MERGERS AND ACQUISITIONSA CASE ANALYSIS ON ARCELOR-MITTAL and TATA CORUS DEAL • By: VIKRAM DAHIYA IIM-ROHTAK
• 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
An acquisition is the purchase of one business or company byanother company or other business entity.
• Gain market share• Economies of scale• Enter new markets• Acquire technology• Utilization of surplus funds• Managerial Effectiveness• Strategic Objective• Vertical integration
Trends in global steel industry• Consumption of steel increased after 1950 and trend was continued till 1970• Consumption of steel started decline from 70s to 80s• After 80s, demand for steel increased continually• International Iron and Steel Institute (IISI) forecasted increment in demand for steel from 1.32 billion tones (in 2010)to 1.62 billion tones(in 2015)• This demand will increase due to countries like India and china• To capture this demand, biggest steel producer of India (TATA Steel ltd.) has been increased its production base by acquiring 4th largest steel producer of world(Corus steel)
Mittal Steel Company N.V. – CEO LakshmiMittal Formed by the merger of - LNM holdings & ISPAT International - International Steel Group Inc.Headquartered in Rotterdam, Netherlands. 2005 Revenues was$28.10 billion World’s largest steel producer by volume and also the largestin turnoverMajor player in following products : Steel, Flat Steel products,Coated Steel, Tubes and Pipes
Arcelor was the worlds largest steel producer interms of turnover before takeover. Second largest in terms of steel output.Guy Dolle was the CEO of Arcelor and itsheadquarter was in Luxembourg city. In 2005, Arcelor had revenues of $38.84 billion.Arcelorwas created through the merger of threecompanies:Arbed, Aceralia and Usinor
• January 2006 : Mittal Steel offers the shareholders of Arcelorto create the worlds first 100 million tonne plus steel producer.• The deal valued at $22.7 billion offer to Arcelor’s shareholders• The deal was split between Mittal Shares (75 percent) andcash (25 percent)• But soon the deal landed into controversy
• An Attractive Target: Arcelor had 71% pre merger revenue share from Europe while Mittal had only 34% While in North America The revenue share for Arcelor was only 9% but Mittal had 42% So they had complementary industrial and market footprint
Arcelor Management – • The management was extremely hostile to Mittal Steel’s bid • The CEO of Arcelor dismissed Mittal Steel as a “company of Indians” European governments – •The French, Spanish and the government of Luxembourg was against the deal •The French opposition was initially very fierce • But It was criticized in the British, American and Indian media as double standards and economic nationalism in Europe
Deal was not getting pushed due to MITTAL’s Indian Nationality The then Commerce Minister KamalNath raised the issuethrough various forums But LN Mittal himself felt that there was no case of “racism” He emphasized that Mittal Steel was a European company andNOT an Indian one.
Deal finally clinched when the shareholders of Arcelor agreedto Mittal Steel’s offer – In June 2006Mittal raised its valuation of Arcelor to $32.9 billion.The Mittal family holds 43 percent of the combined group. The combined company holds 10 percent of the global marketfor steel.
TATA STEEL BACKGROUND Tata Steel is a part of the Tata group, one of the largest diversified business conglomerates in India. Founded in 1907,by JamshedjiNusserwanji Tata Tata Steel CEO in 2007 – Mr. Ratan Tata Headquartered in Mumbai, Maharashtra, India. In 2005-2006, the Tata Steel had revenues of Rs. 17,136.92 cr. In 2011, the revenues of Tata Steel are Rs. 31,102.14 cr. Products of Tata Steel include hot and cold rolled coils and sheets , wire and rods, construction bars, pipes, structural and forging quality steel
CORUS STEEL BACKGROUND Corus Group was formed on 6th October,1999 Formed through merger of two companies- British Steel KoninklijkeHoogovens It had it’s headquarters in London Company consisted of four divisions which included: Strip Products, Long Products, Aluminum and Distribution and Building Systems In terms of performance, the company was regarded as the largest steel producer in the UK with £10,142 million of annual revenue (for 2005) and a work force of 50 000 employees
Why Corus decided to sell ?• Total debt on Corus was $1.6bn• Saturated market of Europe• Though Corus had revenue of $18.06bn, its profit was just $626mn (TATA STEEL revenue was $4.84bn and its profit was $824mn)• Employee cost was 15% while of TATA STEEL was 9%• Decline in market share and profit
