International AG: Tata International AG is the international investment and holding company of the Tata Group. With the combined strength of its subsidiary, Tata AG, and its associate, Tata Enterprises (Overseas) AG, all headquartered in Zug, Switzerland, it promotes and invests in various enterprises and projects overseas. Tata Enterprises (Overseas) AG: This company renders a range of promotional and project services, from project identification and design to planning and establishment of industrial ventures overseas. It offers managerial, technical and operational expertise and personnel to a wide range of industries. Tata AG: This an international trading company which works closely with Tata International and represents Tata Group companies internationally, particularly in Europe. It has traditionally promoted the worldwide export of Indian commodities, finished products and non-traditional industrial items. In recent times its focus has been on third-country international trading, counter-trading and specialist equipment procurement for overseas projects. Tata Tea Inc: A subsidiary of Tata Tea, the company was established to meet the demands of healthconscious US consumers. Tata Tea Inc has catered to the tastes of US markets for the past 15 years through its range of instant and anti-oxidant brands of tea. Engineering:
TATA ACE Technology tie-ups with The Institute of Development in Automotive Engineering, SpA (Italy) Strategic alliances / joint ventures with Cummins Engine Company Inc (USA) for Tata Cummins Holset Engineering Company (UK) for Tata Holset Tata AutoComp Systems: Technology tie-ups with Chuo Spring Company (Japan); Nachi Fujikoshi Corporation (Japan) Le Moteur Moderne (France) Robert Bosch GmbH (Germany). Tata Precision Industries (Singapore) Nita Company (Bangladesh) and Jardine Matheson for Concorde Motors. Menzolit-Fibron (Germany); Owens Corning (USA).
Joint ventures with Ficosa International (Spain) Sungwoo (South Korea) Johnson Controls (USA) T.Rad (Japan) MobiApps (Singapore) Yazaki Corporation (Japan) Nifco (Japan) Yutaka Giken (Japan) Stadco (UK) Telco Construction Equipment Company: Joint ventures with Hitachi Construction Machinery Company (Japan) John Deere (USA) Voltas: Pauling & Harneischfeger (USA).
Tie-ups with Hitachi (Japan) Dunham Bush (USA) Standard Refrigeration (USA) Tayo Rolls: Promoted by the Tata Steel in collaboration with Yodogawa Steel Works and Nissho Iwai Corporation (Japan) in 1968; collaboration with Eisenwerk Sulzau-Werfen (Austria). TRF: Tie-ups with Saarberg Interplan (Germany) Deilmann-Haniet GmbH MAN-GHH (Germany) (Germany) Thyssen Rheistahl Technik Kurimoto (Japan). GmbH (Germany) Tata Projects:
The company's power generation strategic business unit is in the process of setting up a joint venture in the Kingdom of Saudi Arabia. Once incorporated the JV will be known as Al-Tawleed Power & Energy Company, and will offer transformational capabilities to Indian equipment manufacturers in the region. Tata Technodyne: Tie-up with Fluor Daniel India. Information systems and communications Tata Consultancy Services:
Strategic alliances with Accrue Ariba ATG Dynamo BEA BlueMartini BroadVision Chordiant Clarify Cybercash E-Piphany i2 IBM Informatica Informix iPlanet Jacad Kalido Macromedia Microsoft Microstrategy NCR Net Perceptions OpenSite Oracle Peoplesoft Prime Response Rubisoft/Broadbase University of California (Riverside) University of Humberside University of Waterloo Rotterdam School of Management Carnegie Mellon University University of Wisconsin. Sales Logix SAP SeeBeyond Siebel SilverStream Sun Tibco Verisign Vignette Webmethods Webtrends.
Strategic university alliances with Indian Institute of Technology (Mumbai, Chennai and Kanpur) Indian Institute of Science (Bangalore) University of California (San Diego) Tata Infotech: Alliances with Unisys Compaq Sun Microsystems IBM CISCO BaaN CMC:
Oracle Tandem Microsoft MapInfo Uniplex.
Strategic alliances with Compaq Hewlett-Packard IBM Sun Microsystems Silicon Graphics University alliances with Jadavpur University Mysore University Engineering Staff College of India (Hyderabad) Institute of Chartered Accountants of India
Microsoft Oracle Cabletron Cisco Technical Teachers' Training Institute (Chandigarh) Institute of Management Technology (Kolkata) Vellore Engineering College.
Tata Elxsi: Strategic alliances with Silicon Graphics Alias Wavefront SDRC
MSI Bentley MSC Discreet Logic Cambridge Animations Compaq, to provide software and hardware which enables the company to integrate its various solutions. Tata Technologies: SAP Asia Systems Knowledge Technologies Microsoft Corporation International Compaq Corporation Sage International Asia Pacific Structural Dynamics Research IBM Corporation Corporation Oracle Corporation. Services Tata AIG Life and Tata AIG General: Joint venture between the Tata Group and A International Group, Inc (USA). Tata Asset Management: Joint venture between the Tata Group and Klienwort Benson Investment Management (UK). Energy:
Tata Power: Association with Tennessee Valley Authority (USA). Tata BP Solar India: Joint venture involving the Tata Group and BP Solar. It operates in the renewable energy sector. Consumer products: Tata Tea: Trading arrangement with Hitachi Business International, part of the Hitachi Group, for exports of instant tea and coffee. Joint venture with the Tetley Group (UK). Tata Tetley: Joint venture between Tata Tea and Llyons Tetley (UK). New horizons unfolding: Tata Projects Tata Projects is one of the few companies that have earned the ISO 9001, ISO 14001 and OHSAS 18001 certifications for all its operations. Power generation The company's power generation strategic business unit undertakes turnkey engineering, procurement and construction (EPC) projects in the fields of captive power plants, balance of plants for super thermal plant utilities; installation works of steam generators, turbine generators and auxiliaries up to 660 mw. As an EPC contractor the company has a knowledge base of the latest technologies and skills available in project management. The unit's offerings are based on a deep understanding of both domestic and international customer needs in order to achieve the best possible solution. Transmission and distribution The company is a key player in the extra high voltage (EHV) sector with capabilities of turnkey execution of high-voltage transmission lines and substations, execution of distribution substations and substations, and survey of transmission lines using satellite imagery and other modern technology. Backed by a dedicated workforce, the company is teaming with leading global companies in their efforts to execute mega projects in power generation, transmission and distribution. Industrial infrastructure
The company's infrastructure business unit, besides its main business of setting up seawater desalination and water-related treatment plants, is aggressively working on an end-to-end sustainable solution for providing potable drinking water in rural areas, a problem that afflicts most states in India. The company is also working towards creating a sustainable solution for treating arsenic infestation of water, particularly in the state of West Bengal and Bihar. Oil, gas and hydrocarbons The oil, gas and hydrocarbons sector has been identified as another thrust area and a new strategic business unit has been set up to handle the new line of business. At present, it is handling EPC projects for downstream oil, gas and hydrocarbon sector, establishment of crude oil and chemical storage terminals and handling facilities, installation services for main plants, and equipment and piping for refinery and petrochemical projects. Quality services This strategic business unit offers third-party inspection and expediting services in the fields of power, cement, steel, pharmaceuticals, telecom, oil and gas, petrochemicals and windmills. It also offers consultancy services for ISO 9001, ISO 14001 and OHSAS 18001, besides self-certification capabilities assessment of suppliers. Fifteen inspection centres with e-connectivity spanning major industrial cities in India provide fast and cost-effective services. In the international arena, the company is currently providing these services in Abu Dhabi, Sharjah, Dubai, Bahrain, Saudi Arabia, China, Korea and Malaysia. Community initiatives: As part of corporate social responsibility, the company is involved in finding a sustainable solution to the acute problem of fluorosis (excessive fluoride concentration in ground water) in the state of Andhra Pradesh, where the company's corporate office is located. In this regard, the company, by networking with the Federation of Andhra Pradesh Chamber of Commerce and Industry, has donated defluoridation units to provide safe drinking water
in the Gangadevapalli village of Warangal district and Chinnakandakur village of Nalgonda district, both in Andhra Pradesh. The company has also adopted a village to provide education to all children up to primary school and for adult literacy. The company, along with the Tata Relief Committee, took part in the relief operations of tsunami-affected villagers by deploying its mobile / skidmounted desalination plant for safe drinking water at Nagapattinam, Tamil Nadu. The unit is operated by a team of company personnel. Environment management Jamshedpur was India's first planned industrial township. In more recent times, Tata Steel has received ISO 14000 certification for environment management for most of its works, plants, mines and collieries.
