Description
reasons behind Tata going after Corus. It also gives performance of Tata and corus steel post the merger of Tata and corus.
CASE ON “TATA CORUS DEAL”
Table of Contents
Table of Contents....................................................................................................... 2 CURRENT POSITION....................................................................................................1 HISTORY..................................................................................................................... 1 CARE FOR THE FAMILY............................................................................................... 2 STAKEHOLDERS..........................................................................................................3 Employees............................................................................................................... 3 Top Management.................................................................................................... 4 Shareholders........................................................................................................... 5 COMPETITORS............................................................................................................ 6 OTHER MAJOR INDIAN PLAYERS IN STEEL INDUSTRY..................................................7 Steel Authority of India Limited (SAIL).....................................................................7 Jindal Steel and Power Limited (JSPL)......................................................................7 Essar Steel.............................................................................................................. 7 Bhushan Steel Ltd................................................................................................... 7 KEY LEADERS OF TATA STEEL....................................................................................8 REASONS OF TATA GOING FOR CORUS....................................................................12 PERFORMANCE PRE AND POST MERGER..................................................................14 Financial Analysis of Tata-Corus Merger...............................................................14 Comparison Of Performance of Tata-Corus With Steel Majors..................................18 OPERATION AND STRATEGY.....................................................................................21 ANNEXURE I: Time Line of Merger Activities.............................................................24 REFERENCES............................................................................................................ 25
CURRENT POSITION
Tata Steel is among the top ten global steel companies with an annual crude steel capacity of over 28 million tonnes per annum (mtpa). It is now one of the world's most geographicallydiversified steel producers, with operations in 26 countries and a commercial presence in over 50 countries. The Tata Steel Group, with a turnover of US$ 22.8 billion in FY '10, has over 80,000 employees across five continents and is a Fortune 500 company. Tata Steel’s vision is to be the world’s steel industry benchmark through the excellence of its people, its innovative approach and overall conduct. Underpinning this vision is a performance culture committed to aspiration targets, safety and social responsibility, continuous improvement, openness and transparency. Tata Steel’s larger production facilities include those in India, the UK, the Netherlands, Thailand, Singapore, China and Australia. Operating companies within the Group include Tata Steel Limited (India), Tata Steel Europe Limited (formerly Corus), NatSteel, and Tata Steel Thailand (formerly Millennium Steel). [1]
HISTORY
Tata acquired Corus on the 2nd of April 2007 for a price of $12 billion making the Indian company the world’s fifth largest steel producer. This acquisition process has started long back in the year 2005. However, Corus was involved in a considerable number of Merger & Acquisition (M&A) deals and joint ventures (JVs) before Tata. This process started in the year 2000 and with Tata it came to an end. In a period of seven years Corus was involved in 14 deals apart from Tata. In 2005, when the deal was started the price per share was 455 pence. But during the time of acquisition held in 2007, the price per share was 608 pence, which is 33.6% higher than the first offer. For this deal Tata has financed only $4 billion, although the total price of this deal was $12billion. Here the important point is how Tata could manage to get such a huge amount for this deal? Did Tata Steel overheat in its zeal to win Corus? The founder of the Tata Iron & Steel Company - now called Tata Steel - never lived to see it incorporated. In 1902 J.N. Tata seeks the help of geologist Charles Page Perin to identify a site rich in resources such as iron and coal, to build India's first steel plant. The search starts in what is now Madhya Pradesh. In 1907 the team finally chooses Sakchi village in present-day Jharkhand, which has since grown into the steel town of Jamshedpur. TISCO was born in 1907 three years after Jamsetji Nusserwanji Tata died. Tata had been pursuing the dream of setting up a steel plant in India since at least 1882. In 1902, he even travelled to Pittsburgh to seek the help of American geologist and metallurgist Charles Page Perin. In order to make India self sufficient in raw materials, a team of enterprising geologists was sent out to scour the surrounding hills for prospective sources. The area was found to be rich in deposits of iron ore, coking coal, limestone, dolomite, manganese, etc. The
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Steel Company obtained its first colliery in 1910, adding six more in course of time. Several mines were spread over the states of Bihar, Orissa and Karnataka. The Tata’s soon became the first to own a fully mechanized iron ore mine in India at Noamundi. The Coal Beneficiation Plant at West Bokaro undertook beneficiation of low-grade coals, thus helping in the conservation of the fast dwindling resources of high quality coals. The collieries, the mines and the quarries- together furnish the bulk of the raw material requirements of the plant. Within a decade of its birth, TISCO, the first Tata Company to bear the family name, had already made a mark in June 1917. Tata Steel has come a long way from the 1950s, when it made more than 70 per cent of the country's steel and yet had to ration it out, partly because of the artificial shortages during the license raj. Because the industry was protected, there was little incentive to improve technology. The open-hearth process for making steel, which Indian companies all used, took eight hours or more. But there was an alternative that took just 40 minutes. It involved injecting oxygen into molten iron to purify it into steel. One momentous morning in 1980, the company's top metallurgists, including J.J. Irani, who retired as a nonexecutive director of Tata Steel in June 2011, met J.R.D. Tata in Mumbai, to discuss the best way to inject oxygen. The top-blowing method did not allow the gas and molten metal to mix well, while the bottom injection method was a maintenance nightmare, as the heat often damaged the vessel holding the iron. [2]
CARE FOR THE FAMILY
Alike the concern with which the founders built the model city of Jamshedpur, the Tata employees too, share a similar relation of care and affection with their employers. The Tata’s were the first employers to introduce the 8-hour working day (1912), free medical aid (1915), workers’ provident fund scheme (1920) and many other welfare schemes even before they were introduced in the West. The Social Welfare Scheme was formed in 1916 with the purpose of providing assistance to the surrounding areas in the field of education, vocational training, cultural programs, self-employment and family welfare. The Joint Committee for Adivasi Affairs and the Tata Steel Rural Development Society jointly supported this multi-million project. The “employee association with management” program initiated in 1956 gave the workers a stronger voice in the affairs of the Company. Forty-one joint departmental councils were formed to encourage their involvement in matters as diverse as production, quality improvement, safety measures, etc. The industrial harmony propaganda of the Company believes that “the welfare of the laboring class must be one of the first cares of the employer”. [3]
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STAKEHOLDERS
Employees
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Long Standing relations between Tata Steel and Corus Tata Steel engaged Ljmuedin operations of Corus in 1992to help it in coke making and blast furnace facilities improvement Strategic commercial relationship Management at both Tata Steel and Corus highly focussed on improving operational efficiency and productivity [4] CORUS - Continuous improvement program – “The CORUS Way” - Core Values – Code and Ethics • Integrity • Creating Value in Steel • Customer focus • Selective Growth • Respect for our people - World Class Governance
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TATA STEEL - Continuous improvement program – “ASPIRE” - Core Values • Trusteeship • Integrity • Respect for individual • Credibility • Excellence - World Class Governance
A COMMON BUSINESS CULTURE
At the time of acquisition Corus was one of the world’s largest producers of steel and aluminum, and it employed 47,300 people worldwide and 24,000 people in the United Kingdom. [5]
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Top Management
These are the views of the top management at the time of the acquisition Ratan Tata's opening Speech “Today marks the end of a journey that commenced quite sometimes ago and I think when it started Tata Steel saw a strategic fit with Corus in the UK and Netherlands, which would give it a global reach in Europe; synergies with low cost intermediates in India and when we made our first bid to acquire the company, many thought it was an audacious move because an Indian company making a bid for a European steel company much larger in tonnage size which is something that had not happened before.”
