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    Jigar gandhi grand project final report Jigar gandhi grand project final report Document Transcript

    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusA PROJECT TOSTUDYACQUISITION OFTATA AND CORUS 0BY Jigar Gandhi Roll No- 11 PGDM - 4TH semester 1
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corus 2
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusINTRODUCTION –( MERGERS AND ACQUISITION )In this changed business paradigm only those organization rule who visualize the possibilitiesbefore they appear as plausible. Present Business environment, characterized by theglobalization and liberalization, accommodates organization that are coming up withinnovative strategies to survive and flourish.Companies in the global economies climate are thriving to each the pinnacle of the successesseeking competitive edge of over their rivals. While the waves liberalization and deregulationhave been shaking the corporate shore around the global the domestic organizations arefalling prey to the fierce competition and unprecedented challenges carried by this emergingbusiness scenario. The recessionary trend consequents to the wall Street tsunami has made forthe organization a maze with no exit .Drowning in the luxury of producing goods only to keep life simple is suicidal, rather an unquenched thirst must always prevailing that makes the quest for the value sustainable.Existence of keen competition with number and volume also made the texture of thecompetitor stronger shock absorber both finally and strategically creating a wide exposure forthe business enterprises to build armour for protecting themselves from the threats lying inand forthcoming from the environment. Thus, organizations are left with no choice exceptbecoming excellent in all the respects, be it product or process, staff or shareholders,customers or creditors. The aspiration for all the business comes now is “how to becomeworld class”.Achieving business excellences and thereby creating value for a company is considered to bemost vital as well as significant objectives of today’s business enterprises with an aim toensure long run survival and sustainable growth over time. Keeping this objectives in mind,the of corporate restructuring has emerged.Corporate Restructuring usually implies restructuring the corporate sector frommultidimensional angles with a view to obtain competitive edge and thereby ensuringbusiness success 3
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusMEANING AND DEFINITIONSThe word Structure is an economic context implies a specific, suitable relationship among theelements of a particular function or process.To restructure means the (hopefully) purposeful process of changing the structure of aninstitution, a company, an industry, a market, a country, the world economy, etc.This Structure defines constraints under which institutions function in their day to dayoperations and their pursuit or better economic performance.a)The term Restructuring as per as per Oxford Dictionary means, “to give a new structure tobind or rearrange.”b) Sander defines as “Restructuring is an attempt to change the Structure of an institution inorder to relax some or all of the short run constraints It is concerned with the changingstructures in pursuit of long run strategy.c) Crum & Goldberg, defines Restructuring of a company as “A Set of discrete decisivemeasures taken in order to increase the competitiveness of the enterprise and there by toenhance its value. 4
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corus 5
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corus COPORATE RESTRUCTURING Expansion Contraction Corporate Control Changes In Ownership Structure Anti take Share Exchange over Repurchase othersMergers and Tender Asset Joint defencesAcquisitions officers Acquisition Ventures Proxy Contents Spin o ff Split off Divestitures Equity Caved Spilt up out Leveraged MLPs Going Private ESOPs Buyout 6
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusEXPANSATIONExpansion basically implies expanding or increasing the size and volume of business of thefirm. It generally includes Mergers and Acquisition (Mergers and Acquisition), Tenderofficers, Assets acquisition and Joint Ventures.a) Mergers and AcquisitionA transaction where 2 firms agree to integrate their corporation on a relatively on co-equalbasis is called merger. It defines the fusion of two or more companies through directacquisition of the net assets of other(s). It result when the shareholder of more than onecompany, usually two, decide to pool the resources of the companies under common entity.Accordingly, in a manager two or more companies combine into a single unit and loseindividual identities. Acquisition is a strategy where one firm buys a controlling or 100%interest I another firm with intent of making the a subsidiary within its portfolio.A takeover is an Acquisition where the target firm did not solicit the bid of the acquiringfirm. It is a strategy of acquiring control over the management. The objective is toconsolidate and acquire large share of the markets The regulatory framework of take overlisted companies is governed by the Securities and Exchange Board of India –SEBI(substantial Acquisition of Share and Takeovers) Regulation, 1997.In the case of mergers and consent of the majority of shareholders all companies involvedprerequisite, whereas, in the case of acquisition the controlling interest in a company isbought with the consent of its manager.b) Tender OffersIn case of Tender Offer, a public Offer is made for acquiring of the share of the share of thetarget company. Here, the acquisition of shares of the target company indicates theacquisition of management control in that company. For instance, India Cements giving anopen market for the share of Raasi cement.c) Asset AcquisitionsAsset Acquisition imply buying the assets of another company. Such assets may be TangibleAssets like; a manufacturing unit of the firm or Intangible Assets like brand, trade mark, 7
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corusetc..In the case of assets acquisitions, the acquire company may limit its acquisition to thoseparts of the firm which match with the needs of the acquire company.For instance, Laffarge of France acquired only the cement division of Tata Group. Laffargeactually acquired only the 1.70 million tone cement plant and the assets related to suchdivision from Tata Group .Such assets may also be intangible in nature. For example, Coca-Cola acquired some popular brands like Thumps-up, Limca, Gold Spot, etc, related to softdrinks from pale and paid total consideration of Rs.170 crore. Ranbaxy Laboratory’s brandacquisition from Gufic Laboratories must be one of the few cases here the revenues from theBrands matched projection in the first year after the acquisition.The four brand– Mox, Exel, Zole, Roxythro-acquired from Guficnelped notch up sales of Rs72 crore in the first year a 20% improvement over their sales figure under Gufic.d) Joint VentureIn case of Joint two companies enter onto an agreement and accumulate certain resourceswith a view to achieve a particular common business goal. It generally involves fusion ofonly a small part of activities of the companies involved in the agreement and usually forlimited period of time duration . The returns arising out of such venture are shared bypartners according to their prearranged agreement.While entering into any foreign market, multinational companies pursue this strategy of JointVenture. For example, in order to manufacturing automobiles in India, Daewoo Motors andDCM GROUP entered into a Joint Venture.2) CONTRACTIONCOTRACTION is the second form of restricting. In the case of contraction, generally the sizecc gets reduced. Contraction may take place in the form of Spin-Off, Spilt-Off, Divestitures,Spilt-Ups and Equity-Carved Out.a) Spin-OffsA Spin- off is the type of transaction in which a company distributes all the shares owned byit on its subsidiary to its own shareholders. Such distribution of the share among theshareholder is made on pro-rata basis. As result, the proportional ownership of the shareshareholders becomes the same in the newegal subsidiary as well as the parent company. Thenew entry has its own management and is operated independently without the intervention ofparent company. A Spin-off operated independently without the intervention For Example, 8
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corusby spinning of its investment division, Kotak Mahindra Finance Ltd. Formed a subsidiaryknown as Kotak Mahindra Capital Corporation.b) Split-OffsIn the case of Split-Offers, a new company is related in order to take over the operation of anexisting division or unit of company .A portion of existing division or unit of a companyobtain stock in the subsidiary (i.e. the new company) in exchange for stocks of the parentcompany. As a result, the equity base of the parent is reduced representing the downsizing ofthe firm.Thus, shareholding of the new entity. Does not imply the shareholding of the parentcompany. In the case of a split-off, there is no question of cash inflow to the parent company.For example, the board of Directors of the Dabur India Ltd. decided to split-off the pharmasegment and transfer it to a new company for the financial year 2002-03. The demergeproposal was a significant strategic decision reflecting corporate restructuring initiative andwas expected to provide greater focus on independence to the company’s two mainsegments. The FMCG business, which would remain within Dabur India ltd., wouldconcentrate on its core competencies in personal care, health care and Ayurvedic Speciailitis.The new pharmaceutical company Dabur Pharma Ltd. will focus on its expertise inAllopathic, Oncology, Formulations and bulk Drugs.c) Divestitures:A divestiture involves the sales of a proportion or segment of the company to an externalparty. Such sale may cover assets, products lines, subsidiaries or divisions of the undertaking.A company may a choose to sell an undervalued operation which according to the companyis unrelated or non strategic to is core business activities. The sale produced arising out ofsuch sale may be utilized for investing in profitable investment opportunities that areexpected to offer potentially higher returns. Divestiture is considered to be a form ofexpansion of the buying company and a form of construction on the part of the sellingcompany.d) Equity Carved-Out:A n equity carved-out implies the sale of segment or portion of the firm through an equityoffering to the external parties .Here new Shareholder of equity are sold to outsiders who, in 9
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corusturn give them ownership of the portion of the previously existing firm .In that case, a newlegal entity is created. The equity holders in the newly generated entity need not be the sameas the equity holders in the original seller.e) Split-Ups:In the case of a split –up, the entire company is broken up in series 0f spin-offs. As a result,the parent company is broken up in spin –offers. As a result, the present company no longerexists and only the new off-springs continue to survive.A split up basically involves the creation of a new class of stock for each of the parentcompany no longer exists and only the new off-springs continue to survive. A split-upbasically involves the creation of a new class of stock for each of the parent’s operatingsubsidiaries, paying current shareholders a dividend of each new class stock, and thendissolving the parent company may exchange their stock in one or more of the spin-offs.Restructuring of the Andhra Pradesh State Electricity Board (APSEB) is the good example ofSplit-up. APSEB was split-up in 1999 part of the power sector. The power generationdivision and transmission and distribution division of APSEB was transferred to two differentcompanies namely-APGENCo and APTRANACo respectively. As a result of such split-up,the APSEB.3) CORPORATE CONTROLCorporate Restructuring may be done without necessarily new firms or divesting existingorganizations. Corporate control is another type of restructuring which involves obtainingcontrol over the management of firm. Controlling here, is basically defined as processthrough which top managers influence other related members of an entity to implement thepredetermined organization strategies. The top managers and promoters group who stand tolose from competitions in the market corporate control may use the democratic rules tobenefit themselves. Ownership and control are not always separated. A large block of sharesmay give effective control even when there is no majority owners. Corporate controlgenerally includes Anti-takeover defence, share repurchases, exchange offers and proxycontests.a) Anti- Takeover DefenceIt is a technique followed by a company to prevent forcefully acquiring of its managers.With the high level of hostile takeover activity in recent years, various companies are 10