Corporate social responsibility Tata Steel is one of the few Indian companies to be invited to join the UNsponsored Global Compact. It has also been conferred the prestigious Global Business Coalition Award (GBC) for Business Excellence in the Community in view of its outstanding work in the field of HIV / AIDS awareness. Awards
• • • • •
The Betz Dearborn Environment Partnership Award. The CII-Exim Award for Business Excellence, 2000. The JRD QV Award, 2000. The Outstanding Corporate Citizen Award from The Economic Times. The Tata Steel Rural Development Society has won the Federation of Indian Chambers of Commerce and Industry award for Rural Initiatives three times. The company has won the National Energy Conservation Award for three consecutive years from the ministry of power, government of India. The Corporate Social Responsiveness Award from Business World and Compaq.
History of British Steel
A brief history of Corus is best recounted through a series of four vivid images. The first: tumult and euphoria over its birth. British Steel, for long a symbol of British industrial nationalism, and the Dutch Koninklijke Hoogovens merged in 1999 to create what was then the world’s third largest steel maker and Europe’s largest. At that time, it was billed as the perfect merger, if ever there was one. The second: conflict and chaos. The Dutch and British sides did not get along well. Suggested closures on the Dutch side of the business were met with resistance. Sale of the aluminium business was proposed, and then aborted. On a bigger scale, even a merger with CSN was proposed and then aborted. As the powers pulled the company in two directions, the losses mounted. By March 2001, the first results after the merger saw an operating loss of £1.152 billion (for the 15 months to December) — £100 million higher than forecasts. The third image is that of Philippe Varin. He took charge of Corus as its CEO in 2003, and started with a share price of 40 pence and losses of £458 million (2002). Varin was fortuitous. Steel prices recovered and kept rising when he was at the helm. But he was also ruthless, slashing over £600 million in costs. Since 2003, share prices moved up to 390 pence (that was before Tata came calling. The 608 pence offer is now history.)
The final picture, from the past three years, is of a company that lived under the shadow of an acquisition. L.N. Mittal flirted with Corus before he found Arcelor. Then there was a steady stream of reports that said Russian steel makers such as Evraz and SeverStal were considering a bid for it. Among the four images, Corus’s new owner Ratan Tata would be most interested in the third. In many ways, Varin is the architect of the Corus that Tata has paid $12.1 billion for. Corus may have a long and rich Anglo-Dutch heritage, but in the past three years of the modern Corus’s seven-year history, it was Varin who prepared the company for its eventual destiny. Soon after taking charge, Varin launched the ‘Restoring Success’ programme, targeting cost savings of about £680 million over a three-and-a-half year period. By 2005-end, Corus had effected savings worth £555 million, and the gap between its earnings before interest, taxes, depreciation and amortisation (EBITDA) margin of 10 per cent and that of its competitors had dropped to 4.5 per cent. (Its margin was about 6 percentage points lower than its competitors in the EU in 2003.) Apart from cost savings, rising steel prices also helped. How Corus came into Existence: March 22nd 1967 The ‘Iron and Steel Act’ brought into public ownership about 90% of British Steelmaking. The country's nonintegrated steelmaking and re-rolling companies,including half of the specialised steel production facilities were left in the private sector with a number of small companies. July 28th 1967 BSC (British Steel Corporation) was formed from the UK's 14 main steel producing companies. The formation enabled the reshaping of a vital industry after years of insufficient capital investment. The 1970's The Government approved a 10 year development strategy with expenditure of £3,000 million from 1973 onwards, the objective of which was to convert BSC from a large number of small scale works using largely obsolete equipment, to a far more compact organization with highly competitive plant. Steelmaking was to be concentrated in five main areas: South Wales, Sheffield, Scunthorpe, Teesside and Scotland. It was not until 1975 that a closure programme was agreed after a 14 month review by Lord Beswick, the then Minister of State for Industry.By this time BSC was plunging into loss and important parts of the investment
programme was held back. Despite this significant closures had taken place by the end of the decade. The 1980's The start of the 1980s was heralded by a 13 week national steel strike. The strike was the result of the Corporation's pressure for change and a pay dispute.By the end of 1980, BSC had completed the closure of a number of outdated and lossmaking plants and reduced its workforce to 130,000 compared with a total of 268,500 employees at the time of nationalisation.Even so, the prospects for steel sales in the markets available to BSC were such that a corporate plan put forward in December 1980 proposed further significant improvements in cost and efficiency. The aim was to regain a competitive position as a supplier to a world market heavily over-supplied with steel products.By early 1984, BSC was achieving better labour productivity levels than most continental steelmakers and by 1988/89, a figure of 4.7 man hours per tonne was achieved - a threefold improvement since the end of the 1970s.The turnaround in British Steel's fortunes since the early years of 1980s was very substantial. The heavy losses of a few years before were replaced by a pre-tax profit in 1989/90 of £733 million. 1987 On the 3rd December 1987 the UK Government formally announced its intention to privatise the British Steel Corporation. 1988 The British Steel Act 1988 transferred the assets of the Corporation to British Steel, a company registered under the Companies Act & on 5 December 1988, dealings in shares opened at The Stock Exchange. The 1990's The early 1990's saw reduced demand and it was not until 1993 that growth in the UK economy gradually gathered pace and was reflected in a partial recovery in steel demand and price levels. The trend continued into 1994 and helped by continuing efficiency and productivity gains, British Steel returned to profit. 1999 On October 6, 1999 the merger with Koninklijke Hoogovens to form Corus came into effect. Balance Sheet of Corus:
ERIOD ENDING 31-Mar-06 31-Mar-05
Cash And Cash Equivalents 252,500 472,300
Short Term Investments 70,800 -
Net Receivables 830,100 448,600
Inventory 591,400 489,500
Other Current Assets 280,500 245,400 Total Current Assets 2,025,300 1,655,800 Long Term Investments 1,185,600 1,048,900 Property Plant and Equipment 1,023,100 891,900 Goodwill 24
Tata Steel - Corus : Projected capacity (in million tonnes per annum) Corus Group (in UK and The Netherlands) Tata Steel - Jamshedpur Tata Steel - Jharkhand Tata Steel - Orissa Tata Steel - Chattisgarh NatSteel - Singapore Millennium Steel - Thailand Aggregate projected capacity 19 10 12 6 5 2 1.7 55.7
SWOT ANALYSIS OF THE TATA GROUP FROM THE VIEW POINT OF THE CORUS MERGER: STRENGTHS: I. The Tatas have earned enormous goodwill in India, and their image is that of a benign, ethical entity: there is some danger of this image being dented by their alliance with the Marxists of West Bengal. Nevertheless, the value of their goodwill, and of their brand value continue to be enormous. II. Some of the inefficient steel mills in mature markets would face closure while others would shift production to high value-added products using unfinished and semi-finished steel supplied by steel mills in locations like India, Russia and Brazil with access to raw material. This would limit aggregate supply growth and keep prices stable in future. III. With Corus in its fold, Tata Steel can confidently target becoming one of the top-3 steel makers globally by 2015. The company would have an aggregate capacity of close to 56 million tonnes per annum, if all the planned greenfield capacities go on stream by then. IV. Corus, being the second largest steelmaker in Europe, would provide Tata Steel access to some of the largest steel buyers. The acquisition
