A PROJECT TO<br />STUDY<br />Acquisition OF<br />TATA AND CORUS <br /> BY <br />GROUP 4<br />SUURESH-9040<br />NANDITA-9048<br />MALATHI-9061<br />DINESH-9062<br />MITHUN KUMAR-9082<br />Background<br />Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. Every day, investment bankers arrange M&A transactions, which bring separate companies together to form larger ones. When they're not creating big companies from smaller ones, corporate finance deals do the reverse and break up companies through spin-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 can dictate the fortunes of the companies involved for years to come. For a CEO, leading an M&A can represent the highlight of a whole career. And it is no wonder we hear about so many of these transactions; they happen all the time. Next time you flip open the newspaper’s business section, odds are good that at least one headline will announce some kind of M&A transaction. Sure, M&A deals grab headlines, but what does this all mean to investors? To answer this question, this report discusses the forces that drive companies to buy or merge with others, or to split-off or sell parts of their own businesses. Once you know the different ways in which these deals are executed, you'll have a better idea of whether you should cheer or weep when a company you own buys another company - or is bought by one. You will also be aware of the tax consequences for companies and for investors <br />Defining M&A <br />The Main Idea one plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A. This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone. <br />Distinction between Mergers and Acquisitions <br />Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are 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 a new company, DaimlerChrysler and Arcellor-Mittal, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. <br />A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target 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 the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders. <br />Synergy<br />Synergy 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, the companies hope to benefit from the following: <br /> 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. <br />Economies of scale - Yes, size matters. Whether it's 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. <br />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. <br />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 company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones. <br />That said, achieving synergy is easier said than done - it is not automatically realized once two companies merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimes a merger does just the opposite. In many cases, one and one add up to less than two. Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the deal makers. Where there is no value to be created, the CEO and investment bankers - who have much to gain from a successful M&A deal - will try to create an image of enhanced value. The market, however, eventually sees through this and penalizes the company by assigning it a discounted share price. We'll talk more about why M&A may fail in a later section of this tutorial.<br />Varieties of Mergers<br />From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging: <br />Horizontal merger - Two companies that are in direct competition and share the same product lines and markets. <br />Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker. <br />Market-extension merger - Two companies that sell the same products in different markets. <br />Product-extension merger - Two companies selling different but related products in the same market. <br />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: <br />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. <br />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. <br />Acquisitions <br />An acquisition may be only slightly different from a merger. In fact, it may be different in name only. Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing another - there is no exchange of stock or consolidation as a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal. Other times, acquisitions are more hostile. In an acquisition, as in some of the merger deals we discuss above, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. Company X buys all of Company Y's 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 will eventually liquidate or enter another area of business. Another type of acquisition is a reverse merger, a deal that enables a private company to get publicly-listed in a relatively short time period. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly-listed shell company, usually one with no business and limited assets. The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares. Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved. <br />Valuation Matters<br />Investors in a company that is aiming to take over another one must determine whether the purchase will be beneficial to them. In order to do so, they must ask themselves how much the company being acquired is really worth. <br />Naturally, both sides of an M&A deal will have different ideas about the worth of a target company: its seller will tend to value the company at as high of a price as possible, while the buyer will try to get the lowest price that he can. There are, however, many legitimate ways to value companies. The most common method is to look at comparable companies in an industry, but deal makers employ a variety of other methods and tools when assessing a target company. Here are just a few of them: <br />1. Comparative Ratios - The following are two examples of the many comparative metrics on which acquiring companies may base their offers: <br /> 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 target's P/E multiple should be. <br /> 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. <br />2. Replacement Cost <br /> In a few cases, acquisitions are based on the cost of replacing the target company. For simplicity's sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property and get the right equipment. This method of establishing a price certainly wouldn't make much sense in a service industry where the key assets - people and ideas - are hard to value and develop. <br />3. Discounted Cash Flow (DCF) <br /> A key valuation tool in M&A, discounted cash flow analysis determines a company's current value according to its estimated future cash flows. Forecasted free cash flows (operating profit + depreciation + amortization of goodwill – capital expenditures – cash taxes - change in working capital) are discounted to a present value using the company's weighted average costs of capital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this valuation method. <br />Synergy: The Premium for Potential Success <br />For the most part, acquiring companies nearly always pay a substantial premium on the stock market value of the companies they buy. The justification for doing so nearly always boils down to the notion of synergy; a merger benefits shareholders when a company's post-merger share price increases by the value of potential synergy. Let's face it, it would be highly unlikely 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 their company's future prospects. For buyers, the premium represents part of the post-merger synergy they expect can be achieved. The following equation offers a good way to think about synergy and how to determine whether a deal makes sense. The equation solves for the minimum required synergy: <br />In other words, the success of a merger is measured by whether the value of the buyer is enhanced by the action. However, the practical constraints of mergers, which discussed often prevent the expected benefits from being fully achieved. Alas, the synergy promised by deal makers might just fall short. <br />What to Look For - It's hard for investors to know when a deal is worthwhile. The burden of proof 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.<br />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. <br />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. <br />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. <br />Mergers are awfully hard to get right, so investors should look for acquiring companies with a healthy grasp of reality. <br />Doing the Deal <br />Start with an Offer When the CEO and top managers of a company decide that they want to do a merger or acquisition, they start with a tender offer. The process typically begins with the acquiring company carefully and discreetly buying up shares in the target company, or building 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 it intends to buy the company or keep the shares purely as an investment. <br />Working with financial advisors and investment bankers, the acquiring company will arrive at an overall price that it's willing to pay for its target in cash, shares or both. The tender offer is then frequently advertised in the business press, stating the offer price and the deadline by which the shareholders in the target company must accept (or reject) it.