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corusreporting to takeover defences. Such takeover defences may be pre-bid or preventivedefences and post-bid or active defence. Pre-bid or preventive defences are generallyemployed with a view to prevent a sudden, un expected hostile bid from obtaining control ofthe company. When preventive takeover defences are implemented. Such takeover defensesattempt at changing the corporate control position of promoters.b) Share RepurchasesIt involves repurchasing its own shares by a company from the market. Share may berepurchased by following either the tender offer method or through open market method.Share repurchased is at the also called buy back of the shares, leading to the reduction in theequity capital of the company. Share buyback facilities in strengthening promoter’scontrolling position in the company by increasing their stake in the equity of the company. Italso used as a takeover to reduced the number of shares that could be purchased by thepotential acquirer.c) Exchange OffersExchange Offers generally provides one or more classes of securities, the right or exchange aportion or all of their holding for a different classes of securities of the firm. The terms ofexchange offered necessarily involve new securities of greater market value than the pre –exchange offers announcement market value. Exchange offer includes exchanging commonstock for debt, which reduces leverage. Exchange offers a help company to change its capitalstructure while holding the investment policy unaltered.d) Proxy ContestsThe Proxy Contest is a way to take control of a company without owning a majority of itsvoting right. So it is an attempt made by a single shareholders or group of shareholder toundertake control or bring proxy mechanized of corporate.In a Proxy might, a bidder may attempt to use his voting rights and garner the support fromother shareholders with a view to expel the incumbent board or management. Proxy contestsare less frequently used than tender offer for effecting transfer of control. It provides analternative means of corporate control but cost of proxy challenges high. Inefficiency inproxy context raises the question of adverse selection which is the main disadvantage ofcorporate restructuring through proxy contest. 11
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corus4 ) CHANGES IN OWNERSHIP STRUCTUREThe fourth group of restructuring activities is the change in ownership structure, whichbasically results in change in the structure of ownership in the company. The ownershipstructure of a firm affects and its affected by other variables and these variables alsoinfluence the market value .such variables include the levels of principal agent conflicts andinformation asymmetry and their effects on other variables like the operating strategy of thefirm, dividend policy, capital structure etc. The various techniques of changing ownership areleveraged as Buyout, Going Private, MLPs, ESOPs.a) Leveraged Buyout (LBO)Buyouts constitute yet another form of corporate restructuring. It happens, when a group ofpersons gain control of a company by buying all a majority of its shares. There are twocommon types of buyout : Leveraged buyout (LBO) and management buyout (MBO). LBOis the purchase of assets or the equity of a company where the buyer uses a significantamount of debt and very little equity capital of his own for the payment of the considerationfor acquisition. Since LBOs cause substantial financial risk. LBO will not be suitable fromcorporate restructuring if the acquired firm already has a high degree of the Business risk.b) Master Limited Partnerships (MLPs)Master limited partnerships (MLPs) are formed of a general partner and one or more limitedpartners. The general partner runs the business and bears unlimited liability. The limitedpartnership provides an investor with a direct interest in a group of assets , usually, oil, coal,gas, etc.. Master limited partnership units are traded publically the stock and thus providethe investor more liquidity than ordinary limited partnership .One of the most important advantage of MLP is its elimination of the corporate level andshareholders are twice on their investment –once at the corporate level and another at thedistribution level of dividends However ,many companies use MLPs to redistribute assets sothat their returns are not subjected to double taxation.c) Going PrivateIt is the repurchasing of a company’s outstanding stock by employees or a private investor.As a result an initiative, the company stops being publically traded. Sometimes, the companymight have take on significant debt to finance the change in ownership structure. 12
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusCompanies might want to go private in order to structuring their businesses (when they feelthat the process might affect their stock prices poorly in the short run). They also want to goprivate to avoid the expense and regulations associated with remaining listed on a stockexchange.d) Employee Stock Option Plan (ESOP)The term employee stock option (ESOP) means the option given to the whole-time director,or employee of the company the right to purchase or subscribe at the future date, thesecurities offered by the company at a predetermined price. The basis objective of ESOP is tomotivate directors or employee to perform better and improve firm’s value. Apart fromgiving financial gains to employees, they also create a sense of owner amongst directors andemployees. ESOPs tend to develop an entrepreneurial spirit among top level managementsince they own stock and increase in the stock price, if the firm dose well and to their wealth.ESOPs also helped companies to attract talent, motive employee by enabling to share thelong-term growth of he company.Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporatefinance world. Every day, investment bankers arrange M&A transactions, which bringseparate companies together to form larger ones. When theyre not creating big companiesfrom smaller ones, corporate finance deals do the reverse and break up companies throughspin-offs, carve-outs or tracking stocks. Not surprisingly, these actions often make the news.Deals can be worth hundreds of millions, or even billions, of dollars or rupees. They candictate the fortunes of the companies involved for years to come. For a CEO, leading anM&A can represent the highlight of a whole career. And it is no wonder we hear about somany of these transactions; they happen all the time. Next time you flip open the newspaper’sbusiness section, odds are good that at least one headline will announce some kind of M&Atransaction. Sure, M&A deals grab headlines, but what does this all mean to investors? Toanswer this question, this report discusses the forces that drive companies to buy or mergewith others, or to split-off or sell parts of their own businesses. Once you know the differentways in which these deals are executed, youll have a better idea of whether you should cheeror weep when a company you own buys another company - or is bought by one. You willalso be aware of the tax consequences for companies and for investorsDefining M&A 13
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusThe Main Idea one plus one makes three: this equation is the special alchemy of a merger oran acquisition. The key principle behind buying a company is to create shareholder valueover and above that of the sum of the two companies. Two companies together are morevaluable than two separate companies - at least, thats the reasoning behind M&A.This rationale is particularly alluring to companies when times are tough. Strong companieswill act to buy other companies to create a more competitive, cost-efficient company. Thecompanies will come together hoping to gain a greater market share or to achieve greaterefficiency. Because of these potential benefits, target companies will often agree to bepurchased when they know they cannot survive alone.Distinction between Mergers and AcquisitionsAlthough they are often uttered in the same breath and used as though they weresynonymous, the terms merger and acquisition mean slightly different things. When onecompany takes over another and clearly established itself as the new owner, the purchase iscalled an acquisition. From a legal point of view, the target company ceases to exist, thebuyer "swallows" the business and the buyers stock continues to be traded. In the pure senseof the term, a merger happens when two firms, often of about the same size, agree to goforward as a single new company rather than remain separately owned and operated. Thiskind of action is more precisely referred to as a "merger of equals." Both companies stocksare surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler or Arcellor and Mittal ceased to exist when the two firms merged, and anew company, DaimlerChrysler and Arcellor-Mittal, was created. In practice, however,actual mergers of equals dont happen very often. Usually, one company will buy anotherand, as part of the deals terms, simply allow the acquired firm to proclaim that the action is amerger of equals, even if its technically an acquisition. Being bought out often carriesnegative connotations, therefore, by describing the deal as a merger, deal makers and topmanagers try to make the takeover more palatable.A purchase deal will also be called a merger when both CEOs agree that joining together is inthe best interest of both of their companies. But when the deal is unfriendly - that is, when thetarget company does not want to be purchased - it is always regarded as an acquisition.Whether a purchase is considered a merger or an acquisition really depends on whether thepurchase is friendly or hostile and how it is announced. In other words, the real difference lies 14
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corusin how the purchase is communicated to and received by the target companys board ofdirectors, employees and shareholders.SynergySynergy is the magic force that allows for enhanced cost efficiencies of the new business.Synergy takes the form of revenue enhancement and cost savings. By merging, thecompanies hope to benefit from the following: Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package. Economies of scale - Yes, size matters. Whether its purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers. Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge. Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies marketing and distribution, giving them new sales opportunities. A merger can also improve a companys standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.That said, achieving synergy is easier said than done - it is not automatically realized oncetwo companies merge. Sure, there ought to be economies of scale when two businesses arecombined, but sometimes a merger does just the opposite. In many cases, one and one add upto less than two. Sadly, synergy opportunities may exist only in the minds of the corporateleaders and the deal makers. Where there is no value to be created, the CEO and investment 15
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corusbankers - who have much to gain from a successful M&A deal - will try to create an image ofenhanced value. The market, however, eventually sees through this and penalizes thecompany by assigning it a discounted share price. Well talk more about why M&A may failin a later section of this tutorial.Varieties of MergersFrom the perspective of business structures, there is a whole host of different mergers. Hereare a few types, distinguished by the relationship between the two companies that aremerging: Horizontal merger - Two companies that are in direct competition and share the same product lines and markets. Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker. Market-extension merger - Two companies that sell the same products in different markets. Product-extension merger - Two companies selling different but related products in the same market. Conglomeration - Two companies that have no common business areas. There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors: Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable. Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company. We will discuss this further in part four of this tutorial. Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.Acquisitions 16