Muthuraman's Speech “We have always been telling you that over the last three years, Tata Steel has had a strategy for this future, in terms of creating Greenfield capacities in India and one or two places internationally also where our raw materials and energy sources are available. Acquisitions in countries where raw material is not available but there are markets either developed mature or growing markets. Infact, that is the fundamental reason why we went and acquired NatSteel and Millennium steel in the last couple of years. Getting more from steel in terms of branding, distribution and finding current and construction solutions and so on. Looking at logistics and how to reduce logistics cost, so there is a set of strategic objectives that Tata Steel has evolved for its journey from where we are today to where we want to be in the next ten-fifteen years time. The initiatives that we took to look at Corus and to make Corus a part of Tata Steel is in line with these objectives.”[6]
Construction of Task Force Post Acqisition construction of task force and their assigned duties, Post Tata Corus merger, Tata Steel had access to considerable IP and expertise in construction from UK/EU based models. The key driver was 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 was being formed with immediate effects Members from Corus: Mr. Matthew Poole (Director Strategy Long Products Corus) Mr. Colin Ostler (GM Corus Construction Centre)
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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 was 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. [7]
Shareholders
The acquisition was initially not supported by the share holders of Tata Steel. Corus was 4 times the size of Tata Steel when the acquisition was carried out. Tata Steel’s share fell by INR55 on January 31, 2007, closing 10.66% down at ` 463.95 and wiping off ` 3,215 crore in investor wealth at one go. Meanwhile, Corus shares rose 6.8% to 601.5 pence in intra-day trading on the London Stock Exchange on January 31, 2007. On the same day CSN’s shares rose 5.3% to 64.96 Brazilian reals on Sao Paulo’s Bovespa exchange as the news came as a relief to CNS’s investors who feared a CSN-Corus deal would burden the joint company with mounting debt. [8]
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COMPETITORS
Top 10-World's Largest Steel Companies: Ranking 1 2 3 4 5 6 7 8 9 10 [9] Company Name ArcelorMittal Nippon Steel Baosteel Posco Hebei Iron & Steel Group JFE Holdings Wuhan Iron & Steel Group (Wisco) Tata Steel Jiangsu Shagang Group U.S. Steel Country Luxembourg Japan China South Korea China Japan China India China USA Crude Steel Output per year (MT) 10,33,00,000 3,75,00,000 3,54,00,000 3,47,00,000 3,33,00,000 3,30,00,000 2,77,00,000 2,44,00,000 2,33,00,000 2,32,00,000
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OTHER MAJOR INDIAN PLAYERS IN STEEL INDUSTRY
Steel Authority of India Limited (SAIL)
Steel Authority of India Limited is the leading steel-making company in India. It is a fully integrated iron and steel maker, producing both basic and special steels for domestic construction, engineering, power, railway, automotive and defence industries and for sale in export markets. SAIL is also among the five Maharatnas of the country's Central Public Sector Enterprises. The company has the distinction of being India’s second largest producer of iron ore and of having the country’s second largest mines network. This gives SAIL a competitive edge in terms of captive availability of iron ore, limestone, and dolomite which are inputs for steel making.
Jindal Steel and Power Limited (JSPL)
Jindal Steel and Power Limited is one of India’s major steel producers with a significant presence in sectors like Mining, Power Generation and Infrastructure. In terms of tonnage, it is the third largest steel producer in India. The company manufactures and sells sponge iron, mild steel slabs, ferro chrome, iron ore, mild steel, structural, hot rolled plates and coils and coal based sponge iron plant. The company is also involved in power generation.
Essar Steel
Essar Steel is a global producer of steel with a footprint in India, Canada, USA, the Middle East and Asia. Essar Steel is a fully integrated flat carbon steel manufacturer — from iron ore to ready-to-market products with a current capacity of 8.6 million tonnes per annum (MTPA). With our aggressive expansion plans in India, as well as Asia and the Americas, we aim to achieve a capacity of 14 MTPA by 2011-12. Essar products find wide acceptance in highly discerning consumer sectors, such as automotive, white goods, construction, engineering and shipbuilding.Essar Steel is one of India's largest exporters of flat products, exporting to the highly demanding US and European markets, and to the growing markets of South East Asia and the Middle East.
Bhushan Steel Ltd
Bhushan Steel Ltd formerly known as Bhushan Steel & Strips Ltd. is a globally renowned one of the leading prominent player in Steel Industry. Backed by more than two decades, of experience in Steel making, Bhushan Steel is one of the largest Secondary Steel Producer company in India with an existing steel production capacity of 2 million tonnes per annum’s (approx.).The dynamic reason of awesome and unparallel growth of BSL, is rapid integration on the Steel value chain; conceivably, it would be its unwavering focus on acquiring the latest technology and knowhow, also the BSL’s commitment to provide its customers with the best quality products.
