Jigar gandhi grand project final report

Analysis of Merger and Acquisition with respect to Case Study of Tata Corus

A PROJECT TO
STUDY
ACQUISITION OF
TATA AND CORUS

0BY

Jigar Gandhi

Roll No- 11

PGDM - 4TH semester

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INTRODUCTION –( MERGERS AND ACQUISITION )
In this changed business paradigm only those organization rule who visualize the possibilities
before they appear as plausible. Present Business environment, characterized by the
globalization and liberalization, accommodates organization that are coming up with
innovative strategies to survive and flourish.
Companies in the global economies climate are thriving to each the pinnacle of the successes
seeking competitive edge of over their rivals. While the waves liberalization and deregulation
have been shaking the corporate shore around the global the domestic organizations are
falling prey to the fierce competition and unprecedented challenges carried by this emerging
business scenario. The recessionary trend consequents to the wall Street tsunami has made for
the organization a maze with no exit .
Drowning in the luxury of producing goods only to keep life simple is suicidal, rather an un
quenched thirst must always prevailing that makes the quest for the value sustainable.
Existence of keen competition with number and volume also made the texture of the
competitor stronger shock absorber both finally and strategically creating a wide exposure for
the business enterprises to build armour for protecting themselves from the threats lying in
and forthcoming from the environment. Thus, organizations are left with no choice except
becoming excellent in all the respects, be it product or process, staff or shareholders,
customers or creditors. The aspiration for all the business comes now is “how to become
world class”.
Achieving business excellences and thereby creating value for a company is considered to be
most vital as well as significant objectives of today’s business enterprises with an aim to
ensure long run survival and sustainable growth over time. Keeping this objectives in mind,
the of corporate restructuring has emerged.
Corporate Restructuring usually implies restructuring the corporate sector from
multidimensional angles with a view to obtain competitive edge and thereby ensuring
business success

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MEANING AND DEFINITIONS
The word Structure is an economic context implies a specific, suitable relationship among the
elements of a particular function or process.
To restructure means the (hopefully) purposeful process of changing the structure of an
institution, a company, an industry, a market, a country, the world economy, etc.
This Structure defines constraints under which institutions function in their day to day
operations and their pursuit or better economic performance.
a)The term Restructuring as per as per Oxford Dictionary means, “to give a new structure to
bind or rearrange.”
b) Sander defines as “Restructuring is an attempt to change the Structure of an institution in
order to relax some or all of the short run constraints It is concerned with the changing
structures in pursuit of long run strategy.
c) Crum & Goldberg, defines Restructuring of a company as “A Set of discrete decisive
measures taken in order to increase the competitiveness of the enterprise and there by to
enhance its value.

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COPORATE RESTRUCTURING

Expansion Contraction Corporate Control Changes In Ownership
Structure

Anti take Share Exchange
over Repurchase others
Mergers and Tender Asset Joint defences
Acquisitions officers Acquisition Ventures
Proxy Contents

Spin o ff Split off Divestitures Equity Caved Spilt up
out

Leveraged MLPs Going Private ESOPs
Buyout

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EXPANSATION
Expansion basically implies expanding or increasing the size and volume of business of the
firm. It generally includes Mergers and Acquisition (Mergers and Acquisition), Tender
officers, Assets acquisition and Joint Ventures.
a) Mergers and Acquisition
A transaction where 2 firms agree to integrate their corporation on a relatively on co-equal
basis is called merger. It defines the fusion of two or more companies through direct
acquisition of the net assets of other(s). It result when the shareholder of more than one
company, usually two, decide to pool the resources of the companies under common entity.
Accordingly, in a manager two or more companies combine into a single unit and lose
individual identities. Acquisition is a strategy where one firm buys a controlling or 100%
interest I another firm with intent of making the a subsidiary within its portfolio.
A takeover is an Acquisition where the target firm did not solicit the bid of the acquiring
firm. It is a strategy of acquiring control over the management. The objective is to
consolidate and acquire large share of the markets The regulatory framework of take over
listed companies is governed by the Securities and Exchange Board of India –SEBI
(substantial Acquisition of Share and Takeovers) Regulation, 1997.
In the case of mergers and consent of the majority of shareholders all companies involved
prerequisite, whereas, in the case of acquisition the controlling interest in a company is
bought with the consent of its manager.

b) Tender Offers
In case of Tender Offer, a public Offer is made for acquiring of the share of the share of the
target company. Here, the acquisition of shares of the target company indicates the
acquisition of management control in that company. For instance, India Cements giving an
open market for the share of Raasi cement.

c) Asset Acquisitions
Asset Acquisition imply buying the assets of another company. Such assets may be Tangible
Assets like; a manufacturing unit of the firm or Intangible Assets like brand, trade mark,

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etc..In the case of assets acquisitions, the acquire company may limit its acquisition to those
parts of the firm which match with the needs of the acquire company.
For instance, Laffarge of France acquired only the cement division of Tata Group. Laffarge
actually acquired only the 1.70 million tone cement plant and the assets related to such
division from Tata Group .Such assets may also be intangible in nature. For example, Coca-
Cola acquired some popular brands like Thumps-up, Limca, Gold Spot, etc, related to soft
drinks from pale and paid total consideration of Rs.170 crore. Ranbaxy Laboratory’s brand
acquisition from Gufic Laboratories must be one of the few cases here the revenues from the
Brands matched projection in the first year after the acquisition.
The four brand– Mox, Exel, Zole, Roxythro-acquired from Guficnelped notch up sales of Rs
72 crore in the first year a 20% improvement over their sales figure under Gufic.

d) Joint Venture
In case of Joint two companies enter onto an agreement and accumulate certain resources
with a view to achieve a particular common business goal. It generally involves fusion of
only a small part of activities of the companies involved in the agreement and usually for
limited period of time duration . The returns arising out of such venture are shared by
partners according to their prearranged agreement.
While entering into any foreign market, multinational companies pursue this strategy of Joint
Venture. For example, in order to manufacturing automobiles in India, Daewoo Motors and
DCM GROUP entered into a Joint Venture.

2) CONTRACTION
COTRACTION is the second form of restricting. In the case of contraction, generally the size
cc gets reduced. Contraction may take place in the form of Spin-Off, Spilt-Off, Divestitures,
Spilt-Ups and Equity-Carved Out.
a) Spin-Offs
A Spin- off is the type of transaction in which a company distributes all the shares owned by
it on its subsidiary to its own shareholders. Such distribution of the share among the
shareholder is made on pro-rata basis. As result, the proportional ownership of the share
shareholders becomes the same in the newegal subsidiary as well as the parent company. The
new entry has its own management and is operated independently without the intervention of
parent company. A Spin-off operated independently without the intervention For Example,

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by spinning of its investment division, Kotak Mahindra Finance Ltd. Formed a subsidiary
known as Kotak Mahindra Capital Corporation.

b) Split-Offs
In the case of Split-Offers, a new company is related in order to take over the operation of an
existing division or unit of company .A portion of existing division or unit of a company
obtain stock in the subsidiary (i.e. the new company) in exchange for stocks of the parent
company. As a result, the equity base of the parent is reduced representing the downsizing of
the firm.
Thus, shareholding of the new entity. Does not imply the shareholding of the parent
company. In the case of a split-off, there is no question of cash inflow to the parent company.
For example, the board of Directors of the Dabur India Ltd. decided to split-off the pharma
segment and transfer it to a new company for the financial year 2002-03. The demerge
proposal was a significant strategic decision reflecting corporate restructuring initiative and
was expected to provide greater focus on independence to the company’s two main
segments. The FMCG business, which would remain within Dabur India ltd., would
concentrate on its core competencies in personal care, health care and Ayurvedic Speciailitis.
The new pharmaceutical company Dabur Pharma Ltd. will focus on its expertise in
Allopathic, Oncology, Formulations and bulk Drugs.

c) Divestitures:
A divestiture involves the sales of a proportion or segment of the company to an external
party. Such sale may cover assets, products lines, subsidiaries or divisions of the undertaking.
A company may a choose to sell an undervalued operation which according to the company
is unrelated or non strategic to is core business activities. The sale produced arising out of
such sale may be utilized for investing in profitable investment opportunities that are
expected to offer potentially higher returns. Divestiture is considered to be a form of
expansion of the buying company and a form of construction on the part of the selling
company.

d) Equity Carved-Out:
A n equity carved-out implies the sale of segment or portion of the firm through an equity
offering to the external parties .Here new Shareholder of equity are sold to outsiders who, in

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turn give them ownership of the portion of the previously existing firm .In that case, a new
legal entity is created. The equity holders in the newly generated entity need not be the same
as the equity holders in the original seller.

e) Split-Ups:
In the case of a split –up, the entire company is broken up in series 0f spin-offs. As a result,
the parent company is broken up in spin –offers. As a result, the present company no longer
exists and only the new off-springs continue to survive.
A split up basically involves the creation of a new class of stock for each of the parent
company no longer exists and only the new off-springs continue to survive. A split-up
basically involves the creation of a new class of stock for each of the parent’s operating
subsidiaries, paying current shareholders a dividend of each new class stock, and then
dissolving the parent company may exchange their stock in one or more of the spin-offs.
Restructuring of the Andhra Pradesh State Electricity Board (APSEB) is the good example of
Split-up. APSEB was split-up in 1999 part of the power sector. The power generation
division and transmission and distribution division of APSEB was transferred to two different
companies namely-APGENCo and APTRANACo respectively. As a result of such split-up,
the APSEB.