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusAn acquisition may be only slightly different from a merger. In fact, it may be different inname only. Like mergers, acquisitions are actions through which companies seek economiesof scale, efficiencies and enhanced market visibility.Unlike all mergers, all acquisitions involve one firm purchasing another - there is noexchange of stock or consolidation as a new company. Acquisitions are often congenial, andall parties feel satisfied with the deal. Other times, acquisitions are more hostile. In anacquisition, as in some of the merger deals we discuss above, a company can buy anothercompany with cash, stock or a combination of the two. Another possibility, which is commonin smaller deals, is for one company to acquire all the assets of another company. Company Xbuys all of Company Ys assets for cash, which means that Company Y will have only cash(and debt, if they had debt before). Of course, Company Y becomes merely a shell and willeventually liquidate or enter another area of business. Another type of acquisition is a reversemerger, a deal that enables a private company to get publicly-listed in a relatively short timeperiod. A reverse merger occurs when a private company that has strong prospects and iseager to raise financing buys a publicly-listed shell company, usually one with no businessand limited assets. The private company reverse merges into the public company, andtogether they become an entirely new public corporation with tradable shares. Regardless oftheir category or structure, all mergers and acquisitions have one common goal: they are allmeant to create synergy that makes the value of the combined companies greater than thesum of the two parts. The success of a merger or acquisition depends on whether this synergyis achieved.Valuation MattersInvestors in a company that is aiming to take over another one must determine whether thepurchase will be beneficial to them. In order to do so, they must ask themselves how muchthe company being acquired is really worth.Naturally, both sides of an M&A deal will have different ideas about the worth of a targetcompany: its seller will tend to value the company at as high of a price as possible, while thebuyer will try to get the lowest price that he can.There are, however, many legitimate ways to value companies. The most common method isto look at comparable companies in an industry, but deal makers employ a variety of othermethods and tools when assessing a target company. Here are just a few of them: 17
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corus1. Comparative Ratios - The following are two examples of the many comparative metricson which acquiring companies may base their offers: Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring company makes an offer that is a multiple of the earnings of the target company. Looking at the P/E for all the stocks within the same industry group will give the acquiring company good guidance for what the targets P/E multiple should be. Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring company makes an offer as a multiple of the revenues, again, while being aware of the price-to- sales ratio of other companies in the industry.2. Replacement CostIn a few cases, acquisitions are based on the cost of replacing the target company. Forsimplicitys sake, suppose the value of a company is simply the sum of all its equipment andstaffing costs. The acquiring company can literally order the target to sell at that price, or itwill create a competitor for the same cost. Naturally, it takes a long time to assemble goodmanagement, acquire property and get the right equipment. This method of establishing aprice certainly wouldnt make much sense in a service industry where the key assets - peopleand ideas - are hard to value and develop.3. Discounted Cash Flow (DCF)A key valuation tool in M&A, discounted cash flow analysis determines a companys currentvalue according to its estimated future cash flows. Forecasted free cash flows (operatingprofit + depreciation + amortization of goodwill – capital expenditures – cash taxes - changein working capital) are discounted to a present value using the companys weighted averagecosts of capital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival thisvaluation method.Synergy: The Premium for Potential SuccessFor the most part, acquiring companies nearly always pay a substantial premium on the stockmarket value of the companies they buy. The justification for doing so nearly always boilsdown to the notion of synergy; a merger benefits shareholders when a companys post-merger 18
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corusshare price increases by the value of potential synergy. Lets face it, it would be highlyunlikely for rational owners to sell if they would benefit more by not selling.That means buyers will need to pay a premium if they hope to acquire the company,regardless of what pre-merger valuation tells them. For sellers, that premium represents theircompanys future prospects. For buyers, the premium represents part of the post-mergersynergy they expect can be achieved. The following equation offers a good way to thinkabout synergy and how to determine whether a deal makes sense. The equation solves for theminimum required synergy:In other words, the success of a merger is measured by whether the value of the buyer isenhanced by the action. However, the practical constraints of mergers, which discussed oftenprevent the expected benefits from being fully achieved. Alas, the synergy promised by dealmakers might just fall short.What to Look For - Its hard for investors to know when a deal is worthwhile. The burden ofproof should fall on the acquiring company. To find mergers that have a chance of success,investors should start by looking for some of these simple criteria given as below. A reasonable purchase price - A premium of, say, 10% above the market price seems within the bounds of level-headedness. A premium of 50%, on the other hand, requires synergy of stellar proportions for the deal to make sense. Stay away from companies that participate in such contests. Cash transactions - Companies that pay in cash tend to be more careful when calculating bids and valuations come closer to target. When stock is used as the currency for acquisition, discipline can go by the wayside. Sensible appetite – An acquiring company should be targeting a company that is smaller and in businesses that the acquiring company knows intimately. Synergy is hard to create from companies in disparate business areas. Sadly, companies have a bad habit of biting off more than they can chew in mergers.Mergers are awfully hard to get right, so investors should look for acquiring companies witha healthy grasp of reality.Doing the Deal 19
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusStart with an Offer When the CEO and top managers of a company decide that they want todo a merger or acquisition, they start with a tender offer. The process typically begins withthe acquiring company carefully and discreetly buying up shares in the target company, orbuilding a position. Once the acquiring company starts to purchase shares in the open market,it is restricted to buying 5% of the total outstanding shares before it must file with the SEC.In the filing, the company must formally declare how many shares it owns and whether itintends to buy the company or keep the shares purely as an investment.Working with financial advisors and investment bankers, the acquiring company will arriveat an overall price that its willing to pay for its target in cash, shares or both. The tender offeris then frequently advertised in the business press, stating the offer price and the deadline bywhich the shareholders in the target company must accept (or reject) it.The Targets ResponseOnce the tender offer has been made, the target company can do one of several things: Accept the Terms of the Offer - If the target firms top managers and shareholders are happy with the terms of the transaction, they will go ahead with the deal. Attempt to Negotiate - The tender offer price may not be high enough for the target companys shareholders to accept, or the specific terms of the deal may not be attractive. In a merger, there may be much at stake for the management of the target - their jobs, in particular. If theyre not satisfied with the terms laid out in the tender offer, the targets management may try to work out more agreeable terms that let them keep their jobs or, even better, send them off with a nice, big compensation package. Not surprisingly, highly sought-after target companies that are the object of several bidders will have greater latitude for negotiation. Furthermore, managers have more negotiating power if they can show that they are crucial to the mergers future success. Execute a Poison Pill or Some Other Hostile Takeover Defense – A poison pill scheme can be triggered by a target company when a hostile suitor acquires a predetermined percentage of company stock. To execute its defense, the target company grants all shareholders - except the acquiring company - options to buy additional stock at a dramatic discount. This dilutes the acquiring companys share and intercepts its control of the company. Find a White Knight - As an alternative, the target companys management may seek out a friendlier potential acquiring company, or white knight. If a white knight is found, it will offer an equal or higher price for the shares than the hostile bidder. 20
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusMergers and acquisitions can face scrutiny from regulatory bodies. For example, if the twobiggest long-distance companies in the U.S., AT&T and Sprint, wanted to merge, the dealwould require approval from the Federal Communications Commission (FCC). The FCCwould probably regard a merger of the two giants as the creation of a monopoly or, at thevery least, a threat to competition in the industry.Closing the DealFinally, once the target company agrees to the tender offer and regulatory requirements aremet, the merger deal will be executed by means of some transaction. In a merger in whichone company buys another, the acquiring company will pay for the target companys shareswith cash, stock or both. A cash-for-stock transaction is fairly straightforward: targetcompany shareholders receive a cash payment for each share purchased. This transaction istreated as a taxable sale of the shares of the target company. If the transaction is made withstock instead of cash, then its not taxable. There is simply an exchange of share certificates.The desire to steer clear of the tax man explains why so many M&A deals are carried out asstock-for-stock transactions. When a company is purchased with stock, new shares from theacquiring companys stock are issued directly to the target companys shareholders, or thenew shares are sent to a broker who manages them for target company shareholders. Theshareholders of the target company are only taxed when they sell their new shares. When thedeal is closed, investors usually receive a new stock in their portfolios - the acquiringcompanys expanded stock. Sometimes investors will get new stock identifying a newcorporate entity that is created by the M&A deal.Break UpsAs mergers capture the imagination of many investors and companies, the idea of gettingsmaller might seem counterintuitive. But corporate break-ups, or de-mergers, can be veryattractive options for companies and their shareholders.AdvantagesThe rationale behind a spin-off, tracking stock or carve-out is that "the parts are greater thanthe whole." These corporate restructuring techniques, which involve the separation of abusiness unit or subsidiary from the parent, can help a company raise additional equity funds.A break-up can also boost a companys valuation by providing powerful incentives to thepeople who work in the, making it more difficult to attract interest from institutionalinvestors. Meanwhile, there are the extra costs that the parts of the business face if separated. 21
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusWhen a firm divides itself into smaller units, it may be losing the separating unit, and help theparents management to focus on core operations. Most importantly, shareholders get betterinformation about the business unit because it issues separate financial statements. This isparticularly useful when a companys traditional line of business differs from the separatedbusiness unit. With separate financial disclosure, investors are better equipped to gauge thevalue of the parent corporation. The parent company might attract more investors and,ultimately, more capital. Also, separating a subsidiary from its parent can reduce internalcompetition for corporate funds. For investors, thats great news: it curbs the kind of negativeinternal wrangling that can compromise the unity and productivity of a company. Foremployees of the new separate entity, there is a publicly traded stock to motivate and rewardthem. Stock options in the parent often provide little incentive to subsidiary managers,especially because their efforts are buried in the firms overall performance.DisadvantagesThat said, de-merged firms are likely to be substantially smaller than their parents, possiblymaking it harder to tap credit markets and costlier finance that may be affordable only forlarger companies. And the smaller size of the firm may mean it has less representation onmajor indexes synergy that it had as a larger entity. For instance, the division of expensessuch as marketing, administration and research and development (R&D) into differentbusiness units may cause redundant costs without increasing overall revenues.Restructuring MethodsThere are several restructuring methods: doing an outright sell-off, doing an equity carve-out,spinning off a unit to existing shareholders or issuing tracking stock. Each has advantagesand disadvantages for companies and investors. All of these deals are quite complex.Sell-OffsA sell-off, also known as a divestiture, is the outright sale of a company subsidiary.Normally, sell-offs are done because the subsidiary doesnt fit into the parent companys corestrategy. The market may be undervaluing the combined businesses due to a lack of synergybetween the parent and subsidiary. As a result, management and the board decide that thesubsidiary is better off under different ownership. (IPO) of shares, amounting to a partial sell-off. A new publicly-listed company is created, but the parent keeps a controlling stake in thenewly traded subsidiary. A carve-out is a strategic avenue a parent firm may take when one 22
