Acquisition in steel sector

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Introduction to the Case[1]

Indian company, Tata Steel Limited acquired the Anglo-Dutch steel company, Corus Group for US$ 13.70 billion, on January 31, 2007, The Company than formed is called Tata-Corus. It has employed 84,000 people across 45 countries in the world. The merger has made Tata-Corus, the fifth largest steel producer in the world at that time.

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It had the capacity to produce 27 million tons of steel per annum. This acquisition was the biggest overseas acquisition by an Indian company. Tata Steel emerged as the fifth largest steel producer in the world after the acquisition. The acquisition gave Tata Steel access to Corus’ strong distribution network in Europe. The acquisition was made with a view of using Corus’ expertise in making the grades of steel used in automobiles and in aerospace which could be used to boost Tata Steel’s supplies to the Indian automobile market. Corus in turn was expected to benefit from Tata Steel’s expertise in low cost manufacturing of steel. However, some financial experts claimed that the price paid by Tata Steel (608 pence per share of Corus) for the acquisition was too high. Another player was also there for the acquisition of Corus. It was Brazilian steelmaker, Companhia Siderurgica Nacional. But Tata Steel outbid the Companhia Siderurgica Nacional’s (CSN) final offer of 603 pence per share by offering 608 pence per share to acquire Corus. The first offer of Tata Steel was to pay 455 pence per share of Corus, to close the deal at US$ 7.6 billion. CSN then offered 475 pence per share of Corus. After nine rounds of bidding, Tata Steel could finally clinch the deal with its final bid 608 pence per share through an auction which was initiated on January 31, 2007. Most of the analysts and industry experts felt that the acquisition deal was rather expensive for Tata Steel and this move would overvalue the steel industry world over. The cost advantage of operating from India can be leveraged in Western markets, and differentiation based on better technology from Corus can work in the Asian markets.”

Type of Acquisition

  • The acquisition of Corus by Tata Steel is a friendly Acquisition.
  • A Friendly Acquisition is the one in which companies negotiate each other for takeover.
  • It requires nine rounds of negotiations for Tata Steel to acquire Corus.
  • It was a cash acquisition which involved some banks also.

Perspective Advantages of the Acquisition for Tata Steel[2]

Synergy

The combination will yield a value which is more than that of the addition of the value of the two firms (TATA Steel and Corus) individually. Also there will be an increase in research and development capabilities in the automotive, packaging and construction sectors and there will be a transfer, from Europe to India, of technology, best practices and expertise of senior Corus management.

Increase market share

The combination will position the combined group as the fifth largest steel company in the world by production.

Economies of scale

As the labour is cheap in India, the combination of low cost upstream production in India with the high end downstream processing facilities of Corus will improve the competitiveness of the European operations of Corus.

Global presence

The combination will give Tata Steel a meaningful presence in both Europe and Asia. Tata Steel expects to lead the enlarged group with a combined management team. Manufacturing will be organized so as to produce slabs/ primary steel in low-cost facilities and produce high-end products in proximity to client base – in both Europe and India. Tata Steel also believed that between the two companies, there exists a high degree of cultural compatibility, which would facilitate an effective integration of the businesses over time.

The Synergies

Some of the prominent synergies that could arise from the deal were as follows: Tata was one of the lowest cost steel producers in the world and had self sufficiency in raw material. Corus was fighting to keep its productions costs under control and was on the look out for sources of iron ore. Tata had a strong retail and distribution network in India and SE Asia. This would give the European manufacturer a in-road into the emerging Asian markets. Tata was a major supplier to the Indian auto industry and the demand for value added steel products was growing in this market. Hence there would be a powerful combination of high quality developed and low cost high growth markets There would be technology transfer and cross-fertilization of R&D capabilities between the two companies that specialized in different areas of the value chain There was a strong culture fit between the two organizations both of which highly emphasized on continuous improvement and ethics.

Perspective Advantage of the Acquisition for Corus[3]

Corus decide to let the acquisition done

  • Total debt of Corus is 1.6 bn GBP.
  • Supply of raw material at lower cost is the priority of Corus.
  • Corus was using facilities which were relatively old with high cost of production.
  • The employee cost of Corus is 15% while that of Tata Steel is only 9%.
  • The revenue of Corus of $18.06 bn, its profit was just $626 mn while that of $4.84 bn and profit 4 824 mn.

Strategies taken by Tata Steel after acquisition of Corus[4]

Divestments – Tata has planned to sale Corus’ aluminium smelters in Germany and the Netherlands and to advance discussions on the sale of a majority stake in Teesside Cast Products, which would bring clarity to the future of the Teesside operations beyond the current offtake agreement. Efficiency and overhead review – a company-wide efficiency improvement review, including a review of support functions such as IT, Finance and Human Resources, with a target to reduce costs in these areas by around 20%. Asset restructuring – mothballing of the Llanwern hot strip mill; restructuring of engineering steels into two businesses – a specialty steels business at Stocksbridge fed by electric furnace steel from Rotherham and a bar business at Rotherham with steel sourced from the integrated works at Scunthorpe; and streamlining of downstream facilities in Distribution, Building Systems and Tubes.