would open new markets and product segments for Tata Steel, which would help the company to de-risk its businesses through wider geographical reach. V. There may be further constraints to exports as Tata Steel will also be servicing the requirements of NatSteel, Singapore, and Millennium Steel, Thailand, its two recent acquisitions in Asia. VI. This is unlikely to be a short-term outcome as neither Tata Steel's sixmillion-tonne greenfield plant in Orissa nor the expansion in Jamshedpur is likely to create the kind of capacity that can lead to surplus slab-making/semi-finished steel capacity on a standalone basis. WEAKNESSES: I. Research shows that steel-makers in India and Latin America, endowed with rich iron ore resources, enjoy a 20 per cent cost advantage in slab production over their European peers. Hence, any meaningful gains from this deal will emerge only by 2009-10, when Tata Steel can start exporting low-cost slabs to Corus. II. As outlined by Mr B. Muthuraman, Managing Director of Tata Steel, synergies are expected in the procurement of material, in the marketplace, in shared services and better operations in India by adopting Corus's best practices in some areas. III. Short-term triggers that may help improve the operating profit margin of the combined entity seem to be missing. In the third quarter ended September 2006, Corus had clocked an operating margin of 9.2 per cent compared with 32 per cent by Tata Steel for the third quarter ended December 2006. In effect, Tata Steel is buying an operation with substantially lower margins. IV. Investors would consider Corus a a burden for Tata Steel until such time there is a perceptible improvement in its margins. That would keep the Tata Steel stock price subdued and any decline in steel prices would have a disproportionately negative impact on the stock. V. The current cash flows of Corus are barely sufficient to cover technical upgradation, even after considering the synergy gains. If international steel prices decline even modestly, Tata Steel would have to dip into its own cash flows or find other sources like an equity dilution to service the debt. Besides, funds may also be required for upgrading some of the Corus plants to improve efficiencies. Tata Steel would have to manage all this without jeopardising its Greenfield expansion plans which may cost a staggering $20 billion over the same 10-year period.
VI. Interest rates on credit facilities for such buy-outs are often higher than market rates because of the risks involved. At an expected interest rate of 7 per cent per annum, the interest outgo alone would be over $650 million per year. Along with repayment of principal, the annual fund requirement to service this debt would be around $1.5 billion assuming a 10-year repayment horizon. VII. But that is a long way off as Tata Steel would have sufficient crude steel capacity only when its proposed new plants become operational. Till then, the company is targeting to maximise gains through possible synergies between the two operations, which are expected to yield up to $350 million per annum within three years. VIII. The synergy issue is interesting, although it is best to be a little wary of this expectation after disastrous M&A deals in the 1990s (for example, AOL Time-Warner) wherein the anticipated benefits did not materialize. However, there might be value for Tata if this acquisition is intended for the Tata Group, not just Tata Steel, to expand itself. IX. The issue of technology and plant is unclear. Apparently Corus has a number of patents, but it is doubtable that their technology is unique and advanced enough to make a difference. Otherwise, it would not be on the auction block. X. Despite Corus’ premium product line, image, and access to markets for these products, their high-cost structure militates against easy solutions. This realisation impelled Chairman James Leng of Corus to initiate discussions with potential alliance candidates. THREATS: There are both threats and opportunities with the Corus purchase. The main rationale for the purchase have been a) synergy, b) access to markets, c) access to technology, and d) economies of scale. On the other hand, steel is at a cyclic peak in demand and price right now, and it is likely that with a cooling predicted for China this year that commodity demand will slow. I. There is serious competition, from Arcelor-Mittal, the consolidating Japanese, and increasingly muscular Chinese firms. New capacity is coming online in both China and India in 2007, as well. II. Besides, along with the technology come obsolete plants, and, worryingly, unionised British labour: the kind of problem US Steel had. This is possibly the most dicey part of the deal, because these are poor-quality organised workers; and this is the real reason Corus had such low valuation -- Britain's militant union labour is comparable to
its football hooligans: unruly, difficult to manage. Tata's vaunted HR skills will be tested sorely. III. Would the capacity additions outrun the demand growth and lead to subdued steel prices? Under normal circumstances, that could have been a very strong possibility. But many industry leaders believe that the global steel industry would see a structural shift in the coming years. IV. But, are the manufacturing assets of Corus good enough to command this price? It is a well-known fact that the UK plants of Corus are among the least efficient in Europe and would struggle to break even at a modest decline in steel prices from current levels. V. Recent financial performance of Corus would dent the hopes of Tata Steel shareholders even further. EBITDA margins, after adjusting for one-time incomes, have steadily declined over the last 3 years. For the 9-month period ended September 2006, EBITDA margins of Corus were barely 8 per cent as compared to around 40 per cent for Tata Steel. VI. A 20-25 per cent equity dilution may be on the cards for Tata Steel as the company has to pay the amount of $4.1b raising from the market to Corus. The equity component could be raised in the form of preferential offer by Tata Steel to Tata Sons, or through GDRs (global depository receipts) in the overseas market or a rights offer to shareholders. VII. This has led to considerable uncertainty on the pricing front. Though regaining pricing power is one of the objectives of the Tata-Corus deal, prices may not necessarily remain stable in this fragmented industry. The top five players, even after this round of consolidation, will control only about 25 per cent of global capacities. Hence, the steel cycle may stabilise only if the latest deal triggers a further round of consolidation among the top ten producers. Corus Financials Year 2004 Revenues 18.32 EBITDA 1.91 EBITDA Margin (%) 10.44 Operating Profits 1.30 Operating Profit Margin (%) 7.09 Net Profit 0.87
2005 19.91 1.86 9.34 1.17 5.89 0.72
Jan-Sep 2006 14.10 1.12 7.96 0.75 5.29 0.25
Net Profit Margin (%) (Figures in $ Billion)
I. While a majority of analysts are willing to concede that the acquisition
makes strategic sense and may pay off in the long term, the consensus view is that stock price of Tata Steel would remain depressed in the short to medium term because of the higher financial risks II. The last few years were some of the best ever for the global steel industry as robust demand from emerging economies like China pushed up prices. Profits of steel manufacturers across the globe swelled and their market capitalisations have multiplied many times. III. A presence in mature markets would also provide Tata Steel an opportunity to go further up the value chain as demand for specialised
and high value-added products in these markets is high. The market reach of Corus would also help in seeking longer-term deals with buyers and to explore opportunities for pushing branded products.