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corusof its subsidiaries is growing faster and carrying higher valuations than other businessesowned by the parent. A carve-out generates cash because shares in the subsidiary are sold tothe public, but the issue also unlocks the value of the subsidiary unit and enhances theparents shareholder value. The new legal entity of a carve-out has a separate board, but inmost carve-outs, the parent retains some control. In these cases, some portion of the parentfirms board of directors may be shared. Since the parent has a controlling stake, meaningboth firms have common shareholders, the connection between the two will likely be strong.That said, sometimes companies carve-out a subsidiary not because its doing well, butbecause it is a burden. Such an intention wont lead to a successful result, especially if acarved-out subsidiary is too loaded with debt, or had trouble even when it was a part of theparent and is lacking an established track record for growing revenues and profits. Carve-outscan also create unexpected friction between the parent and subsidiary. Problems can arise asmanagers of the carved-out company must be accountable to their public shareholders as wellas the owners of the parent company. This can create divided loyalties.Equity Carve-OutsMore and more companies are using equity carve-outs to boost shareholder value. A parentfirm makes a subsidiary public through a raider’s initial public offering stock dividendmeaning they dont grant shareholders the same voting rights as those of the main stock. Eachshare of tracking stock may have only a half or a quarter of a vote. In rare cases, holders oftracking stock have no vote at all. Like carve-outs, spin-offs are usually about separating ahealthy operation. In most cases, spin-offs unlock hidden shareholder value. For the parentcompany, it sharpens management focus. For the spin-off company, management doesnthave to compete for the parents attention and capital. Once they are set free, managers canexplore new opportunities. Investors, however, should beware of throw-away subsidiaries theparent created to separate legal liability or to off-load debt. Once spin-off shares are issued toparent company shareholders, some shareholders may be tempted to quickly dump theseshares on the market, depressing the share valuation.Tracking StockA tracking stock is a special type of stock issued by a publicly held company to track thevalue of one segment of that company. The stock allows the different segments of thecompany to be valued differently by investors. Lets say a slow-growth company trading at alow (P/E ratio) happens to have a fast growing business unit. The company might issue a 23
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corustracking stock so the market can value the new business separately from the old one and at asignificantly higher P/E rating. Why would a firm issue a tracking stock rather than spinning-off or carving-out its fast growth business for shareholders? The company retains controlover the subsidiary; the two businesses can continue to enjoy synergies and share marketing,administrative support functions, a headquarters and so on. Finally, and most importantly, ifthe tracking stock climbs in value, the parent company can use the tracking stock it owns tomake acquisitions. Still, shareholders need to remember that tracking stocks are price-earnings ratio class B.Why They Can FailIts no secret that plenty of mergers dont work. Those who advocate mergers will argue thatthe merger will cut costs or boost revenues by more than enough to justify the price premium.It can sound so simple: just combine computer systems, merge a few departments, use sheersize to force down the price of supplies and the merged giant should be more profitable thanits parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry.Historical trends show that roughly two thirds of big mergers will disappoint on their ownterms, which means they will lose value on the stock market. The motivations that drivemergers can be flawed and efficiencies from economies of scale may prove elusive. In manycases, the problems associated with trying to make merged companies work are all tooconcrete.Flawed IntentionsFor starters, a booming stock market encourages mergers, which can spell trouble. Dealsdone with highly rated stock as currency are easy and cheap, but the strategic thinking behindthem may be easy and cheap too. Also, mergers are often attempt to imitate: somebody elsehas done a big merger, which prompts other top executives to follow suit. A merger mayoften have more to do with glory-seeking than business strategy. The executive ego, which isboosted by buying the competition, is a major force in M&A, especially when combined withthe influences from the bankers, lawyers and other assorted advisers who can earn big feesfrom clients engaged in mergers. Most CEOs get to where they are because they want to bethe biggest and the best, and many top executives get a big bonus for merger deals, no matterwhat happens to the share price later. On the other side of the coin, mergers can be driven bygeneralized fear. 24
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusGlobalization, the arrival of new technological developments or a fast-changing economiclandscape that makes the outlook uncertain are all factors that can create a strong incentivefor defensive mergers. Sometimes the management team feels they have no choice and mustacquire a rival before being acquired. The idea is that only big players will survive a morecompetitive world.The Obstacles to making it WorkCoping with a merger can make top managers spread their time too thinly and neglect theircore business, spelling doom. Too often, potential difficulties seem trivial to managers caughtup in the thrill of the big deal. The chances for success are further hampered if the corporatecultures of the companies are very different. When a company is acquired, the decision istypically based on product or market synergies, but cultural differences are often ignored. Itsa mistake to assume that personnel issues are easily overcome. For example, employees at atarget company might be accustomed to easy access to top management, flexible workschedules or even a relaxed dress code. These aspects of a working environment may notseem significant, but if new management removes them, the result can be resentment andshrinking productivity. More insight into the failure of mergers is found in the highlyacclaimed study from McKinsey, a global consultancy. The study concludes that companiesoften focus too intently on cutting costs following mergers, while revenues, and ultimately,profits, suffer. Merging companies can focus on integration and cost-cutting so much thatthey neglect day-to-day business, thereby prompting nervous customers to flee. This loss ofrevenue momentum is one reason so many mergers fail to create value for shareholders. Butremember, not all mergers fail. Size and global reach can be advantageous, and strongmanagers can often squeeze greater efficiency out of badly run rivals. Nevertheless, thepromises made by deal makers demand the careful scrutiny of investors. The success ofmergers depends on how realistic the deal makers are and how well they can integrate twocompanies while maintaining day-to-day operations. 25
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corus 26
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusTATA STEEL 27
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corus 28
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusFounder : Jamsedji TataFounded : 1907Head Quarter : MumbaiArea Served : World wideProduct : Steel, Long Steel, wire productsEmployees : 81,000Plant Location : JamshedpurStock Exchange : Recognized by BSE, NSE TISCO ( Tata Iron and Steel Company) formerly called : Is an Indian Multinational company 10th largest steel producing with annually having 23.5 metric tones steel capacity Tata Steel has been ranked #401 in Fortune Global 500 Tata Steel has a presences in around 50 countries with a manufacturing operations in 26 countries till date Major Competitors are Arcelor Mittal, Essar Steel, JSW (Jindal Steel Work), SAIL etc 29
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusTata Steel Background • Tata Steel a part of the Tata group, one of the largest diversified business conglomerates in India. • Founded in 1907,by Jamshedji Nusserwanji Tata. • Started with a production capacity of 1,00,000 tones, has transformed into a global giant • In the mid- 1990s, Tata steel emerged as Asia’s first and India’s largest integrated steel producer in the private sector. • In February 2005, Tata steel acquired the Singapore based steel manufacturer NatSteel, that let the company gain access to major Asian markets and Australia. • Tata steel acquired the Thailand based Millennium Steel in December 2005. Tata Steel generated net sales of Rs.175 billion in the financial year 2006-07. • The company’s profit before tax in the same year was Rs. 64.14 billion while its profit after tax was Rs. 42.22 billion. 30
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusCORUS 31
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corus Founder : Karl Ulrich Kohler Founded : 1985 Head Quarter : London, UK Corus Group : Koninklijke Hoogovens & British Steel (1999) Employees : 50,000 Area Served : World-Wide. Rating : It is world 6th largest company 2nd in Europe 1st in United Kingdom 32
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corus our group was formed through the merger of Koninklijke and British Steel in year October 1999 The plants are located at United Kingdom and at the Netherland. The company was recognized as the worlds best steel producer by World Steel Dynamics. 33
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusLITERATURE REVIEW – THE STEEL INDUSTRYTHE GLOBAL STEEL INDUSTRYThe current global steel industry is in its best position in comparing to last decades. The pricehas been rising continuously. The demand expectations for steel products are rapidly growingfor coming years. The shares of steel industries are also in a high pace. The steel industry isenjoying its 6th consecutive years of growth in supply and demand. And there is many moremerger and acquisitions which overall buoyed the industry and showed some good results.The subprime crisis has lead to the recession in economy of different Countries, which maylead to have a negative effect on whole steel industry in coming years. However steelproduction and consumption will be supported by continuous economic growth.CONTRIBUTION OF COUNTRIES TO GLOBAL STEEL INDUSTRYFig-1 34
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusThe countries like China, Japan, India and South Korea are in the top of the above in steelproduction in Asian countries. China accounts for one third of total production i.e. 419m ton,Japan accounts for 9% i.e. 118m ton, India accounts for 53m ton and South Korea isaccounted for 49m ton, which all totally becomes more than 50% of global production. Apartfrom this USA, BRAZIL, UK accounts for the major chunk of the whole growth.The steel industry has been witnessing robust growth in both domestic as well as internationalmarkets. In this article, let us have a look at how has the steel industry performed globally in2007.Capacity: The global crude steel production capacity has grown by around 7% to 1.6 bn in2007 from 1.5 bn tonnes in 2006. The capacity has shown a growth rate of 7% CAGR since2003. The additions to capacity over last few years have ranged from 36 m tonnes in 2004 to108 m tonnes in 2007. Asian region accounts for more than 60% of the total productioncapacity of world, backed mainly by capacity in China, Japan, India, Russia and South Korea.These nations are among the top steel producers in the world.Fig-2Production: The global steel production stood at 1.3 bn tonnes in 2007, showing an increaseof 7.5% as compared to 2006 levels. The global steel production showed a growth of 8%CAGR between 2003 and 2007. China accounts for around 36% of world crude steelproduction followed by Japan (9%), US (7%), Russia (5%) and India (4%). In 2007, all the 35