3) CORPORATE CONTROL
Corporate Restructuring may be done without necessarily new firms or divesting existing
organizations. Corporate control is another type of restructuring which involves obtaining
control over the management of firm. Controlling here, is basically defined as process
through which top managers influence other related members of an entity to implement the
predetermined organization strategies. The top managers and promoters group who stand to
lose from competitions in the market corporate control may use the democratic rules to
benefit themselves. Ownership and control are not always separated. A large block of shares
may give effective control even when there is no majority owners. Corporate control
generally includes Anti-takeover defence, share repurchases, exchange offers and proxy
contests.
a) Anti- Takeover Defence
It is a technique followed by a company to prevent forcefully acquiring of its managers.
With the high level of hostile takeover activity in recent years, various companies are

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reporting to takeover defences. Such takeover defences may be pre-bid or preventive
defences and post-bid or active defence. Pre-bid or preventive defences are generally
employed with a view to prevent a sudden, un expected hostile bid from obtaining control of
the company. When preventive takeover defences are implemented. Such takeover defenses
attempt at changing the corporate control position of promoters.

b) Share Repurchases
It involves repurchasing its own shares by a company from the market. Share may be
repurchased by following either the tender offer method or through open market method.
Share repurchased is at the also called buy back of the shares, leading to the reduction in the
equity capital of the company. Share buyback facilities in strengthening promoter’s
controlling position in the company by increasing their stake in the equity of the company. It
also used as a takeover to reduced the number of shares that could be purchased by the
potential acquirer.

c) Exchange Offers
Exchange Offers generally provides one or more classes of securities, the right or exchange a
portion or all of their holding for a different classes of securities of the firm. The terms of
exchange offered necessarily involve new securities of greater market value than the pre –
exchange offers announcement market value. Exchange offer includes exchanging common
stock for debt, which reduces leverage. Exchange offers a help company to change its capital
structure while holding the investment policy unaltered.

d) Proxy Contests
The Proxy Contest is a way to take control of a company without owning a majority of its
voting right. So it is an attempt made by a single shareholders or group of shareholder to
undertake control or bring proxy mechanized of corporate.
In a Proxy might, a bidder may attempt to use his voting rights and garner the support from
other shareholders with a view to expel the incumbent board or management. Proxy contests
are less frequently used than tender offer for effecting transfer of control. It provides an
alternative means of corporate control but cost of proxy challenges high. Inefficiency in
proxy context raises the question of adverse selection which is the main disadvantage of
corporate restructuring through proxy contest.

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4 ) CHANGES IN OWNERSHIP STRUCTURE
The fourth group of restructuring activities is the change in ownership structure, which
basically results in change in the structure of ownership in the company. The ownership
structure of a firm affects and its affected by other variables and these variables also
influence the market value .such variables include the levels of principal agent conflicts and
information asymmetry and their effects on other variables like the operating strategy of the
firm, dividend policy, capital structure etc. The various techniques of changing ownership are
leveraged as Buyout, Going Private, MLPs, ESOPs.

a) Leveraged Buyout (LBO)
Buyouts constitute yet another form of corporate restructuring. It happens, when a group of
persons gain control of a company by buying all a majority of its shares. There are two
common types of buyout : Leveraged buyout (LBO) and management buyout (MBO). LBO
is the purchase of assets or the equity of a company where the buyer uses a significant
amount of debt and very little equity capital of his own for the payment of the consideration
for acquisition. Since LBOs cause substantial financial risk. LBO will not be suitable from
corporate restructuring if the acquired firm already has a high degree of the Business risk.

b) Master Limited Partnerships (MLPs)
Master limited partnerships (MLPs) are formed of a general partner and one or more limited
partners. The general partner runs the business and bears unlimited liability. The limited
partnership provides an investor with a direct interest in a group of assets , usually, oil, coal,
gas, etc.. Master limited partnership units are traded publically the stock and thus provide
the investor more liquidity than ordinary limited partnership .
One of the most important advantage of MLP is its elimination of the corporate level and
shareholders are twice on their investment –once at the corporate level and another at the
distribution level of dividends However ,many companies use MLPs to redistribute assets so
that their returns are not subjected to double taxation.

c) Going Private
It is the repurchasing of a company’s outstanding stock by employees or a private investor.
As a result an initiative, the company stops being publically traded. Sometimes, the company
might have take on significant debt to finance the change in ownership structure.

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Companies might want to go private in order to structuring their businesses (when they feel
that the process might affect their stock prices poorly in the short run). They also want to go
private to avoid the expense and regulations associated with remaining listed on a stock
exchange.
d) Employee Stock Option Plan (ESOP)
The term employee stock option (ESOP) means the option given to the whole-time director,
or employee of the company the right to purchase or subscribe at the future date, the
securities offered by the company at a predetermined price. The basis objective of ESOP is to
motivate directors or employee to perform better and improve firm’s value. Apart from
giving financial gains to employees, they also create a sense of owner amongst directors and
employees. ESOPs tend to develop an entrepreneurial spirit among top level management
since they own stock and increase in the stock price, if the firm dose well and to their wealth.
ESOPs also helped companies to attract talent, motive employee by enabling to share the
long-term growth of he company.

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate
finance world. Every day, investment bankers arrange M&A transactions, which bring
separate companies together to form larger ones. When they're not creating big companies
from smaller ones, corporate finance deals do the reverse and break up companies through
spin-offs, carve-outs or tracking stocks. Not surprisingly, these actions often make the news.
Deals can be worth hundreds of millions, or even billions, of dollars or rupees. They can
dictate the fortunes of the companies involved for years to come. For a CEO, leading an
M&A can represent the highlight of a whole career. And it is no wonder we hear about so
many of these transactions; they happen all the time. Next time you flip open the newspaper’s
business section, odds are good that at least one headline will announce some kind of M&A
transaction. Sure, M&A deals grab headlines, but what does this all mean to investors? To
answer this question, this report discusses the forces that drive companies to buy or merge
with others, or to split-off or sell parts of their own businesses. Once you know the different
ways in which these deals are executed, you'll have a better idea of whether you should cheer
or weep when a company you own buys another company - or is bought by one. You will
also be aware of the tax consequences for companies and for investors

Defining M&A

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The Main Idea one plus one makes three: this equation is the special alchemy of a merger or
an acquisition. The key principle behind buying a company is to create shareholder value
over and above that of the sum of the two companies. Two companies together are more
valuable than two separate companies - at least, that's the reasoning behind M&A.
This rationale is particularly alluring to companies when times are tough. Strong companies
will act to buy other companies to create a more competitive, cost-efficient company. The
companies will come together hoping to gain a greater market share or to achieve greater
efficiency. Because of these potential benefits, target companies will often agree to be
purchased when they know they cannot survive alone.

Distinction between Mergers and Acquisitions
Although they are often uttered in the same breath and used as though they were
synonymous, the terms merger and acquisition mean slightly different things. When one
company takes over another and clearly established itself as the new owner, the purchase is
called an acquisition. From a legal point of view, the target company ceases to exist, the
buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense
of the term, 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. This
kind of action is more precisely referred to as a "merger of equals." Both companies' stocks
are surrendered and new company stock is issued in its place. For example, both Daimler-
Benz and Chrysler or Arcellor and Mittal ceased to exist when the two firms merged, and a
new company, DaimlerChrysler and Arcellor-Mittal, was created. In practice, however,
actual mergers of equals don't happen very often. Usually, one company will buy another
and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a
merger of equals, even if it's technically an acquisition. Being bought out often carries
negative connotations, therefore, by describing the deal as a merger, deal makers and top
managers try to make the takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining together is in
the best interest of both of their companies. But when the deal is unfriendly - that is, when the
target company does not want to be purchased - it is always regarded as an acquisition.
Whether a purchase is considered a merger or an acquisition really depends on whether the
purchase is friendly or hostile and how it is announced. In other words, the real difference lies

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in how the purchase is communicated to and received by the target company's board of
directors, employees and shareholders.

