Almost every organization aims at expanding their business to be able to survive in the market characterized by stiff competition. To achieve this there are many expansion corporate strategies like mergers, acquisitions, joint ventures, and strategic alliances. Among these acquisitions is one of the most popular strategies adopted by large corporate bodies. Acquisition or take-over means the acquisition of one company’s (acquired company) total or controlling interest by another company (acquiring company).
They are carried out with the purpose of fulfilling the objectives such as quick growth, diversification, reducing competition, increasing the market share, or to create goodwill in the industry. This case describes the acquisition story of Corus, the erstwhile British Steel Major by Tata Steel manufacturer, an India based steel manufacturer. The deal was meant to achieve the objective of becoming the world’s largest steel maker. However, the company had to be satisfied with the sixth position in the world’s steel manufacturing industry.
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The term acquisition means the attempt of one firm to acquire another firm’s ownership or control either with their mutual consent or against their desire. Tata Steel, founded in 1907, the acquiring firm, is Asia's first and India's largest private sector steel company. Tata Steel, part of the Indian conglomerate Tata Group, was ranked 56th in the list of steelmakers around the world with an output of 5.3 million tons in 2006 (Transforming Vision into reality).
On the other hand, Corus, the acquired firm, was formed on October 6, 1999, with the merger of Dutch group Koninklijke Hoogovens N V and UK's British Steel Plc., based in London Corus was one of the world's largest producers of steel and aluminum, and it employed 47,300 people worldwide and 24,000 people in the United Kingdom.
There are many reasons why these large corporate bodies go for acquisition mainly they are carried to maximize growth by expanding their production and marketing operations. Other reasons are to reduce competition, to achieve diversification, to make optimum use of underutilized resources-men, physical, and managerial skills, to become an empire in the industry, to become rich, to procure wealth, etc, whereas the Tata Steel Makers acquired Corus Steel company with the intension of deriving many benefits such as for creating a good image of becoming one of the leading steel manufacturers in the world, to have a strong position in terms of construction, automotive and packaging market sector, to lower down the cost position in Europe and South East Asia, to double its size and profitability, to expand its scale of operation from 7 MTPA to 25 MTPA in order to reap the benefits of economies of scale, to have more efficient operations through optimization of asset base and material flow including sourcing of raw materials, and semi-finished steel, to face competition globally, and to take the benefit from Corus pan-European network.
After the transaction, the acquired company operates as a part of the acquiring company. The separate identity of the acquired company is lost and it is acquired within the administrative framework of the acquiring company. In our case, the acquiring company is Tata Steel Makers founded in 1907 and it is Asia’s first and India’s largest private sector company and the acquired company is the Corus-the Erstwhile British Steel Major which was found on October 6, 1999, with the merger of Dutch group Koninklijke Hoogovens N V and UK’s British Steel PLc., based in London Corus was one of the world’s largest producers of steel and aluminum. The acquisition between these companies took place on January 31, 2007, with the objective of becoming the world’s largest Steelmaker.
On October 5, 2006, Tata Steel confirmed its interest in acquiring Corus. Tata Steel proposed a $7.6 bn bid for Corus at 455 pence a share in cash on October 26, 2006. Brazil's CSN made an indicative bid of 475 pence a share on November 17, 2006. At this, Tata Steel raised its bid to $9.2 bn at 500 pence per Corus share on December 11, 2006. CSN in response made a formal bid of $9.6 bn at 515 pence a share in cash on the same day (Corus accepts takeover bid by Tata).
Consequently, the UK Takeover Panel set January 30, 2007, as the deadline for Tata Steel and CSN to make revised offers. On January 31, 2007, Tata Steel acquired Corus and took a quantum leap from being ranked 56th in the global steel production to the 6th largest steel producer. The $12.1 bn Tata Steel-Corus deal would be at No. 4 among the top deals witnessed by the steel industry since the late 1990s (Table 1).
Table No. 1 Top Deals in the Steel Industry
At the time of the acquisition, the acquired company had goodwill of the value of £m 83, which was taken as an asset. It was further evaluated for impairment per annum and whenever there is a possible indicator of impairment.
The only ones unimpressed by it all were the stock markets, which fretted over the high cost of the bid and what it might do to Tata Steel's balance sheet. Tata Steel's share fell by INR55 on January 31, 2007, closing 10.66% down at INR463.95, and wiping off INR3,215 crore in investor wealth at one go (Krishnan 2007). Meanwhile, Corus shares rose 6.8% to 601.5 pence in intra-day trading on the London Stock Exchange on January 31, 2007. On the same day, CSN's shares rose 5.3% to 64.96 Brazilian reals on Sao Paulo's Bovespa exchange as the news came as a relief to CNS's investors who feared a CSN-Corus deal would burden the joint company with mounting debt (Cited in Malay 2005).
On January 31, 2007, Tata Steel's Managing Director, Muthuraman, elaborated on the implications of the Corus acquisition. He observed "Firstly, it (Corus) immediately comes in with a capacity of 19 MTPA at a cost of little more than half of what a similar Greenfield site would. Secondly, it (Corus) gives access to developed and mature markets of Europe where one can go downstream much more than say in India or China and where the quality of products and service is important.
Thirdly, Corus has a highly developed Research and Development (R&D) capability and although Tata Steel has better R&D than other Indian players, this is another strength Corus brings to Tata Steel. Another important factor is that the management and work culture is very similar to Tata Steel which will help in integration" (Cited in Q&A 2007).
The senior-level management of Tata Steel indicates that the debt-equity ratio will be maintained at 78:22, at which the first offer was made in October 2006. Based on this, a 20-25% equity dilution can be a possibility for Tata Steel. The equity could be raised in the form of a preferential offer by Tata Steel to Tata Sons. This is likely to be done through Global Depository Receipts (GDRs) in the overseas market or a rights offer to shareholders (Cited in Andy 2007).
This dilution may lower per-share earnings, which might impact the share prices in the next year or so. As Tata Steel plans its six-million-ton greenfield ventures in Orissa, its debt levels may rise sharply (Cited in Revised Acquisition of Corus by Tata Steel 2007).In the third quarter ended September 2006, Corus had an operating margin of 9.2% in comparison with 32% by Tata Steel for the third quarter ended December 2006.
This would in effect mean that Tata Steel is buying operation with substantially lower margins. Another factor worth noting is that while Corus's Dutch units are performing well, its UK Based plants are struggling. Pension liabilities of Corus ($24 bn) will bring down future profitability (Cited in Revised Acquisition of Corus by Tata Steel 2007).
Though retaining the pricing power is one of the goals of the Tata-Corus deal, prices may not remain stable in this divided and disjointed industry where the top five companies after the Tata Corus deal, will control only about 25% of global capacities. But the steel cycle may stabilize only if deals like Arcelor-Mittal and Tata-Corus trigger a further round of consolidation among the top ten producers in the steel industry (Cited in Corus Accepts Takeover Bid by Tata Steel, 2006).
Any meaningful advantages and profits from this deal will emerge only by 2009-10, that is, when Tata Steel would be in a position to export low-cost slabs to Corus. This may not happen in the short-term as neither the Tata Steel's six-million-ton greenfield plant in Orissa nor the expansion in Jamshedpur will lead to the creation in the capacity that can result in surplus slab-making/semi-finished steel capacity exclusively (Cited in Krishnan 2007).
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