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KEY LEADERS OF TATA STEEL
Jamsetji Nusserwanji Tata: In his lifetime J.N.Tata was captivated and led by the three guiding stars - building an iron and steel company, generating hydro-electric power and creating an institution that offer the best education in science. Jamsetji Tata had started his quest for steel way back in 1882 but it was twenty-five years later, in December 1907 that the explorers found their way to Sakchi - at the confluence of the rivers Subarnarekha and Kharkai. On 27th February 1908 when the first stake was driven into the soil of Sakchi the dream had come alive.When Tata’s issued shares on 26th August 1907, for the first time in the financial history of the country, the Indian people - the masses, the affluent and the common people -joined hands to put up the first truly Indian enterprise. The Tata family contributed the remaining 11% shares of the Tata Iron and Steel Company Limited. It did not take long for work to begin thereafter. In 1908 the plant became functional and the next year, in 1909 the blast furnaces, steel furnaces, coke ovens, powerhouse and machine shops were laid down. Land for the site, mines and quarries were acquired in 1910. The Government contributed their bit by connecting railway to Gorumahisani. The first steel ingot was rolled on 16th February 1912 - a momentous day in the history of industrial India. Sir Dorabji Tata: He was the elder son of Hirabai and Parsi Zoroastrian Jamsetji Nusserwanji Tata. Dorabji was intimately involved in the fulfilment of his father's ideas of a modern iron and steel industry, and agreed to the necessity for hydroelectric electricity to power the industry. Dorab is credited with the establishment of the conglomerates Tata Steel in 1907 and Tata Power in 1911, which are the core of the present-day Tata Group. Dorabji is known to have personally accompanied the mineralogists who were searching for iron fields, and it is said that his presence encouraged the researchers to look in areas that would otherwise have been neglected. Under Dorabji's management, the business that had once included three cotton mills and the Taj Hotel Bombay grew to include India's largest private sector steel company, three electric companies and one of India’s leading insurance companies. [10] Sir Nowroji Saklatvala: He was born on September 10, 1875. He was educated at St. Xavier’s School and College. He joined the Tata organisation in 1899 as a clerk in the Svadeshi Mills. On the death of Sir Dorab Tata, he was elected as Chairman of Tata Sons in 1932. Being an ordained priest he led a simple life style and was sympathetic towards the helpless and the poor. As Chairman of Tata Steel (TISCO) he was greatly responsible for the profit sharing scheme for the employees. As Chairman of Sir Dorabji Tata Trust, he encouraged several charitable institutions. [11] Sir Jehangir Jivaji Ghandy: He was born on November 18, 1896, at Bombay, his father Jivaji Dinshaw Ghandy being a Solicitor of repute, and a Director of Tata Sons Limited and several other Tata Companies. After graduating, Sir Jehangir went to Jamshedpur in 1917 - and the association between the man and the place was to continue uninterrupted for 55 years. He joined Tata Steel for practical training when the capacity of the plant was about 100,000 tons of steel per year. The following year he left for the U.S. for studies in business administration as well as in Metallurgical and Steel Works Engineering. He returned three years later to rejoin Tata Steel and a systematic climb in responsibility led to his being the first Indian General Manager of the Tata Steel plant in 1938. He piloted the Company through the years of the Depression and in
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1954, as Director-in-Charge of the Tata Iron and Steel Company; he participated in expanding its capacity to two million tons per annum. His role in Tata's industrial enterprises became closer with his appointments to the Boards of Tata Industries in 1945, the year he was knighted, and of the parent firm of Tata Sons in 1959. Sir Jehangir's interest in industry went beyond the making of steel and he was one of the first of the new breed of technocrats who saw the steel industry only as the base of a growing mushroom of industrial and engineering activity. [12] Jehangir Ratanji Dadabhoy Tata: He was born in Paris, France, the second child of Parsi father Ratanji Dadabhoy Tata and his French wife, Suzanne "Sooni". His father was a first cousin of Jamsetji Tata, a pioneer industrialist in India.JRD Tata joined Tata & Sons as an unpaid apprentice in 1925. In 1938, at the age of 34, JRD was elected Chairman of Tata & Sons making him the head of the largest industrial group in India. For decades, J R D directed the huge Tata Group of companies, with major interests in Steel, Engineering, Power, Chemicals and Hospitality. He was famous for succeeding in business while maintaining high ethical standards - refusing to bribe politicians or use the black market. Under his chairmanship, the assets of the Tata Group grew from $100 million to over $5 billion. He started with 14 enterprises under his leadership and half a century later on July 26, 1988, when he left, Tata & Sons was a conglomerate of 95 enterprises which they either started or in which they had controlling interest. In 1945, he founded Tata Motors. In 1956, JRD Tata initiated a program of closer 'employee association with management' to give workers a stronger voice in the affairs of the company. He firmly believed in employee welfare and espoused the principles of an eighthour working day, free medical aid, workers' provident scheme, and workmen's accident compensation schemes, which were later, adopted as statutory requirements in India. In 1968, he founded Tata Consultancy Services. In 1979, Tata Steel instituted a new practice: a worker being deemed to be "at work" from the moment he leaves home for work till he returns home from work. This made the company financially liable to the worker for any mishap on the way to and from work. With his charismatic leadership, Tata has contributed to the industrial development of India for over 53 years. He passed on the Chairmanship of Tata Sons to his younger colleague, Ratan N. Tata, on March 25, 1991 and was unanimously elected by the Board of Tata Sons as Chairman Emeritus for life. [13] Mr. Russi Mody: He joined Tata Steel in 1939 and has worked in various positions in different departments of the company. He served the Company for several years before he made his first internal shift into the newly established Personnel Division in 1947. Within a few years of being into the division he was promoted to the position of Director of Personnel in 1953. In the year 1955, Mr. Mody was made the Deputy Agent in Calcutta. Adding more to his experience within the various section of the company Mr. Mody took up the position of the Director of Raw Materials in 1965. In 1970, he was appointed as Director of Operations and in 1972. Mr. Mody became the Joint Managing Director. It was almost after 35 years of experience within the company that Mr. Mody became the Managing Director of the organization in 1974 where he served till 1992. Mr. Russi Mody has also served as the Chairman of Tata Steel from 1984 to 1993. Kunnisseri Parmeswar Mahalingam: He served Tata Steel with distinction for 37 years in an era when Tata Steel was Tisco, and steel making involved working in the searing heat of open hearth furnaces. Radical changes have transformed the company since the time when Mahalingam’s career took wing — from graduate trainee to technical adviser to the MD, and finally, to director of technical services in 1974.Mahalingam’s nurturing and talent spotting skills were also, at least in part, responsible for the current Tata Steel managing director B Page 9 of 25
