TATA & CORUS

(A CASE OF ACQUISITION)

COMPANYS PROFILE
TATA Steel

Founded in 1907,byJamsetji Nusserwanji Tata. Tata company listed on BSE and NSE and employs about 82700 (2007) people. started with a production capacity of 1,00,000 tones has transformed into a global giant .

Its revenue in 2005-2006 was 22000 Crores. (5 billion US $. Its revenues in year 2011-12 is now Rs 1,18,754 Crores including the South Asian and UK/European operations.

It has a main steel plant located at Jamshedpur. The Company also has three Greenfield steel projects in the states of Jharkhand, Orissa and Chhattisgarh.

CORUS Steel

Corus is Europe's second largest steel producer. Corus group was formed on 6th October 1999. Company has four divisions: Strip product , Long product , Aluminum and Distribution and Building system.

Corus main steelmaking operations primarily in the UK and the Netherland. Corus provides innovative solutions. It is listed on London stock exchange.

RATAN TATAS VISION

We aspire to be the global steel industry benchmark for Value Creation and Corporate Citizenship

CHALLENGES
FINANCIAL ASPECTS. High debt to finance the purchase.
NON FINANCIAL ASPECTS

1.

2.

Cultural differences Structures and Compensation models Foreign political Environment.

THE DEAL

ABOUT THE DEAL

TATA Acquired CORUS on 2nd April 2007 which is 4 times larger than its size. The deal price was $ 12 Billion. TATA Steel,the winner of the auction for CORUS declares a bid of 608 Pence per share.

In 2005 when the deal was started the price per share was 455 pence. TATA Surpassed the final bid from Brazilian steel maker COMPANHIA SIDERURGICA NACIONAL (CSN) of 603 pence per share. The combined entity has become the worlds fifth largest steelmaker after the deal.

For this deal TATA has finance only 4 Billion $ from internal company resources.

TATA Have secured funding commitments from its advisors.

These advisors were Deutshe bank, ABN Amro and Standard Chartered.

IMPORTANCE OF DEAL
FOR TATA

The initial motive behind the deal was not CORUS revenue size but rather its market value.

To compete on global scale because then TATA was just at 56th rank in steel production.
CORUS holds a number of Patents and R & D facility.

 Acquiring Corus will give Tata access to European customers of steel. Acquisition cost will be lower then setting up new green field plants and marketing channel.

FOR CORUS

To extend its Global reach through TATA.

To get access to Indian Ore reserves, as well as virgin market for steel. To get access to low cost materials. Total Debt of Corus was GBP 1.6bn

Saturated market of Europe. Better facilities and lower cost of production Employee cost was 15 % (TATA- 9%) Profit margin was 3.4% (TATA- 17%)

PROCESS OF DEAL

Sep 20, 06 : CORUS uses the strategy to work with low cost producer. Oct 06, 06 : Initial offer by TATA is considered to be too low. Oct 17, 06: TATA kept its offer to 455 pence per share. Oct 20, 06 : CORUS accepts the offer of 4.3 billion. Oct 23, 06 : Brazilian Steel Group CSN counter-offer to TATAs offer. Oct 27, 06 : CORUS criticized by JCB for acceptance of TATAs offer. Nov 18, 06 : The CSN approaches Corus With an offer of 475 pence per share Nov 27, 06 : Board of Corus decides to give more time for shareholders to decide whether it issue forward a formal offer. Dec 18, 06 : Tata increases its original bid for Corus 500 pence per share, then CSN made its counter bid at 515 pence per share in cash Jan 31, 07 : Tata agreed to offer Corus investors 608 pence per share in cash Apr 02, 07 : Tata steel manages to win acquisition to CSN and has the full voting support from Corus shareholders

Major Acquisitions
Target Arcelor NKK Corp LMM Holdings Buyer Mittal Steel Kawasaki Steel Ispat Intl Value ($ bn) 31 14.1 13.3 Year 2006 2001 2004

Corus
Krupp AG Dofasco Intl Steel

TATA
Thyssen Arcelor Mittal Steel

12.0
8.0 5.2 4.8

2006
1997 2005 2005

GLOBAL STEEL RANKING

COMPANY CAPACITY in (million tones)

1. Arcelor-Mittal 2. Nippon steel 3. Posco 4. JEF steel 5. Tata steel Corus

110.0 32.0 30.5 30.0 27.7

POST ACQUISITION

New entity will be run by one of Tatas steel subsidiaries. Seven members committee. Share price of TATA On the date of announcement 536.60 On the date of Acquisition- 464.90 Todays price- 440

Tata Steel- Corus : Projected capacity (in million tones per annum)
Corus Group (in UK and Netherlands) 19

Tata Steel- Jamshedpur

Tata Steel- Jharkhand Tata Steel- Orissa Tata Steel- Chattisgarh Tata Steel- Singapore Millennium Steel- Thailand

10
12 6 5 2 1.7

Aggregate projected capacity

55.7

LESSONS FROM THE CASE

Tatas vision of becoming global player in steel got realized. (What price to pay for this dream?) Due to high price paid for the acquisition, the debt burden on Tata Steel went up substantially. It reduced the profitability of Tata Steel. Though Corus had large assets, the margins earned by the plant were substantially lower than Tata Steel Plant. (It is not how much assets you have counts, but what these assets can earn for you counts!). Separate figures for European operations are not being reported by TISCO in its balance sheet.

LESSONS FROM THE CASE

However the reported figures for 2010-11 are following: Item reported TISCO Indian Total for the Operations Group* -------------------------------------------------------------------------------Total revenue 29236 (24.6%) 1,18,753 EBITDA 12223 (72.0%) 16976 Net Profit 6686 (75.5%) 8856 -------------------------------------------------------------------------------

Figures in Rs Crores.

*Includes South Asian and UK/European Operations.

LESSONS FROM THE CASE

The latest figures for the half year of 2011-12 are following: Item reported TISCO Indian For European Operations Operations -----------------------------------------------------------------------------Total revenue 16072 41,695 EBITDA 12223 2412* Net Profit 6686 N.A. -----------------------------------------------------------------------------

Figures in Rs Crores.

* Includes settlement of Rs 685 Cr received for settlement from Teeside Cast Products.

LESSONS FROM THE CASE

It can thus be seen from the figures that, European operations (Corus) though are 3-4 times larger in producing only 1/5th of the EBITDA. TISCO is not reporting separately the net profit figures for the European/UK operations. There is likelihood of losses after the interest and depreciation figures are taken in. This poses the question that, was the huge investment put in for acquisition for Corus good for TISCO. If the same investment was put for something else, may be it would have produced much better profits for TISCO.

LESSONS FROM THE CASE

The first lesson that is evident is that, it is not the size of operations that matters, but the net profit achieved that matters. The second lesson is that, it does not matter what assets you hold. What matters is that, what these assets can do for you. The valuation needs to be on the basis of the assets earning capacity. The asset that is producing loss has little value. Tatas possibly paid too much for the acquisition. They could have allowed the Brazilian company to acquire Corus and looked for the next opportunity available. Paying too much is one of main reasons for failure of the M&As.