Synergy

Synergy is the magic force that allows for enhanced cost efficiencies of the new business.
Synergy takes the form of revenue enhancement and cost savings. By merging, the
companies hope to benefit from the following:
 Staff reductions - As every employee knows, mergers tend to mean job losses. Consider
all the money saved from reducing the number of staff members from accounting,
marketing and other departments. Job cuts will also include the former CEO, who
typically leaves with a compensation package.
 Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new
corporate IT system, a bigger company placing the orders can save more on costs.
Mergers also translate into improved purchasing power to buy equipment or office
supplies - when placing larger orders, companies have a greater ability to negotiate prices
with their suppliers.
 Acquiring new technology - To stay competitive, companies need to stay on top of
technological developments and their business applications. By buying a smaller
company with unique technologies, a large company can maintain or develop a
competitive edge.
 Improved market reach and industry visibility - Companies buy companies to reach
new markets and grow revenues and earnings. A merge may expand two companies'
marketing and distribution, giving them new sales opportunities. A merger can also
improve a company's standing in the investment community: bigger firms often have an
easier time raising capital than smaller ones.

That said, achieving synergy is easier said than done - it is not automatically realized once
two companies merge. Sure, there ought to be economies of scale when two businesses are
combined, but sometimes a merger does just the opposite. In many cases, one and one add up
to less than two. Sadly, synergy opportunities may exist only in the minds of the corporate
leaders and the deal makers. Where there is no value to be created, the CEO and investment

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bankers - who have much to gain from a successful M&A deal - will try to create an image of
enhanced value. The market, however, eventually sees through this and penalizes the
company by assigning it a discounted share price. We'll talk more about why M&A may fail
in a later section of this tutorial.

Varieties of Mergers

From the perspective of business structures, there is a whole host of different mergers. Here
are a few types, distinguished by the relationship between the two companies that are
merging:
 Horizontal merger - Two companies that are in direct competition and share the same
product lines and markets.
 Vertical merger - A customer and company or a supplier and company. Think of a cone
supplier merging with an ice cream maker.
 Market-extension merger - Two companies that sell the same products in different
markets.
 Product-extension merger - Two companies selling different but related products in the
same market.
 Conglomeration - Two companies that have no common business areas. There are two
types of mergers that are distinguished by how the merger is financed. Each has certain
implications for the companies involved and for investors:
 Purchase Mergers - As the name suggests, this kind of merger occurs when one
company purchases another. The purchase is made with cash or through the issue of some
kind of debt instrument; the sale is taxable. Acquiring companies often prefer this type of
merger because it can provide them with a tax benefit. Acquired assets can be written-up
to the actual purchase price, and the difference between the book value and the purchase
price of the assets can depreciate annually, reducing taxes payable by the acquiring
company. We will discuss this further in part four of this tutorial.
 Consolidation Mergers - With this merger, a brand new company is formed and both
companies are bought and combined under the new entity. The tax terms are the same as
those of a purchase merger.

Acquisitions

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An acquisition may be only slightly different from a merger. In fact, it may be different in
name only. Like mergers, acquisitions are actions through which companies seek economies
of scale, efficiencies and enhanced market visibility.

Unlike all mergers, all acquisitions involve one firm purchasing another - there is no
exchange of stock or consolidation as a new company. Acquisitions are often congenial, and
all parties feel satisfied with the deal. Other times, acquisitions are more hostile. In an
acquisition, as in some of the merger deals we discuss above, a company can buy another
company with cash, stock or a combination of the two. Another possibility, which is common
in smaller deals, is for one company to acquire all the assets of another company. Company X
buys all of Company Y's assets for cash, which means that Company Y will have only cash
(and debt, if they had debt before). Of course, Company Y becomes merely a shell and will
eventually liquidate or enter another area of business. Another type of acquisition is a reverse
merger, a deal that enables a private company to get publicly-listed in a relatively short time
period. A reverse merger occurs when a private company that has strong prospects and is
eager to raise financing buys a publicly-listed shell company, usually one with no business
and limited assets. The private company reverse merges into the public company, and
together they become an entirely new public corporation with tradable shares. Regardless of
their category or structure, all mergers and acquisitions have one common goal: they are all
meant to create synergy that makes the value of the combined companies greater than the
sum of the two parts. The success of a merger or acquisition depends on whether this synergy
is achieved.

Valuation Matters
Investors in a company that is aiming to take over another one must determine whether the
purchase will be beneficial to them. In order to do so, they must ask themselves how much
the company being acquired is really worth.
Naturally, both sides of an M&A deal will have different ideas about the worth of a target
company: its seller will tend to value the company at as high of a price as possible, while the
buyer will try to get the lowest price that he can.

There are, however, many legitimate ways to value companies. The most common method is
to look at comparable companies in an industry, but deal makers employ a variety of other
methods and tools when assessing a target company. Here are just a few of them:

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1. Comparative Ratios - The following are two examples of the many comparative metrics
on which acquiring companies may base their offers:

 Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring company
makes an offer that is a multiple of the earnings of the target company. Looking at the P/E
for all the stocks within the same industry group will give the acquiring company good
guidance for what the target's P/E multiple should be.
 Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring company
makes an offer as a multiple of the revenues, again, while being aware of the price-to-
sales ratio of other companies in the industry.

2. Replacement Cost
In a few cases, acquisitions are based on the cost of replacing the target company. For
simplicity's sake, suppose the value of a company is simply the sum of all its equipment and
staffing costs. The acquiring company can literally order the target to sell at that price, or it
will create a competitor for the same cost. Naturally, it takes a long time to assemble good
management, acquire property and get the right equipment. This method of establishing a
price certainly wouldn't make much sense in a service industry where the key assets - people
and ideas - are hard to value and develop.

3. Discounted Cash Flow (DCF)
A key valuation tool in M&A, discounted cash flow analysis determines a company's current
value according to its estimated future cash flows. Forecasted free cash flows (operating
profit + depreciation + amortization of goodwill – capital expenditures – cash taxes - change
in working capital) are discounted to a present value using the company's weighted average
costs of capital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this
valuation method.

Synergy: The Premium for Potential Success
For the most part, acquiring companies nearly always pay a substantial premium on the stock
market value of the companies they buy. The justification for doing so nearly always boils
down to the notion of synergy; a merger benefits shareholders when a company's post-merger

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share price increases by the value of potential synergy. Let's face it, it would be highly
unlikely for rational owners to sell if they would benefit more by not selling.

That means buyers will need to pay a premium if they hope to acquire the company,
regardless of what pre-merger valuation tells them. For sellers, that premium represents their
company's future prospects. For buyers, the premium represents part of the post-merger
synergy they expect can be achieved. The following equation offers a good way to think
about synergy and how to determine whether a deal makes sense. The equation solves for the
minimum required synergy:

In other words, the success of a merger is measured by whether the value of the buyer is
enhanced by the action. However, the practical constraints of mergers, which discussed often
prevent the expected benefits from being fully achieved. Alas, the synergy promised by deal
makers might just fall short.
What to Look For - It's hard for investors to know when a deal is worthwhile. The burden of
proof should fall on the acquiring company. To find mergers that have a chance of success,
investors should start by looking for some of these simple criteria given as below.
 A reasonable purchase price - A premium of, say, 10% above the market price seems
within the bounds of level-headedness. A premium of 50%, on the other hand, requires
synergy of stellar proportions for the deal to make sense. Stay away from companies that
participate in such contests.
 Cash transactions - Companies that pay in cash tend to be more careful when calculating
bids and valuations come closer to target. When stock is used as the currency for
acquisition, discipline can go by the wayside.
 Sensible appetite – An acquiring company should be targeting a company that is smaller
and in businesses that the acquiring company knows intimately. Synergy is hard to create
from companies in disparate business areas. Sadly, companies have a bad habit of biting
off more than they can chew in mergers.
Mergers are awfully hard to get right, so investors should look for acquiring companies with
a healthy grasp of reality.

Doing the Deal

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Start with an Offer When the CEO and top managers of a company decide that they want to
do a merger or acquisition, they start with a tender offer. The process typically begins with
the acquiring company carefully and discreetly buying up shares in the target company, or
building a position. Once the acquiring company starts to purchase shares in the open market,
it is restricted to buying 5% of the total outstanding shares before it must file with the SEC.
In the filing, the company must formally declare how many shares it owns and whether it
intends to buy the company or keep the shares purely as an investment.
Working with financial advisors and investment bankers, the acquiring company will arrive
at an overall price that it's willing to pay for its target in cash, shares or both. The tender offer
is then frequently advertised in the business press, stating the offer price and the deadline by
which the shareholders in the target company must accept (or reject) it.
The Target's Response
Once the tender offer has been made, the target company can do one of several things:
 Accept the Terms of the Offer - If the target firm's top managers and shareholders are
happy with the terms of the transaction, they will go ahead with the deal.
 Attempt to Negotiate - The tender offer price may not be high enough for the target
company's shareholders to accept, or the specific terms of the deal may not be attractive.
In a merger, there may be much at stake for the management of the target - their jobs, in
particular. If they're not satisfied with the terms laid out in the tender offer, the target's
management may try to work out more agreeable terms that let them keep their jobs or,
even better, send them off with a nice, big compensation package. Not surprisingly,
highly sought-after target companies that are the object of several bidders will have
greater latitude for negotiation. Furthermore, managers have more negotiating power if
they can show that they are crucial to the merger's future success.
 Execute a Poison Pill or Some Other Hostile Takeover Defense – A poison pill
scheme can be triggered by a target company when a hostile suitor acquires a
predetermined percentage of company stock. To execute its defense, the target company
grants all shareholders - except the acquiring company - options to buy additional stock at
a dramatic discount. This dilutes the acquiring company's share and intercepts its control
of the company.
 Find a White Knight - As an alternative, the target company's management may seek out
a friendlier potential acquiring company, or white knight. If a white knight is found, it
will offer an equal or higher price for the shares than the hostile bidder.