Muthuraman made a career with the Group. He was a member of the selection committee that in 1966 spotted the potential in a greenhorn graduate trainee who was destined to lead the company. Balasubramanian Muthuraman: He was the Managing Director of Tata Steel, India's largest steel manufacturer. Mr. Muthuraman is known for his leadership, courage, foresight and his successful strategies that have brought about a positive change in not just Tata Steel and the industry, but also ushered in great optimism in the Indian industrial sector. Having started as a "graduate trainee" in Tata Steel right after graduation, he spent some time in the engineering and iron & steel making side of the company before moving to sales and marketing to understand better the interface with the distribution chain and the customers. He has spent most of his career in sales and marketing. He saw the company through the worst of recessions in the industry in the early nineties as the head of the sales and marketing team. For 20 years he honed his skills and developed enduring relationship with the customers. Mr. Muthuraman with his all-round experience was selected to spearhead the prestigious Cold Rolling Mill project of Tata Steel as Vice President in 1995. Successful completion of this project led to higher responsibility for Mr. Muthuraman to serve as the main change agent in the organisation through major diversification projects as Executive Director (Special Projects) in August 2000. Recognising Mr. Muthuraman's considerable contribution to the organisation and his potential to make Tata Steel a market oriented and customer focused organisation he was appointed Managing Director in July 2001.Under his dynamic leadership Tata Steel achieved rapid all round growth developing new products and markets through branded products in line with the changing customer requirements. Mr. Muthuraman played a significant role in strengthening quality focus and customer orientation in Tata Steel. Outstanding entrepreneur Mr. Muthuraman led Tata Steel to successfully acquire organisations in England, Singapore and Thailand to expand its base beyond Indian boundaries to develop new technologies and serve larger customer base. Through personal touch and with humility Mr. Muthuraman successfully integrated the operations of diverse organisations from different nations to imbibe the Tata culture of empathy and contribution to all stakeholders particularly sharing the gains with the society. [14][15] Ratan Naval Tata: He (born 28 December 1937) is the present chairman of Tata Sons and therefore, Tata Group. He is also the chairman of major Tata companies such as Tata Steel, Tata Motors, Tata Power, Tata Consultancy Services, Tata Tea, Tata Chemicals, The Indian Hotels Company and Tata Teleservices. When he returned to India in 1962 after turning down a job with IBM on the advice of JRD, he was sent to Jamshedpur to work on the shop floor at Tata Steel with other blue-collar employees, shovelling limestone and handling the blast furnace. In 1981, JRD Tata stepped down as Tata Industries chairman, naming Ratan as his successor. He was heavily criticized for lacking experience in running a company of the scale of Tata Industries. In 1991, he was appointed group chairman of the Tata group. As group chairman, he has been responsible for converting "the corporate commonwealth" of different Tata-affiliated companies into a cohesive company. He has been responsible for the acquisition of Tetley, Jaguar Land Rover and Corus, which have turned Tata from a largely India-centric company into a global business, with 65% revenues coming from abroad. He also pushed the development of Indica and the Nano. He is widely credited for the success of the Tata Group of companies, especially after the liberalization of controls after the 1990s. In August 2007, Ratan Tata led Tata Group's acquisition of British steel maker Corus. At that time, this was the largest takeover of a foreign company by an Indian company, and resulted in Tata Group becoming the fifth largest Page 10 of 25
steel producer in the world. He's packing his bags -- again. December 2012, when he turns 75, is the third scheduled retirement for Rattan Tata.
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REASONS OF TATA GOING FOR CORUS
Tata Steel's case for the acquisition is that its low-cost plants in India would use Corus's finishing plants to supply and expand the latter's high-end customer franchises in Europe. Tata Steel has the same strategy for 1.8 million tons at NatSteel in Singapore and Millennium Steel in Thailand, companies it has bought over the past two years for a combined $653 million. While Tata Steel now has tremendous growth opportunities, it also faces significant challenges. Maintaining its low-cost advantages by securing captive raw materials as it expands capacity is one; another is tempering its bet on the current high steel prices with the prospect that they could soften over time. Imminent consolidation in China, the rise of new rivals as a result of consolidation, and cartelization among the top producers are transforming the global steel business. Low Bargaining power: Tata Steel's stated argument, however, is rooted in its captive iron ore and coal resources. The distribution of the world's iron ore resources strengthens that case. The world's top five iron ore producers control an overwhelming 90% of the market, according to a Tata Steel presentation. In contrast, the top five steel producers command less than 20% of the world market. What's clear in those numbers is the relatively low bargaining power of steel producers vis-à-vis their ore suppliers. 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. 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." Tata Steel, too, may have found it difficult to penetrate the lucrative construction, packaging and automobile markets in Europe without Corus's help to open doors. If Tata steel meets the technical specifications of customers and at a slightly lower cost, it can break into that market more easily with Corus in tow. Tata-Corus's advantage lies in low-cost raw materials, "the benefits will come mainly from being a one-stop shop for all kinds of steel, which could help the company get orders from customers across wider geographies." they can improve economies of scale and scope and have greater distribution for Tata and Corus products in geographies where they are not present." Two parties will have to work together for technology transfer and coordinating supply chains. What works in favour of Tata-Corus is the friendly nature of the deal, and the strong Anglo-Indian link Reducing waste: (lean tech) is looking to reduce waste in its plate manufacturing process. It has adopted the concept of “flow”. This means that the products are “pulled” through the process according to customer demand. All parts of the production process, from the supply of raw steel (slab) to the finished steel plate, are carefully planned. Scheduling for each element of the process ensures that bottlenecks are kept to a minimum. Each process is paced (known as “takt”