Global Steel output (in million tonnes) Country 2005 2006 % change China 355.8 418.8 17.7 Japan 112.5 116.2 3.3 US 94.9 98.5 3.8 Russia 66.1 70.6 6.8 South Korea 47.8 48.4 1.3 Germany 44.5 47.2 6.1 India 40.9 44.0 7.6 Ukraine 38.6 40.8 5.7 Italy 29.4 31.6 7.5 Brazil 31.6 30.9 (2.2) World production 1,028.8 1,120.7 8.9 IV. Corus is also very strong in research and technology development, which would add to the competitive strength for Tata Steel in future. Both companies can learn from each other and achieve better efficiencies by adopting the best practices. V. The price of an asset is more a factor of its future earnings potential than its past earnings record. Operating margins of Corus can be significantly improved if Tata Steel can supply slabs and billets. Tata Steel is targeting consolidated EBITDA margins of around 25 per cent as and when it starts supplying crude steel to Corus. If the company can sustain such margins on the enlarged capacities, it would be quite impressive.
VI. However, long-term investors would appreciate that right now steel
manufacturing assets are costly and Corus was a prized target which made it even more costly. With the strategic importance of such a large deal in mind, Tata Steel management has taken the plunge. While the industry expects steel prices to remain firm in the next twothree years, the impact of Chinese exports has not been factored into prices and the steel cycle. There are clear indications that steel imports into the EU and the US have been rising significantly. At 10-12 million tonnes in the third quarter of 2006, they are twice the level in the same period last year and China has been a key contributor The raison d'etre for this deal for Tata Steel is access to the European market and significantly higher value-added presence. In the long run, there is considerable scope to restructure Corus' high-cost plants at Port Talbot, Scunthorpe and the slab-making unit at Teesside. However, this dynamic may change if the Tatas can make some acquisitions in low-cost regions such as Latin America, opening up a secure source of slab-making that can be exported to Corus's plants in the UK. Or if the iron ore policy in India undergoes a change over the next couple of years, Tata Steel may be able to explore alternatives in the coming years. Going by the IISI forecasts, global steel demand would be 1.32 billion tonnes by 2010 and 1.62 billion tonnes by 2015. Even Arcelor-Mittal, the largest global steel player by far, has a present capacity, which is just 6.8 per cent for projected demand in 2015. To maintain its current share, Arcelor-Mittal would have to add another 50 million tonnes of capacity by then. This confirms the view that there is still considerable scope for consolidation in the steel industry.
Global steel ranking Company Arcelor - Mittal Nippon Steel Posco JEF Steel Tata Steel - Corus Bao Steel China US Steel Nucor Riva Capacity (in million tonnes) 110.0 32.0 30.5 30.0 27.7 23.0 19.0 18.5 17.5
Thyssen Krupp 16.5 As the industry consolidates further, Tata Steel - even with its planned greenfield capacity additions - would have remained a medium-sized player after a decade. This made it absolutely vital that the company did not miss out on large acquisition opportunities. Tata Steel - Corus : Present capacity (in million tonnes per annum) Corus Group (in UK and The Netherlands) Tata Steel - Jamshedpur NatSteel - Singapore Millennium Steel - Thailand 19 5 2 1.7
Aggregate present capacity 27.7 XI. As Tata Motors is keen to enter European markets (after its aborted deal with a British auto company), and acquiring Corus may well be the first step towards a vertical integration by acquiring a local auto
plant as well: design in India at low cost, and produce in Europe for local markets. The Tata-Corus Saga: Complete Coverage Tata Steel and Corus announce revised acquisition terms at 500 pence per share Commenting on this announcement, Ratan Tata, Chairman of Tata Steel, said: "We remain convinced of the compelling strategic rationale of this partnership and the revised terms deliver substantial additional value to Corus shareholders." Jim Leng, Chairman of Corus, said "The Revised Acquisition terms from Tata Steel are a substantial increase from the previous offer. Accordingly, the Corus Board are pleased to recommend this to Corus Shareholders". Defined terms in this announcement have the same meaning as in the Scheme Document. 1. Terms of the Revised Acquisition Under the terms of the Revised Acquisition, Corus Shareholders will be entitled to receive 500 pence in cash for each Corus Share (the "Revised Price"). This represents a price of 1000 pence in cash for each Corus ADS. The terms of the Revised Acquisition value the entire existing issued and to be issued share capital of Corus at approximately £4.7 billion and the Revised Price represents: (i) An increase of approximately 10 per cent. compared to 455 pence, being the Price under the original terms of the Acquisition; (ii) on an enterprise value basis, a multiple of approximately 7.5 times EBITDA from continuing operations for the twelve months to 30 September 2006 (excluding the non-recurring pension credit of £96 million) and a multiple of approximately 5.9 times EBITDA from continuing operations for the year ended 31 December 2005; (iii) a premium of approximately 38.7 per cent. to the average closing midmarket price of 360.5 pence per Corus Share for the twelve months ended 4 October 2006, being the last Business Day prior to the announcement by Tata Steel that it was evaluating various opportunities including Corus; and
(iv) a premium of approximately 22.7 per cent. to the closing mid-market price of 407.5 pence per Corus Share on 4 October 2006, being the last Business Day prior to the announcement by Tata Steel that it was evaluating various opportunities including Corus. The terms of the Revised Acquisition described in this announcement remain subject to the Conditions and do not affect Tata Steel's intentions regarding the business of Corus, its management, employees and locations, nor the proposals relating to Corus's pension schemes, the Corus Share Schemes, Convertible Bonds or cancellation of the Deferred Shares, each as described more fully in the Scheme Document. Further details of the Revised Acquisition will be contained in a circular which is expected to be posted to Corus Shareholders shortly. On 4 December 2006 the EGM and Court Meeting of Corus were adjourned to 20 December 2006. Corus intends to advise shareholders as appropriate in due course, and in any event in advance of the meetings, on the action that shareholders should take at those meetings. 2. Recommendation The Corus Directors, who have been so advised by Credit Suisse (as lead financial adviser), JPMorgan Cazenove and HSBC, consider the terms of the Revised Acquisition to be fair and reasonable, so far as Corus Shareholders are concerned. Accordingly, the Corus Directors unanimously recommend that Corus Shareholders vote in favour of the Revised Acquisition as they have undertaken to do in respect of their own beneficial holdings of Corus Shares, representing approximately 0.1 per cent. of the existing share capital of Corus. Although Credit Suisse is acting as lead financial adviser to Corus, other members of the Credit Suisse Group are, with the consent of Corus, providing acquisition finance and related services to Tata Steel in relation to the Revised Acquisition and, as a consequence, Credit Suisse is a connected party to Tata Steel. JPMorgan Cazenove, as part of the JPMorgan group, has historical relationships with the Tata companies and, as a consequence, is also a connected party to Tata Steel. HSBC is therefore providing independent advice to the Board of Corus in connection with the Revised Acquisition for the purposes of Rule 3 of the Code. In providing advice to the Corus Directors, Credit Suisse, JPMorgan Cazenove and HSBC have taken into account the commercial assessments of the Corus Directors.