<br />The Target's Response <br />Once the tender offer has been made, the target company can do one of several things: <br />Accept the Terms of the Offer - If the target firm's top managers and shareholders are happy with the terms of the transaction, they will go ahead with the deal. <br />Attempt to Negotiate - The tender offer price may not be high enough for the target company's 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 they're not satisfied with the terms laid out in the tender offer, the target's 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 merger's future success. <br /> 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 company's share and intercepts its control of the company. <br />Find a White Knight - As an alternative, the target company's 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. <br />Mergers and acquisitions can face scrutiny from regulatory bodies. For example, if the two biggest long-distance companies in the U.S., AT&T and Sprint, wanted to merge, the deal would require approval from the Federal Communications Commission (FCC). The FCC would probably regard a merger of the two giants as the creation of a monopoly or, at the very least, a threat to competition in the industry.<br />Closing the Deal<br />Finally, once the target company agrees to the tender offer and regulatory requirements are met, the merger deal will be executed by means of some transaction. In a merger in which one company buys another, the acquiring company will pay for the target company's shares with cash, stock or both. A cash-for-stock transaction is fairly straightforward: target company shareholders receive a cash payment for each share purchased. This transaction is treated as a taxable sale of the shares of the target company. If the transaction is made with stock instead of cash, then it's 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 as stock-for-stock transactions. When a company is purchased with stock, new shares from the acquiring company's stock are issued directly to the target company's shareholders, or the new shares are sent to a broker who manages them for target company shareholders. The shareholders of the target company are only taxed when they sell their new shares. When the deal is closed, investors usually receive a new stock in their portfolios - the acquiring company's expanded stock. Sometimes investors will get new stock identifying a new corporate entity that is created by the M&A deal. <br />Break Ups <br />As mergers capture the imagination of many investors and companies, the idea of getting smaller might seem counterintuitive. But corporate break-ups, or de-mergers, can be very attractive options for companies and their shareholders. <br />Advantages<br />The rationale behind a spin-off, tracking stock or carve-out is that "the parts are greater than the whole." These corporate restructuring techniques, which involve the separation of a business unit or subsidiary from the parent, can help a company raise additional equity funds. A break-up can also boost a company's valuation by providing powerful incentives to the people who work in the, making it more difficult to attract interest from institutional investors. Meanwhile, there are the extra costs that the parts of the business face if separated. When a firm divides itself into smaller units, it may be losing the separating unit, and help the parent's management to focus on core operations. Most importantly, shareholders get better information about the business unit because it issues separate financial statements. This is particularly useful when a company's traditional line of business differs from the separated business unit. With separate financial disclosure, investors are better equipped to gauge the value of the parent corporation. The parent company might attract more investors and, ultimately, more capital. Also, separating a subsidiary from its parent can reduce internal competition for corporate funds. For investors, that's great news: it curbs the kind of negative internal wrangling that can compromise the unity and productivity of a company. For employees of the new separate entity, there is a publicly traded stock to motivate and reward them. Stock options in the parent often provide little incentive to subsidiary managers, especially because their efforts are buried in the firm's overall performance.<br />Disadvantages <br />That said, de-merged firms are likely to be substantially smaller than their parents, possibly making it harder to tap credit markets and costlier finance that may be affordable only for larger companies. And the smaller size of the firm may mean it has less representation on major indexes synergy that it had as a larger entity. For instance, the division of expenses such as marketing, administration and research and development (R&D) into different business units may cause redundant costs without increasing overall revenues. <br />Restructuring Methods<br />There 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 advantages and disadvantages for companies and investors. All of these deals are quite complex. <br />Sell-Offs<br />A sell-off, also known as a divestiture, is the outright sale of a company subsidiary. Normally, sell-offs are done because the subsidiary doesn't fit into the parent company's core strategy. The market may be undervaluing the combined businesses due to a lack of synergy between the parent and subsidiary. As a result, management and the board decide that the subsidiary 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 the newly traded subsidiary. A carve-out is a strategic avenue a parent firm may take when one of its subsidiaries is growing faster and carrying higher valuations than other businesses owned by the parent. A carve-out generates cash because shares in the subsidiary are sold to the public, but the issue also unlocks the value of the subsidiary unit and enhances the parent's shareholder value. The new legal entity of a carve-out has a separate board, but in most carve-outs, the parent retains some control. In these cases, some portion of the parent firm's board of directors may be shared. Since the parent has a controlling stake, meaning both firms have common shareholders, the connection between the two will likely be strong. That said, sometimes companies carve-out a subsidiary not because it's doing well, but because it is a burden. Such an intention won't lead to a successful result, especially if a carved-out subsidiary is too loaded with debt, or had trouble even when it was a part of the parent and is lacking an established track record for growing revenues and profits. Carve-outs can also create unexpected friction between the parent and subsidiary. Problems can arise as managers of the carved-out company must be accountable to their public shareholders as well as the owners of the parent company. This can create divided loyalties.<br />Spin-offs <br />A spin-off occurs when a subsidiary becomes an independent entity. The parent firm distributes shares of the subsidiary to its shareholders through a . Since this transaction is a dividend distribution, no cash is generated. Thus, spin-offs are unlikely to be used when a firm needs to finance growth or deals. Like the carve-out, the subsidiary becomes a separate legal entity with a distinct management and board. Besides getting rid of an unwanted subsidiary, sell-offs also raise cash, which can be used to pay off debt. In the late 1980s and early 1990s, corporate would use debt to finance acquisitions. Then, after making a purchase they would sell-off its subsidiaries to raise cash to service the debt. The raiders' method certainly makes sense if the sum of the parts is greater than the whole. When it isn't, deals are unsuccessful.