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time) to control the amount of product in each stage of the process. This ensures that processes operate smoothly without overload or delay and keep the desired output and quality. Culture: everyone can put forward ideas and have a say in how processes can change for the better. This is known as engagement. Global Player: We are looking at how Tata Steel should position itself in the globalising steel industry, so that we do not remain a very good but small regional player." Tata Steel is advantageously poised to make the entire world its playing field. Natural resources like iron ore and ferrous alloys are not available in too many geographical locations and India has them in plenty. As the global steel industry is fragmented and awash with extra capacity worth 15 to 20 per cent of consumption, setting up Greenfield ventures may not always be a justifiable strategy. So Tata Steel plans to take the acquisition route to globalisation in the immediate future. The business mission is to provide large international customers with a comprehensive supply chain management service for steel and associated products and services. Access to raw material: Indian firms are blessed with a dependable domestic supply of iron ore Searching for R&D: Indian steelmakers operate relatively dated manufacturing facilities and do not produce the sophisticated finished steel products for which expanding markets such as the automobile industry are raising demand Seeking new markets: The third motivation for foreign investment is to gain access to new markets. Despite their low cost of production, Indian steelmakers have never been major global suppliers of finished steel, so an interest in foreign markets can be expected for local companies looking to diversify their businesses
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PERFORMANCE PRE AND POST MERGER
Financial Analysis of Tata-Corus Merger
Performance of TATA Steel before and after merger 2010-11 Sales 118753 cr 2009-10 2007-08 2006-07 (merger) 102393 cr 147329 cr 132110 cr 25650 cr 4951 cr 69.45 0.78 12350 cr 66.80 0.81 4177 cr 65.28 (0.15) 2008-09 200506 17144 cr 3506 cr 63.35 0.29 200405 15877 cr 3474 cr 62.77 0.54
PAT 8983 cr (2009) cr Earnings 75.63 60.26 per share debt/equity 1.55 1.77 Source: Company Reports
Conclusion: Immediately after acquisition of Corus, Tata Steel’s overall revenue increased many times and profit after tax also increased but in subsequent years profit has not shown the same growth. Rather, profits are decreasing and in financial year 2009-10 company showed a loss of Rs. 2009 crores. As far as earnings per shares are concerned, there is nothing much to boast about. Earnings per share have not shown any improvements. As far as financial analysis is concerned, company has not performed well and has not gained much to strengthen its balance sheet. But with a view of following the strategic plan laid down it went ahead with the acquisition of Corus. Six-pronged strategy outlined by Tata Steel in 2003 1. Expand into an Rs1, 000-crore Company by 2008-09 and to increase capacity from 4 million tonne then to 30 million tonne by 2015. 2. The company will acquire and develop more port terminals in the country, both on the east and the west coasts. 3. Third, the company now uses only one mobile crane at Haldia, but has plans to add a few more to improve cargo handling efficiency and thus reduce the turnaround time, which in turn reduces the ocean freight, which customers have to pay in foreign exchange. 4. It plans to start non-vessel operations by reserving slots in container vessels owned by others for certain sectors. 5. It would acquire more containers with an aim to increase container service in the years to come.
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6. It would soon open new offices in Pune and Nagpur, and then at Surat and Coimbatore, to increase its customer base.
Performance of Corus before merger 2006(pounds) 2005(pounds) Turnover 9733 10140 mn Profit After 229 451 tax Earnings per 10p 10.17p share Net debt at NA 821 the end of the period Source: Company Reports 2004(pounds) 9332 mn 441 10.07p 842 2003 7953 mn -305 9.25p 1013 2002 7188 mn -458 14.23p 1236
Conclusion: it can be clearly seen that Corus was facing financial crisis. Its debt was all time high and it was in losses. Thus with Tata steel pursuing its strategic plan of expansion and going for entering into new markets acquired Corus at 603p per share which was 49% higher than the most recent closing price. Thus the reasons why Corus agreed to be sold to a relatively smaller company are, a. A chance to bail out of debt and financial stress b. Access to cheap high quality iron ore from India c. Corus had high cost of production
d. Though Corus was having high turnover than Tata steel but its profit were lower than those of Tata steel.
Calculation of valuation of synergy for merger Inputs Current risk free rate = Risk Premium = 7.00% 9.70%
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Beta Pre-tax cost of debt Tax rate Debt to Capital Ratio Revenues Operating (EBIT)
Acquiring firm(TATA ) 1.12 8.00% 34.00% 68.00%
Target Firm(CORUS ) 0.50 8.00% 34.00% 25.00% $12,845.00 $610.35 36.93% 0.00% 4
After merger 1.12705 5.00% 30.00% 68.00% $16,729.00 $1,187.00 36.93% 80.00% 4
In terminal year 1.13342542
$3,884.00 Income $1,187.00 36.93% 80.00% 4 17.86% 5.28% 9.31% 24.37% 80.00% 19.50%
Pre-tax return on capital Reinvestment Rate = Length of growth period Cost of Equity = After-tax cost of debt = Cost of capital =
11.85% 5.28% 10.21% 24.37% 0.00% 0.00% $1,271.21 $4,222.67 $4,133.69
17.93% 3.50% 8.12% 25.85% 80.00% 20.68% $881.58 $23,171.78 $17,839.06
17.99% 3.50% 8.14%
After-tax return on capital = Reinvestment Rate = Expected growth rate=
Value of firm PV of FCFF in high growth $787.10 = Terminal value = $18,366.74 Value of firm today = $13,653.06 Value of Synergy Value of independent firms Value of combined firm Value of synergy $17,786.74 $17,839.06 $52.32
After studying balance sheets of TATA and Corus, retrieving information from corporate websites and using spreadsheets provided by Aswath Damodran, Professor of Finance at the Stern School of Business at New York University we arrived at a positive synergy value of $52.32 and it demonstrates that the merger should be a successful one as it takes into account various financial inputs like revenues, debt, dividend payout ratio etc. and arrives at value of both acquiring and target firm and accordingly determine the synergy value.
