TATA CORUS

ACQUISITION:
WHAT WENT
WRONG?

Submitted By: Group-7

1) Amlan Sarkar- 2018EPGP003
2) Jasdeep Singh- 2018EPGP020
3) Mayank Vyas- 2018EPGP028
4) Rohit Dubey- 2018EPGP044
5) S. Karthikeyan- 2018EPGP045
Q.1) Is there merit in the allegations of Mr. Cyrus M? Do you think people at Tata Steel could have
predicted poor performance?

The Acquisition of Corus by Tata Steel was full of controversy. There were numerous issues raised before
and after the acquisition. After couple of months of bids and counter bids (bidding starts on 20th
October 2006), Tata steel wins the battle against Brazil’s CSN for Corus on 1st Feb 2007. Tata steel
acquires 21.1 % of equity share capital for 11.7$/share. British press describes the contest between Tata
Steel and Brazil’s CSN as a battle to “decide the fate of more than two centuries of British industrial
history”. Tata Steel paid $12 billion to acquire Corus. It has been considered as the Largent acquisition
made by an Indian company.

In spite of paying such a hefty sum, many Financial Analyst felt that Tata made a mistake in evaluating
the deal value. Immediately after the deal, Tata steel’s share price fell to INR 463.95 in BSE .Analysts
also expressed that increased Debt liability of Tata steel (Tata steel borrowed $7.3 billion in loans as a
part of its loan term financial arrangement to takeover Corus. From Citi group, standard chartered and
ABN Amro). Following adverse impacts were observed post the deal –
 Moody investors services downgraded Tata steel’s rating from Baa2 (investment grade) to Ba1
(speculative grade)
 Standard and poor’s rating service India downgraded Tata steel on the “negative implication”
watch list after the acquisition
 Analyst expressed fear that Tata steel over stretched itself due to execution risk coupled with
lack of international business experience
 Analyst expressed the synergy difference between Tata Steel and Corus in term of Financial -
Before Acquisition, EBITDA margins for Tata’s were about 40% while that of Corus were 7%.

Frustrated with poor performance by Tata steel and continue to carry the burden of debt due to the
acquisition , Mr. Cyrus Mistry alleged that “Tata Steel’s decision to acquire steelmaker Corus at the
costly price of $12 billion was taken due to a single man’s ego, implying that Ratan Tata was solely
responsible.”

If we do a situation analysis, the deal was rightly in line with Tata steel’s strategic planning and rightly
poised to take over Corus. Few pointers to consider to understand the deal:-

 The acquisition created a well-balanced company, strategically placed to compete in global

environment.
 Board approved the deal considering the deal would put the combined group as the fifth largest
steel company in the world by the production output. ( adding 19 million tons of production
capacity)
 Starting a new venture in Europe as a part of consolidating steel industry would have been a
costlier option than acquiring Corus.
 The new entity would have a meaningful market presence in both Europe and Asia
 Would increase the completion in Europe considering low cost upstream production in India and
high stream downstream facilities in Europe.

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  In 2008 , Tata made into Fortune 500 list mainly due to the acquisition of Corus
 In 2007 end , benefit of the merger were realized in manufacturing
 During due diligence phase, Tata estimated that funding would be supported by Tata Sons and
would not pose a burden to Tata steel’s balance sheet- Any loan would be serviced through
Corus’s cash flow - Corus’s revenue at the time of acquisition was 20 billion USD.
 From long term strategic perspective of Tata steel’s vision, the acquisition is in agreement.
Leadership believed that consolidation in steel industry will take place. Corus was the only
player that would fits the plan of consolidation.

In a nutshell, the acquisition decision fulfilled the long term vision of Tata Steel’s leadership and rightly
poised to flourish. Perhaps, the cultural differences and continued poor performance of Tata steel
domestically and internationally made the deal a dubious one.

Q2) What is the strategic logic of the Corus acquisitions?

Strategy:-
Corporate Level:-

 Goal of Tata Group as part of Internationalization strategy was “at least 30% of revenues should
come from overseas operation”. Acquisition of Corus Aligns with corporate strategy of Tata Group
to achieve 30% revenue.
 Acquisition of Corus would bring Tata Steel to 5th from 56th position in global market. Tata steel
market focus was on developing automotive sector and growing construction industry. Corus have
their product expertise in those fields
 Once Corus been acquired Tata steel will have access to 40 countries across the globe,
transforming it into a major global player from a domestic player.
 Acquisition helps Tata Group a Penetration into European market. Tata Steel can enhance its
global name which will open up other world markets for Tata Steel with increasing bargaining
power with respect to suppliers and customers.
 Cost of acquisition is less than setting up new green filed plant in European market. It will give
immediate access to established Corus sales & distribution channel.
 Corus was larger than Tata Steel however the valuation is only $6 billion which is very less
compared to Tata Steel value. Acquisition will almost double the size of capacity and revenue for
Tata Steel.
 De integrated business model strategy was followed by Tata Steel. By series of foreign acquisition,
they want to have their Steel Plant facilities located nearer to the raw material source while the
finishing capacities nearer to the consumers
 According to Tata Steel expected synergies and efficiencies flowing in and would bring in annual
benefits of USD 350 million per annum by year 2010.