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Mergers and acquisitions can face scrutiny from regulatory bodies. For example, if the two
biggest long-distance companies in the U.S., AT&T and Sprint, wanted to merge, the deal
would require approval from the Federal Communications Commission (FCC). The FCC
would probably regard a merger of the two giants as the creation of a monopoly or, at the
very least, a threat to competition in the industry.

Closing the Deal
Finally, once the target company agrees to the tender offer and regulatory requirements are
met, the merger deal will be executed by means of some transaction. In a merger in which
one company buys another, the acquiring company will pay for the target company's shares
with cash, stock or both. A cash-for-stock transaction is fairly straightforward: target
company shareholders receive a cash payment for each share purchased. This transaction is
treated as a taxable sale of the shares of the target company. If the transaction is made with
stock instead of cash, then it's not taxable. There is simply an exchange of share certificates.
The desire to steer clear of the tax man explains why so many M&A deals are carried out as
stock-for-stock transactions. When a company is purchased with stock, new shares from the
acquiring company's stock are issued directly to the target company's shareholders, or the
new shares are sent to a broker who manages them for target company shareholders. The
shareholders of the target company are only taxed when they sell their new shares. When the
deal is closed, investors usually receive a new stock in their portfolios - the acquiring
company's expanded stock. Sometimes investors will get new stock identifying a new
corporate entity that is created by the M&A deal.
Break Ups
As mergers capture the imagination of many investors and companies, the idea of getting
smaller might seem counterintuitive. But corporate break-ups, or de-mergers, can be very
attractive options for companies and their shareholders.
Advantages
The rationale behind a spin-off, tracking stock or carve-out is that "the parts are greater than
the whole." These corporate restructuring techniques, which involve the separation of a
business unit or subsidiary from the parent, can help a company raise additional equity funds.
A break-up can also boost a company's valuation by providing powerful incentives to the
people who work in the, making it more difficult to attract interest from institutional
investors. Meanwhile, there are the extra costs that the parts of the business face if separated.

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When a firm divides itself into smaller units, it may be losing the separating unit, and help the
parent's management to focus on core operations. Most importantly, shareholders get better
information about the business unit because it issues separate financial statements. This is
particularly useful when a company's traditional line of business differs from the separated
business unit. With separate financial disclosure, investors are better equipped to gauge the
value of the parent corporation. The parent company might attract more investors and,
ultimately, more capital. Also, separating a subsidiary from its parent can reduce internal
competition for corporate funds. For investors, that's great news: it curbs the kind of negative
internal wrangling that can compromise the unity and productivity of a company. For
employees of the new separate entity, there is a publicly traded stock to motivate and reward
them. Stock options in the parent often provide little incentive to subsidiary managers,
especially because their efforts are buried in the firm's overall performance.

Disadvantages

That said, de-merged firms are likely to be substantially smaller than their parents, possibly
making it harder to tap credit markets and costlier finance that may be affordable only for
larger companies. And the smaller size of the firm may mean it has less representation on
major indexes synergy that it had as a larger entity. For instance, the division of expenses
such as marketing, administration and research and development (R&D) into different
business units may cause redundant costs without increasing overall revenues.
Restructuring Methods
There are several restructuring methods: doing an outright sell-off, doing an equity carve-out,
spinning off a unit to existing shareholders or issuing tracking stock. Each has advantages
and disadvantages for companies and investors. All of these deals are quite complex.

Sell-Offs
A sell-off, also known as a divestiture, is the outright sale of a company subsidiary.
Normally, sell-offs are done because the subsidiary doesn't fit into the parent company's core
strategy. The market may be undervaluing the combined businesses due to a lack of synergy
between the parent and subsidiary. As a result, management and the board decide that the
subsidiary is better off under different ownership. (IPO) of shares, amounting to a partial sell-
off. A new publicly-listed company is created, but the parent keeps a controlling stake in the
newly traded subsidiary. A carve-out is a strategic avenue a parent firm may take when one

22


of its subsidiaries is growing faster and carrying higher valuations than other businesses
owned by the parent. A carve-out generates cash because shares in the subsidiary are sold to
the public, but the issue also unlocks the value of the subsidiary unit and enhances the
parent's shareholder value. The new legal entity of a carve-out has a separate board, but in
most carve-outs, the parent retains some control. In these cases, some portion of the parent
firm's board of directors may be shared. Since the parent has a controlling stake, meaning
both firms have common shareholders, the connection between the two will likely be strong.
That said, sometimes companies carve-out a subsidiary not because it's doing well, but
because it is a burden. Such an intention won't lead to a successful result, especially if a
carved-out subsidiary is too loaded with debt, or had trouble even when it was a part of the
parent and is lacking an established track record for growing revenues and profits. Carve-outs
can also create unexpected friction between the parent and subsidiary. Problems can arise as
managers of the carved-out company must be accountable to their public shareholders as well
as the owners of the parent company. This can create divided loyalties.

Equity Carve-Outs
More and more companies are using equity carve-outs to boost shareholder value. A parent
firm makes a subsidiary public through a raider’s initial public offering stock dividend
meaning they don't grant shareholders the same voting rights as those of the main stock. Each
share of tracking stock may have only a half or a quarter of a vote. In rare cases, holders of
tracking stock have no vote at all. Like carve-outs, spin-offs are usually about separating a
healthy operation. In most cases, spin-offs unlock hidden shareholder value. For the parent
company, it sharpens management focus. For the spin-off company, management doesn't
have to compete for the parent's attention and capital. Once they are set free, managers can
explore new opportunities. Investors, however, should beware of throw-away subsidiaries the
parent created to separate legal liability or to off-load debt. Once spin-off shares are issued to
parent company shareholders, some shareholders may be tempted to quickly dump these
shares on the market, depressing the share valuation.

Tracking Stock
A tracking stock is a special type of stock issued by a publicly held company to track the
value of one segment of that company. The stock allows the different segments of the
company to be valued differently by investors. Let's say a slow-growth company trading at a
low (P/E ratio) happens to have a fast growing business unit. The company might issue a

23


tracking stock so the market can value the new business separately from the old one and at a
significantly higher P/E rating. Why would a firm issue a tracking stock rather than spinning-
off or carving-out its fast growth business for shareholders? The company retains control
over the subsidiary; the two businesses can continue to enjoy synergies and share marketing,
administrative support functions, a headquarters and so on. Finally, and most importantly, if
the tracking stock climbs in value, the parent company can use the tracking stock it owns to
make acquisitions. Still, shareholders need to remember that tracking stocks are price-
earnings ratio class B.

Why They Can Fail
It's no secret that plenty of mergers don't work. Those who advocate mergers will argue that
the merger will cut costs or boost revenues by more than enough to justify the price premium.
It can sound so simple: just combine computer systems, merge a few departments, use sheer
size to force down the price of supplies and the merged giant should be more profitable than
its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry.
Historical trends show that roughly two thirds of big mergers will disappoint on their own
terms, which means they will lose value on the stock market. The motivations that drive
mergers can be flawed and efficiencies from economies of scale may prove elusive. In many
cases, the problems associated with trying to make merged companies work are all too
concrete.

Flawed Intentions
For starters, a booming stock market encourages mergers, which can spell trouble. Deals
done with highly rated stock as currency are easy and cheap, but the strategic thinking behind
them may be easy and cheap too. Also, mergers are often attempt to imitate: somebody else
has done a big merger, which prompts other top executives to follow suit. A merger may
often have more to do with glory-seeking than business strategy. The executive ego, which is
boosted by buying the competition, is a major force in M&A, especially when combined with
the influences from the bankers, lawyers and other assorted advisers who can earn big fees
from clients engaged in mergers. Most CEOs get to where they are because they want to be
the biggest and the best, and many top executives get a big bonus for merger deals, no matter
what happens to the share price later. On the other side of the coin, mergers can be driven by
generalized fear.

