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Tata Corus Case

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Abstract: |On January 31, 2007, Tata Steel Limited (Tata Steel), one of the |[pic][pic][pic] | |leading steel producers in India, acquired the Anglo Dutch steel | | |producer Corus Group Plc (Corus) for US$ 12. 11 billion (€ 8. 5 | | |billion). The process of acquisition concluded only after nine | | |rounds of bidding against the other bidder for Corus - the Brazil | | |based Companhia Siderurgica Nacional (CSN). | | | | | |This acquisition was the biggest overseas acquisition by an Indian| | |company. Tata Steel emerged as the fifth largest steel producer in| | |the world after the acquisition. The acquisition gave Tata Steel | | |access to Corus' strong distribution network in Europe. | | Corus' expertise in making the grades of steel used in automobiles and in aerospace could be used to boost Tata Steel's supplies to the Indian automobile market. Corus in turn was expected to benefit from Tata Steel's expertise in low cost manufacturing of steel. However, some financial experts claimed that the price paid by Tata Steel (608 pence per share of Corus) for the acquisition was too high. Corus had been facing tough times and had reported a substantial decline in profit after tax in the year 2006. Analysts asked whether the deal would really bring any substantial benefits to Tata Steel. Moreover, since the acquisition was done through an all cash deal, analysts said that the acquisition would be a financial burden for Tata Steel. Issues: » Gain an in-depth knowledge about various corporate valuation techniques. Critically examine the rationale behind the acquisition of Corus by Tata Steel. » Understand the advantages and disadvantages of cross-border acquisitions. » Understand the need for growth through acquisitions in foreign countries. » Study the regulations governing mergers & acquisitions in the case of a cross-border acquisition. » Get insights into the consolidation trends in the Indian and global steel industries. Contents: |  |Page No. |Introduction |1 | |Background Note |2 | |Tata Steel Vs CSN: The Bidding War |4 | |Financing the Acquisition |5 | |The Integration Efforts |7 | |The Synergies |8 | |The Pitfalls |9 | |The Road Ahead |10 | |Exhibits | | "The financials for this deal [require] high performance levels, perfect post-deal execution and sustained high steel prices. It is a risky game and will be okay for Tata as long as the economy is growing and no major bumps occur. If [these bumps] do occur, they can become a challenge, and I am reminded of the high leverage days of the mid-1980s. "1 - Vivek Gupta, Managing Director, AT Kearney (India), in February 2007. "Indian steel companies are on a consolidation mode. The Tata-Corus deal has set many records. So far, the only $1 billion-plus deal was done by ONGC, and it's the first milestone for India Inc, with the Tata deal crossing $10 billion mark. It's a landmark deal since an Indian company has taken over an international company three times its size. "2 - S. Mukherji, Managing Director, ICICI Securities, in February 2007. Introduction |On January 31, 2007, India based Tata Steel Limited (Tata Steel) |[pic][pic][pic][pic][pic][pic] | |acquired the Anglo Dutch steel company, Corus Group Plc (Corus) | | |for US$ 13. 0 billion3. The merged entity, Tata-Corus, employed | | |84,000 people across 45 countries in the world. It had the | | |capacity to produce 27 million tons of steel per annum, making it | | |the fifth largest steel producer in the world as of early 2007 | | |(Refer Exhibit I for the top ten players in the steel industry | | |after the merger). Commenting on the acquisition, Ratan Tata, | | |Chairman, Tata & Sons, said, "Together, we are a well balanced | | |company, strategically well placed to compete at the leading edge | | |of a rapidly changing global steel industry. "4 | | Tata Steel outbid the Brazilian steelmaker Companhia Siderurgica Nacional's (CSN) final offer of 603 pence per share by offering 608 pence per share to acquire Corus. |[pic][pic][pic] |Tata Steel had first offered to pay 455 pence per share of Corus, | | |to close the deal at US$ 7. 6 billion on October 17, 2006. CSN then| | |offered 475 pence per share of Corus on November 17, 2006. | | | | | |Finally, an auction5 was initiated on January 31, 2007, and after | | |nine rounds of bidding, Steel could finally clinch the deal with | | |its final bid 608 pence per share, almost 34% higher than the | | |first bid of 455 pence per share of Corus. | | | | |Many analysts and industry experts felt that the acquisition deal | | |was rather expensive for Tata Steel and this move would overvalue | | |the steel industry world over. | Tata Steel's Acquisition of Corus - Next Page>> [pic] Top of Form |[pic] |[pic]Enter your search terms [pic]Submit search form [pic] | |[pic][pic][pic][pic][pic][pic][pic][pic][pic][pic][pic][pic] | Bottom of Form [pic] [pic] | | | |[pic] | |Marketing Financial Products |Case Studies in Finance Vol III | |Textbooks Collection |[pic] | | |[pic] | | |Case Study Volumes Collection | 1] "Did Tata Steel Overheat in its Zeal to Win Corus? " [email protected], February 08, 2007. ] "Tata Win Booster for Corporate India's Confidence," The Economic Times, February 01, 2007. 