<br />Equity Carve-Outs <br />More and more companies are using equity carve-outs to boost shareholder value. A parent firm makes a subsidiary public through a raider’s initial public offering stock dividend meaning they don't grant shareholders the same voting rights as those of the main stock. Each share of tracking stock may have only a half or a quarter of a vote. In rare cases, holders of tracking stock have no vote at all. Like carve-outs, spin-offs are usually about separating a healthy operation. In most cases, spin-offs unlock hidden shareholder value. For the parent company, it sharpens management focus. For the spin-off company, management doesn't have to compete for the parent's attention and capital. Once they are set free, managers can explore new opportunities. Investors, however, should beware of throw-away subsidiaries the parent created to separate legal liability or to off-load debt. Once spin-off shares are issued to parent company shareholders, some shareholders may be tempted to quickly dump these shares on the market, depressing the share valuation. <br />Tracking Stock<br />A tracking stock is a special type of stock issued by a publicly held company to track the value of one segment of that company. The stock allows the different segments of the company to be valued differently by investors. Let's say a slow-growth company trading at a low (P/E ratio) happens to have a fast growing business unit. The company might issue a tracking stock so the market can value the new business separately from the old one and at a significantly 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 control over 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, if the tracking stock climbs in value, the parent company can use the tracking stock it owns to make acquisitions. Still, shareholders need to remember that tracking stocks are price-earnings ratio class B.<br />Why They Can Fail <br />It's no secret that plenty of mergers don't work. Those who advocate mergers will argue that the 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 sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry. <br />Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market. The motivations that drive mergers can be flawed and efficiencies from economies of scale may prove elusive. In many cases, the problems associated with trying to make merged companies work are all too concrete. <br />Flawed Intentions <br />For starters, a booming stock market encourages mergers, which can spell trouble. Deals done with highly rated stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Also, mergers are often attempt to imitate: somebody else has done a big merger, which prompts other top executives to follow suit. A merger may often have more to do with glory-seeking than business strategy. The executive ego, which is boosted by buying the competition, is a major force in M&A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. Most CEOs get to where they are because they want to be the biggest and the best, and many top executives get a big bonus for merger deals, no matter what happens to the share price later. On the other side of the coin, mergers can be driven by generalized fear. Globalization, the arrival of new technological developments or a fast-changing economic landscape that makes the outlook uncertain are all factors that can create a strong incentive for defensive mergers. Sometimes the management team feels they have no choice and must acquire a rival before being acquired. The idea is that only big players will survive a more competitive world.<br />The Obstacles to making it Work <br />Coping with a merger can make top managers spread their time too thinly and neglect their core business, spelling doom. Too often, potential difficulties seem trivial to managers caught up in the thrill of the big deal. The chances for success are further hampered if the corporate cultures of the companies are very different. When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. It's a mistake to assume that personnel issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity. More insight into the failure of mergers is found in the highly acclaimed study from McKinsey, a global consultancy. The study concludes that companies often 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 that they neglect day-to-day business, thereby prompting nervous customers to flee. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders. But remember, not all mergers fail. Size and global reach can be advantageous, and strong managers can often squeeze greater efficiency out of badly run rivals. Nevertheless, the promises made by deal makers demand the careful scrutiny of investors. The success of mergers depends on how realistic the deal makers are and how well they can integrate two companies while maintaining day-to-day operations. <br />LITERATURE REVIEW – THE STEEL INDUSTRY<br />THE GLOBAL STEEL INDUSTRY<br />The current global steel industry is in its best position in comparing to last decades. The price has been rising continuously. The demand expectations for steel products are rapidly growing for coming years. The shares of steel industries are also in a high pace. The steel industry is enjoying its 6th consecutive years of growth in supply and demand. And there is many more merger and acquisitions which overall buoyed the industry and showed some good results.<br />The subprime crisis has lead to the recession in economy of different Countries, which may lead to have a negative effect on whole steel industry in coming years. However steel production and consumption will be supported by continuous economic growth.<br />CONTRIBUTION OF COUNTRIES TO GLOBAL STEEL INDUSTRY<br />Fig-1<br />The countries like China, Japan, India and South Korea are in the top of the above in steel production 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 is accounted for 49m ton, which all totally becomes more than 50% of global production. Apart from this USA, BRAZIL, UK accounts for the major chunk of the whole growth.<br />The steel industry has been witnessing robust growth in both domestic as well as international markets. In this article, let us have a look at how has the steel industry performed globally in 2007. <br />Capacity: The global crude steel production capacity has grown by around 7% to 1.6 bn in 2007 from 1.5 bn tonnes in 2006. The capacity has shown a growth rate of 7% CAGR since 2003. The additions to capacity over last few years have ranged from 36 m tonnes in 2004 to 108 m tonnes in 2007. Asian region accounts for more than 60% of the total production capacity 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.<br />Fig-2<br />Production: The global steel production stood at 1.3 bn tonnes in 2007, showing an increase of 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 steel production followed by Japan (9%), US (7%), Russia (5%) and India (4%). In 2007, all the top five steel producing countries have showed an increase in production except US, which showed a decline. <br />RankCountryProduction (mn tonnes)World share (%)1China48936.0%2Japan1209.0%3US987.0%4Russia725.0%5India534.0%6South Korea513.5%<br /> Source: JSW Steel AR FY08<br /> Table-1<br />Consumption: The global steel consumption grew by 6.6% to 1.2 bn tonnes as compared to 2006 levels. The global finished steel consumption showed a growth of 8% CAGR, in line with the production, between the period 2003 and 2007. The finished steel consumption in China and India grew by 13% and 11% respectively in 2007. The BRIC countries were the major demand drivers for steel consumption, accounting for nearly 80% of incremental steel consumption in 2007. <br />RankCountryConsumption (mn tonnes)World share (%)1China40836.0%2US1089.0%3Japan806.7%4South Korea554.6%5India514.2%6Russia403.3%<br /> Source: JSW Steel AR FY08<br /> Table-2<br />Outlook: As per IISI estimates, the finished steel consumption in world is expected to reach a 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%<br />Indian Steel Industry<br />India, which has emerged among the top five steel producing and consuming countries over the last few years, backed by strong growth in its economy. <br />Capacity: Steel capacity increased by 6% to 60 m tonnes in FY08. It registered a robust growth of 8% CAGR between the period FY04 and FY08. The capacity expansion in the country was primarily through brown field expansions as it requires lower investments than a greenfield expansion. <br /> Fig-3<br />Production: Steel production has registered a growth of 6% to reach a level of 54 m tonnes in FY8. The production has grown nearly in line with the capacity expansion and registered a growth of 7% CAGR with an average capacity utilization of 92% between the period FY04 and FY08. India is currently the fifth largest producer of steel in the world, contributing almost 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 in FY08. <br /> Fig-4<br />Consumption: 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 a CAGR of 12% between FY04 and FY08. Construction & infrastructure, manufacturing and automobile sectors accounted for 59%, 13% and 11% for the total consumption of steel respectively in FY08. Although steel consumption is rapidly growing in the country, the per capita steel consumption still stands at 48 kgs. Moreover, in the