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Comparison Of Performance of Tata-Corus With Steel Majors
Acquirer Tata Steel Bharti Airtel Hindalco Tata Motors ONGC Videocon Target company Corus Zain Novelis Land Rover & Jaguar Imperial energy Deal value($mn) 12000 10700 5982 2300 1900 729 597 500 293 290 Industry Steel Telecom Steel Automobile Oil and Gas Electrnoics Pharmaceutical Oil and Gas Steel Electronics Year 2007 2005 2006 2005 2009 2006 2008 2010 2005 2005
Daewoo Electronics Dr. Reddy’s lab Betapharm HPCL Kenya Petroleum Refinery Ltd. Tata Steel Natsteel Videocon Thomson SA Source: www.ibef.org
Conclusions: Tata Steel’s acquisition has been the biggest acquisition till now in the history of India. The deal is the largest Indian takeover of a foreign company and will create the world's fifthlargest steel group ($7.6 billion takeover bid from Tata Steel)
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Target Arcelor NKK Corp LNM Holdings Krupp AG Corus Dofasco
Buyer Mittal Steel Kawasaki Steel Ispat Intl Thyssen Tata Steel Arcelor
Value ($bn) 32.2 14.1 13.3 8.3 8.0 5.2
Year 2006 2001 2004 1997 2006 2005
Intl Steel
Mittal Steel
4.8
2005
Performance of steel companies in India (2010), POSCO Mittal TATA Steel SAIL Jindal ISPAT industries Uttam Galva Revenue($) 31.6 bn 28.132 bn 22.741 bn 9.629 bn 4.210 bn 2.36 bn 1 bn Profit($) 2.8 bn 3.365 bn 2.75 bn 1.52 bn 354 mn -0.07 bn 22.85 mn Employees 29648 320000 34101 131910 7669 3000 18000 Capacitytonnes) 12 mn NA 31 mn 13.5 mn NA 14.3 mn NA
Thus looking at the acquisition history in India and post merger performances, TATA Corus deal shows positive results though initially TATA had to bear losses. Still TATA steel is 5 th largest steel company in the world and posses one of the largest capacity.
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Some of the other notable achievement of TATA steel are
a. Ranked 56th producer in the world before acquisition and ranked 5th after acquisition.
b. It is the largest private sector steel company in India in terms of domestic production. c. Currently ranked 410th on Fortune Global 500. d. Tata Steel is the 8th most valuable brand according to an annual survey conducted by Brand Finance and The Economic Times in 2010. e. Tata Steel holds a very vital place in Indian business history, because it has introduced some of the unique concepts like • 8-hour working days, • leave with pay and pension system for the first time in India, and • The first player to start rapid industrialization process.
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OPERATION AND STRATEGY
Tata Steel has successfully improved its operations. They have taken various initiatives like total operational performance (TOP), total productivity maintenance (TPM), knowledge management (KM), operation research and decision support systems (OR and DSS), and Six Sigma. Various initiatives have resulted in improved utilization of raw materials like coal with high ash content and blue dust, which was converted into a byproduct. It benchmarked its norms against the best plants in the world. It can be best explained by the example, “the production of sinter plant was increased by 60 per cent which was as good as having one sinter plant free.”[16] But having faced with the global economic crisis, it was the inherent resilience of Tata Steel that could sustain the company through the tough phase. The key issues in operations in 2009-10 were thus related to the macro economic situation. In the following paragraph the flexibility in operations and the responsiveness of employees is emphasized as the factors that key to Tata Steel. The collapse in private business investment and decline in consumption levels due to high unemployment rates led to low capacity utilisation in the steel industry in the first half of the 2009-10. In order to match the reduced demand, steel companies, especially in the US and Europe, reduced their capacity utilisation by temporarily taking capacity off stream. However in emerging economies like India, the credit shortage was not as acute as in the western world and so demand conditions continued to be relatively stable, even though prices dropped significantly in line with the global pricing scenario. [17] In early part of 2009-10, the European operations of Tata Steel declined by almost 35% due to lower volumes and increasing prices, but very significant measures to bring about operating cost savings were undertaken to offset some of the resulting losses. Cost reduction is a continuing activity across the businesses of Tata Steel in Europe, as is productivity improvement and working capital management. These enormous achievements have been realised despite very serious challenges in the market. It is imperative to have a look at the underlying logic of Tata Steel adopting the strategy of Globalisation. The company plans to produce 30 million tons of steel by 2015. This Objective cannot be achieved by organic growth alone. So acquisition had to be one of the strategies to
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achieve the mission. At the time of acquisition it was expected that with more consolidation and fewer players in the market, the sharp declines and fluctuations in the cycle would ease, increasing earnings multiples and finally, valuations. The main reason for this is resource geography, or which is a de-integrated method of steel making. This means that the steel production takes place in a place where it makes most economic sense. It is not wrong to assume that it has in fact been the way it was expected. It works in two ways. One, low cost steel producing countries like India is building a lot of slab capacity because of their proximity to iron ore. They thus want to expand globally, especially where they can produce finished steel using their raw output in mature markets. But having operations in Europe is costlier than, say in Brazil, Russia or India but the most effective way for Tata Steel now to grow is looking for markets where costs are higher, simply because their low cost slabs can afford that. [18]
The other strategic issue is the reduction in the labour cost. The reason it is being treated as an issue is because of the involvement of the Trade Union. Tata steel says that to achieve competitiveness cost needs to be reduced and that would be done by closing certain plants that does not fit into the strategy of Tata Steel Europe. The jobs at risk are in operational, functional and management positions. A 90-day consultation process is followed up with affected employees and union representatives. The company has made efforts and continue to do so to achieve the job losses through voluntary redundancies. However, it is important that critical skills are retained enabling the business to increase output should the markets recover. A comprehensive range of redundancy packages and outplacement support services have been made available to those leaving the company. Full consultations with employees and their representatives are done throughout the process.