Why TATA decided to buy Corus?• To tap European market• Helped TATA to feature in top 10 Steel producer of world• Cost of acquisition is lower than setting Green field plant and distribution channel• TATA manufactures Low value long & fast steel products while Corus produced high value Stripped product• Technology Benefit, Economic of scale. Corus holds number of patents and R&D facilities
RACE FOR CORUS• October 20,2006:Tata steel picks up 100% stake in Corus at 455 pence in all cash deal, valued at $8.04 bn• November 19, 2006:CSN offers 475 pence per share and valued Corus at $8.4 bn• December 11, 2006:Tata raises offer to 500 pence, CSN counters with 515 pence per share, valuing at $9.6 bn• December 19, 2006: UK watchdog on merger and acquisitions announced last date for revised offer for each Tata and CSN• January 31, 2007:UK watchdog panel announces the revised offer of Tata steel for acquisition of Corus at 608 pence per share• April 2, 2007 : Tata Steel manages to win the acquisition to CSN and has the full voting support form Corus’ shareholders
Whether the deals added value? Whether it was a good move? Industry and Market Reactions to the deals.We use the following measures to analyze the same: Ratio Analysis Trend Analysis Steel Industry Analysis ArcelorMittal Tata Corus Data Used: Balance Sheet and Income Statement
Year 2010 2009 2008 2007 2006Revenue 78,025.0 61,021.0 116,942.0 96,293.0 55,726.0Total Revenue 78,025.0 61,021.0 116,942.0 96,293.0 55,726.0Cost of Revenue, Total 68,636.0 56,873.0 96,366.0 74,923.0 43,946.0Gross Profit 9,389.0 4,148.0 20,576.0 21,370.0 11,780.0Selling/General/Administrative 3,336.0 3,676.0 6,243.0 4,996.0 2,871.0Expenses, TotalResearch & Development 0.0 0.0 0.0 0.0 0.0Depreciation/Amortization 0.0 0.0 0.0 0.0 0.0Interest Expense (Income), Net 0.0 0.0 0.0 0.0 0.0OperatingUnusual Expense (Income) 2,448.0 1,942.0 2,373.0 2,408.0 1,740.0Other Operating Expenses, Total 0.0 0.0 0.0 0.0 0.0Operating Income 3,605.0 -1,470.0 11,960.0 13,966.0 7,169.0Interest Income (Expense), Net Non- 0.0 0.0 0.0 -912.0 -624.0OperatingGain (Loss) on Sale of Assets 0.0 0.0 0.0 0.0 0.0Other, Net 0.0 0.0 0.0 0.0 49.0
Key Figures Mittal ArcelorCompany Total (MT) (Paris: LOR)2005 Sales (bil.) $28.10 $38.84 $66.941-Year Sales Growth 27% 8%2005 Net Income (bil.) $3.37 $4.58 $7.951-Year Net Income Growth -28% 66%Employees 175,000 96,000Soucre: Companiesstatements
• Strong financial performance in the second half of 2006• Full-year (EBITDA) rose 2.1% to $15.27 billion from $14.96 billion in 2005• Combined sales slightly decreased in 2006 but had a quantum jump in 2007• Sales figure for Mittal Steel more than doubled after the merger.• Net Income of the company has risen from $3.36 billion to $6.10 billion in 2006 and to $11.8 billion in 2007• Venture into new businesses and market like Luxembourg, Senegal, Liberia• Enlarged brand portfolio
Key Financial Ratios Net Profit Return On Net Asset Turnover Earnings Per Debt EquityYear Margin(%) Worth(%) Ratio Share Ratio 22.81 14.68 0.98 71.58 0.64 2011 19.96 13.45 1.12 56.37 0.68 2010 21.09 21.1 1.22 69.7 1.34 2009 23.43 21.52 1.2 63.85 1.08 2008 23.53 29.95 1.09 72.74 0.69 2007 2006 22.78 35.94 0.98 63.35 0.26
• Before the deal TATA STEEL was the 56th largest producer of steel.• After the deal it became the 5th largest
• The acquisition by Tata amounted to a total of 608 pence per ordinary share or ₤6.2 billion (US $12 billion) which was paid in cash• The price that they paid represents a premium of over 68% over the average closing market share price over the twelve month period• The day after the acquisition was officially announced, Tata Steel’s share fell by 10.7% on the Bombay stock market.
• Full-year (PBDIT) rose 21.3 percent to Rs. 8830.95 cr. from Rs. 7275.87 cr. in 2008• Combined sales increased 12.61 percent to Rs. 19654.41 cr.• Profit of the company has risen from Rs. 3506 cr. to 4222 cr.• Economies of Scale• Forward integration for Tata Steel• Increased presence in global markets
Camparison between both deals• In the Mittal Steel-Arcelor deal, the EV/EBITDA was 6.2 times while it was 9 times in case of Tata – Corus• In terms of EV/tonne too, Tata Steels price, at $700-710 per tonne was higher than what Arcelor commanded at $586 per tonne• In case of Mittal Steel- Arcelor, the deal involved a share swap along with cash while Tata Steel had to shell out hard cash for Corus