rural areas in the country, it stands at a mere 2 kg. It should be noted that the world’s average per capita steel consumption was 189 kg and while that of China was 309 kg in 2007. <br /> Fig-5<br />Trade equations: India became net importer of steel in FY08 with estimated net imports of 1.9 m tonnes. In the past few years, its exports have remained at more or less the same levels while on the other hand, imports have increased on the back of robust demand and capacity constraints in the domestic markets. The imports showed a growth of around 48% while exports declined by around 6% in FY08. <br />Outlook: As per IISI estimates, the demand for steel in India are expected to grow at a rate of 9% and 12% in 2008 and 2009. The medium term outlook for steel consumption remains extremely bullish and is estimated at an average of above 10% in the next few years. <br />TATA Vs. CORUS<br />CorusThe 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 tonnes and 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 British Steel and Hoogovens there were two assets the British plant asset which was older and less productive and the Dutch plant asset which was regarded as the crown jewel by every one in the industry. They have union issues and are burdened with more than $ 13 billion of pension liabilities. The Corus was making only a profit of $ 1.9 billion from its 18.2 million tonnes production per year (compared to $ 1.5 billion form 8.7 million tone capacity by Tata).<br />The Corus was having leading market position in construction and packaging in Europe with leading R&D. The Corus was the 9th largest steel producer in the world. It opened its bid for 100 % stake late in the 2006. Tata (India) & CSN (Companhia Siderurgica Nacional) emerged as most powerful bidders.CSN (Companhia Siderurgica Nacional)<br />CSN (Companhia Siderurgica Nacional) was incorporated in the year 1941. The company initially focused on the production of coke, pig iron castings and long products. The company was having three main expansions at the Presidente Vargas Steel works during the 1970’s and 1980’s. The first completed in the year 1974, increased installed capacity to 1.6 million tons of crude steel. The second completed in 1977, raised capacity to 2.4 million tons of crude steel. The third completed in the year 1989, increased capacity to 4.5 million tons of crude steel. The company was privatized by the Brazilian government by selling 91 % of its share.<br />The Mission of CNS is to increase value for the shareholders. Maintain position as one of the world’s lowest-cost steel producer. Maintain a high EBITDA and strengthen position as a global player. CNS is having fully integrated manufacturing facilities. The crude steel capacity was 5.6 million tons. The product mix consisted of Slabs, Hot and Cold rolled Galvanized and Tin mill products. In 2004 CSN sold steel products to customers in Brazil and 61 other countries. In 2002, 65 % of the steel sales were in domestic market and operating revenues were 70 %. In 2003, the same figures were 59 % and 61 % and in 2004 the same figures were 71% and 73 %. The principal export markets for CSN were North America (44%),Europe(32%) and Asia(11%).<br />Tata Steel<br />Tata steel, India’s largest private sector steel company was established in the 1907.The Tata steel which falls under the umbrella of Tata sons has strong pockets and strong financials to support acquisitions. Tata steel is the 55th in production of steel in world. The company has committed itself to attain global scale operations.Production capacity of Tata steel is given in the table below:-<br /> Table-3The product mix of Tata steel consist of flat products and long products which are in the lower value chain. The Tata steel is having a low cost of production when compared to Corus. The Tata steel was already having its capacity expansion with its indigenous projects to the tune of 28 million tones.<br />Indian Scenario<br />After liberalization, there have been no shortages of iron and steel materials in the country. Apparent consumption of finished (carbon) steel increased from 14.84 Million tonnes in 1991-92 to 39.185 million tonnes (Provisional) in 2005-06. The steel industry which was facing 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 industry is buoyant due to strong growth in demand particularly by the demand for steel in China. The Steel industry was de-licensed and de-controlled in 1991 & 1992 respectively. Today, India is the 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 4.695 Million Tonnes. The share of Main Producers (i.e. SAIL, RINL and TSL) and secondary producers in the total production of Finished (Carbon) steel was 36% and 64% respectively during the period of April-November, 2006.<br />Corus decides to sell Reasons for decision:<br />Total debt of Corus is 1.6bn GBP<br />Corus needs supply of raw material at lower cost<br /> Though Corus has revenues of $18.06bn, its profit was just $626mn (Tata’s revenue was $4.84 bn & profit $ 824mn)<br />Corus facilities were relatively old with high cost of production<br /> Employee cost is 15 %( Tata steel- 9%)<br /> Tata Decides to bid: Reasons for decision:<br />Tata is looking to manufacture finished products in mature markets of Europe.<br />At present manufactures low value long and flat steel products while Corus produces high value stripped products<br />A diversified product mix will reduce risks while higher end products will add to bottom line.<br /> Corus holds a number of patents and R & D facility.<br /> Cost of acquisition is lower than setting up a green field plant and marketing and distribution channels<br /> Tata is known for efficient handling of labour and it aims at reducing employee cost and improving productivity at Corus<br /> It had already expanded its capacities in India.<br /> It will move from 55th in world to 5th in production of steel globally.<br />Tata Steel Vs CSN: The Bidding War<br />There was a heavy speculation surrounding Tata Steel's proposed takeover of Corus ever since Ratan Tata had met Leng in Dubai, in July 2006. On October 17, 2006, Tata Steel made an offer of 455 pence a share in cash valuing the acquisition deal at US$ 7.6 billion. Corus responded positively to the offer on October 20, 2006.<br />Agreeing to the takeover, Leng said, "This combination with Tata, for Corus shareholders and employees alike, represents the right partner at the right time at the right price and on the right terms." In the first week of November 2006, there were reports in media that Tata was joining hands with Corus to acquire the Brazilian steel giant CSN which was itself keen on acquiring Corus. On November 17, 2006, CSN formally entered the foray for acquiring Corus with a bid of 475 pence per share. In the light of CSN's offer, Corus announced that it would defer its extraordinary meeting of shareholders to December 20, 2006 from December 04, 2006, in order to allow counter offers from Tata Steel and CSN...<br />Financing the Acquisition<br />By the first week of April 2007, the final draft of the financing structure of the acquisition was worked out and was presented to the Corus' Pension Trusties and the Works Council by the senior management of Tata Steel. The enterprise value of Corus including debt and other costs was estimated at US$ 13.7 billion <br />The Integration Efforts<br />Industry experts felt that Tata Steel should adopt a 'light handed integration’ approach, which meant that Ratan Tata should bring in some changes in Corus but not attempt a complete overhaul of Corus'systems (Refer Exhibit XI and Exhibit XII for projected financials of Tata-Corus). N Venkiteswaran, Professor, Indian Institute of Management, Ahmedabad said, “If the target company is managed well, there is no need for a heavy-handed integration. It makes sense for the Tatas to allow the existing management to continue as before.<br />The Synergies<br />Most 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 the world, up from fifty-sixth position.There were many likely synergies between Tata Steel, the lowest-cost producer of steel in the world, and Corus, a large player with a significant presence in value-added steel segment and a strong distribution network in Europe. Among the benefits to Tata Steel was the fact that it would be able to supply semi-finished steel to Corus for finishing at its plants, which were located closer to the high-value markets.<br />The Pitfalls<br />Though the potential benefits of the Corus deal were widely appreciated, some analysts had doubts about the outcome and effects on Tata Steel's performance. They pointed out that Corus' EBITDA (earnings before interest, tax, depreciation and amortization) at 8 percent was much lower than that of Tata Steel which was at 30 percent in the financial year 2006-07.