One of the issues in operations was the Supply Chain process in the European operations. They identified this problem and are now in a continuing process of improving this. Improving operations has been the major objective in the year 2010-11. It must be noted that Corus was rebranded as Tata Steel Europe (TSE) after it was taken over by Tata Steel in 2010.TSE continuously works towards higher levels of operational excellence through improving asset performance in respect of quality, reliability and cost. The major objective was to improve the customer service level by improving the supply chain. In an effort to improve the operations
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and make it flexible to market demands they have taken several initiatives. The blast furnaces at Wales were not in the best of conditions. To improve operations £ 185 million was invested in rebuilding it. A fund of £ 100 million was also set up to for short payback capital projects to improve operations. One major aim of TSE is to strategize to handle the Fluctuating demand and changing environmental regulations. To take care of the environment in which it operates and to meet the objective it commissioned a BOS gas recycler that reduces emission of CO2 by 250000 tons. [19]
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ANNEXURE I: Time Line of Merger Activities
September 20, 2006 : Corus Steel has decided to acquire a strategic partnership with a Company that is a low cost producer October 5, 2006 : The Indian steel giant, Tata Steel wants to fulfil its ambition to Expand its business further. October 6, 2006: The initial offer from Tata Steel is considered to be too low both by Corus and analysts. October 17, 2006: Tata Steel has kept its offer to 455p per share. October 18, 2006 : Tata still doesn’t react to Corus and its bid price remains the same October 20, 2006 : Corus accepts terms of £ 4.3 billion takeover bid from Tata Steel October 23, 2006: The Brazilian Steel Group CSN recruits a leading investment bank to offer advice on possible counter-offer to Tata Steel’s bid. October 27, 2006: Corus is criticized by the chairman of JCB, Sir Anthony Bamford, for its decision to accept an offer from Tata. November 3, 2006: The Russian steel giant Severstal announces officially that it will not make a bid for Corus November 18, 2006: The battle over Corus intensifies when Brazilian group CSN approached the board of the company with a bid of 475p per share November 27, 2006: The board of Corus decides that it is in the best interest of its will shareholders to give more time to CSN to satisfy the preconditions and decide whether it issue forward a formal offer December 18, 2006: Within hours of Tata Steel increasing its original bid for Corus to 500 pence per share, Brazil's CSN made its formal counter bid for Corus at 515 pence per share in cash, 3% more than Tata Steel's Offer. January 31, 2007: Britain's Takeover Panel announces in an e- mailed statement that after an auction Tata Steel had agreed to offer Corus investors 608 pence per share in cash April 2, 2007: Tata Steel manages to win the acquisition to CSN and has the full voting support form Corus’ shareholders
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REFERENCES
1. Tata Steel. Available at: http://www.tatasteel.com/about-us/company-profile.asp. Accessed on 13-Aug 2011 2. Business Standard 2010. Available at: http://businesstoday.intoday.in/story/tata-steelhistory/1/16465.html. Accessed on 13-Aug 2011
3. Tata Steel, Available at: http://www.tatasteel100.com/heritage/history/history18.asp.
Accessed on 14 Aug 2011
4. Tata Steel 2009. Available at: http://www.tatasteel.com/investorrelations/main-q4-06-
07.asp. Accessed on 14 Aug 2011
5. Rajesh Mahapatra (2007), “India’s Tata Steel Calls Corus Acquisition Strategic; Some
Raise Concern Over Deal’s High Cost” Available at: http://www.wallst.net/news/news.asp?Source=APNEWS&id=48880. Accessed on 17Aug 2011
6. Business Standard 2007. Transcript of Press Conference for CORUS Acquisition, 31st
January 2007
7. Nayak Amar K J R, Kummer, Christoper B 2006, Case Study : Tata Steel Acquiring
Corus plc: A Case of an Emerging MNE Acquiring a Traditional European MNE, 8. Malapur, Rashmi (2007). Case Study: Tata’s Acquisition of Corus: A Quantum Leap
9. World’s Largest Steel Companies. Available at:
http://www.steelads.com/info/largeststeel/TOP30-Worlds-Largest-Steel-Companies.html. Accessed on 17-Aug 2011 10. Building on a cherished legacy - Sir Dorabji Tata, Available at: http://www.dorabjitatatrust.org/about/history.aspx. Accessed on 17th Aug 2011 11. SIR NAOROJI SAKLATVALA. Available at: http://www.tatacentralarchives.com/history/biographies/07%20ndsaklatvala.htm. Accessed on 17th Aug 2011 12. SIR JEHANGIR GHANDY. Available at: http://www.tatacentralarchives.com/history/biographies/11%20jjgandhy.htm. Accessed on 17th Aug 2011 13. J.R.D. TATA. Available at: http://www.tatacentralarchives.com/history/biographies/15%20jrdtata.htm. Accessed on 17th Aug 2011 14. Mr B Muthuraman (Vice Chairman). Available at: http://www.tatasteel100.com/people/leadership-muthuraman.asp. Accessed on 17th Aug 2011 15. Jamshedji Tata Award for Lifetime Achievement for Quality – 2008. Available at : http://www.isqnet.org/Awds%20Citation/JamshedjiMr.%20B.%20Muthuraman.pdf. Accessed on 20 July 2011
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16. Production at Sinster Plant 2009. Available at: http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=cbcce0ac-7c9d-460a-a1a5cf70b3ae7f87%40sessionmgr112&vid=4&hid=111. Accessed on August 15, 2011, 17. Tata Steel. Available at: http://www.tatasteel.com/investors/annual-report-200910/annual-report-2009-10.pdf. Accessed on August 15, 2011 18. New prospects of Tata Steel. Available at: http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=49c01bd8-a8e8-4a80-bf1e087ad4583e51%40sessionmgr111&vid=6&hid=7. Accessed on August 17, 2011 from 19. Tata Steel. Available at: http://www.tatasteel.com/investors/annual-report-201011/annual-report-2010-11.pdf. Accessed on Aug 15, 2011
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doc_458497915.doc
reasons behind Tata going after Corus. It also gives performance of Tata and corus steel post the merger of Tata and corus.