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Business Level: -
Strength of Tata Steel

 Tata Steel has Positive Economic Value added among the steel industries
 Efficient in manufacturing process. “Steel Dynamics, a US-based industry research group, gave
Tata Steel 10 out of 10 for its operating costs and named it the best steel maker in the world.”
 Firm presence in domestic market. Tata steel was 2nd largest steel producer in India after SAIL
 Integrated steel manufacturing approach and efficient labor & operation utilization.

Economics of Scale: - Raw Materials

Tata steel has relative cost advantage because of the core mines they posses in India and Outside. As
Corus was trying to keep the costs under control which can be achieved through material sourcing from
India. Tata steel felt that lower cost upstream production in India with higher upstream facilities of Corus
could give them competitive advantage in European market.

Economics of Scale: - Product Mix:

The combined entity of Tata-Corus will have a tremendous beneficial reach and scale of 24 million tons
per annum. Tata Steel could have High valued- added product mix and strong market positions in
automotive, construction and packaging. A diversified product mix reduces the risk and high end products
of Corus will add to the bottom line.

Economics of Scale: - Technology Access:

Acquisition paves way for Tata to have access to Corus matured R&D facilities and Patents. Corus provides
innovative solutions to markets worldwide. 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.

Efficiency expertise of Tata:

Tata was known for the efficient handling of labor. Corus labor cost was 15% of their revenues and Tata
Steel was only 7%. So Tata steel believed that they could optimize the labor cost and other operational
expensed through their learning curves and knowledge.

Cultural Synergy

Strong cultural fit was expected to be between Corus and Tata Steel as both of them emphasized on
continuous improvement and ethics. Core values like creating value in steel, code of ethics etc. reflected
same ideas among the companies. So Tata steel believed the post integration stage will be quick compared
to any other merger.

External Conditions Favoring Acquisition

Steel industry (heavy industry) was considered as a very important and influential parameter for the
development of modern economy. As Indian was growing and was de regulated industry, there were lot
of domestic opportunities to expand the industry. Favorable Domestic Opportunities helped Tata to
expand locally and invest globally .In 2005 the acquisitions of Singapore‘s NatSteel and Thailand‘s

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 Millennium Steel strengthened Tata Steel‘s position in higher value finished products in growing Asian
markets, such as wire rods for construction, as the company also built on its strength in semi-finished
steel. The acquisition of Corus would enable Tata to control a considerable market of finished goods in
Asia, India and Europe. Brazilian CSN and other players were also trying hard to acquire Corus which meant
that a quick acquisition was the only alternative

To Mitigate External Threats

Arcelor-Mittal’s share price rose steeply following the Arcelor’s takeover by Mittal for $36.1 billion in
2006, which was seen as a vital competitor threat by many steel producers. Consolidation of Steel Industry
was eminent during that time. New Environment regulation and china‘s plan to expand its capacity to
capture the Asian market was felt as threat for the steel producers around the world. Consolidation in the
steel industry was a necessity with increase in demand of developing nations and to reduce Volatility of
steel prices in Global market.

Q3) Carry out a valuation of Corus on a standalone basis and as a merged entity? Clearly state the
basis on which various numbers are derived like WACC, future cash flows etc.

Following assumptions were made in evaluating the “standalone” and “with synergy” value for the Tata-
Corus deal:
Metrics for Forecasting References
Avg. Revenue Growth 8% https://www.oecd.org/sti/ind/43312347.pdf
In 2006 the global economy enjoyed one of its strongest periods of
expansion in 20 years, with economic growth accelerating from
Long term Growth Rate 3.80% 3.3% in 2005 to 3.8% in 2006

Corporate Tax Rate 30% https://www.contractorcalculator.co.uk/taxtables2006.aspx

Corus’ credit ratings, which are a key determinant of the terms on
which the Group can issue debt, improved during the year and at
30 December 2006 the corporate long term ratings were as
Cost of Debt (Kd) 6% follows: • Moody’s: Ba2 • Standard & Poor’s: BB

Risk Free Rate 4.50% https://bib.kuleuven.be/files/ebib/jaarverslagen/CORUS_2006.pdf

Beta 2.17 http://tata-corus.blogspot.com/

Market Risk Premium 7% http://tata-corus.blogspot.com/

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Summary of the valuation is as below:

Type Value(US $Bn)

Actual Acquisition Price 12
DCF Without Synergy 7.93
DCF With Synergy 8.36
EBIDTA Median Valuation 8.69
EBIDTA Average Valuation 9.69

Value(US $Bn)
14
12
10
8
6
4
2 Value(US $Bn)
0

All the detailed calculations are done in the excel spreadsheet, attached as annexure.

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