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corustop five steel producing countries have showed an increase in production except US, whichshowed a decline. Rank Country Production (mn tonnes) World share (%) 1 China 489 36.0% 2 Japan 120 9.0% 3 US 98 7.0% 4 Russia 72 5.0% 5 India 53 4.0% 6 South Korea 51 3.5% Source: JSW Steel AR FY08 Table-1Consumption: The global steel consumption grew by 6.6% to 1.2 bn tonnes as compared to2006 levels. The global finished steel consumption showed a growth of 8% CAGR, in linewith the production, between the period 2003 and 2007. The finished steel consumption inChina and India grew by 13% and 11% respectively in 2007. The BRIC countries were themajor demand drivers for steel consumption, accounting for nearly 80% of incremental steelconsumption in 2007. Rank Country Consumption (mn tonnes) World share (%) 1 China 408 36.0% 2 US 108 9.0% 3 Japan 80 6.7% 4 South Korea 55 4.6% 5 India 51 4.2% 6 Russia 40 3.3% Source: JSW Steel ARFY08 Table-2Outlook: As per IISI estimates, the finished steel consumption in world is expected to reacha level of 1.75 bn tonnes by 2016, growth of 4% CAGR over the consumption level of 2007.The steel consumption in 2008 and 2009 is estimated to grow above 6% 36
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusIndian Steel IndustryIndia, which has emerged among the top five steel producing and consuming countries overthe last few years, backed by strong growth in its economy.Capacity: Steel capacity increased by 6% to 60 m tonnes in FY08. It registered a robustgrowth of 8% CAGR between the period FY04 and FY08. The capacity expansion in thecountry was primarily through brown field expansions as it requires lower investments than agreenfield expansion. Fig-3Production: Steel production has registered a growth of 6% to reach a level of 54 m tonnesin FY8. The production has grown nearly in line with the capacity expansion and registered agrowth of 7% CAGR with an average capacity utilization of 92% between the period FY04and FY08. India is currently the fifth largest producer of steel in the world, contributingalmost 4% of the total steel production in world. The top three steel producing companies(SAIL, Tata Steel and JSW Steel) contributed around 45% of the total steel production inFY08. 37
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corus Fig-4Consumption: Steel consumption has increased by 10% to 51.5 m tonnes in FY08.Consumption growth has been exceeding production growth since past few years. It grew at aCAGR of 12% between FY04 and FY08. Construction & infrastructure, manufacturing andautomobile sectors accounted for 59%, 13% and 11% for the total consumption of steelrespectively in FY08. Although steel consumption is rapidly growing in the country, the percapita steel consumption still stands at 48 kgs. Moreover, in the rural areas in the country, itstands at a mere 2 kg. It should be noted that the world’s average per capita steelconsumption was 189 kg and while that of China was 309 kg in 2007. Fig-5 38
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusTrade equations: India became net importer of steel in FY08 with estimated net imports of1.9 m tonnes. In the past few years, its exports have remained at more or less the same levelswhile on the other hand, imports have increased on the back of robust demand and capacityconstraints in the domestic markets. The imports showed a growth of around 48% whileexports declined by around 6% in FY08.Outlook: As per IISI estimates, the demand for steel in India are expected to grow at a rate of9% and 12% in 2008 and 2009. The medium term outlook for steel consumption remainsextremely bullish and is estimated at an average of above 10% in the next few years.TATA Vs. CORUSCorusThe Corus was created by the merger of British Steel and Dutch steel company, Hoogovens.Corus was Europe’s second largest steel producer with a production of 18.2 million tonnesand revenue of GDP 9.2 billion (in 2005). The product mix consisted of Strip steel products,Long products, Distribution and building system and Aluminum. With the merger of BritishSteel and Hoogovens there were two assets the British plant asset which was older and lessproductive and the Dutch plant asset which was regarded as the crown jewel by every one inthe industry. They have union issues and are burdened with more than $ 13 billion of pensionliabilities. The Corus was making only a profit of $ 1.9 billion from its 18.2 million tonnesproduction per year (compared to $ 1.5 billion form 8.7 million tone capacity by Tata).The Corus was having leading market position in construction and packaging in Europe withleading R&D. The Corus was the 9th largest steel producer in the world. It opened its bid for100 % stake late in the 2006. Tata (India) & CSN (Companhia Siderurgica Nacional)emerged as most powerful bidders.CSN (Companhia Siderurgica Nacional)CSN (Companhia Siderurgica Nacional) was incorporated in the year 1941. The companyinitially focused on the production of coke, pig iron castings and long products. The companywas having three main expansions at the Presidente Vargas Steel works during the 1970’s and1980’s. The first completed in the year 1974, increased installed capacity to 1.6 million tonsof crude steel. The second completed in 1977, raised capacity to 2.4 million tons of crude 39
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corussteel. The third completed in the year 1989, increased capacity to 4.5 million tons of crudesteel. The company was privatized by the Brazilian government by selling 91 % of its share.The Mission of CNS is to increase value for the shareholders. Maintain position as one of theworld’s lowest-cost steel producer. Maintain a high EBITDA and strengthen position as aglobal player. CNS is having fully integrated manufacturing facilities. The crude steelcapacity was 5.6 million tons. The product mix consisted of Slabs, Hot and Cold rolledGalvanized and Tin mill products. In 2004 CSN sold steel products to customers in Braziland 61 other countries. In 2002, 65 % of the steel sales were in domestic market andoperating revenues were 70 %. In 2003, the same figures were 59 % and 61 % and in 2004the same figures were 71% and 73 %. The principal export markets for CSN were NorthAmerica (44%),Europe(32%) and Asia(11%).Tata SteelTata steel, India’s largest private sector steel company was established in the 1907.The Tatasteel which falls under the umbrella of Tata sons has strong pockets and strong financials tosupport acquisitions. Tata steel is the 55th in production of steel in world. The company hascommitted itself to attain global scale operations.Production capacity of Tata steel is given in the table below:- Table-3 40
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusThe product mix of Tata steel consist of flat products and long products which are in thelower value chain. The Tata steel is having a low cost of production when compared toCorus. The Tata steel was already having its capacity expansion with its indigenous projectsto the tune of 28 million tones.Indian ScenarioAfter liberalization, there have been no shortages of iron and steel materials in the country.Apparent consumption of finished (carbon) steel increased from 14.84 Million tonnes in1991-92 to 39.185 million tonnes (Provisional) in 2005-06. The steel industry which wasfacing a recession for some time has staged a turn around since the beginning of 2002.Demand has started showing an uptrend on account of infrastructure boom. The steel industryis buoyant due to strong growth in demand particularly by the demand for steel in China. TheSteel industry was de-licensed and de-controlled in 1991 & 1992 respectively. Today, India isthe 7th largest crude steel producer of steel in the world. In 2005-06, production of Finished(Carbon) Steel was 44.544 million tonnes. Production of Pig Iron in 2005-06 was 4.695Million Tonnes. The share of Main Producers (i.e. SAIL, RINL and TSL) and secondaryproducers in the total production of Finished (Carbon) steel was 36% and 64% respectivelyduring the period of April-November, 2006.Corus decides to sell Reasons for decision: Total debt of Corus is 1.6bn GBP Corus needs supply of raw material at lower cost Though Corus has revenues of $18.06bn, its profit was just $626mn (Tata’s revenue was $4.84 bn & profit $ 824mn) Corus facilities were relatively old with high cost of production Employee cost is 15 %( Tata steel- 9%)Tata Decides to bid: Reasons for decision:  Tata is looking to manufacture finished products in mature markets of Europe.  At present manufactures low value long and flat steel products while Corus produces high value stripped products  A diversified product mix will reduce risks while higher end products will add to bottom line.  Corus holds a number of patents and R & D facility. 41
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corus  Cost of acquisition is lower than setting up a green field plant and marketing and distribution channels  Tata is known for efficient handling of labour and it aims at reducing employee cost and improving productivity at Corus  It had already expanded its capacities in India.  It will move from 55th in world to 5th in production of steel globally.Tata Steel Vs CSN: The Bidding WarThere was a heavy speculation surrounding Tata Steels proposed takeover of Corus eversince Ratan Tata had met Leng in Dubai, in July 2006. On October 17, 2006, Tata Steel madean offer of 455 pence a share in cash valuing the acquisition deal at US$ 7.6 billion. Corusresponded positively to the offer on October 20, 2006.Agreeing to the takeover, Leng said, "This combination with Tata, for Corus shareholdersand employees alike, represents the right partner at the right time at the right price and on theright terms." In the first week of November 2006, there were reports in media that Tata wasjoining hands with Corus to acquire the Brazilian steel giant CSN which was itself keen onacquiring Corus. On November 17, 2006, CSN formally entered the foray for acquiring Coruswith a bid of 475 pence per share. In the light of CSNs offer, Corus announced that it woulddefer its extraordinary meeting of shareholders to December 20, 2006 from December 04,2006, in order to allow counter offers from Tata Steel and CSN...Financing the AcquisitionBy the first week of April 2007, the final draft of the financing structure of the acquisitionwas worked out and was presented to the Corus Pension Trusties and the Works Council bythe senior management of Tata Steel. The enterprise value of Corus including debt and othercosts was estimated at US$ 13.7 billionThe Integration EffortsIndustry experts felt that Tata Steel should adopt a light handed integration’ approach, whichmeant that Ratan Tata should bring in some changes in Corus but not attempt a completeoverhaul of Corussystems (Refer Exhibit XI and Exhibit XII for projected financials of Tata-Corus). N Venkiteswaran, Professor, Indian Institute of Management, Ahmedabad said, “Ifthe target company is managed well, there is no need for a heavy-handed integration. Itmakes sense for the Tatas to allow the existing management to continue as before. 42
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusThe SynergiesMost experts were of the opinion that the acquisition did make strategic sense for Tata Steel.After successfully acquiring Corus, Tata Steel became the fifth largest producer of steel in theworld, up from fifty-sixth position.There were many likely synergies between Tata Steel, thelowest-cost producer of steel in the world, and Corus, a large player with a significantpresence in value-added steel segment and a strong distribution network in Europe. Amongthe benefits to Tata Steel was the fact that it would be able to supply semi-finished steel toCorus for finishing at its plants, which were located closer to the high-value markets.The PitfallsThough the potential benefits of the Corus deal were widely appreciated, some analysts haddoubts about the outcome and effects on Tata Steels performance. They pointed out thatCorus EBITDA (earnings before interest, tax, depreciation and amortization) at 8 percentwas much lower than that of Tata Steel which was at 30 percent in the financial year 2006-07.The Road AheadBefore the acquisition, the major market for Tata Steel was India. The Indian marketaccounted for sixty nine percent of the companys total sales. Almost half of Corusproduction of steel was sold in Europe (excluding UK). The UK consumed twenty ninepercent of its production.After the acquisition, the European market (including UK) would consume 59 percent of themerged entitys total production.Tata - Corus: Visionary deal or costly blunder?After four months of twists and turns, Tata Steel has won the race to acquire Corus Group.The bidding war between Tata Steel and Brazilian company CSN was riveting and ended in arapid-fire auction. Initial reactions to the deal were highly diverse and retail investors werecompletely puzzled by the market reaction.Going by the stock market reaction, the acquisition was a big blunder. The stock tanked 10.5per cent after the deal was announced and another 1.6 per cent. Investors were worried aboutthe financial risks of such a costly deal. 43