3. Financing The financing arrangements relating to Tata Steel UK, as described in Part Nine of the Scheme Document, remain in place. The additional funding required under the proposed terms of the Revised Acquisition will be funded by way of two letter of credit facility agreements dated 5 December 2006 and 10 December 2006 respectively, between, among others, TATASTEEL Asia Holdings Pte Ltd, Tata Steel, Standard Chartered Bank and Standard Chartered First Bank of Korea. ABN AMRO and Deutsche Bank, as joint financial advisers to Tata Steel and Tata Steel UK, are satisfied that sufficient resources are available to satisfy in full the consideration payable to Corus Shareholders under the proposed terms of the Revised Acquisition. 4. Implementation Agreement and Inducement Fee The Implementation Agreement as described in the Scheme Document remains in effect. The amount of the Inducement Fee referred to in the Implementation Agreement is 1 per cent. of the value of the Revised Acquisition calculated by reference to the price per Corus Share and the fully diluted share capital of Corus, together with an amount equal to any VAT which is recoverable by Corus (if applicable). 5. Disclosure of interests in Corus and irrevocable undertakings Tata Limited, a wholly owned subsidiary of Tata Sons, holds 2,125 Corus Shares. Since Corus Shares held either by members of the Tata Steel Group or by Tata Limited are excluded from the definition of Scheme Shares, Tata Steel will not be entitled to vote these Shares at the Court Meeting. Tata Steel UK has received irrevocable undertakings to vote in favour of the Revised Acquisition and the resolutions at the Court Meeting and EGM from the directors of Corus in respect of 1,164,416 Corus Shares, representing approximately 0.1 per cent. of the existing issued ordinary share capital of Corus. These undertakings are in respect of their entire beneficial holdings of Corus Shares. Further details relating to these undertakings, including the circumstances in which they cease to have any effect, were included in the Scheme Document. The interests of the Deutsche Bank Group consist of, as at 7 December 2006, a long position of 4,786,061 Corus Shares, a long position of 472,597 Dutch Bonds and a long position of 76,336 Euro Bonds. For reasons of confidentiality, only limited enquires have been made as to the interests of
the Deutsche Bank Group and a further announcement detailing such interests will be made if required. Except as disclosed in this paragraph 5, as at 7 December 2006, being the last practicable date before this announcement, neither Tata Steel or Tata Steel UK, nor any of the directors of Tata Steel or Tata Steel UK, nor so far as Tata Steel and Tata Steel UK are aware, any person acting in concert with Tata Steel or Tata Steel UK, (i) has any interest in or right to subscribe for any relevant Corus securities, nor (ii) has any short positions in respect of relevant Corus securities (whether conditional or absolute and whether in the money or otherwise), including any short position under a derivative, any agreement to sell or any delivery obligation or right to require another person to take delivery, nor (iii) has borrowed or lent any relevant Corus securities (save for any borrowed shares which have been on-lent or sold). 6. General Save as set out above, in all other respects, including the availability and terms of the Loan Note Alternative, the Revised Acquisition will be subject to the Conditions and on the same terms set out in the Scheme Document. This announcement is not intended to and does not constitute, or form part of, any offer or invitation to purchase any securities or the solicitation of any vote or approval in any jurisdiction pursuant to the Revised Acquisition or otherwise. The Revised Acquisition will be made solely through the Revised Scheme Document, which will contain the full terms and conditions of the Revised Acquisition, including details of how to vote in respect of the Revised Acquisition. Any response to the Revised Acquisition should be made only on the basis of the information contained in the Revised Scheme Document. ABN AMRO Corporate Finance Limited, which is authorised and regulated by the Financial Services Authority, is acting for Tata Steel and Tata Steel UK in connection with the Revised Acquisition and is not acting for any other person in relation to the Revised Acquisition and will not be responsible to anyone other than Tata Steel and Tata Steel UK for providing the protections afforded to clients of ABN AMRO Corporate Finance Limited, nor for providing advice in relation to the Revised Acquisition or any matters referred to herein. Deutsche Bank AG is authorised under German Banking Law (competent authority: BaFin - Federal Financial Supervising Authority) and with respect
to UK commodity derivatives business by the Financial Services Authority; regulated by the Financial Services Authority for the conduct of UK business. Deutsche Bank AG is acting for Tata Steel and Tata Steel UK and no one else in connection with the Revised Acquisition and will not be responsible to anyone other than Tata Steel and Tata Steel UK for providing the protections afforded to clients of Deutsche Bank AG nor for providing advice in connection with the Revised Acquisition or any matters referred to therein. N M Rothschild & Sons Limited ("Rothschild"), which is authorised and regulated in the UK by the Financial Services Authority, is acting for Tata Steel and Tata Steel UK in connection with the Revised Acquisition and is not acting for any other person in relation to the Revised Acquisition and will not be responsible to anyone other than Tata Steel and Tata Steel UK for providing the protections afforded to clients of Rothschild, nor for providing advice in relation to the Revised Acquisition or any matters referred to herein. Credit Suisse, which is authorised and regulated by the Financial Services Authority, is acting for Corus in connection with the Proposals and is not advising any other person in relation to the Proposals and will not be responsible to anyone other than Corus for providing the protections afforded to clients of Credit Suisse, nor for providing advice in relation to the Proposals or any matters referred to herein. JPMorgan Cazenove, which is authorised and regulated by the Financial Services Authority, is acting for Corus in connection with the Proposals and is not acting for any other person in relation to the Proposals and will not be responsible to anyone other than Corus for providing the protections afforded to clients of JPMorgan Cazenove, nor for providing advice in relation to the Proposals or any matters referred to herein. HSBC, which is authorised and regulated by the Financial Services Authority, is acting for Corus in connection with the Proposals and is not acting for any other person in relation to the Proposals and will not be responsible to anyone other than Corus for providing the protections afforded to clients of HSBC, nor for providing advice in relation to the Proposals or any matters referred to herein. The availability of the proposals discussed herein to persons who are not resident in the United Kingdom may be affected by the laws of the relevant jurisdictions. Persons who are not so resident should inform themselves
about and observe any applicable requirements. Further details in relation to overseas shareholders will be contained in the Revised Scheme Document. The distribution of this announcement in jurisdictions other than England and Wales may be restricted by law and therefore persons in such jurisdictions into whose possession this announcement comes should inform themselves about and observe such restrictions. Any failure to comply with the applicable restrictions may constitute a violation of the securities laws of any such jurisdiction. This announcement has been prepared for the purposes of complying with English law and the Takeover Code, and the information disclosed may not be the same as that which would have been disclosed if this announcement had been prepared in accordance with the laws of jurisdictions outside of England and Wales. Corus is currently subject to the informational requirements of the Exchange Act and, in accordance therewith, files reports and other information with the US Securities and Exchange Commission (the 'SEC'). Reports and other information filed by Corus with the SEC may be inspected and copies taken at the public reference facilities maintained by the SEC at Room 1580, 100 F Street, N.E., Washington, DC 20549, United States. Copies of such material may also be obtained by mail from the Branch of Public Reference of the SEC at 100 F Street, N.E., Washington, DC 20549, United States at prescribed rates and, with respect to certain reports and information, free of charge on the SEC's website at www.sec.gov. In addition, such material may be obtained from the website of the New York Stock Exchange at www.nyse.com. The Loan Notes that may be issued pursuant to the Revised Acquisition have not been and will not be registered under the Securities Act of 1933, as amended (the "Securities Act") or under the relevant securities laws of any state or territory or other jurisdiction of the United States. Accordingly, Loan Notes may not be offered or sold in the United States, except in a transaction not subject to, or in reliance on an exemption from, the registration requirements of the Securities Act and such state securities laws. Any Loan Notes which may be issued pursuant to the Revised Acquisition have not been and will not be registered under the relevant securities laws of the Netherlands or Japan and any relevant clearances and registrations have not been, and will not be, obtained from the securities commission of any province of Canada. No prospectus in relation to the Loan Notes has been, or will be, lodged with, or registered with, the Australian Securities and