Price offered to pay[5]

The acquisition of Corus by Tata was a cash acquisition. Because of lack of agreement, an auction process was carried on January 31, 2007 for the acquisition. Tata Steel announced the proposed acquisition of Corus Group at 608p per share, that being 5p more than CSN’s top offer of 603p. The final valuation of Corus was thus put at $12.04 Billion. By the first week of April 2007, the final draft of the financing structure of the acquisition was worked out and was presented to the Corus’ Pension Trusties and the Works Council by the senior management of Tata Steel. The enterprise value of Corus including debt and other costs was estimated at US$ 13.7 billion.

Final seal structure

  • $3.5-3.8bn infusion from Tata Steel ($2bn as its equity contribution, $1.5-1.8bn through a bridge loan)
  • $5.6bn through a LBO ($3.05bn through senior term loan, $2.6bn through high yield loan)

Merchant Bankers Role in the case

TATA- CORUS Deal – $12 billion

Equity Contribution from Tata Steel- $3.88 billion Credit Suisse leaded, joined by Deutsche Bank[6] (Deutsche Bank AG is authorized under German Banking Law and with respect to UK commodity derivatives business by the Financial Services Authority; regulated by the Financial Services Authority for the conduct of UK business) and ABN AMRO (ABN AMRO Corporate Finance Limited, which is authorized and regulated by the Financial Services Authority, is acting for Tata Steel and Tata Steel UK in connection with the Revised Acquisition) in the consortium. When the revised rates are offered to Corus for its acquisition, the markets in India reacted immediately, leading Tata Steel shares dropping as much as three percent on the Bombay Stock Exchange (BSE) as investors feared the higher acquisition price may hurt the profitability of the acquired entity.[7] Merchant bankers dealing with the buy-out said while the financial commitment for 4.3 billion pounds was intact, the Tatas had approached Standard Chartered Bank and Standard Chartered First Bank of Korea for additional finances. “ABN Amro and Deutsche Bank, as joint financial advisers to Tata Steel and Tata Steel UK, are satisfied sufficient resources are available to satisfy in full the consideration payable to Corus shareholders,” the joint statement said. Of the $ 8.12 billion of financing Credit Suisse provided 45%. ABN AMRO and Deutsche provided 27.5% each.

Post Acquisition Analysis

With this acquisition, Tata Steel, with a crude steel making capacity of 28.1 million tones per annum, became the sixth largest steel company in the world, with a presence in several countries across continents. In the financial year 2007-08, Tata Steel had included Corus’ financials consolidated accounts for the first time. Consolidated net sales for FY 2007-08 stood at Rs 1,31,536 crore ($33 billion).The consolidated net profit was Rs 12,350 crore. On a stand alone basis, Tata Steel’s net sales grew 12% to Rs 19,693.28 crore against Rs 17,551.09 crore in FY 2007. Net profit for the year was Rs 4,687.03 crore against Rs 4,222.15 crore in FY 2007. The company, during the year, also completed its long-term financing programme for its Corus acquisition. Of the total enterprise value of $14.2 billion, the financing included around $10.5 billion as bridge funding, the balance applied out of Tata Steel’s own cash and borrowings.

Strategic and Integration Committee[8]

A ‘Strategic and Integration Committee’ was formulated to develop and execute the integration and further growth plans. Appropriate cross functional teams were formed under this committee to look into specific issues.

New Board formulation[9]

A new board was formulated with representation from both the companies to provide a common platform for strategy and integration. Mr. R.N. Tata will be the Chairman of Tata Steel and Corus Mr. Jim Leng will be the deputy chairman of Tata Steel and Corus Mr. B Muthuraman, Mr. Ishaat Hussain and Mr. Arun Gandhi to join the Corus board. After the acquisition, the top management team of Corus was retained as Tata Steel believed that a high degree of cultural compatibility existed between the two companies. This was expected to facilitate an effective integration of business over a period of time

Why Merger and Acquisition takes place?

A merger and acquisition will make economic sense to the acquiring firm if its shareholders wealth is maximized. They create an economic advantage (EA) when the combined present value of the merged firms is greater than the sum of the individual present values as separate entities. Acquisition or merger involves costs. Suppose that firm P acquires firm Q. After acquisition P will gain the present value of Q, i.e Vq, but it also have to pay price to Q. Thus, the cost of merging to P is: Cash paid – Vq. For P, the net economic advantage of merger (NEA) is positive if the economic advantage exceeds the cost of merging. The economic advantage, i.e., [Vpq – (Vp + Vq)], represents the benefits resulting from operating efficiencies and synergy when two firms merge. If the acquiring firm pays cash equal to the value of the acquired firm, i.e. cash paid – Vq = 0, then the entire economic advantage of merger will accrue to the shareholders of the acquired firm. In practice, the acquired and acquiring firm may share the economic advantage between themselves.

Conclusion

After analyzing the whole case at last we can say that Tata Steel’s acquisition of Corus was a fruitful case for Tata Steel, as it gives it an edge over its competitors. The presence of Tata in India (a low wage country) gives it an opportunity to produce low cost steel and the presence of Corus in England gives it the advantage to compete with other players in the market. Tata Steel’s balance sheet is also showing this thing. 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 tones per annum, if all the planned Greenfield capacities go on stream by then. Also the management staff of Corus is found to be very effective. That too is very advantageous for Tata Steel. We can conclude that if the acquisitions well planned, Executed and the necessary precautions taken for the deal a company can achieve its strategic objectives and thus ensure its growth through Acquisition.

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