24


Globalization, the arrival of new technological developments or a fast-changing economic
landscape that makes the outlook uncertain are all factors that can create a strong incentive
for defensive mergers. Sometimes the management team feels they have no choice and must
acquire a rival before being acquired. The idea is that only big players will survive a more
competitive world.

The Obstacles to making it Work

Coping with a merger can make top managers spread their time too thinly and neglect their
core business, spelling doom. Too often, potential difficulties seem trivial to managers caught
up in the thrill of the big deal. The chances for success are further hampered if the corporate
cultures of the companies are very different. When a company is acquired, the decision is
typically based on product or market synergies, but cultural differences are often ignored. It's
a mistake to assume that personnel issues are easily overcome. For example, employees at a
target company might be accustomed to easy access to top management, flexible work
schedules or even a relaxed dress code. These aspects of a working environment may not
seem significant, but if new management removes them, the result can be resentment and
shrinking productivity. More insight into the failure of mergers is found in the highly
acclaimed study from McKinsey, a global consultancy. The study concludes that companies
often focus too intently on cutting costs following mergers, while revenues, and ultimately,
profits, suffer. Merging companies can focus on integration and cost-cutting so much that
they neglect day-to-day business, thereby prompting nervous customers to flee. This loss of
revenue momentum is one reason so many mergers fail to create value for shareholders. But
remember, not all mergers fail. Size and global reach can be advantageous, and strong
managers can often squeeze greater efficiency out of badly run rivals. Nevertheless, the
promises made by deal makers demand the careful scrutiny of investors. The success of
mergers depends on how realistic the deal makers are and how well they can integrate two
companies while maintaining day-to-day operations.

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26


TATA STEEL

27


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Founder : Jamsedji Tata

Founded : 1907

Head Quarter : Mumbai

Area Served : World wide

Product : Steel, Long Steel, wire products

Employees : 81,000

Plant Location : Jamshedpur

Stock Exchange : Recognized by BSE, NSE

 TISCO ( Tata Iron and Steel Company) formerly called :

 Is an Indian Multinational company

 10th largest steel producing with annually having 23.5 metric tones steel capacity

 Tata Steel has been ranked #401 in Fortune Global 500

 Tata Steel has a presences in around 50 countries with a manufacturing operations in 26
countries till date

 Major Competitors are Arcelor Mittal, Essar Steel, JSW (Jindal Steel Work), SAIL etc

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Tata Steel Background

• Tata Steel a part of the Tata group, one of the largest diversified business
conglomerates in India.

• Founded in 1907,by Jamshedji Nusserwanji Tata.

• Started with a production capacity of 1,00,000 tones, has transformed into a global
giant

• In the mid- 1990s, Tata steel emerged as Asia’s first and India’s largest integrated
steel producer in the private sector.

• In February 2005, Tata steel acquired the Singapore based steel manufacturer
NatSteel, that let the company gain access to major Asian markets and Australia.

• Tata steel acquired the Thailand based Millennium Steel in December 2005.

Tata Steel generated net sales of Rs.175 billion in the financial year 2006-07.
• The company’s profit before tax in the same year was Rs. 64.14 billion while its
profit after tax was Rs. 42.22 billion.

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CORUS

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 Founder : Karl Ulrich Kohler

 Founded : 1985

 Head Quarter : London, UK

 Corus Group : Koninklijke Hoogovens & British Steel (1999)

 Employees : 50,000

 Area Served : World-Wide.

 Rating : It is world 6th largest company

2nd in Europe

1st in United Kingdom

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 our group was formed through the merger of Koninklijke and British Steel in year
October 1999

 The plants are located at United Kingdom and at the Netherland.

 The company was recognized as the world's best steel producer by World Steel
Dynamics.

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LITERATURE REVIEW – THE STEEL INDUSTRY

THE GLOBAL STEEL INDUSTRY
The current global steel industry is in its best position in comparing to last decades. The price
has been rising continuously. The demand expectations for steel products are rapidly growing
for coming years. The shares of steel industries are also in a high pace. The steel industry is
enjoying its 6th consecutive years of growth in supply and demand. And there is many more
merger and acquisitions which overall buoyed the industry and showed some good results.
The subprime crisis has lead to the recession in economy of different Countries, which may
lead to have a negative effect on whole steel industry in coming years. However steel
production and consumption will be supported by continuous economic growth.

CONTRIBUTION OF COUNTRIES TO GLOBAL STEEL INDUSTRY

Fig-1

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The countries like China, Japan, India and South Korea are in the top of the above in steel
production in Asian countries. China accounts for one third of total production i.e. 419m ton,
Japan accounts for 9% i.e. 118m ton, India accounts for 53m ton and South Korea is
accounted for 49m ton, which all totally becomes more than 50% of global production. Apart
from this USA, BRAZIL, UK accounts for the major chunk of the whole growth.
The steel industry has been witnessing robust growth in both domestic as well as international
markets. In this article, let us have a look at how has the steel industry performed globally in
2007.

Capacity: The global crude steel production capacity has grown by around 7% to 1.6 bn in
2007 from 1.5 bn tonnes in 2006. The capacity has shown a growth rate of 7% CAGR since
2003. The additions to capacity over last few years have ranged from 36 m tonnes in 2004 to
108 m tonnes in 2007. Asian region accounts for more than 60% of the total production
capacity of world, backed mainly by capacity in China, Japan, India, Russia and South Korea.
These nations are among the top steel producers in the world.

Fig-2

Production: The global steel production stood at 1.3 bn tonnes in 2007, showing an increase
of 7.5% as compared to 2006 levels. The global steel production showed a growth of 8%
CAGR between 2003 and 2007. China accounts for around 36% of world crude steel
production followed by Japan (9%), US (7%), Russia (5%) and India (4%). In 2007, all the

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top five steel producing countries have showed an increase in production except US, which
showed a decline.

Rank Country Production (mn tonnes) World share (%)
1 China 489 36.0%

2 Japan 120 9.0%

3 US 98 7.0%

4 Russia 72 5.0%

5 India 53 4.0%

6 South Korea 51 3.5%
Source: JSW Steel AR FY08
Table-1
Consumption: The global steel consumption grew by 6.6% to 1.2 bn tonnes as compared to
2006 levels. The global finished steel consumption showed a growth of 8% CAGR, in line
with the production, between the period 2003 and 2007. The finished steel consumption in
China and India grew by 13% and 11% respectively in 2007. The BRIC countries were the
major demand drivers for steel consumption, accounting for nearly 80% of incremental steel
consumption in 2007.
Rank Country Consumption (mn tonnes) World share (%)

1 China 408 36.0%

2 US 108 9.0%

3 Japan 80 6.7%

4 South Korea 55 4.6%

5 India 51 4.2%

6 Russia 40 3.3%
Source: JSW Steel AR
FY08
Table-2
Outlook: As per IISI estimates, the finished steel consumption in world is expected to reach
a level of 1.75 bn tonnes by 2016, growth of 4% CAGR over the consumption level of 2007.
The steel consumption in 2008 and 2009 is estimated to grow above 6%

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Indian Steel Industry
India, which has emerged among the top five steel producing and consuming countries over
the last few years, backed by strong growth in its economy.
Capacity: Steel capacity increased by 6% to 60 m tonnes in FY08. It registered a robust
growth of 8% CAGR between the period FY04 and FY08. The capacity expansion in the
country was primarily through brown field expansions as it requires lower investments than a
greenfield expansion.

Fig-3

Production: Steel production has registered a growth of 6% to reach a level of 54 m tonnes
in FY8. The production has grown nearly in line with the capacity expansion and registered a
growth of 7% CAGR with an average capacity utilization of 92% between the period FY04
and FY08. India is currently the fifth largest producer of steel in the world, contributing
almost 4% of the total steel production in world. The top three steel producing companies
(SAIL, Tata Steel and JSW Steel) contributed around 45% of the total steel production in
FY08.

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Fig-4

Consumption: Steel consumption has increased by 10% to 51.5 m tonnes in FY08.
Consumption growth has been exceeding production growth since past few years. It grew at a
CAGR of 12% between FY04 and FY08. Construction & infrastructure, manufacturing and
automobile sectors accounted for 59%, 13% and 11% for the total consumption of steel
respectively in FY08. Although steel consumption is rapidly growing in the country, the per
capita steel consumption still stands at 48 kgs. Moreover, in the rural areas in the country, it
stands at a mere 2 kg. It should be noted that the world’s average per capita steel
consumption was 189 kg and while that of China was 309 kg in 2007.