3] As on January 31, 2007, 1 US Dollar = 44. 18 INR and 1 Pound = 86. 73 INR. 4] "Tata Steel Completes Acquisition of European Steelmaker Corus," International Herald Tribune, April 03, 2007. 5] Since Tata Steel and CSN could not declare their final offer by January 31, 2007, an auction had to be initiated by The Takeover Panel which oversees mergers and acquisitions in the UK. Introduction Contd... |Commenting on the deal, Sajjan Jindal, Managing Director, Jindal |[pic][pic][pic][pic][pic][pic] | |South West Steel said, "The price paid is expensive... ll steel | | |companies may get re-rated now but it's a good deal for the | | |industry. "6 Despite the worries of the deal being expensive for | | |Tata Steel, industry experts were optimistic that the deal would | | |enhance India's position in the global steel industry with the | | |world's largest7 and fifth largest steel producers having roots in| | |the country. Stressing on the synergies that could arise from this| | |acquisition, Phanish Puram, Professor of Strategic and | | |International Management, London Business School said, "The | | |Tata-Corus deal is different because it links low-cost Indian | | |production and raw materials and growth markets to high-margin | | |markets and high technology in the West. | | The cost advantage of operating from India can be leveraged in Western markets, and differentiation based on better technology from Corus can work in the Asian markets. 8 |[pic][pic][pic] |Background Note | | |Tata Steel | | | | | |Tata Steel is a part of the Tata Group, one of the largest | | |diversified business conglomerates in India. Tata Group companies | | |generated revenues of Rs. 967,229 million in the financial year | | |2005-06. | | | | |The group's market capitalization was US$ 63 billion as of July | | |2007 (only 28 of the 96 Tata Group companies were publicly | | |listed). In 1907, Jamshedji Tata established Tata Steel at Sakchi | | |in West Bengal. The site had a good supply of iron ore and | | |water... | Excerpts 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, |[pic][pic][pic][pic][pic][pic] | |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 (Refer Table I for fund raising mix for the Corus' acquisition)... [pic][pic][pic] |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... | The Synergies |Most experts were of the opinion that the acquisition did make |[pic][pic][pic][pic][pic][pic] | |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... [pic][pic][pic] |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 (Refer | | |Table III for the spread of Tata-Corus markets before and after | | |the acquisition)... |Tata Steel's Acquisition of Corus | |Top of Form | |Case Details | |++ Font | Font -- | |Case Intro 1 | |Bottom of Form | |Case Intro 2 | | | |Excerpts | | | | | |ICMR HOME | Case Studies Collection | | | | | | | |Case Details: | | | | | | | |Case Code : FINC049 | | | |Case Length : 27 Pages | | | |Period : 2006-2007 | | | |Pub. Date : 2008 | | | |Teaching Note : Available | | | |Organization : Tata Steel Limited, Corus Group Plc | | | |Industry : Iron & Steel | | | |Countries : India, Netherlands | | | | | | | |To download Tata Steel's Acquisition of Corus case study | | | |(Case Code: FINC049) click on the button below, and select | | | |the case from the list of available cases: | | | | | | | |[pic] | | | | | | | |Price: | | | | | | | |For delivery in electronic format: Rs. 00; | | | |For delivery through courier (within India): Rs. 400 + Rs. | | | |25 for Shipping & Handling Charges | | | | | | | |[pic] | | | | | | | | | | | | | | | | | | | | | | | | | | |[pic] | | | |Gadgets powered by Google | | | | | | | |» Finance Case Studies | | | |» Short Case Studies | | | |» View Detailed Pricing Info | | | |» How To Order This Case | | | |» Business Case Studies | | | |» Case Studies by Area | | | |» Case Studies by Industry | | | |» Case Studies by Company | | | | | | | |[pic] | | | |Top of Form | | | |[pic] | | | |[pic][pic][pic] | | | | | | | |[pic]Web | | | |[pic]icmrindia. rg | | | | | | | |[pic][pic][pic][pic][pic][pic] | | | | | | | |Bottom of Form | | | |[pic][pic] | | | |[pic] | | | |Please note: | | | | | | | |This case study was compiled from published sources, and is| | | |intended to be used as a basis for class discussion. It is | | | |not intended to illustrate either effective or ineffective | | | |handling of a management situation. Nor is it a primary | | | |information source. | |[pic][pic][pic] | | | |
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