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusMedia reaction to the deal had been just the opposite. Almost all the reports were adulatorywhile editorials praised the coming of age of Indian industry. A prominent financial dailypresented the deal almost as revenge of the natives against the old colonial masters with apicture of London covered in our national colours. Its editorial warned the market not to betagainst Tata, citing the previous instances when skeptics were proved wrong by the group.Official reaction had been no different and the finance minister even offered all possible helpto the Tata Group.Was the acquisition too costly for Tata Steel? Was price the only criterion while evaluatingan acquisition? Should managers focus on keeping shareholders happy after every quarter orshould they focus on the long-term, big picture? These are tough questions and,unfortunately, answers would be clear only after many years - at least in this case.When could the steel cycle turn?The last few years were some of the best ever for the global steel industry as robust demandfrom emerging economies like China pushed up prices. Profits of steel manufacturers acrossthe globe swelled and their market capitalizations have multiplied many times. Global Steel output (in million tonnes) Country 2005 2006 % change China 355.8 418.8 17.7 Japan 112.5 116.2 3.3 US 94.9 98.5 3.8 Russia 66.1 70.6 6.8 South Korea 47.8 48.4 1.3 Germany 44.5 47.2 6.1 India 40.9 44.0 7.6 Ukraine 38.6 40.8 5.7 Italy 29.4 31.6 7.5 44
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corus Brazil 31.6 30.9 (2.2) World production 1,028.8 1,120.7 8.9 Table-4How long will the good times last? Tata Steel believes the steel cycle is in a long-term uptrend and the risk of a downturn in prices is low. In fact, managing director B Muthuramansaid the global steel industry might witness sustained growth as during the 30-year periodbetween 1945 and 1975.The massive post-war infrastructure build-up in Western countries led to the sustained steeldemand growth in that period. The coming decades would see similar infrastructure spendingin 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, corroboratesthis in its outlook. The growth in demand for global steel would average 4.9 per cent per yeartill 2010 according to the IISI. Between 2010 and 2015, demand growth is expected tomoderate to 4.2 per cent per annum according to IISI forecasts. Much of this demand growthwould come from China and India, where the IISI estimates growth rates to be 6.2 per centand 7.7 per cent annually from 2010 to 2015.Now let’s consider steel prices. Expectations of sustained demand growth have already led tomassive capacity additions, mostly in emerging markets. Chinese steel capacity has expandedsignificantly over the last decade while a large number of mega steel plants are being plannedin India. Capacity additions by Russian and Brazilian steelmakers would also be significant infuture as they have access to raw material.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 manyindustry leaders believe that the global steel industry would see a structural shift in thecoming years.Some of the inefficient steel mills in mature markets would face closure while others wouldshift production to high value-added products using unfinished and semi-finished steelsupplied 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.Major global steel makers are also not unduly worried about the possibility of large-scaleexports from China, which would depress international steel prices. Chinese capacity isexpected to continue to grow in the coming years, but so would the demand. 45
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusBesides, Chinese steel plants are not expected to emerge very efficient as they depend onimported raw materials, which limit their pricing power. Many steel analysts expectsignificant consolidation in the Chinese steel industry as margins erode further in future. TheChinese government has already started squeezing the smaller units by withdrawing their rawmaterial import permits.The need for scaleGoing by the IISI forecasts, global steel demand would be 1.32 billion tonnes by 2010 and1.62 billion tonnes by 2015. Even Arcelor-Mittal, the largest global steel player by far, has apresent capacity, which is just 6.8 per cent for projected demand in 2015. To maintain itscurrent share, Arcelor-Mittal would have to add another 50 million tonnes of capacity bythen. This confirms the view that there is still considerable scope for consolidation in the steelindustry. Global steel ranking Company Capacity (in million tonnes) Arcelor – Mittal 110.0 Nippon Steel 32.0 Posco 30.5 JEF Steel 30.0 Tata Steel – Corus 27.7 Bao Steel China 23.0 US Steel 19.0 Nucor 18.5 Riva 17.5 Thyssen Krupp 16.5 46
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusAs the industry consolidates further, Tata Steel - even with its planned greenfield capacityadditions - would have remained a medium-sized player after a decade. This made itabsolutely vital that the company did not miss out on large acquisition opportunities. Apartfrom Corus, there are not many among the top-10 steel makers, which would becomepossible acquisition targets in the near future. ata Steel - Corus : Present capacity (in million tonnes per annum) Corus Group (in UK and The Netherlands) 19 Tata Steel - Jamshedpur 5 Nat Steel – Singapore 2 Millennium Steel - Thailand 1.7 Aggregate present capacity 27.7 Tata Steel - Corus : Projected capacity(in million tonnes per annum) Corus Group (in UK and The Netherlands) 19 Tata Steel - Jamshedpur 10 Tata Steel – Jharkhand 12 Tata Steel – Orissa 6 Tata Steel - Chhattisgarh 5 Nat Steel – Singapore 2 47
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corus Millennium Steel - Thailand 1.7 Aggregate projected capacity 55.7With Corus in its fold, Tata Steel can confidently target becoming one of the top-3 steelmakers globally by 2015. The company would have an aggregate capacity of close to 56million tonnes per annum, if all the planned greenfield capacities go on stream by then.Neat strategic fitCorus, being the second largest steelmaker in Europe, would provide Tata Steel access tosome of the largest steel buyers. The acquisition would open new markets and productsegments for Tata Steel, which would help the company to de-risk its businesses throughwider geographical reach.A presence in mature markets would also provide Tata Steel an opportunity to go further upthe value chain as demand for specialized and high value-added products in these markets ishigh. The market reach of Corus would also help in seeking longer-term deals with buyersand to explore opportunities for pushing branded products.Corus is also very strong in research and technology development, which would add to thecompetitive strength for Tata Steel in future. Both companies can learn from each other andachieve better efficiencies by adopting the best practices.But at what cost?Now that Tata Steel has achieved its strategic objective of becoming one of the major playersin the global steel industry and steel demand growth is likely to be robust over the nextdecade, has the company paid too much for Corus? Even those analysts and industryobservers who agree on the positive outlook for steel demand growth and the need to achievescale believe so.The enterprise valuation of Corus at around $13.5 billion appears too steep based on therecent financial performance of Corus. Tata Steel is paying 7 times EBITDA of Corus for2005 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 thatArcelor has much superior assets, wider market reach and is financially much stronger than 48
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusCorus, the price paid by Tata Steel looks almost obscenely high. Tata Steels B Muthuramanhas defended the deal arguing that the enterprise value (EV) per tonne of capacity is not veryhigh. The EV per tonne for the Tata-Corus deal was around $710 is only modestly higherthan the Mittal-Arcelor deal. Besides, setting up new steel plants would cost anywherebetween $1,200 and $1,300 per tonne and would take at least five years in most developingcountries.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 wouldstruggle to break even at a modest decline in steel prices from current levels.Recent financial performance of Corus would dent the hopes of Tata Steel shareholders evenfurther. EBITDA margins, after adjusting for one-time incomes, have steadily declined overthe last 3 years. For the 9-month period ended September 2006, EBITDA margins of Coruswere barely 8 per cent as compared to around 40 per cent for Tata Steel.Corus FinancialsYear 2004 2005 Jan-Sep 2006Revenues 18.32 19.91 14.10EBITDA 1.91 1.86 1.12EBITDA Margin (%) 10.44 9.34 7.96Operating Profits 1.30 1.17 0.75Operating Profit Margin (%) 7.09 5.89 5.29Net Profit 0.87 0.72 0.25Net Profit Margin (%) 4.73 3.63 1.77Figures in $ BillionTable-8The price of an asset is more a factor of its future earnings potential than its past earningsrecord. Operating margins of Corus can be significantly improved if Tata Steel can supplyslabs and billets. Tata Steel is targeting consolidated EBITDA margins of around 25 per centas and when it starts supplying crude steel to Corus. If the company can sustain such marginson the enlarged capacities, it would be quite impressive.But that is a long way off as Tata Steel would have sufficient crude steel capacity only whenits proposed new plants become operational. Till then, the company is targeting to maximize 49
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corusgains through possible synergies between the two operations, which are expected to yield upto $350 million per annum within three years. In the meanwhile, Tata Steel has to make surethat cash flows from Corus are sufficient to service the huge amount of debt, which is beingavailed to finance the acquisition. According to the details available so far, Tata Steel wouldcontribute $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 financedthrough debt. The debt facilities are believed to be structured in such a way that they can beserviced largely from the cash flows of Corus.Interest rates on credit facilities for such buy-outs are often higher than market rates becauseof the risks involved. At an expected interest rate of 7 per cent per annum, the interest outgoalone would be over $650 million per year. Along with repayment of principal, the annualfund requirement to service this debt would be around $1.5 billion - assuming a 10-yearrepayment horizon.The current cash flows of Corus are barely sufficient to cover this, even after considering thesynergy gains. If international steel prices decline even modestly, Tata Steel would have todip 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 improveefficiencies. Tata Steel would have to manage all this without jeopardizing its greenfieldexpansion plans which may cost a staggering $20 billion over the same 10-year period.No wonder investors are deeply worried!To its credit, the Tata Steel management has acknowledged that it would not be an easy taskto manage the next five years when Corus would have to hold on to its margins without thehelp of cheaper inputs supplied by Tata Steel. If the group can survive this initial periodwithout much damage, life may become much easier for the Tata Steel management.Investors would consider Corus a burden for Tata Steel until such time there is a perceptibleimprovement in its margins. That would keep the Tata Steel stock price subdued and anydecline in steel prices would have a disproportionately negative impact on the stock.However, long-term investors would appreciate that right now steel manufacturing assets arecostly and Corus was a prized target which made it even more costly. With the strategicimportance of such a large deal in mind, Tata Steel management has taken the plunge. If itcan pull it off, even after a decade, the Corus acquisition would become the deal, whichwould transform Tata Steel. 50
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusTata and Corus:In addition to Tata Steels bid for Corus, the largest private sector steel producer in India hasmade a mark and consolidated it is presence in the foreign land, through acquisition his latestones being in Indonesia. In case of Corus, only time will tell whether Tata Steel wouldsucceed or not, but in other endeavours the company has already succeeded in acquiringsome steel plants. Tata Steel, the countrys largest private sector steel company, was in talkswith Anglo American of South Africa to acquire its 79 per cent stake in Highveld Steel.While the Highveld acquisition is still going through the evaluation process. According toanalysts, if the acquisition of Highveld Steel goes through to completion, Tata Steelsproduction capacity will go up to 6 million tonne from the current level of 5 million tonne.Highveld, the largest vanadium producer in the world, manufactures steel, vanadiumproducts, Ferro-alloys, carbonaceous products and metal containers and closures. Analystsobserve a clear trend in Tata Steels plans to expand capacities. But Highveld was notsupposed to be the first global acquisition for Tata Steel. In February 2005, the companycompleted the acquisition of Singapores largest steel company, NatSteel Asia, which has atwo-million tonne steel capacity with presence across Singapore, Thailand, China, Malaysia,Vietnam, the Philippines and Australia. As per the deal, the enterprise value of NatSteel Asiawas pegged at Rs 1,313 crore. Tata Steel has plans to establish steel manufacturing units inIran and Bangladesh too. With a stated vision to become a 20-25 million tonne company by2015, the company has also signed a few joint ventures and announced organic expansionplans.Over all scenarioTata Steel acquiring Corus throws up several interesting questions on emergingmultinationals and traditional multinationals in the steel industry and particularly thecomplexities of the acquisition in the above context. What has been surprising in the abovecase is that how could a small steel maker, Tata Steel from a developing country like Indiabuy up a large steel company, Corus PLC from the United Kingdom. Prior to the acquisition,Corus was four times bigger than Tata Steel. However, the operating profit for Tata Steel was 51