Investments Commission, the Dutch Listing Authority or the Japanese Ministry of Finance. Accordingly, unless otherwise determined by Tata Steel UK and permitted by applicable law and regulation, the Loan Notes may not be, offered, sold, resold, transferred, delivered or distributed, directly or indirectly in or into the Netherlands, Canada, Australia or Japan or any other jurisdiction where to do so would violate the laws of that jurisdiction or would require registration thereof in such jurisdiction. The Dutch Listing Authority has not reviewed, approved or disapproved this announcement, the Revised Acquisition or the Loan Notes nor has it expressed a view on the accuracy or adequacy of this announcement. The Revised Acquisition relates to the shares of a UK company and are proposed to be made by means of a scheme of arrangement under English company law. A transaction effected by means of a scheme of arrangement is not subject to the tender offer rules under the Exchange Act. Accordingly, the Revised Acquisition is subject to the disclosure requirements, rules and practices applicable in the United Kingdom to schemes of arrangement, which differ from the requirements of US tender offer rules. Financial information included in the relevant documentation will have been prepared in accordance with accounting standards applicable in the UK and India that may not be comparable to the financial statements of US companies. This announcement includes 'forward-looking statements' under United States securities laws, including statements about the expected timing of the Revised Acquisition, the expected effects on Corus of the Revised Acquisition, anticipated earnings enhancements, estimated cost savings and other synergies, potential strategic options, plans for and benefits of integration, estimated future growth, market position and steelmaking capacity and all other statements in this announcement other than statements of historical fact. Forward-looking statements include, without limitation, statements that typically contain words such as 'will', 'may', 'should', 'continue', 'aims', 'believes', 'expects', 'estimates', 'intends', 'anticipates', 'projects', 'plans' or similar expressions. By their nature, forward-looking statements involve known or unknown risks and uncertainties because they relate to events and depend on circumstances that all occur in the future. Actual results may differ materially from those expressed in the forwardlooking statements depending on a number of factors, including, but not limited to, the satisfaction of the conditions to the Revised Acquisition, future market conditions, the behaviour of other market participants, an adverse change in the economic climate, a fluctuation in the level of clients'
commercial activity, appropriate consultation with employee representative bodies, a loss of key personnel and the extent to which the Corus and Tata Steel businesses are successfully integrated. Many of these risks and uncertainties relate to factors that are beyond the companies' abilities to control or estimate precisely, such as future market conditions and the behaviors of other market participants. The forward looking statements contained in this announcement are made as of the date hereof and Corus, Tata Steel and Tata Steel UK assume no obligation and do not intend publicly to update or revise these forward-looking statements, whether as a result of future events, new information or otherwise except as required pursuant to applicable law. The London business day following the date of the relevant transaction. This requirement will continue until the date on which the Scheme becomes effective, lapses or is otherwise withdrawn or on which the "offer period" otherwise ends. If two or more persons act together pursuant to an agreement or understanding, whether formal or informal, to acquire an "interest" in "relevant securities" of Corus, they will be deemed to be a single person for the purpose of Rule 8.3. Under the provisions of Rule 8.1 of the Takeover Code, all "dealings" in "relevant securities" of Corus by Tata Steel, Tata Steel UK or Corus, or by any of their respective "associates", must be disclosed by no later than 12.00 noon (London time) on the London business day following the date of the relevant transaction. A disclosure table, giving details of the companies in whose "relevant securities" "dealings" should be disclosed, and the number of such securities in issue, can be found on the Takeover Panel's website at www.thetakeoverpanel.org.uk. "Interests in securities" arise, in summary, when a person has long economic exposure, whether conditional or absolute, to changes in the price of securities. In particular, a person will be treated as having an "interest" by virtue of the ownership or control of securities, or by virtue of any option in respect of, or derivative referenced to, securities. Terms in quotation marks are defined in the Takeover Code, which can also be found on the Panel's website. If you are in any doubt as to whether or not you are required to disclose a "dealing" under Rule 8 you should consult the Panel.
Tata's Corus buy: A game theory analysis Tata Steel's acquisition of Corus shows how coordinated strategies can yield greater benefits even in a competitive marketplace. The strategic fit of Corus's range of high-end products and know-how, and its access to developed markets, combined with Tata's low-cost access to ore, efficient basic steel production, and its own market access certainly provide a solid starting point. What they have done is breaking out of the self-limiting constraints of noncooperative reasoning that actually ends up being suboptimal. Instead, a coordinated solution through collaboration has led to the potential for greater gains for both. The game plan Starting with an expectation of a good potential fit, let us see how Tata and Corus have together won out. Visualise a two-dimensional (X-Y) space with Tata's objective function along the horizontal axis (X) and Corus's along a vertical axis (Y). Tatas are out to conquer the world The essential requirement for this analysis is that there is an objective function, i.e. a line that measures increasing overall benefit, which can be defined separately for each party along one of these axes. We may surmise that Tata's primary concern was to pay no more than reasonable compensation for Corus in order to result in a profitable combination, shown as a percentage cut from a notional asking price on the horizontal axis. Corus's objective function could be the retention of maximum sustainable benefits with employment participation (assuming that the management and union are in sync). This is shown as a percentage on the vertical axis. Mapping Tata's and Corus's responses in terms of the percentage cut in price and percentage benefits retained, we get one set of points for Tata and another set for Corus. A line through the first set represents Tata's response function or strategy, and a line through the other set represents Corus's response function. For a given cut in price, Tata favours fewer benefits than Corus expects, and for a given benefit level, Corus wants less of a price cut than Tata. The Hamada diagram
The Hamada diagram enables a graphic depiction of game theory, and this analysis is an adaptation. Tata's ideal solution, referred to as its "bliss point", is on its strategy line corresponding to a high price cut. This is where it has its highest economic welfare. Corus's bliss point, likewise, is on its strategy line where retained benefits are high. Each party's economic welfare decreases as it moves away from its bliss point; each party's indifference curves are therefore concentric around its bliss point. For Tata Steel, as the cost of acquisition reduces moving right along the horizontal axis, Tata can concede more benefits to Corus's employees. For Corus, the management and employees seek a sustainable long-term solution that yields benefits with participation. Tata's and Corus's responses intersect (coincide) at N, the non-cooperative or Nash equilibrium. This is the norm for non-zero-sum games when players adopt conflicting, mistrustful strategies, so competitive responses force the solution to a point where neither can benefit by acting unilaterally. Coordinated solutions, however, can make both better-off, i.e. deliver a bigger price cut together with more benefits. This is because efficiency occurs where the respective indifference curves are tangential to each other, whereas they intersect at the point of Nash equilibrium. These tangential points are on the "contract curve" joining the two bliss points. A coordinated solution on this line is efficient, and at the midpoint C, is Pareto optimal (most efficient). Some complexities As things are never as simple as they seem, consider some real-world complexities. One set arises from limits imposed by either side for economic, political or emotional reasons, e.g. a reserve price by Corus that is short of the Pareto optimal level at C, which would introduce an asymptote (vertical line) at AC, and/or a cap on benefits by Tata (a horizontal line) at AT. The response functions themselves are likely to be curved rather than straight, and will tail off parallel to the asymptotes. Therefore, the solution at C may be infeasible, and the best-feasible-solution may be suboptimal at S. Still, the take-away is that the model helps us understand aspects of reality by abstracting some of its elements, so we can better focus on them. Its usefulness is in the insights into the rationale for going beyond our selfimposed barriers in seeking better solutions, and these are necessarily collaborative solutions that can take us beyond non-cooperative equilibrium.