Fig-5

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Trade equations: India became net importer of steel in FY08 with estimated net imports of
1.9 m tonnes. In the past few years, its exports have remained at more or less the same levels
while on the other hand, imports have increased on the back of robust demand and capacity
constraints in the domestic markets. The imports showed a growth of around 48% while
exports declined by around 6% in FY08.
Outlook: As per IISI estimates, the demand for steel in India are expected to grow at a rate of
9% and 12% in 2008 and 2009. The medium term outlook for steel consumption remains
extremely bullish and is estimated at an average of above 10% in the next few years.

TATA Vs. CORUS
Corus
The Corus was created by the merger of British Steel and Dutch steel company, Hoogovens.
Corus was Europe’s second largest steel producer with a production of 18.2 million tonnes
and revenue of GDP 9.2 billion (in 2005). The product mix consisted of Strip steel products,
Long products, Distribution and building system and Aluminum. With the merger of British
Steel and Hoogovens there were two assets the British plant asset which was older and less
productive and the Dutch plant asset which was regarded as the crown jewel by every one in
the industry. They have union issues and are burdened with more than $ 13 billion of pension
liabilities. The Corus was making only a profit of $ 1.9 billion from its 18.2 million tonnes
production per year (compared to $ 1.5 billion form 8.7 million tone capacity by Tata).
The Corus was having leading market position in construction and packaging in Europe with
leading R&D. The Corus was the 9th largest steel producer in the world. It opened its bid for
100 % stake late in the 2006. Tata (India) & CSN (Companhia Siderurgica Nacional)
emerged as most powerful bidders.

CSN (Companhia Siderurgica Nacional)
CSN (Companhia Siderurgica Nacional) was incorporated in the year 1941. The company
initially focused on the production of coke, pig iron castings and long products. The company
was having three main expansions at the Presidente Vargas Steel works during the 1970’s and
1980’s. The first completed in the year 1974, increased installed capacity to 1.6 million tons
of crude steel. The second completed in 1977, raised capacity to 2.4 million tons of crude

39


steel. The third completed in the year 1989, increased capacity to 4.5 million tons of crude
steel. The company was privatized by the Brazilian government by selling 91 % of its share.
The Mission of CNS is to increase value for the shareholders. Maintain position as one of the
world’s lowest-cost steel producer. Maintain a high EBITDA and strengthen position as a
global player. CNS is having fully integrated manufacturing facilities. The crude steel
capacity was 5.6 million tons. The product mix consisted of Slabs, Hot and Cold rolled
Galvanized and Tin mill products. In 2004 CSN sold steel products to customers in Brazil
and 61 other countries. In 2002, 65 % of the steel sales were in domestic market and
operating revenues were 70 %. In 2003, the same figures were 59 % and 61 % and in 2004
the same figures were 71% and 73 %. The principal export markets for CSN were North
America (44%),Europe(32%) and Asia(11%).

Tata Steel

Tata steel, India’s largest private sector steel company was established in the 1907.The Tata
steel which falls under the umbrella of Tata sons has strong pockets and strong financials to
support acquisitions. Tata steel is the 55th in production of steel in world. The company has
committed itself to attain global scale operations.
Production capacity of Tata steel is given in the table below:-

Table-3

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The product mix of Tata steel consist of flat products and long products which are in the
lower value chain. The Tata steel is having a low cost of production when compared to
Corus. The Tata steel was already having its capacity expansion with its indigenous projects
to the tune of 28 million tones.

Indian Scenario

After liberalization, there have been no shortages of iron and steel materials in the country.
Apparent consumption of finished (carbon) steel increased from 14.84 Million tonnes in
1991-92 to 39.185 million tonnes (Provisional) in 2005-06. The steel industry which was
facing a recession for some time has staged a turn around since the beginning of 2002.
Demand has started showing an uptrend on account of infrastructure boom. The steel industry
is buoyant due to strong growth in demand particularly by the demand for steel in China. The
Steel industry was de-licensed and de-controlled in 1991 & 1992 respectively. Today, India is
the 7th largest crude steel producer of steel in the world. In 2005-06, production of Finished
(Carbon) Steel was 44.544 million tonnes. Production of Pig Iron in 2005-06 was 4.695
Million Tonnes. The share of Main Producers (i.e. SAIL, RINL and TSL) and secondary
producers in the total production of Finished (Carbon) steel was 36% and 64% respectively
during the period of April-November, 2006.
Corus decides to sell Reasons for decision:
 Total debt of Corus is 1.6bn GBP
 Corus needs supply of raw material at lower cost
 Though Corus has revenues of $18.06bn, its profit was just $626mn (Tata’s revenue was
$4.84 bn & profit $ 824mn)
 Corus facilities were relatively old with high cost of production
 Employee cost is 15 %( Tata steel- 9%)
Tata Decides to bid: Reasons for decision:
 Tata is looking to manufacture finished products in mature markets of Europe.
 At present manufactures low value long and flat steel products while Corus produces
high value stripped products
 A diversified product mix will reduce risks while higher end products will add to
bottom line.
 Corus holds a number of patents and R & D facility.

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 Cost of acquisition is lower than setting up a green field plant and marketing and
distribution channels
 Tata is known for efficient handling of labour and it aims at reducing employee cost
and improving productivity at Corus
 It had already expanded its capacities in India.
 It will move from 55th in world to 5th in production of steel globally.

Tata Steel Vs CSN: The Bidding War
There was a heavy speculation surrounding Tata Steel's proposed takeover of Corus ever
since Ratan Tata had met Leng in Dubai, in July 2006. On October 17, 2006, Tata Steel made
an offer of 455 pence a share in cash valuing the acquisition deal at US$ 7.6 billion. Corus
responded positively to the offer on October 20, 2006.
Agreeing to the takeover, Leng said, "This combination with Tata, for Corus shareholders
and employees alike, represents the right partner at the right time at the right price and on the
right terms." In the first week of November 2006, there were reports in media that Tata was
joining hands with Corus to acquire the Brazilian steel giant CSN which was itself keen on
acquiring Corus. On November 17, 2006, CSN formally entered the foray for acquiring Corus
with a bid of 475 pence per share. In the light of CSN's offer, Corus announced that it would
defer its extraordinary meeting of shareholders to December 20, 2006 from December 04,
2006, in order to allow counter offers from Tata Steel and CSN...
Financing the Acquisition
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
The Integration Efforts
Industry experts felt that Tata Steel should adopt a 'light handed integration’ approach, which
meant that Ratan Tata should bring in some changes in Corus but not attempt a complete
overhaul of Corus'systems (Refer Exhibit XI and Exhibit XII for projected financials of Tata-
Corus). N Venkiteswaran, Professor, Indian Institute of Management, Ahmedabad said, “If
the target company is managed well, there is no need for a heavy-handed integration. It
makes sense for the Tatas to allow the existing management to continue as before.

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The Synergies
Most experts were of the opinion that the acquisition did make strategic sense for Tata Steel.
After successfully acquiring Corus, Tata Steel became the fifth largest producer of steel in the
world, up from fifty-sixth position.There were many likely synergies between Tata Steel, the
lowest-cost producer of steel in the world, and Corus, a large player with a significant
presence in value-added steel segment and a strong distribution network in Europe. Among
the benefits to Tata Steel was the fact that it would be able to supply semi-finished steel to
Corus for finishing at its plants, which were located closer to the high-value markets.
The Pitfalls
Though the potential benefits of the Corus deal were widely appreciated, some analysts had
doubts about the outcome and effects on Tata Steel's performance. They pointed out that
Corus' EBITDA (earnings before interest, tax, depreciation and amortization) at 8 percent
was much lower than that of Tata Steel which was at 30 percent in the financial year 2006-07.
The Road Ahead
Before the acquisition, the major market for Tata Steel was India. The Indian market
accounted for sixty nine percent of the company's total sales. Almost half of Corus'
production of steel was sold in Europe (excluding UK). The UK consumed twenty nine
percent of its production.

After the acquisition, the European market (including UK) would consume 59 percent of the
merged entity's total production.

Tata - Corus: Visionary deal or costly blunder?

After four months of twists and turns, Tata Steel has won the race to acquire Corus Group.
The bidding war between Tata Steel and Brazilian company CSN was riveting and ended in a
rapid-fire auction. Initial reactions to the deal were highly diverse and retail investors were
completely puzzled by the market reaction.
Going by the stock market reaction, the acquisition was a big blunder. The stock tanked 10.5
per cent after the deal was announced and another 1.6 per cent. Investors were worried about
the financial risks of such a costly deal.

43


Media reaction to the deal had been just the opposite. Almost all the reports were adulatory
while editorials praised the coming of age of Indian industry. A prominent financial daily
presented the deal almost as revenge of the natives against the old colonial masters with a
picture of London covered in our national colours. Its editorial warned the market 'not to bet
against Tata', citing the previous instances when skeptics were proved wrong by the group.
Official reaction had been no different and the finance minister even offered all possible help
to the Tata Group.
Was the acquisition too costly for Tata Steel? Was price the only criterion while evaluating
an acquisition? Should managers focus on keeping shareholders happy after every quarter or
should they focus on the long-term, big picture? These are tough questions and,
unfortunately, answers would be clear only after many years - at least in this case.