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corus$840 million (sale of 5.3 million tons), whereas in case of Corus it was $860 million(sale of18.6 million tons) in the year 2006. It is also interesting to find out why a large global steelmaker, Corus decided to sell itself off to a small steel maker from a developing country.Many questioned if the Tatas were wise in acquiring Corus that had accumulated huge debtburden, made operational losses and whose share price had drastically come down. Theintriguing issue of this acquisition has been on how the final bidding price of the Corus rise upto 70% over the stock price of Corus prior to the bidding. Most importantly, how did TataSteel organize the huge capital for the acquisition? It appears that several external playersparticipated in the acquisition process and so how were they all involved in the biddingprocess. Further, the issues of post acquisition are also unique in this case as the context andculture of the acquirer and the acquired companies are different.Until the 1990s, not many Indian companies had contemplated spreading their wings abroad.An Indian corporate or group company acquiring a business in Europe or the U.K. seemedpossible only in the realm of fantasy. In addition to these issues, Indian companies in generalhave had huge liabilities of origin in term of poor quality, service and reliability in theinternational markets. At the same time many the global steel industry was getting restructuredfrom a large number of smaller steel makers to a fewer large steel conglomerates through theworldwide mergers and acquisition. The steel companies in India were also wondering on howto go about in these circumstances. In the above context, how did the top management of TataSteel and the Tata Group Perceive the acquisition of Corus? When Tata Steel began biddinghigher price on Corus plc, many wondered how the Tatas manage the huge financial deal andwhether it will be good for the financial health of Tata Steel.Tata acquired Corus on the 2nd of April 2007 for a price of $12 billion making the IndianCompany the world’s sixth largest steel producer. This acquisition process has started longback in the year 2005. However, Corus itself was involved in a considerable number ofMerger & Acquisition (M&A) deals and joint ventures (JVs) beginning in the year2000. In aperiod of seven years Corus was involved in 14 deals. In 2006, the Tata first offered 455 penceper share of Corus but by the end of the bidding process in 2007, Tata offered 608 pence pershare, which is 33.6% higher than the first offer. For this deal, Tata has financed only $4billion, though the total price of this deal was $12billion. Given below are the reactions ofRatan Tata and B. Muthuraman on what they felt about the acquisition. 52
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusTata steel financial status post mergerPost Acquisition Management:There has been a great deal of suspicion on how well the two entities, viz., Tata Steel andCorus plc integrate in the post acquisition situation. This concern has been expressed since theculture and perspectives of the two companies and the people are seemingly very differentfrom each other. Ratan Tata however, has been confident that the post acquisitionmanagement will not be too difficult as the two organizational cultures will be effectivelyintegrated.Ratan Tata has said he is confident the two companies will have “a cultural fit and similarwork practices.”Nearly 30 years ago J.R.D Tata had lured away a young engineer from Corus’s predecessorcompany, British Steel, to work at Tata Steel. That young Sheffield-educated engineer – SirJamshed J. Irani (knighted by the Queen 10 years ago) – was Tata Steel’s Managing Directoruntil six years ago.Tata Corus has made developed some management structure to deal with the smooth operationof the two entities. It has also adopted several system integrations in both the entities tosmoothen the transactions between the two entities. Tata Steel has formed a seven- memberintegration committee to spearhead its union with Corus group. While Ratan Tata, chairman ofthe Tata group, heads the committee, three of the members are from Tata Steel and the otherthree are from Corus group. Members of the integration committee from Tata Steel includeManaging Director B Muthuraman, Deputy Managing Director (steel) T Mukherjee, and chieffinancial officer Kaushik Chatterjee. The Corus group is represented in the committee by CEOPhillipe Varin, executive director(finance) David Lloyd, and division director (strip products)Rauke Henstra.The company has also created several Taskforce Teams to ensure integration specific set ofactivities in the two entities for smoother transaction. For instance, the company has created atask force to integrate the UK/EU model in construction to the Indian market.Tata Corus Task force 53
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusPost Tata Corus merger, Tata Steel has access to considerable IP and expertise in Constructionfrom UK/EU based models. The key driver is to find ways to utilize this knowledge and assistthe capture of value for Tata Steel in the construction market in India. To achieve, a taskforcecomprising of following executives from both the entities is being formed with immediateeffects.Members from CorusMr. Matthew Poole (Director Strategy Long Products Corus)Mr. Colin Ostler (GM Corus Construction Centre)Mr. Darayus Shroff (Corus International)Members from Tata Steel:Mr. Sangeeta Prasad (CSM South, Flat Products)Mr. Pritish Kumar Sen (Market Research Group)Mr. Rajeev Sahay (Head Planning & Scheduling, TGS)The scope of the taskforce will be to:1. Ensure smooth market knowledge exchange between Tata Corus and Tata Bluescope andidentify Knowledge gaps.2. Complete mapping of construction sector for Indian market using externalresource if necessary.3. Understand key drivers for construction through knowledge gained fromstakeholders of the construction community.4. Map key competencies of Tata Corus against market drivers/ requirements.5. Develop a five- year strategy.The taskforce members will report to Mr. Paul Lormor (Director Construction Development).The engagement of the members of the taskforce will be on part time basis and they willcontinue to discharge their current responsibilities.The taskforce will continue till June 2008, by which time it is expected to taskforce preparethe business case and place it before the board for approvalCorus Acquisition FinancingTata steel is pleased to announce the refinancing of its GBP 3,620 million acquisition bridge 54
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corusfacility and revolving credit facility which had been provided by Credit Suisse, ABN AMROand Deutsche Bank to fund its acquisition of Corus Group plc that was completed on April 2,2007.The refinancing is by way of non recourse Facilities totaling GBP 3,170 million(the“Refinancing Facilities”) which are being Arranged by a syndicate led by Citigroup, ABNAMRO and Standard Chartered Bank. This refinancing provides significant benefits andflexibility over the term of financing to the group.The Refinancing Facility comprises a five year GBP 1670 million amortizing loan which willbe syndicated by the joint book runners to relationship banks of Tata steel and Corus and aseven year minimally amortizing term loan of GBP 1500 million that will be syndicated toinstitutional investors and banks in the USA, Europe and Asia. The balance amount of theacquisition bridge is being repaid by an additional equity contribution by Tata Steel/ Tata SteelAsia which had been previously disclosed on April 17, 2007.Subsequent to the conclusion of the discussions on the commercial terms of the financing, theprocess to discuss the security package for the above transaction will commence with theTrustees of the UK Pension Funds in continuation of the dialogue with the Trustees fromOctober 2006. Concurrently, Corus will engage in the consultative process with the CorusNetherlands Works Council to seek their advice on the above financing.Tata Steel is one of India’s largest companies and is amongst the world’s lowest cost steelproducers and most profitable steel companies. Corus Group plc is Europe’s second largeststeel producer and the combined entity is the fifth largest steel producer in the world with aninstalled capacity of 28 million tons p.a.Group Strategy Function - Tata CorusThe Tata Steel Group has the ambition to become a bench mark in the global steel industry interms of value creation and corporate citizenship. The group strategy function will beorganized to support the delivery of the group ambition. The main responsibilities of the groupstrategy function are as follows:  To originate the group strategy i.e. portfolio management, market sector positioning, industrial foot print, partnerships and alliances, and translate the Group strategy into strategy action plans.  To organize and support the strategic planning process across the group 55
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corus  To originate and assess corporate business development initiatives i.e. corporate partnerships/alliances.  To monitor the steel industry which includes macro economic trends, steel market dynamics, competitive arena, technology, standards and regulationsTHE DETAILS ABOUT THE COMPANY’S PERFORMANCEBalance sheet Mar 10 Mar 09 Mar 08 Mar 07 Mar 06Sources of fundsOwners fundEquity share capital 887.41 730.79 730.78 580.67 553.67Share application money - - - 147.06 -Preference share capital - 5,472.66 5,472.52 - -Reserves & surplus 36,281.34 23,501.15 21,097.43 13,368.42 9,201.63Loan fundsSecured loans 2,259.32 3,913.05 3,520.58 3,758.92 2,191.74Unsecured loans 22,979.88 23,033.13 14,501.11 5,886.41 324.41Total 62,407.95 56,650.78 45,322.42 23,741.48 12,271.45Uses of fundsFixed assetsGross block 22,306.07 20,057.01 16,479.59 16,029.49 15,407.17Less : revaluation reserve - - - - -Less : accumulated 10,143.63 9,062.47 8,223.48 7,486.37 6,699.85depreciationNet block 12,162.44 10,994.54 8,256.11 8,543.12 8,707.32Capital work-in-progress 3,843.59 3,487.68 4,367.45 2,497.44 1,157.73Investments 44,979.67 42,371.78 4,103.19 6,106.18 4,069.96Net current assetsCurrent assets, loans & 13,425.27 11,591.66 38,196.34 14,671.91 4,997.00 56
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusadvancesLess : current liabilities & 12,003.02 11,899.95 9,755.78 8,279.70 6,913.83provisionsTotal net current assets 1,422.25 -308.29 28,440.56 6,392.21 -1,916.83Miscellaneous expenses not - 105.07 155.11 202.53 253.27writtenTotal 62,407.95 56,650.78 45,322.42 23,741.48 12,271.45Notes:Book value of unquoted 44,243.24 41,665.63 3,790.47 5,793.46 3,477.38investmentsMarket value of quoted 4,397.79 1,491.89 3,260.65 2,979.00 4,079.52investmentsContingent liabilities 13,184.61 12,188.55 9,250.08 7,185.93 3,872.34Number of equity 8872.14 7305.92 7305.84 5804.73 5534.73sharesoutstanding (Lacs)Profit loss account Mar 10 Mar 09 Mar 08 Mar 07 Mar 06IncomeOperating income 24,940.65 24,348.32 19,654.41 17,452.66 15,132.09ExpensesMaterial consumed 8,491.42 8,279.44 6,024.80 5,679.95 4,661.53Manufacturing expenses 3,803.33 3,349.96 2,693.73 2,589.24 2,364.40Personnel expenses 2,361.48 2,305.81 1,589.77 1,454.83 1,351.51Selling expenses 82.17 61.49 52.53 64.71 80.75Adminstrative expenses 1,622.77 1,518.83 1,224.54 986.20 902.30Expenses capitalised -326.11 -343.65 -175.50 -236.02 -112.62Cost of sales 16,035.06 15,171.88 11,409.87 10,538.91 9,247.87Operating profit 8,905.59 9,176.44 8,244.54 6,913.75 5,884.22 57
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusOther recurring income 331.59 305.36 347.28 485.14 256.95Adjusted PBDIT 9,237.18 9,481.80 8,591.82 7,398.89 6,141.17Financial expenses 1,848.19 1,489.50 929.03 251.25 168.44Depreciation 1,083.18 973.40 834.61 819.29 775.10Other write offs - - - - -Adjusted PBT 6,305.81 7,018.90 6,828.18 6,328.35 5,197.63Tax charges 2,168.50 2,114.87 2,380.28 2,040.47 1,734.38Adjusted PAT 4,137.31 4,904.03 4,447.90 4,287.88 3,463.25Non recurring items 909.49 297.71 239.13 -123.02 -4.37Other non cash adjustments - - - 57.29 47.50Reported net profit 5,046.80 5,201.74 4,687.03 4,222.15 3,506.38Earnigs before appropriation 14,555.78 11,589.20 9,281.01 7,198.31 5,296.59Equity dividend 709.77 1,168.95 1,168.93 943.91 719.51Preference dividend 45.88 109.45 22.19 - -Dividend tax 122.80 214.10 202.43 160.42 100.92Retained earnings 13,677.33 10,096.70 7,887.46 6,093.98 4,476.16Cash flow Mar 10 Mar 09 Mar 08 Mar 07 Mar 06Profit before tax 7,214.30 7,315.61 7,066.36 6,261.65 5,239.96Net cashflow-operating activity 8,369.22 7,397.22 6,254.20 5,118.10 3,631.39Net cash used in investing activity -5,254.84 -9,428.08 -29,318.58 -5,427.60 -2,464.59Netcash used in fin. activity -1,473.13 3,156.42 15,848.07 7,702.46 -1,125.13Net inc/dec in cash and equivlnt 1,641.25 1,125.56 -7,216.31 7,392.96 41.67Cash and equivalnt begin of year 1,592.89 465.04 7,681.35 288.39 246.72Cash and equivalnt end of year 3,234.14 1,590.60 465.04 7,681.35 288.39 58