<br />The Road Ahead<br />Before the acquisition, the major market for Tata Steel was India. The Indian market accounted for sixty nine percent of the company's total sales. Almost half of Corus' production of steel was sold in Europe (excluding UK). The UK consumed twenty nine percent of its production.<br />After the acquisition, the European market (including UK) would consume 59 percent of the merged entity's total production.<br />Tata - Corus: Visionary deal or costly blunder?<br />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 a rapid-fire auction. Initial reactions to the deal were highly diverse and retail investors were completely puzzled by the market reaction. <br />Going by the stock market reaction, the acquisition was a big blunder. The stock tanked 10.5 per cent after the deal was announced and another 1.6 per cent. Investors were worried about the financial risks of such a costly deal.<br />Media reaction to the deal had been just the opposite. Almost all the reports were adulatory while editorials praised the coming of age of Indian industry. A prominent financial daily presented the deal almost as revenge of the natives against the old colonial masters with a picture of London covered in our national colours. Its editorial warned the market 'not to bet against 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 help to the Tata Group. <br />Was the acquisition too costly for Tata Steel? Was price the only criterion while evaluating an acquisition? Should managers focus on keeping shareholders happy after every quarter or should 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. <br />When could the steel cycle turn?<br />The last few years were some of the best ever for the global steel industry as robust demand from emerging economies like China pushed up prices. Profits of steel manufacturers across the globe swelled and their market capitalizations have multiplied many times.<br />Global Steel output(in million tonnes)Country20052006% changeChina355.8418.817.7Japan112.5116.23.3US94.998.53.8Russia220.127.116.11South Korea47.848.41.3Germany44.547.26.1India40.944.07.6Ukraine38.640.85.7Italy29.431.67.5Brazil31.630.9(2.2)World production1,028.81,120.78.9<br /> Table-4<br />How long will the good times last? Tata Steel believes the steel cycle is in a long-term up trend and the risk of a downturn in prices is low. In fact, managing director B Muthuraman said the global steel industry might witness sustained growth as during the 30-year period between 1945 and 1975. <br />The massive post-war infrastructure build-up in Western countries led to the sustained steel demand growth in that period. The coming decades would see similar infrastructure spending in emerging economies and steel demand would continue to grow, according to this view. <br />The International Iron and Steel Institute (IISI), a respected steel research body, corroborates this in its outlook. The growth in demand for global steel would average 4.9 per cent per year till 2010 according to the IISI. Between 2010 and 2015, demand growth is expected to moderate to 4.2 per cent per annum according to IISI forecasts. Much of this demand growth would come from China and India, where the IISI estimates growth rates to be 6.2 per cent and 7.7 per cent annually from 2010 to 2015. <br />Now let’s consider steel prices. Expectations of sustained demand growth have already led to massive capacity additions, mostly in emerging markets. Chinese steel capacity has expanded significantly over the last decade while a large number of mega steel plants are being planned in India. Capacity additions by Russian and Brazilian steelmakers would also be significant in future as they have access to raw material. <br />Would the capacity additions outrun the demand growth and lead to subdued steel prices? Under normal circumstances, that could have been a very strong possibility. But many industry leaders believe that the global steel industry would see a structural shift in the coming years. <br />Some of the inefficient steel mills in mature markets would face closure while others would shift production to high value-added products using unfinished and semi-finished steel supplied by steel mills in locations like India, Russia and Brazil with access to raw material. This would limit aggregate supply growth and keep prices stable in future. <br />Major global steel makers are also not unduly worried about the possibility of large-scale exports from China, which would depress international steel prices. Chinese capacity is expected to continue to grow in the coming years, but so would the demand. <br />Besides, Chinese steel plants are not expected to emerge very efficient as they depend on imported raw materials, which limit their pricing power. Many steel analysts expect significant consolidation in the Chinese steel industry as margins erode further in future. The Chinese government has already started squeezing the smaller units by withdrawing their raw material import permits. <br />The need for scale<br />Going by the IISI forecasts, global steel demand would be 1.32 billion tonnes by 2010 and 1.62 billion tonnes by 2015. Even Arcelor-Mittal, the largest global steel player by far, has a present capacity, which is just 6.8 per cent for projected demand in 2015. To maintain its current share, Arcelor-Mittal would have to add another 50 million tonnes of capacity by then. This confirms the view that there is still considerable scope for consolidation in the steel industry. <br />Global steel rankingCompanyCapacity (in million tonnes)Arcelor – Mittal110.0Nippon Steel32.0Posco30.5JEF Steel30.0Tata Steel - Corus27.7Bao Steel China23.0US Steel19.0Nucor18.5Riva17.5Thyssen Krupp16.5<br /> <br />As the industry consolidates further, Tata Steel - even with its planned greenfield capacity additions - would have remained a medium-sized player after a decade. This made it absolutely vital that the company did not miss out on large acquisition opportunities. Apart from Corus, there are not many among the top-10 steel makers, which would become possible acquisition targets in the near future. <br />Tata Steel - Corus : Present capacity (in million tonnes per annum)Corus Group (in UK and The Netherlands)19Tata Steel - Jamshedpur5Nat Steel - Singapore2Millennium Steel - Thailand1.7Aggregate present capacity27.7<br />Tata Steel - Corus : Projected capacity(in million tonnes per annum)Corus Group (in UK and The Netherlands)19Tata Steel - Jamshedpur10Tata Steel - Jharkhand12Tata Steel - Orissa6Tata Steel - Chhattisgarh5Nat Steel - Singapore2Millennium Steel - Thailand1.7Aggregate projected capacity55.7<br /> <br />With Corus in its fold, Tata Steel can confidently target becoming one of the top-3 steel makers globally by 2015. The company would have an aggregate capacity of close to 56 million tonnes per annum, if all the planned greenfield capacities go on stream by then. <br />Neat strategic fit<br />Corus, being the second largest steelmaker in Europe, would provide Tata Steel access to some of the largest steel buyers. The acquisition would open new markets and product segments for Tata Steel, which would help the company to de-risk its businesses through wider geographical reach. <br />A presence in mature markets would also provide Tata Steel an opportunity to go further up the value chain as demand for specialized and high value-added products in these markets is high. The market reach of Corus would also help in seeking longer-term deals with buyers and to explore opportunities for pushing branded products.<br />Corus is also very strong in research and technology development, which would add to the competitive strength for Tata Steel in future. Both companies can learn from each other and achieve better efficiencies by adopting the best practices.<br />But at what cost?<br />Now that Tata Steel has achieved its strategic objective of becoming one of the major players in the global steel industry and steel demand growth is likely to be robust over the next decade, has the company paid too much for Corus? Even those analysts and industry observers who agree on the positive outlook for steel demand growth and the need to achieve scale believe so.