Take the recent airlines association formation, or the standoff between Delhi Metro versus the rest: the champions of the Bus Rapid Transit Systems, the High Capacity Bus System, etc. There is every reason to jettison silo mentalities and dogmatic arguments, and instead seek coordinated solutions drawing on abilities beyond adversarial contention, polemic and disputation. The first requirement is diverse skills and domain knowledge in the group evaluating situations and developing workable solutions. Good intentions are desirable, but expertise is absolutely essential. The next is to focus, first of all, on the fundamental objective. Presumably, this should be defined in the public interest. Finally, even if Pareto optimality is infeasible, the need is to design and develop a pragmatic, best-feasible-solution work plan, and execute it well.
Tata Steel reaction on Corus Merger-SOME SHORTFALLS: After the euphoria of winning a high-stakes bidding war to acquire Corus Group, Tata Steel top brass had to face some tough questions from the media and analysts today morning. Tata Group chairman Ratan Tata led the Tata Steel top management in defending the buy-out and espousing the long-term strategic vision for the Tata Steel-Corus combine. Tata Steel believes that, though the Corus valuations appear to be very steep based on current performance, it can achieve significant gains in future through operational synergies and access to mature markets. Ratan Tata was categorical in dismissing the criticism that the deal was detrimental to shareholder interests. He went on to add that the negative reaction of the stock market was without appreciating the long-term gains and strategic importance of the deal. "With this acquisition we can prove that Indian industry can step outside the national shores and prove itself as a global player", he said. As expected, most of the questions were centred on the valuation of Corus, which most analysts have termed as very high. Tata Steel managing director B Muthuraman admitted that the price offered by his company is expensive on the basis of 2005 EBITDA levels of Corus. However, he argued that the deal is not very expensive on the basis of enterprise value per tonne of capacity - especially when compared to similar deals in recent years. Muthuraman asserted that the cost of setting up a greenfield plant is considerably higher and would take anywhere between three to five years to become operational.
HOW CORUS WILL BE PAID: Tata Steel management also sought to allay fears of very high financial burden on Tata Steel because of the acquisition. The equity infusion by Tata Steel into its subsidiary Tata Steel UK, which is the acquiring company, would be around $4.1 billion. The Tata Steel management elaborated that this amount would be tied up in such a way that the investment by Tata Steel would be attractive in terms of the capacity being acquired. A part of this amount would come from Tata Sons, which has already subscribed to a preferential issue of equity shares by Tata Steel. The remaining amount of close to $9.5 billion, including existing debt of Corus which would be re-financed, would come from borrowings which have already been tied up. Tata Steel said these debt facilities have been structured in such a way that they would be serviced from future cash flows of Corus. Though these liabilities would appear on the consolidated financial statements of Tata Steel, their servicing would not affect the standalone cash flows of the company. However, the stock market refused to buy these arguments and the Tata Steel stock ended the day with substantial losses of nearly 10.5 per cent. Most of the leading stock brokerages have downgraded the stock while some have come out with recommendations to sell. How the deal came through According to the rules framed by the UK Takeover Panel, both the companies were supposed to quote at least five pence higher each time any of the two makes an offer. The nine-round auction called by the UK Takeover Panel began at 2200 hrs (IST) (1630 hrs GMT) on Tuesday. The Panel had made clear that if the auction stretched to the ninth round, the price could go beyond 600 pence per share, valuing Corus more than $11 billion. At close of trading on London Stock Exchange on Tuesday, Corus shares rose to a seven-year high of 566.5 pence. The auction started at 2200 hrs IST (1630 GMT) on Tuesday and stretched till early hours of Wednesday, followed by the announcement by the UK Takeover Panel shortly after. Tata Steel was being advised by Deutsche Bank, ABN Amro and N M Rothschild & Sons, and legal advisors Herbert Smith. CSN's advisors were Lazard and Goldman Sachs and law firm Macfarlanes. On Tuesday, Tata Steel reported a 41 percent jump in net third-quarter profit to Rs 10.63 billion. Sterling, which has been nudging the $2 mark for several
weeks, could get a boost from the deal as Tata Steel looks to buy pounds to pay Corus's British shareholders. Steely resolve paid off When Tata Steel decided to woo Corus, all was well, until CSN hopped into the ring and hinted at an offer for Corus at 475 pence a share. On December 10, 2006, Tata punched back, raising its bid to 500 pps. But the Brazilian steelmaker CSN refused to be silenced, dangling a 515 pence a share offer. It was then that the UK Takeover panel stepped in and set a deadline till January 30 for the bidding. Earlier on Tuesday, Tata's Board met to discuss strategy for the auction, besides approving the earnings for the October-December quarter. Tata - Corus: Visionary deal or costly blunder? After four months of twists and turns, Tata Steels win the race to acquire Corus Group. The bidding war between Tata Steel and Brazilian company CSN was riveting and ended in a rapid-fire auction. Initial reactions to the deal are highly diverse and retail investors are completely puzzled by the market reaction. Going by the stock market reaction, the acquisition is a big blunder. The stock tanked 10.5 per cent after the deal was announced and another 1.6 per cent later on. Investors are worried about the financial risks of such a costly deal. But Tata Steel believes the steel cycle is in a long-term up trend and the risk of a downturn in prices is low. In fact, managing director B Muthuraman said the global steel industry might witness sustained growth as during the 30year period between 1945 and 1975. The massive post-war infrastructure build-up in Western countries led to the sustained steel demand growth in that period. The coming decades would see similar infrastructure spending in emerging economies and steel demand would continue to grow, according to this view. The International Iron and Steel Institute (IISI), a respected steel research body, corroborates this in its outlook. The growth in demand for global steel would average 4.9 per cent per year till 2010 according to the IISI. Between 2010 and 2015, demand growth is expected to moderate to 4.2 per cent per annum according to IISI forecasts. Much of this demand growth would come from China and India, where the IISI estimates growth rates to be 6.2 per cent and 7.7 per cent annually from 2010 to 2015. Now lets consider steel prices. Expectations of sustained demand growth have already led to massive capacity additions, mostly in emerging markets.
Chinese steel capacity has expanded significantly over the last decade while a large number of mega steel plants are being planned in India. Capacity additions by Russian and Brazilian steelmakers would also be significant in future as they have access to raw material. Major global steel makers are also not unduly worried about the possibility of large-scale exports from China, which would depress international steel prices. Chinese capacity is expected to continue to grow in the coming years, but so would the demand. Besides, Chinese steel plants are not expected to emerge very efficient as they depend on imported raw materials, which limit their pricing power. Many steel analysts expect significant consolidation in the Chinese steel industry as margins erode further in future. The Chinese government has already started squeezing the smaller units by withdrawing their raw material import permits. Now that Tata Steel has achieved its strategic objective of becoming one of the major players in the global steel industry and steel demand growth is likely to be robust over the next decade, has the company paid too much for Corus? Even those analysts and industry observers who agree on the positive outlook for steel demand growth and the need to achieve scale believe so. The enterprise valuation of Corus at around $13.5 billion appears too steep based on the recent financial performance of Corus. Tata Steel is paying 7 times EBITDA of Corus for 2005 and a higher 9 times EBITDA for 12 months ended 30 September 2006. In comparison, Mittal Steel acquired Arcelor at an EBITDA multiple of around 4.5. Considering the fact that Arcelor has much superior assets, wider market reach and is financially much stronger than Corus, the price paid by Tata Steel looks almost obscenely high. Tata Steel's B Muthuraman has defended the deal arguing that the enterprise value (EV) per tonne of capacity is not very high. The EV per tonne for the Tata-Corus deal is around $710 is only modestly higher than the MittalArcelor deal. Besides, setting up new steel plants would cost anywhere between $1,200 and $1,300 per tonne and would take at least five years in most developing countries. In the meanwhile, Tata Steel has to make sure that cash flows from Corus are sufficient to service the huge amount of debt, which is being availed to finance the acquisition. According to the details available so far, Tata Steel would contribute $4.1 billion as equity component while the balance $9.4 billion, including the re-financing of existing debt of Corus after adjusting for cash balance, would be financed through debt.The debt facilities are believed to be structured in such a way that they can be serviced largely from the cash flows of Corus.
