Tata Corus Merger

analysis
MOHIT JAGGI , TANU SHREE ,AGNES ,NARAINS SINGH
SAURABH PALIWAL
Content

 Steel industry overview

 Tata Steel overview
 Corus
 Background
 Why Corus wanted to be acquired
 What Tata accepted
 Merger acquisition time line
 Issues in Merger
 Performance post merger
 Reason for M&A failure
Steel Industry Overview 2006
 Steel consumption barometer of
economic progress of country .
 Steel prices were on an upward
trend after 2004 as Chinese
economy was on rise
 Industry consolidated was the
norm in 2000 to 2010
Corus back ground
 Dutch steelmaker, was formed in 1999 by the merger of British Steel
with Hoogovens of the Netherlands.
 Corus had the highest cost of production amongst World steel maker
 British half of the business sustained serious losses while the Dutch
side was quite profitable.
 Corus’s management realized that the status quo was unsustainable
given the increased competition from steelmakers in developing
economies who had access to cheaper labor and raw materials
 Corus management decided to look partner from outside
Tata Background

 Tata Steel was founded in 1907, and the plant started production in
1912
 One of Lowest cost of production of steel due to use to its ownership of
raw materials (coal and iron),
Why Tata wanted to acquire Corus
 Access to high premium European market
 Leverage low steel cost production in India
 Helped to feature in top 10 players in the world.
 Lower Risk Compared To Developing New Products.
 CORUS holds number of patents and R&D facilities
 Strong momentum of steel industry consolidation (12 Mega merger
from 2004 to 2007)
 Upward trend in steel prize after 2004 and strong forecast for steel
demand with .
 cost of a greenfield entity would be in the region of $1200-1300
against enterprise value paid to Corus of $ 700 to 800
Why Cours wanted to be acquired

 Saturated market of Europe

 Decline in market share and profit
 Total debt of Corus was 1.6 Billion
 Corus facilities were relatively old with high cost of production.
 To extend its global reach through Tata steel
 Favorability of shareholders over Tata’s deal
 To get access to low cost Indian Ore reserves
Synergies in deal
 Economies of Scale and Scope - The deal would have Created world’s fifth largest steel
company by the production capacity providing both economies of scale and scope to
combined entity.
 Distribution network synergy -The deal would have facilitated the Tata steel entry in high
margin European market and Tata steel would gain sustainably from distribution network
of Corus.
 Operation Synergy - Corus which has the highest production cost of steel would learn from
Tata steel which had the lowest cost of production in the world.
 Operation Synergy -The deal was powerful combination of low cost upstream production of
Tata steel in India with the high end downstream processing of steel in Corus. facilities of
Corus will improve the competitiveness of the European operations of Corus significantly
 Manufacturing will be organized so as to produce slabs/ primary steel in low-cost facilities
and produce high-end products in proximity to client base - in both Europe and India.
 Combination will also allow the cross-fertilization of research and development capabilities
in the
 Merger Timeline

10th Dec 06 1st Feb 2007 -

Dec 05 Corus 20 Oct 06- -Tata Steel Tata Steel
and Tata Corus’s accept raises offer acquire Corus
management Tata Steel’s 500p a share @ 608 pence
meet offer. in cash. per share

17th Oct 06- 17th Nov 06- 11th Dec 06

Tata Steel CSN makes a CSN raises its
makes a cash counter bid of formal offer to
offer 455p a 475p a share. 515p
Share

Final negotiated price was 33% higher than the original price
Terms of the transaction

steel UK
Asia Pvt

Group
Corus
Steel

SGPR
Steel
Tata

Tata

Tata
Ltd
 Tata Corous was all cash Deal and a case
of leveraged buyout.
 The Acquisition was proposed to be made
by Tata Steel U.K., a wholly-owned
indirect subsidiary of Tata Steel which
was incorporated in the United Kingdom
for the purpose of completing the
Acquisition
Market reaction
Impact of buyers Financial

Tata Steel Europe's

turnover in the total From 50% Contribution
turnover of the group to negative contribution
reduced from 76% to in EBIDTA
57%

Debt Increased sharply

Impact of buyers Financial
What went wrong
 Wrong Timing - : This acquisition came at the height of commodity cycle
and in last phase of sixth merge waves.
 Tata Over paid for Corus- Tatas engaged in a bidding war with CSN and
spent 33% than what was originally offered
 Issues in Integration
 Deal design: In hindsight, doing an all-cash deal funded by debt may have
been a big mistake. For one, a part stock deal may have softened the blow
a fair bit
 Failure in governance & Integration: After taking over, the Tatas chose a
hands-off strategy. And left it to the incumbent group CEO, Mr Varin, and his
team to independently run operations for the first two years. McKinsey & Co
christened this as a new Asian style of integration. No 100 day plans. No
integration teams swooping down on their conquests
What went wrong

 Weakening Demand in European Market – Week Market condition

and Global slow down post financial crisis of 2008 resulted in
demand never picking up from European market
 Dumping from China- China the bigger consume and producer of
Steel was cooling off and its steel industry was dumping all across
the world. This did not make life easier for steel companies outside
china
Way Ahead
 India's total domestic steel manufacturing capacity currently stands at around 120 million tons a year, which is
expected to more than double to 300 million tons a year by 2030

 Tata Steel, is focusing inward (domestic market ) now, more than 10 years after it made bought UK-based
steelmaker Corus.

 It finalized of the joint venture with Thyssenkrup AG to sell off corus which marks the end of a long, painful
chapter in Tata Steel Ltd.’s contemporary history.

 Corus added over $6 billion in debt at Tata Steel and cost India’s largest private sector steel company its
financial health and leadership in the home market.

 Competitor JSW Steel Ltd. stole a march over the Tata company expanding capacity to 18 mtpa versus Tata
Steel’s 13 mtpa.

 Tata now hopes to win back the number one spot with its almost complete acquisition of Bhushan Steel Ltd. (5.6
mtpa).