<br />The enterprise valuation of Corus at around $13.5 billion appears too steep based on the recent financial performance of Corus. Tata Steel is paying 7 times EBITDA of Corus for 2005 and a higher 9 times EBITDA for 12 months ended 30 September 2006. In comparison, Mittal Steel acquired Arcelor at an EBITDA multiple of around 4.5. Considering the fact that Arcelor has much superior assets, wider market reach and is financially much stronger than Corus, the price paid by Tata Steel looks almost obscenely high. Tata Steel's B Muthuraman has defended the deal arguing that the enterprise value (EV) per tonne of capacity is not very high. The EV per tonne for the Tata-Corus deal was around $710 is only modestly higher than the Mittal-Arcelor deal. Besides, setting up new steel plants would cost anywhere between $1,200 and $1,300 per tonne and would take at least five years in most developing countries. <br />But, are the manufacturing assets of Corus good enough to command this price? It is a well-known fact that the UK plants of Corus are among the least efficient in Europe and would struggle to break even at a modest decline in steel prices from current levels. <br />Recent financial performance of Corus would dent the hopes of Tata Steel shareholders even further. EBITDA margins, after adjusting for one-time incomes, have steadily declined over the last 3 years. For the 9-month period ended September 2006, EBITDA margins of Corus were barely 8 per cent as compared to around 40 per cent for Tata Steel.<br />Corus FinancialsYear20042005Jan-Sep 2006Revenues18.3219.9114.10EBITDA1.911.861.12EBITDA Margin (%)10.449.347.96Operating Profits1.301.170.75Operating Profit Margin (%)7.095.895.29Net Profit0.870.720.25Net Profit Margin (%)4.733.631.77Figures in $ Billion<br />Table-8<br />The price of an asset is more a factor of its future earnings potential than its past earnings record. Operating margins of Corus can be significantly improved if Tata Steel can supply slabs and billets. Tata Steel is targeting consolidated EBITDA margins of around 25 per cent as and when it starts supplying crude steel to Corus. If the company can sustain such margins on the enlarged capacities, it would be quite impressive.<br />But that is a long way off as Tata Steel would have sufficient crude steel capacity only when its proposed new plants become operational. Till then, the company is targeting to maximize gains through possible synergies between the two operations, which are expected to yield up to $350 million per annum within three years. In the meanwhile, Tata Steel has to make sure that cash flows from Corus are sufficient to service the huge amount of debt, which is being availed to finance the acquisition. According to the details available so far, Tata Steel would contribute $4.1 billion as equity component while the balance $9.4 billion, including the re-financing of existing debt of Corus after adjusting for cash balance, would be financed through debt. The debt facilities are believed to be structured in such a way that they can be serviced largely from the cash flows of Corus.<br />Interest rates on credit facilities for such buy-outs are often higher than market rates because of the risks involved. At an expected interest rate of 7 per cent per annum, the interest outgo alone would be over $650 million per year. Along with repayment of principal, the annual fund requirement to service this debt would be around $1.5 billion - assuming a 10-year repayment horizon. <br />The current cash flows of Corus are barely sufficient to cover this, even after considering the synergy gains. If international steel prices decline even modestly, Tata Steel would have to dip into its own cash flows or find other sources like an equity dilution to service the debt. <br />Besides, funds may also be required for upgrading some of the Corus plants to improve efficiencies. Tata Steel would have to manage all this without jeopardizing its greenfield expansion plans which may cost a staggering $20 billion over the same 10-year period. <br />No wonder investors are deeply worried!<br />To its credit, the Tata Steel management has acknowledged that it would not be an easy task to manage the next five years when Corus would have to hold on to its margins without the help of cheaper inputs supplied by Tata Steel. If the group can survive this initial period without much damage, life may become much easier for the Tata Steel management. <br />Investors would consider Corus a burden for Tata Steel until such time there is a perceptible improvement in its margins. That would keep the Tata Steel stock price subdued and any decline in steel prices would have a disproportionately negative impact on the stock. <br />However, long-term investors would appreciate that right now steel manufacturing assets are costly and Corus was a prized target which made it even more costly. With the strategic importance of such a large deal in mind, Tata Steel management has taken the plunge. If it can pull it off, even after a decade, the Corus acquisition would become the deal, which would transform Tata Steel.<br />Tata and Corus:<br />In addition to Tata Steel's bid for Corus, the largest private sector steel producer in India has made a mark and consolidated it is presence in the foreign land, through acquisition his latest one's being in Indonesia. In case of Corus, only time will tell whether Tata Steel would succeed or not, but in other endeavours the company has already succeeded in acquiring some steel plants. Tata Steel, the country's largest private sector steel company, was in talks with 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 to analysts, if the acquisition of Highveld Steel goes through to completion, Tata Steel's production 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, vanadium products, Ferro-alloys, carbonaceous products and metal containers and closures. Analysts observe a clear trend in Tata Steel's plans to expand capacities. But Highveld was not supposed to be the first global acquisition for Tata Steel. In February 2005, the company completed the acquisition of Singapore's largest steel company, NatSteel Asia, which has a two-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 Asia was pegged at Rs 1,313 crore. Tata Steel has plans to establish steel manufacturing units in Iran and Bangladesh too. With a stated vision to become a 20-25 million tonne company by 2015, the company has also signed a few joint ventures and announced organic expansion plans.<br />Over all scenario <br />Tata Steel acquiring Corus throws up several interesting questions on emerging multinationals and traditional multinationals in the steel industry and particularly the complexities of the acquisition in the above context. What has been surprising in the above case is that how could a small steel maker, Tata Steel from a developing country like India buy 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 $840 million (sale of 5.3 million tons), whereas in case of Corus it was $860 million(sale of 18.6 million tons) in the year 2006. It is also interesting to find out why a large global steel maker, Corus decided to sell itself off to a small steel maker from a developing country.<br />Many questioned if the Tatas were wise in acquiring Corus that had accumulated huge debt burden, made operational losses and whose share price had drastically come down. The intriguing issue of this acquisition has been on how the final bidding price of the Corus rise up to 70% over the stock price of Corus prior to the bidding. Most importantly, how did Tata Steel organize the huge capital for the acquisition? It appears that several external players participated in the acquisition process and so how were they all involved in the bidding process. Further, the issues of post acquisition are also unique in this case as the context and culture of the acquirer and the acquired companies are different.<br />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. seemed possible only in the realm of fantasy. In addition to these issues, Indian companies in general have had huge liabilities of origin in term of poor quality, service and reliability in the international markets. At the same time many the global steel industry was getting restructured from a large number of smaller steel makers to a fewer large steel conglomerates through the worldwide mergers and acquisition. The steel companies in India were also wondering on how to go about in these circumstances. In the above context, how did the top management of Tata Steel and the Tata Group Perceive the acquisition of Corus? When Tata Steel began bidding higher price on Corus plc, many wondered how the Tatas manage the huge financial deal and whether it will be good for the financial health of Tata Steel.<br />Tata acquired Corus on the 2nd of April 2007 for a price of $12 billion making the Indian Company the world’s sixth largest steel producer. This acquisition process has started long back in the year 2005. However, Corus itself was involved in a considerable number of Merger & Acquisition (M&A) deals and joint ventures (JVs) beginning in the year2000. In a period of seven years Corus was involved in 14 deals. In 2006, the Tata first offered 455 pence per share of Corus but by the end of the bidding process in 2007, Tata offered 608 pence per share, which is 33.6% higher than the first offer. For this deal, Tata has financed only $4 billion, though the total price of this deal was $12billion. Given below are the reactions of Ratan Tata and B. Muthuraman on what they felt about the acquisition.