To its credit, the Tata Steel management has acknowledged that it would not be an easy task to manage the next five years when Corus would have to hold on to its margins without the help of cheaper inputs supplied by Tata Steel. If the group can survive this initial period without much damage, life may become much easier for the Tata Steel management. If it can pull it off, even after a decade, the Corus acquisition would become the deal, which would transform Tata Steel. The distribution angle, and the access to Corus's existing customer list, may not be a great advantage, given that growth in demand for steel is likely to come not in Europe but in Asia. This is diametrically opposed to the approach Tata Sons took with the acquisition of Tetley Tea and access to OECD markets. The scale argument has some merit. After all, Arcelor-Mittal's merger rationale was that it would be able to distance between itself from the next smaller firms in the industry. There is value in creating seller power in an otherwise fragmented industry. There are plenty of pluses and minuses in the deal, and we shall have to wait and see how it pans out. However, the only people who have clearly benefited are Corus' shareholders. A skeptic wondered whether the losing bidder, CSN, was in cahoots with Corus management. They certainly managed to hand over to Corus owners a huge windfall at the expense of Tata Steel (a premium of 49% over the closing price on October 4, 2006). But it is necessary to focus on the true value of the acquired firm, and not get caught up in the emotions of a bidding war. "Buy low, sell high" should be the mantra, as the 'synergy' often ballyhooed by the M&A specialists may or may not materialise. Consequences Of the Takeover: In a giant leap, Tata Steel's acquisition of the Anglo-Dutch steel major Corus has vaulted the former to the fifth position from 56th in global steel production capacity. With the exception of Arcelor-Mittal, which has combined production capacities of 110 million tonnes, Tata Corus, with a capacity of 23.5 million tonnes, will be only 5-7 million tonnes shy of the next three players - Nippon Steel, Posco and JFE Steel. At the same time, it will also have players such as Baosteel, US Steel, Nucor and Thyssenkrupp breathing down its neck in the global sweepstakes. Spelling out the rationale for the deal, Mr Ratan Tata, Chairman, Tata Sons, has claimed, "... it will take several years for us (Tatas) to build a 19-milliontonne enterprise from scratch, leave alone establishing it in Europe with a
brand name." In that sense, it is obviously an important strategic move for Tata Steel with long-term global implications in a consolidating sector. This hotly-contested mega deal has, however, come at a stiff price of $12.1 billion in equity value and with a debt component of around $1.5 billion Corus as an enterprise is worth $13.6 billion. That takes the winning final bid for the shares of Corus 34 per cent higher than the initial offer the Tatas made on October 20. The financing of the acquisition is unlikely to pose a challenge for the Tata group, but the financial risks associated with high-cost debt may be quite high. Though the financing pattern is yet to be spelt out fully, initial indications are that the $4.1 billion of the total consideration will flow from Tata Steel/Tata Sons by way of debt and equity contribution by these two and the balance $8 billion, will be raised by a special investment vehicle created in the UK for this purpose. Preliminary indications from the senior management of Tata Steel suggest that the debt-equity ratio will be maintained in the same proportion of 78:22, in which the first offer was made last October. Thus an quity dilution of 20-25% is on the cards for Tata. This dilution is likely to contribute to lower per share earnings, whose impact will be spread over the next year or so. As Tata Steel also remains committed to its six-million-tonne greenfield ventures in Orissa, its debt levels may rise sharply in the medium term. This is in sharp contrast to Mittal's acquisition of Arcelor, where the latter's operating margins were higher than the former's and the combined entity was set to enjoy a better margin. Despite that, on the basis of conventional metrics such as EV/EBITDA and EV/tonne, Arcelor Mittal's valuation has turned to be lower than Tata Corus. On top of that, Tata is making an all-cash offer for Corus vis-vis the cash-cum-stock swap offer made by Mittal for Arcelor. Corus has been working on the "Restoring Success" programme aimed at closing the competitive gap that existed between Corus and the European steel peers. The gap in 2003 was about 6 per cent in the operating profit level when measured against the average of European competitors. And this programme is expected to deliver the full benefits of 680 million pounds in line with plan. With this programme running out in 2006 and being replaced by `The Corus Way', the scope for Tata Steel to bring about short-term improvements in margins may be limited. Even the potential synergies of the $300-350 million a year expected to accrue to the bottomline of the combined entity from the third year onwards, may be at lower levels in the first two years.
Whenever a strategic move of this scale is made (where a company takes over a global major with nearly four times its capacity and revenues), it is clearly a long-term call on the structural dynamics of the sector. And investors will have to weigh their investment options only over the long run. In my view, two factors may soften the risks of dramatic restructuring at the high-cost plants in UK. If global consolidation gathers momentum with, say, the merger of Thyssenkrupp with Nucor, or Severstal with Gerdau or any of the top five players, the likelihood of pricing stability may ease the performance pressures on Tata-Corus. Two, if the Tatas contemplate global listing (say, in London) on the lines of Vedanta Resources (the holding company of Sterlite Industries), it may help the group command a much higher price-earnings multiple and give it greater flexibility in managing its finances. Conclusion: Whenever the history of Corporate India's coming of age is written, Tata Steel's acquisition of Corus will figure as a landmark event. It is the largest overseas acquisition by an Indian company, by a mile and then some. It took daring and imagination to make the first move, and a steely nerve to see the battle through when it became a competitive landscape. Tata, already the fifth-largest in the world for medium and heavy trucks (helped by the acquisition of Daewoo's truck unit a couple of years ago), will now also be the world's fifth-largest producer of steel. Tata Steel was once written off as an also-ran because of its high costs a few decades ago, has reinvented itself as one of the lowest-cost steelmakers in the world, partly through new technology, but as case studies from the IIMs show, also significantly because they were able to hammer out a pact with their workers, transforming the company and the way they made steel. The old-fashioned commitment by the Tata to their workers and their communities -- as seen most vividly in the remarkably well-maintained flagship company town of Jamshedpur -- has paid huge dividends in an era of robber-baron management. The group also becomes the first Indian multi-product business house of consequence to be truly international, in that something like half its business will now be outside the country-and it goes without saying that Tata-Corus will have to be run as an international company, from the board level down. In many ways, the elements of this story carry with them the different facets of the transformation of India's manufacturing sector. Every Indian manufacturing company will now feel a little taller.
But corporate acquisitions are about cold calculations, though animal spirits might play their part. The stock market's response to Tata Steel's aggressive bidding to pocket Corus, in a night that seems to have been full of drama, should remind everyone that winning an auction is not the end of the process, only the beginning. There is, first, the question of whether Tata paid too much-given that the final price is a third higher than the opening bid, and bearing in mind that the Corus share price has doubled in the last year or so. Implicit in the question is whether this is one more manifestation of the winner's curse. The truth is that no one knows the answer, which depends fundamentally on how the steel market evolves over time and whether steel prices stay buoyant. A variety of scenarios can be drawn up.