When could the steel cycle turn?
The last few years were some of the best ever for the global steel industry as robust demand
from emerging economies like China pushed up prices. Profits of steel manufacturers across
the globe swelled and their market capitalizations have multiplied many times.

Global Steel output
(in million tonnes)
Country 2005 2006 % change
China 355.8 418.8 17.7
Japan 112.5 116.2 3.3
US 94.9 98.5 3.8
Russia 66.1 70.6 6.8
South Korea 47.8 48.4 1.3
Germany 44.5 47.2 6.1
India 40.9 44.0 7.6
Ukraine 38.6 40.8 5.7
Italy 29.4 31.6 7.5

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Brazil 31.6 30.9 (2.2)
World production 1,028.8 1,120.7 8.9

Table-4
How long will the good times last? Tata Steel believes the steel cycle is in a long-term up
trend and the risk of a downturn in prices is low. In fact, managing director B Muthuraman
said the global steel industry might witness sustained growth as during the 30-year period
between 1945 and 1975.
The massive post-war infrastructure build-up in Western countries led to the sustained steel
demand growth in that period. The coming decades would see similar infrastructure spending
in emerging economies and steel demand would continue to grow, according to this view.
The International Iron and Steel Institute (IISI), a respected steel research body, corroborates
this in its outlook. The growth in demand for global steel would average 4.9 per cent per year
till 2010 according to the IISI. Between 2010 and 2015, demand growth is expected to
moderate to 4.2 per cent per annum according to IISI forecasts. Much of this demand growth
would come from China and India, where the IISI estimates growth rates to be 6.2 per cent
and 7.7 per cent annually from 2010 to 2015.
Now let’s consider steel prices. Expectations of sustained demand growth have already led to
massive capacity additions, mostly in emerging markets. Chinese steel capacity has expanded
significantly over the last decade while a large number of mega steel plants are being planned
in India. Capacity additions by Russian and Brazilian steelmakers would also be significant in
future as they have access to raw material.
Would the capacity additions outrun the demand growth and lead to subdued steel prices?
Under normal circumstances, that could have been a very strong possibility. But many
industry leaders believe that the global steel industry would see a structural shift in the
coming years.
Some of the inefficient steel mills in mature markets would face closure while others would
shift production to high value-added products using unfinished and semi-finished steel
supplied by steel mills in locations like India, Russia and Brazil with access to raw material.
This would limit aggregate supply growth and keep prices stable in future.
Major global steel makers are also not unduly worried about the possibility of large-scale
exports from China, which would depress international steel prices. Chinese capacity is
expected to continue to grow in the coming years, but so would the demand.

45


Besides, Chinese steel plants are not expected to emerge very efficient as they depend on
imported raw materials, which limit their pricing power. Many steel analysts expect
significant consolidation in the Chinese steel industry as margins erode further in future. The
Chinese government has already started squeezing the smaller units by withdrawing their raw
material import permits.

The need for scale

Going by the IISI forecasts, global steel demand would be 1.32 billion tonnes by 2010 and
1.62 billion tonnes by 2015. Even Arcelor-Mittal, the largest global steel player by far, has a
present capacity, which is just 6.8 per cent for projected demand in 2015. To maintain its
current share, Arcelor-Mittal would have to add another 50 million tonnes of capacity by
then. This confirms the view that there is still considerable scope for consolidation in the steel
industry.

Global steel ranking

Company Capacity (in million tonnes)

Arcelor – Mittal 110.0

Nippon Steel 32.0

Posco 30.5

JEF Steel 30.0

Tata Steel – Corus 27.7

Bao Steel China 23.0

US Steel 19.0

Nucor 18.5

Riva 17.5

Thyssen Krupp 16.5

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As the industry consolidates further, Tata Steel - even with its planned greenfield capacity
additions - would have remained a medium-sized player after a decade. This made it
absolutely vital that the company did not miss out on large acquisition opportunities. Apart
from Corus, there are not many among the top-10 steel makers, which would become
possible acquisition targets in the near future.

ata Steel - Corus : Present capacity (in million tonnes per annum)

Corus Group (in UK and The Netherlands) 19

Tata Steel - Jamshedpur 5

Nat Steel – Singapore 2

Millennium Steel - Thailand 1.7

Aggregate present capacity 27.7

Tata Steel - Corus : Projected capacity(in million tonnes per annum)

Corus Group (in UK and The Netherlands) 19

Tata Steel - Jamshedpur 10

Tata Steel – Jharkhand 12

Tata Steel – Orissa 6

Tata Steel - Chhattisgarh 5

Nat Steel – Singapore 2

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Millennium Steel - Thailand 1.7

Aggregate projected capacity 55.7

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 tonnes per annum, if all the planned greenfield capacities go on stream by then.
Neat strategic fit

Corus, being the second largest steelmaker in Europe, would provide Tata Steel access to
some of the largest steel buyers. The acquisition would open new markets and product
segments for Tata Steel, which would help the company to de-risk its businesses through
wider geographical reach.
A presence in mature markets would also provide Tata Steel an opportunity to go further up
the value chain as demand for specialized and high value-added products in these markets is
high. The market reach of Corus would also help in seeking longer-term deals with buyers
and to explore opportunities for pushing branded products.
Corus is also very strong in research and technology development, which would add to the
competitive strength for Tata Steel in future. Both companies can learn from each other and
achieve better efficiencies by adopting the best practices.

But at what cost?

Now that Tata Steel has achieved its strategic objective of becoming one of the major players
in the global steel industry and steel demand growth is likely to be robust over the next
decade, has the company paid too much for Corus? Even those analysts and industry
observers who agree on the positive outlook for steel demand growth and the need to achieve
scale believe so.
The enterprise valuation of Corus at around $13.5 billion appears too steep based on the
recent financial performance of Corus. Tata Steel is paying 7 times EBITDA of Corus for
2005 and a higher 9 times EBITDA for 12 months ended 30 September 2006. In comparison,
Mittal Steel acquired Arcelor at an EBITDA multiple of around 4.5. Considering the fact that
Arcelor has much superior assets, wider market reach and is financially much stronger than

48


Corus, the price paid by Tata Steel looks almost obscenely high. Tata Steel's B Muthuraman
has defended the deal arguing that the enterprise value (EV) per tonne of capacity is not very
high. The EV per tonne for the Tata-Corus deal was around $710 is only modestly higher
than the Mittal-Arcelor deal. Besides, setting up new steel plants would cost anywhere
between $1,200 and $1,300 per tonne and would take at least five years in most developing
countries.
But, are the manufacturing assets of Corus good enough to command this price? It is a well-
known fact that the UK plants of Corus are among the least efficient in Europe and would
struggle to break even at a modest decline in steel prices from current levels.
Recent financial performance of Corus would dent the hopes of Tata Steel shareholders even
further. EBITDA margins, after adjusting for one-time incomes, have steadily declined over
the last 3 years. For the 9-month period ended September 2006, EBITDA margins of Corus
were barely 8 per cent as compared to around 40 per cent for Tata Steel.

Corus Financials
Year 2004 2005 Jan-Sep 2006
Revenues 18.32 19.91 14.10
EBITDA 1.91 1.86 1.12
EBITDA Margin (%) 10.44 9.34 7.96
Operating Profits 1.30 1.17 0.75
Operating Profit Margin (%) 7.09 5.89 5.29
Net Profit 0.87 0.72 0.25
Net Profit Margin (%) 4.73 3.63 1.77
Figures in $ Billion
Table-8
The price of an asset is more a factor of its future earnings potential than its past earnings
record. Operating margins of Corus can be significantly improved if Tata Steel can supply
slabs and billets. Tata Steel is targeting consolidated EBITDA margins of around 25 per cent
as and when it starts supplying crude steel to Corus. If the company can sustain such margins
on the enlarged capacities, it would be quite impressive.

But that is a long way off as Tata Steel would have sufficient crude steel capacity only when
its proposed new plants become operational. Till then, the company is targeting to maximize

49


gains through possible synergies between the two operations, which are expected to yield up
to $350 million per annum within three years. In the meanwhile, Tata Steel has to make sure
that cash flows from Corus are sufficient to service the huge amount of debt, which is being
availed to finance the acquisition. According to the details available so far, Tata Steel would
contribute $4.1 billion as equity component while the balance $9.4 billion, including the re-
financing of existing debt of Corus after adjusting for cash balance, would be financed
through debt. The debt facilities are believed to be structured in such a way that they can be
serviced largely from the cash flows of Corus.