<br />Tata steel financial status post merger<br />Post Acquisition Management:<br />There has been a great deal of suspicion on how well the two entities, viz., Tata Steel and Corus plc integrate in the post acquisition situation. This concern has been expressed since the culture and perspectives of the two companies and the people are seemingly very different from each other. Ratan Tata however, has been confident that the post acquisition management will not be too difficult as the two organizational cultures will be effectively integrated.<br />Ratan Tata has said he is confident the two companies will have “a cultural fit and similar work practices.”<br />Nearly 30 years ago J.R.D Tata had lured away a young engineer from Corus’s predecessor company, British Steel, to work at Tata Steel. That young Sheffield-educated engineer – Sir Jamshed J. Irani (knighted by the Queen 10 years ago) – was Tata Steel’s Managing Director until six years ago.<br />Tata Corus has made developed some management structure to deal with the smooth operation of the two entities. It has also adopted several system integrations in both the entities to smoothen the transactions between the two entities. Tata Steel has formed a seven- member integration committee to spearhead its union with Corus group. While Ratan Tata, chairman of the Tata group, heads the committee, three of the members are from Tata Steel and the other three are from Corus group. Members of the integration committee from Tata Steel include Managing Director B Muthuraman, Deputy Managing Director (steel) T Mukherjee, and chief financial officer Kaushik Chatterjee. The Corus group is represented in the committee by CEO Phillipe Varin, executive director(finance) David Lloyd, and division director (strip products) Rauke Henstra.<br />The company has also created several Taskforce Teams to ensure integration specific set of activities in the two entities for smoother transaction. For instance, the company has created a task force to integrate the UK/EU model in construction to the Indian market.<br />Tata Corus Task force<br />Post Tata Corus merger, Tata Steel has access to considerable IP and expertise in Construction from UK/EU based models. The key driver is to find ways to utilize this knowledge and assist the capture of value for Tata Steel in the construction market in India. To achieve, a taskforce comprising of following executives from both the entities is being formed with immediate effects.<br />Members from Corus<br />Mr. Matthew Poole (Director Strategy Long Products Corus)<br />Mr. Colin Ostler (GM Corus Construction Centre)<br />Mr. Darayus Shroff (Corus International)<br />Members from Tata Steel:<br />Mr. Sangeeta Prasad (CSM South, Flat Products)<br />Mr. Pritish Kumar Sen (Market Research Group)<br />Mr. Rajeev Sahay (Head Planning & Scheduling, TGS)<br />The scope of the taskforce will be to:<br />1. Ensure smooth market knowledge exchange between Tata Corus and Tata Bluescope and identify Knowledge gaps.<br />2. Complete mapping of construction sector for Indian market using external<br />resource if necessary.<br />3. Understand key drivers for construction through knowledge gained from<br />stakeholders of the construction community.<br />4. Map key competencies of Tata Corus against market drivers/ requirements.<br />5. Develop a five- year strategy.<br />The taskforce members will report to Mr. Paul Lormor (Director Construction Development).<br />The engagement of the members of the taskforce will be on part time basis and they will continue to discharge their current responsibilities.<br />The taskforce will continue till June 2008, by which time it is expected to taskforce prepare the business case and place it before the board for approval<br />Corus Acquisition Financing<br />Tata steel is pleased to announce the refinancing of its GBP 3,620 million acquisition bridge facility and revolving credit facility which had been provided by Credit Suisse, ABN AMRO and Deutsche Bank to fund its acquisition of Corus Group plc that was completed on April 2, 2007.<br />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, ABN AMRO and Standard Chartered Bank. This refinancing provides significant benefits and flexibility over the term of financing to the group.<br />The Refinancing Facility comprises a five year GBP 1670 million amortizing loan which will be syndicated by the joint book runners to relationship banks of Tata steel and Corus and a seven year minimally amortizing term loan of GBP 1500 million that will be syndicated to institutional investors and banks in the USA, Europe and Asia. The balance amount of the acquisition bridge is being repaid by an additional equity contribution by Tata Steel/ Tata Steel Asia which had been previously disclosed on April 17, 2007.<br />Subsequent to the conclusion of the discussions on the commercial terms of the financing, the process to discuss the security package for the above transaction will commence with the Trustees of the UK Pension Funds in continuation of the dialogue with the Trustees from October 2006. Concurrently, Corus will engage in the consultative process with the Corus Netherlands Works Council to seek their advice on the above financing.<br />Tata Steel is one of India’s largest companies and is amongst the world’s lowest cost steel producers and most profitable steel companies. Corus Group plc is Europe’s second largest steel producer and the combined entity is the fifth largest steel producer in the world with an installed capacity of 28 million tons p.a.<br />Group Strategy Function - Tata Corus<br />The Tata Steel Group has the ambition to become a bench mark in the global steel industry in terms of value creation and corporate citizenship. The group strategy function will be organized to support the delivery of the group ambition. The main responsibilities of the group strategy function are as follows:<br /><ul><li>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
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 regulations</li></ul>THE DETAILS ABOUT THE COMPANY’S PERFORMANCE<br />Balance sheet<br />Mar ' 10Mar ' 09Mar ' 08Mar ' 07Mar ' 06Sources of fundsOwner's fundEquity share capital887.41730.79730.78580.67553.67Share application money---147.06-Preference share capital-5,472.665,472.52--Reserves & surplus36,281.3423,501.1521,097.4313,368.429,201.63Loan fundsSecured loans2,259.323,913.053,520.583,758.922,191.74Unsecured loans22,979.8823,033.1314,501.115,886.41324.41Total62,407.9556,650.7845,322.4223,741.4812,271.45Uses of fundsFixed assetsGross block22,306.0720,057.0116,479.5916,029.4915,407.17Less : revaluation reserve-----Less : accumulated depreciation10,143.639,062.478,223.487,486.376,699.85Net block12,162.4410,994.548,256.118,543.128,707.32Capital work-in-progress3,843.593,487.684,367.452,497.441,157.73Investments44,979.6742,371.784,103.196,106.184,069.96Net current assetsCurrent assets, loans & advances13,425.2711,591.6638,196.3414,671.914,997.00Less : current liabilities & provisions12,003.0211,899.959,755.788,279.706,913.83Total net current assets1,422.25-308.2928,440.566,392.21-1,916.83Miscellaneous expenses not written-105.07155.11202.53253.27Total62,407.9556,650.7845,322.4223,741.4812,271.45Notes:Book value of unquoted investments44,243.2441,665.633,790.475,793.463,477.38Market value of quoted investments4,397.791,491.893,260.652,979.004,079.52Contingent liabilities13,184.6112,188.559,250.087,185.933,872.34Number of equity sharesoutstanding (Lacs)8872.147305.927305.845804.735534.73<br />Profit loss account Mar ' 10Mar ' 09Mar ' 08Mar ' 07Mar ' 06IncomeOperating income24,940.6524,348.3219,654.4117,452.6615,132.09ExpensesMaterial consumed8,491.428,279.446,024.805,679.954,661.53Manufacturing expenses 3,803.333,349.962,693.732,589.242,364.40Personnel expenses2,361.482,305.811,589.771,454.831,351.51Selling expenses82.1761.4952.5364.7180.75Adminstrative expenses1,622.771,518.831,224.54986.20902.30Expenses capitalised-326.11-343.65-175.50-236.02-112.62Cost of sales16,035.0615,171.8811,409.8710,538.919,247.87Operating profit8,905.599,176.448,244.546,913.755,884.22Other recurring income331.59305.36347.28485.14256.95Adjusted PBDIT9,237.189,481.808,591.827,398.896,141.17Financial expenses1,848.191,489.50929.03251.25168.44Depreciation 1,083.18973.40834.61819.29775.10Other write offs-----Adjusted PBT6,305.817,018.906,828.186,328.355,197.63Tax charges 2,168.502,114.872,380.282,040.471,734.38Adjusted