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusDIVIDENDYear Month Dividend (%)2010 May 802009 Jun 1602008 Jun 1602007 May 1552006 May 1302005 May 1302004 May 1002003 May 802002 April -2001 May 402000 May 501999 May 401998 May 401997 May 45Annual results in brief Mar 10 Mar 09 Mar 08 Mar 07 Mar 06Sales 25,021.98 24,315.77 19,693.28 19,762.57 17,144.22Operating profit 8,952.09 9,133.43 8,223.54 6,973.27 5,931.51Interest 1,508.40 1,152.69 878.70 173.90 118.44Gross profit 8,297.48 8,289.01 7,679.84 7,233.04 6,067.83EPS (Rs) 56.87 71.18 64.14 72.71 63.33 59
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusAnnual results in details Mar 10 Mar 09 Mar 08 Mar 07 Mar 06Other income 853.79 308.27 335.00 433.67 254.76Stock adjustment 134.97 -289.27 -38.73 -82.47 -104.91Raw material 5,494.74 5,709.91 3,429.52 3,121.46 2,368.30Power and fuel 1,268.28 1,091.37 - - 819.17Employee expenses 2,361.48 2,305.81 1,594.77 1,456.83 1,353.01Excise - - - 2,210.55 2,004.83Admin and selling expenses - - - - -Research and development - - - - -expensesExpenses capitalised - - - - -Other expenses 6,810.42 6,364.52 6,484.18 6,082.93 4,772.31Provisions made - - - - -Depreciation 1,083.18 973.40 834.61 819.29 775.10Taxation 2,167.50 2,113.87 2,379.33 2,039.50 1,733.58Net profit / loss 5,046.80 5,201.74 4,687.03 4,222.15 3,506.38Extra ordinary item - - 221.13 -152.10 -52.77Prior year adjustments - - - - -Equity capital 887.41 730.79 730.78 580.67 553.67Equity dividend rate - - - - -Agg.of non-prom. shares (Lacs) 6051.62 4825.23 4825.87 4033.17 4051.91Agg.of non promotoHolding (%) 68.53 66.05 66.06 69.48 73.21OPM (%) 35.78 37.56 41.76 35.29 34.60GPM (%) 32.07 33.66 38.34 35.81 34.87NPM (%) 19.50 21.12 23.40 20.91 20.15 60
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusThe Acquisition Process:The acquisition process started on September 20, 2006 and completed on July 2, 2007. In theprocess both the companies have faced many ups and downs. The details of the process ofacquisition are provided in the Exhibit 1 After the final round of bidding and when the resultswere awaited Ratan Tata seemed to have asked Muthuraman to prepare two speeches viz., (a)on conceding defeat and (b) on winning the bid. A group of executives from Tata Steeldescribed on what Muthuraman had to say about his writing the two speechesExhibit 1: Key Milestones of the Tata Corus DealSeptember 20, 2006:-Corus Steel has decided to acquire a strategic partnership with aCompany that is a low cost producerOctober 5, 2006 :- The Indian steel giant, Tata Steel wants to fulfill its ambition to Expand itsbusiness further.October 6, 2006 :- The initial offer from Tata Steel is considered to be too low both by Corusand analysts.October 17, 2006:- Tata Steel has kept its offer to 455p per share.October 18, 2006:- Tata still doesn’t react to Corus and its bid price remains the same.October 20, 2006:- Corus accepts terms of £ 4.3 billion takeover bid from Tata Steel.October 23, 2006:- The Brazilian Steel Group CSN recruits a leading investment bank to offeradvice on possible counter- offer to Tata Steel’s bid.October 27, 2006:- Corus is criticized by the chairman of JCB, Sir AnthonyBamford, for its decision to accept an offer from Tata.November 3, 2006:- The Russian steel giant Severstal announces officially that it will not 61
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corusmake a bid for Corus.November 18, 2006:- The battle over Corus intensifies when Brazilian group CSN approachedthe board of the company with a bid of 475p per share.November 27, 2006:- The board of Corus decides that it is in the best interest of its willshareholders to give more time to CSN to satisfy the pre- conditions and decide whether itissue forward a formal offerDecember 18, 2006:- Within hours of Tata Steel increasing its original bid for Corus to500pence per share, Brazils CSN made its formal counter bid forCorus at 515 pence per share in cash, 3% more than Tata Steels Offer.January 31, 2007:- Britains Takeover Panel announces in an e- mailed statement that after anauction Tata Steel had agreed to offer Corus investors608 pence per share in cashApril 2, 2007:- Tata Steel manages to win the acquisition to CSN and has the full votingsupport form Corus’ shareholdersWhen Mr. Muthuraman tried to write the speech on conceding defeat; he could not writeanything for long; his hand writing which is usually neat and beautiful was illegible withnumber of overwriting. After a lot of attempts he was able to write one. Whereas, he couldsmoothly and in beautiful hand writing wrote the winning speech. During the final rounds ofbidding, the top management team of the Tata’s Including Ratan Tata, Muthuraman, KaushikChaterjee and their key support staff were in a secluded location that was inaccessible toothers. Further, all their communication devices were changed in order that the competitors ofthe bidding or the rivals had any access to the discussion of the negotiating team of the Tatas.”The official declaration of the completed transaction between the two companies wasannounced to be effective by Court of Justice in England and Wales and consistent with theScheme of Arrangement of the Tata Steel Scheme on April 2, 2007. The total value of thisacquisition amounted to £6.2 billion (US$12 billion). Tata Steel the winner of the auction forCorus declares a bid of 608 pence per share surpassed the final bid from Brazilian Steel maker 62
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusCompanhia Siderurgica Nacional (CSN) of 603 pence per share.According the Scheme regulations, Tata Steel was required to deliver a consideration not laterthan 2 weeks following the official date of the completion of the transaction.Prior to the beginning of the deal negotiations, both Tata Steel and Corus were interested inentering into an M&A deal due to several reasons. The official press release issued by both thecompany states that the combined entity will have a pro forma crude steel production of 27million tons in 2007, with 84,000 employees across four continents and a joint presence in 45countries, which makes it a serious rival to other steel giants.The deal between Tata & Corus was officially announced on April 2 nd, 2007 at a price of 608pence per ordinary share in cash. This deal is a 100% acquisition and the new entity will berun by one of Tata steel subsidiaries. As stated by Tata, the initial motive behind thecompletion of the deal was not Corus’ revenue size, but rather its market value. Even thoughCorus is larger in size as compared to the Tatas, the company was valued less than Tata (atapproximately $6.2 billion) at the time when the deal negotiations started.But from Corus’ point of view, as the management has stated that the basic reason forsupporting this deal were the expected synergies between the two entities. What were thevarious motivations for Corus to have upported the acquisition by the Tatas? Was it becauseof better price offered by the Tatas? Was this deal the best way for the shareholders of Corusto exit from the loss making steel business?First of all, the general assumption is that the acquisition was not cheap for Tata. The pricethat they paid represents a very high 49% premium over the closing mid market share price ofCorus on 4 October, 2006 and a premium of over 68% over the average closing market shareprice over the twelve month period. Moreover, since the deal was paid for in cashautomatically makes it more expensive, implying a cash outflow from Tata Steel in theamount of £1.84 billion.Tata has reportedly financed only $4 billion of the Corus purchase from internal companyresources, meaning that more than two - thirds of the deal has had to be financed through loansfrom major banks. The day after the acquisition was officially announced, Tata Steel’s sharefell by 10.7 percent on the Bombay stock market. Tata’s new debt amounting to $8 billion dueto the acquisition, financed with Corus’ cash flows, is expected to generate up to $640 millionin annual interest charges (8% annual interest cost). This amount combined with Corus’existing interest debt charges of $400 million on an annual basis implies that the combined 63
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corusentity’s interest obligation will amount to approximately $725 million after the acquisition.The complexity of the deal especially from the financial implications of the acquisition hasgripped many.Time line of events:Oct 5, 2006 - Tatas confirm interest in acquiring CorusOct 17 - Tatas propose a $7.6 billion bid for Corus at 455 pence a share in cashOct 20 - Corus Board approves Tata bidNov 17 - CSN makes indicative bid of 475 pence a shareNov 27 - Corus adjourns extraordinary shareholders meeting from Dec 4 to Dec 20 to allowCSN more timeDec 10 - Tata Steel raises its bid to $9.2 billionDec 10 - Tata Steel raises bid to $9.2 billion at 500 pence per Corus share; Corus BoardRecommends offer.Dec 11 - CSN makes a formal bid of $9.6 billion at 515 pence a share in cash; Corus BoardRecommends offerDec 19 - UK Takeover Panel watchdog sets a January 30 deadline for Tata Steel and CSN tomake revised offersDec 22 - Tata Steel wins approval from the European Commission to buy Corus2007Jan 26 - Takeover Panel says it will launch an auction on January 30Jan 29 - EU clears CSN bid for CorusJan 30 - Auction for Corus startsJan 31 - Tatas outbid CSN with 608 pence a share offer; says expects to close transaction bymiddle of March 2007.Tata Steel wins Corus with a $11.3 billion offerFinancing StructureTata Steel Equity- $2056m 100%Tata Steel Asia Holdings Bridge/Mezzanine Debt - $1824m Pte Ltd 100%Tata Steel UK Ltd Acquisition Debt- $5635m 64
    • Analysis of Merger and Acquisition with respect to Case Study of Tata CorusSenior Debt- $3056m 100% High Yield Debt - $2579mRevolving Credit Facility- $669mCorus Group Places Findings of Merger and AcquisitionsOperational and financial advantages of mergers and acquisitions:The operational and financial advantages of mergers and acquisitions are widely documentedand may also present the face of M&A activity to shareholders, the public, corporate appealsto legislators etc.Merger and Acquisition is advantageous in following ways: It increases market share, It lower down the cost of production, It increases the competitiveness, It acquires research and development process ,know how and patents.Some of the potential disadvantages facing consumers in regard to mergers are thefollowing. It increases cost to consumers It Decreases corporate performance and/or services It Potentially lowered industry innovation Suppression of competing businesses Decline in equity pricing and investment valueShareholders may also be disadvantaged by corporate leadership if it becomes too content orcomplacent with its market positioning.In other words, when M&A activity reduces industry competition and produces a powerfuland influential corporate entity, that company may suffer from non-competitive stimulus andlowered share prices.Lower share prices and equity valuations may also arise from the merger itself being a short-term disadvantage to the company. 65
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corus BIBLIOGRAPHYSources:1) http://www.nvca.org/index.php?option=com_docman&task=doc_download&gid=368&Itemid=932) http://www.economicshelp.org/microessays/competition /benefits-mergers.html3) http://www.economicshelp.org/microessays/competition /uk-mergers.html4) http://www.investopedia.com/university/mergers/merge rs5.asp5) http://legal-dictionary.thefreedictionary.com/Merger s+and+Acquisitions6) http://www.gbata.com/docs/jgbat/v1n2/v1n2p1.pdf7) http://www.oag.state.ny.us/media_center/2009/apr/pdf s/BofAmergLetter.pdf8) Jarrod McDonald, Max Coulhard, and Paul De Lange.(Fall, 2005) Planning for aSuccessful Merger: A Lesson form an Australian Case Study. Journal of Global Business andTechnology, Volume 1, Number 2 66
    • Analysis of Merger and Acquisition with respect to Case Study of Tata Corus ConclusionMergers and acquisitions can be: Costly due to the high legal expenses The cost of acquiring a new company that may not be profitable in the short run. More of strategic corporate decision than a tactical maneuver. Moreover, if a poison pill unknowingly emerges after a sudden acquisition of another companys shares, this could render the acquisition approach very expensive and/or redundant. Elimination of healthy competition Concentration of economic power Monopoly effecting the customer and suppliers Adverse effect as national economy. 67