Interest rates on credit facilities for such buy-outs are often higher than market rates because
of the risks involved. At an expected interest rate of 7 per cent per annum, the interest outgo
alone would be over $650 million per year. Along with repayment of principal, the annual
fund requirement to service this debt would be around $1.5 billion - assuming a 10-year
repayment horizon.

The current cash flows of Corus are barely sufficient to cover this, even after considering the
synergy gains. If international steel prices decline even modestly, Tata Steel would have to
dip into its own cash flows or find other sources like an equity dilution to service the debt.
Besides, funds may also be required for upgrading some of the Corus plants to improve
efficiencies. Tata Steel would have to manage all this without jeopardizing its greenfield
expansion plans which may cost a staggering $20 billion over the same 10-year period.
No wonder investors are deeply worried!
To its credit, the Tata Steel management has acknowledged that it would not be an easy task
to manage the next five years when Corus would have to hold on to its margins without the
help of cheaper inputs supplied by Tata Steel. If the group can survive this initial period
without much damage, life may become much easier for the Tata Steel management.
Investors would consider Corus a burden for Tata Steel until such time there is a perceptible
improvement in its margins. That would keep the Tata Steel stock price subdued and any
decline in steel prices would have a disproportionately negative impact on the stock.
However, long-term investors would appreciate that right now steel manufacturing assets are
costly and Corus was a prized target which made it even more costly. With the strategic
importance of such a large deal in mind, Tata Steel management has taken the plunge. If it
can pull it off, even after a decade, the Corus acquisition would become the deal, which
would transform Tata Steel.

50


Tata and Corus:
In addition to Tata Steel's bid for Corus, the largest private sector steel producer in India has
made a mark and consolidated it is presence in the foreign land, through acquisition his latest
one's being in Indonesia. In case of Corus, only time will tell whether Tata Steel would
succeed or not, but in other endeavours the company has already succeeded in acquiring
some steel plants. Tata Steel, the country's largest private sector steel company, was in talks
with Anglo American of South Africa to acquire its 79 per cent stake in Highveld Steel.
While the Highveld acquisition is still going through the evaluation process. According to
analysts, if the acquisition of Highveld Steel goes through to completion, Tata Steel's
production capacity will go up to 6 million tonne from the current level of 5 million tonne.
Highveld, the largest vanadium producer in the world, manufactures steel, vanadium
products, Ferro-alloys, carbonaceous products and metal containers and closures. Analysts
observe a clear trend in Tata Steel's plans to expand capacities. But Highveld was not
supposed to be the first global acquisition for Tata Steel. In February 2005, the company
completed the acquisition of Singapore's largest steel company, NatSteel Asia, which has a
two-million tonne steel capacity with presence across Singapore, Thailand, China, Malaysia,
Vietnam, the Philippines and Australia. As per the deal, the enterprise value of NatSteel Asia
was pegged at Rs 1,313 crore. Tata Steel has plans to establish steel manufacturing units in
Iran and Bangladesh too. With a stated vision to become a 20-25 million tonne company by
2015, the company has also signed a few joint ventures and announced organic expansion
plans.

Over all scenario

Tata Steel acquiring Corus throws up several interesting questions on emerging
multinationals and traditional multinationals in the steel industry and particularly the
complexities of the acquisition in the above context. What has been surprising in the above
case is that how could a small steel maker, Tata Steel from a developing country like India
buy up a large steel company, Corus PLC from the United Kingdom. Prior to the acquisition,
Corus was four times bigger than Tata Steel. However, the operating profit for Tata Steel was

51


$840 million (sale of 5.3 million tons), whereas in case of Corus it was $860 million(sale of
18.6 million tons) in the year 2006. It is also interesting to find out why a large global steel
maker, Corus decided to sell itself off to a small steel maker from a developing country.
Many questioned if the Tatas were wise in acquiring Corus that had accumulated huge debt
burden, made operational losses and whose share price had drastically come down. The
intriguing issue of this acquisition has been on how the final bidding price of the Corus rise up
to 70% over the stock price of Corus prior to the bidding. Most importantly, how did Tata
Steel organize the huge capital for the acquisition? It appears that several external players
participated in the acquisition process and so how were they all involved in the bidding
process. Further, the issues of post acquisition are also unique in this case as the context and
culture of the acquirer and the acquired companies are different.

Until the 1990s, not many Indian companies had contemplated spreading their wings abroad.
An Indian corporate or group company acquiring a business in Europe or the U.K. seemed
possible only in the realm of fantasy. In addition to these issues, Indian companies in general
have had huge liabilities of origin in term of poor quality, service and reliability in the
international markets. At the same time many the global steel industry was getting restructured
from a large number of smaller steel makers to a fewer large steel conglomerates through the
worldwide mergers and acquisition. The steel companies in India were also wondering on how
to go about in these circumstances. In the above context, how did the top management of Tata
Steel and the Tata Group Perceive the acquisition of Corus? When Tata Steel began bidding
higher price on Corus plc, many wondered how the Tatas manage the huge financial deal and
whether it will be good for the financial health of Tata Steel.

Tata acquired Corus on the 2nd of April 2007 for a price of $12 billion making the Indian
Company the world’s sixth largest steel producer. This acquisition process has started long
back in the year 2005. However, Corus itself was involved in a considerable number of
Merger & Acquisition (M&A) deals and joint ventures (JVs) beginning in the year2000. In a
period of seven years Corus was involved in 14 deals. In 2006, the Tata first offered 455 pence
per share of Corus but by the end of the bidding process in 2007, Tata offered 608 pence per
share, which is 33.6% higher than the first offer. For this deal, Tata has financed only $4
billion, though the total price of this deal was $12billion. Given below are the reactions of
Ratan Tata and B. Muthuraman on what they felt about the acquisition.

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Tata steel financial status post merger

Post Acquisition Management:
There has been a great deal of suspicion on how well the two entities, viz., Tata Steel and
Corus plc integrate in the post acquisition situation. This concern has been expressed since the
culture and perspectives of the two companies and the people are seemingly very different
from each other. Ratan Tata however, has been confident that the post acquisition
management will not be too difficult as the two organizational cultures will be effectively
integrated.
Ratan Tata has said he is confident the two companies will have “a cultural fit and similar
work practices.”
Nearly 30 years ago J.R.D Tata had lured away a young engineer from Corus’s predecessor
company, British Steel, to work at Tata Steel. That young Sheffield-educated engineer – Sir
Jamshed J. Irani (knighted by the Queen 10 years ago) – was Tata Steel’s Managing Director
until six years ago.
Tata Corus has made developed some management structure to deal with the smooth operation
of the two entities. It has also adopted several system integrations in both the entities to
smoothen the transactions between the two entities. Tata Steel has formed a seven- member
integration committee to spearhead its union with Corus group. While Ratan Tata, chairman of
the Tata group, heads the committee, three of the members are from Tata Steel and the other
three are from Corus group. Members of the integration committee from Tata Steel include
Managing Director B Muthuraman, Deputy Managing Director (steel) T Mukherjee, and chief
financial officer Kaushik Chatterjee. The Corus group is represented in the committee by CEO
Phillipe Varin, executive director(finance) David Lloyd, and division director (strip products)
Rauke Henstra.
The company has also created several Taskforce Teams to ensure integration specific set of
activities in the two entities for smoother transaction. For instance, the company has created a
task force to integrate the UK/EU model in construction to the Indian market.

Tata Corus Task force

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Post Tata Corus merger, Tata Steel has access to considerable IP and expertise in Construction
from UK/EU based models. The key driver is to find ways to utilize this knowledge and assist
the capture of value for Tata Steel in the construction market in India. To achieve, a taskforce
comprising of following executives from both the entities is being formed with immediate
effects.

Members from Corus
Mr. Matthew Poole (Director Strategy Long Products Corus)
Mr. Colin Ostler (GM Corus Construction Centre)
Mr. Darayus Shroff (Corus International)

Members from Tata Steel:
Mr. Sangeeta Prasad (CSM South, Flat Products)
Mr. Pritish Kumar Sen (Market Research Group)
Mr. Rajeev Sahay (Head Planning & Scheduling, TGS)

The scope of the taskforce will be to:
1. Ensure smooth market knowledge exchange between Tata Corus and Tata Bluescope and
identify Knowledge gaps.
2. Complete mapping of construction sector for Indian market using external
resource if necessary.
3. Understand key drivers for construction through knowledge gained from
stakeholders of the construction community.
4. Map key competencies of Tata Corus against market drivers/ requirements.
5. Develop a five- year strategy.
The taskforce members will report to Mr. Paul Lormor (Director Construction Development).
The engagement of the members of the taskforce will be on part time basis and they will
continue to discharge their current responsibilities.
The taskforce will continue till June 2008, by which time it is expected to taskforce prepare
the business case and place it before the board for approval

Corus Acquisition Financing
Tata steel is pleased to announce the refinancing of its GBP 3,620 million acquisition bridge

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