PAT4,137.314,904.034,447.904,287.883,463.25Non recurring items909.49297.71239.13-123.02-4.37Other non cash adjustments---57.2947.50Reported net profit5,046.805,201.744,687.034,222.153,506.38Earnigs before appropriation14,555.7811,589.209,281.017,198.315,296.59Equity dividend709.771,168.951,168.93943.91719.51Preference dividend45.88109.4522.19--Dividend tax122.80214.10202.43160.42100.92Retained earnings13,677.3310,096.707,887.466,093.984,476.16<br />Cash flow<br /> Mar ' 10Mar ' 09Mar ' 08Mar ' 07Mar ' 06Profit before tax7,214.307,315.617,066.366,261.655,239.96Net cashflow-operating activity8,369.227,397.226,254.205,118.103,631.39Net cash used in investing activity-5,254.84-9,428.08-29,318.58-5,427.60-2,464.59Netcash used in fin. activity-1,473.133,156.4215,848.077,702.46-1,125.13Net inc/dec in cash and equivlnt1,641.251,125.56-7,216.317,392.9641.67Cash and equivalnt begin of year1,592.89465.047,681.35288.39246.72Cash and equivalnt end of year3,234.141,590.60465.047,681.35288.39<br />DIVIDEND<br />YearMonthDividend (%)2010May802009Jun1602008Jun1602007May1552006May1302005May1302004May1002003May802002April-2001May402000May501999May401998May401997May45<br />Annual results in brief<br /> Mar ' 10Mar ' 09Mar ' 08Mar ' 07Mar ' 06Sales25,021.9824,315.7719,693.2819,762.5717,144.22Operating profit8,952.099,133.438,223.546,973.275,931.51Interest1,508.401,152.69878.70173.90118.44Gross profit8,297.488,289.017,679.847,233.046,067.83EPS (Rs)56.8771.1864.1472.7163.33<br />Annual results in detailsMar ' 10Mar ' 09Mar ' 08Mar ' 07Mar ' 06Other income853.79308.27335.00433.67254.76Stock adjustment134.97-289.27-38.73-82.47-104.91Raw material5,494.745,709.913,429.523,121.462,368.30Power and fuel1,268.281,091.37--819.17Employee expenses2,361.482,305.811,594.771,456.831,353.01Excise---2,210.552,004.83Admin and selling expenses-----Research and development expenses-----Expenses capitalised-----Other expenses6,810.426,364.526,484.186,082.934,772.31Provisions made-----Depreciation1,083.18973.40834.61819.29775.10Taxation2,167.502,113.872,379.332,039.501,733.58Net profit / loss5,046.805,201.744,687.034,222.153,506.38Extra ordinary item--221.13-152.10-52.77Prior year adjustments-----Equity capital887.41730.79730.78580.67553.67Equity dividend rate-----Agg.of non-prom. shares (Lacs)6051.624825.234825.874033.174051.91Agg.of non promotoHolding (%)68.5366.0566.0669.4873.21OPM (%)35.7837.5641.7635.2934.60GPM (%)32.0733.6638.3435.8134.87NPM (%)19.5021.1223.4020.9120.15<br />The Acquisition Process:<br />The acquisition process started on September 20, 2006 and completed on July 2, 2007. In the process both the companies have faced many ups and downs. The details of the process of acquisition are provided in the Exhibit 1 After the final round of bidding and when the results were 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 Steel described on what Muthuraman had to say about his writing the two speeches<br />Exhibit 1: Key Milestones of the Tata Corus Deal<br />September 20, 2006:-Corus Steel has decided to acquire a strategic partnership with a Company that is a low cost producer<br />October 5, 2006 :- The Indian steel giant, Tata Steel wants to fulfill its ambition to Expand its business further.<br />October 6, 2006 :- The initial offer from Tata Steel is considered to be too low both by Corus and analysts.<br />October 17, 2006:- Tata Steel has kept its offer to 455p per share.<br />October 18, 2006:- Tata still doesn’t react to Corus and its bid price remains the same.<br />October 20, 2006:- Corus accepts terms of £ 4.3 billion takeover bid from Tata Steel.<br />October 23, 2006:- The Brazilian Steel Group CSN recruits a leading investment bank to offer advice on possible counter- offer to Tata Steel’s bid.<br />October 27, 2006:- Corus is criticized by the chairman of JCB, Sir Anthony<br />Bamford, for its decision to accept an offer from Tata.<br />November 3, 2006:- The Russian steel giant Severstal announces officially that it will not make a bid for Corus.<br />November 18, 2006:- The battle over Corus intensifies when Brazilian group CSN approached the board of the company with a bid of 475p per share.<br />November 27, 2006:- The board of Corus decides that it is in the best interest of its will shareholders to give more time to CSN to satisfy the pre- conditions and decide whether it issue forward a formal offer<br />December 18, 2006:- Within hours of Tata Steel increasing its original bid for Corus to500 pence per share, Brazil's CSN made its formal counter bid for<br />Corus at 515 pence per share in cash, 3% more than Tata Steel's Offer.<br />January 31, 2007:- Britain's Takeover Panel announces in an e- mailed statement that after an auction Tata Steel had agreed to offer Corus investors<br />608 pence per share in cash<br />April 2, 2007:- Tata Steel manages to win the acquisition to CSN and has the full voting support form Corus’ shareholders<br />When Mr. Muthuraman tried to write the speech on conceding defeat; he could not write anything for long; his hand writing which is usually neat and beautiful was illegible with number of overwriting. After a lot of attempts he was able to write one. Whereas, he could smoothly and in beautiful hand writing wrote the winning speech. During the final rounds of bidding, the top management team of the Tata’s Including Ratan Tata, Muthuraman, Kaushik Chaterjee and their key support staff were in a secluded location that was inaccessible to others. Further, all their communication devices were changed in order that the competitors of the bidding or the rivals had any access to the discussion of the negotiating team of the Tatas.”<br />The official declaration of the completed transaction between the two companies was announced to be effective by Court of Justice in England and Wales and consistent with the Scheme of Arrangement of the Tata Steel Scheme on April 2, 2007. The total value of this acquisition amounted to £6.2 billion (US$12 billion). Tata Steel the winner of the auction for Corus declares a bid of 608 pence per share surpassed the final bid from Brazilian Steel maker Companhia Siderurgica Nacional (CSN) of 603 pence per share.<br />According the Scheme regulations, Tata Steel was required to deliver a consideration not later than 2 weeks following the official date of the completion of the transaction. <br />Prior to the beginning of the deal negotiations, both Tata Steel and Corus were interested in entering into an M&A deal due to several reasons. The official press release issued by both the company states that the combined entity will have a pro forma crude steel production of 27 million tons in 2007, with 84,000 employees across four continents and a joint presence in 45 countries, which makes it a serious rival to other steel giants.<br />The deal between Tata & Corus was officially announced on April 2 nd, 2007 at a price of 608 pence per ordinary share in cash. This deal is a 100% acquisition and the new entity will be run by one of Tata steel subsidiaries. As stated by Tata, the initial motive behind the completion of the deal was not Corus’ revenue size, but rather its market value. Even though Corus is larger in size as compared to the Tatas, the company was valued less than Tata (at approximately $6.2 billion) at the time when the deal negotiations started.<br />But from Corus’ point of view, as the management has stated that the basic reason for supporting this deal were the expected synergies between the two entities. What were the various motivations for Corus to have upported the acquisition by the Tatas? Was it because of better price offered by the Tatas? Was this deal the best way for the shareholders of Corus to exit from the loss making steel business?<br />First of all, the general assumption is that the acquisition was not cheap for Tata. The price that they paid represents a very high 49% premium over the closing mid market share price of Corus on 4 October, 2006 and a premium of over 68% over the average closing market share price over the twelve month period. Moreover, since the deal was paid for in cash automatically makes it more expensive, implying a cash outflow from Tata Steel in the amount of £1.84 billion.<br />Tata has reportedly financed only $4 billion of the Corus purchase from internal company resources, meaning that more than two - thirds of the deal has had to be financed through loans from major banks. The day after the acquisition was officially announced, Tata Steel’s share fell by 10.7 percent on the Bombay stock market. Tata’s new debt amounting to $8 billion due to the acquisition, financed with Corus’ cash flows, is expected to generate up to $640 million in 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 entity’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 has gripped many.<br />