CASE ON “TATA CORUS DEAL”
Table of Contents
Table of Contents....................................................................................................... 2 CURRENT POSITION....................................................................................................1 HISTORY..................................................................................................................... 1 CARE FOR THE FAMILY............................................................................................... 2 STAKEHOLDERS..........................................................................................................3 Employees............................................................................................................... 3 Top Management.................................................................................................... 4 Shareholders........................................................................................................... 5 COMPETITORS............................................................................................................ 6 OTHER MAJOR INDIAN PLAYERS IN STEEL INDUSTRY..................................................7 Steel Authority of India Limited (SAIL).....................................................................7 Jindal Steel and Power Limited (JSPL)......................................................................7 Essar Steel.............................................................................................................. 7 Bhushan Steel Ltd................................................................................................... 7 KEY LEADERS OF TATA STEEL....................................................................................8 REASONS OF TATA GOING FOR CORUS....................................................................12 PERFORMANCE PRE AND POST MERGER..................................................................14 Financial Analysis of Tata-Corus Merger...............................................................14 Comparison Of Performance of Tata-Corus With Steel Majors..................................18 OPERATION AND STRATEGY.....................................................................................21 ANNEXURE I: Time Line of Merger Activities.............................................................24 REFERENCES............................................................................................................ 25
CURRENT POSITION
Tata Steel is among the top ten global steel companies with an annual crude steel capacity of over 28 million tonnes per annum (mtpa). It is now one of the world's most geographicallydiversified steel producers, with operations in 26 countries and a commercial presence in over 50 countries. The Tata Steel Group, with a turnover of US$ 22.8 billion in FY '10, has over 80,000 employees across five continents and is a Fortune 500 company. Tata Steel’s vision is to be the world’s steel industry benchmark through the excellence of its people, its innovative approach and overall conduct. Underpinning this vision is a performance culture committed to aspiration targets, safety and social responsibility, continuous improvement, openness and transparency. Tata Steel’s larger production facilities include those in India, the UK, the Netherlands, Thailand, Singapore, China and Australia. Operating companies within the Group include Tata Steel Limited (India), Tata Steel Europe Limited (formerly Corus), NatSteel, and Tata Steel Thailand (formerly Millennium Steel). [1]
HISTORY
Tata acquired Corus on the 2nd of April 2007 for a price of $12 billion making the Indian company the world’s fifth largest steel producer. This acquisition process has started long back in the year 2005. However, Corus was involved in a considerable number of Merger & Acquisition (M&A) deals and joint ventures (JVs) before Tata. This process started in the year 2000 and with Tata it came to an end. In a period of seven years Corus was involved in 14 deals apart from Tata. In 2005, when the deal was started the price per share was 455 pence. But during the time of acquisition held in 2007, the price per share was 608 pence, which is 33.6% higher than the first offer. For this deal Tata has financed only $4 billion, although the total price of this deal was $12billion. Here the important point is how Tata could manage to get such a huge amount for this deal? Did Tata Steel overheat in its zeal to win Corus? The founder of the Tata Iron & Steel Company - now called Tata Steel - never lived to see it incorporated. In 1902 J.N. Tata seeks the help of geologist Charles Page Perin to identify a site rich in resources such as iron and coal, to build India's first steel plant. The search starts in what is now Madhya Pradesh. In 1907 the team finally chooses Sakchi village in present-day Jharkhand, which has since grown into the steel town of Jamshedpur. TISCO was born in 1907 three years after Jamsetji Nusserwanji Tata died. Tata had been pursuing the dream of setting up a steel plant in India since at least 1882. In 1902, he even travelled to Pittsburgh to seek the help of American geologist and metallurgist Charles Page Perin. In order to make India self sufficient in raw materials, a team of enterprising geologists was sent out to scour the surrounding hills for prospective sources. The area was found to be rich in deposits of iron ore, coking coal, limestone, dolomite, manganese, etc. The
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Steel Company obtained its first colliery in 1910, adding six more in course of time. Several mines were spread over the states of Bihar, Orissa and Karnataka. The Tata’s soon became the first to own a fully mechanized iron ore mine in India at Noamundi. The Coal Beneficiation Plant at West Bokaro undertook beneficiation of low-grade coals, thus helping in the conservation of the fast dwindling resources of high quality coals. The collieries, the mines and the quarries- together furnish the bulk of the raw material requirements of the plant. Within a decade of its birth, TISCO, the first Tata Company to bear the family name, had already made a mark in June 1917. Tata Steel has come a long way from the 1950s, when it made more than 70 per cent of the country's steel and yet had to ration it out, partly because of the artificial shortages during the license raj. Because the industry was protected, there was little incentive to improve technology. The open-hearth process for making steel, which Indian companies all used, took eight hours or more. But there was an alternative that took just 40 minutes. It involved injecting oxygen into molten iron to purify it into steel. One momentous morning in 1980, the company's top metallurgists, including J.J. Irani, who retired as a nonexecutive director of Tata Steel in June 2011, met J.R.D. Tata in Mumbai, to discuss the best way to inject oxygen. The top-blowing method did not allow the gas and molten metal to mix well, while the bottom injection method was a maintenance nightmare, as the heat often damaged the vessel holding the iron. [2]
CARE FOR THE FAMILY
Alike the concern with which the founders built the model city of Jamshedpur, the Tata employees too, share a similar relation of care and affection with their employers. The Tata’s were the first employers to introduce the 8-hour working day (1912), free medical aid (1915), workers’ provident fund scheme (1920) and many other welfare schemes even before they were introduced in the West. The Social Welfare Scheme was formed in 1916 with the purpose of providing assistance to the surrounding areas in the field of education, vocational training, cultural programs, self-employment and family welfare. The Joint Committee for Adivasi Affairs and the Tata Steel Rural Development Society jointly supported this multi-million project. The “employee association with management” program initiated in 1956 gave the workers a stronger voice in the affairs of the Company. Forty-one joint departmental councils were formed to encourage their involvement in matters as diverse as production, quality improvement, safety measures, etc. The industrial harmony propaganda of the Company believes that “the welfare of the laboring class must be one of the first cares of the employer”. [3]
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STAKEHOLDERS
Employees
-
Long Standing relations between Tata Steel and Corus Tata Steel engaged Ljmuedin operations of Corus in 1992to help it in coke making and blast furnace facilities improvement Strategic commercial relationship Management at both Tata Steel and Corus highly focussed on improving operational efficiency and productivity [4] CORUS - Continuous improvement program – “The CORUS Way” - Core Values – Code and Ethics • Integrity • Creating Value in Steel • Customer focus • Selective Growth • Respect for our people - World Class Governance
-
TATA STEEL - Continuous improvement program – “ASPIRE” - Core Values • Trusteeship • Integrity • Respect for individual • Credibility • Excellence - World Class Governance
A COMMON BUSINESS CULTURE
At the time of acquisition Corus was one of the world’s largest producers of steel and aluminum, and it employed 47,300 people worldwide and 24,000 people in the United Kingdom. [5]
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Top Management
These are the views of the top management at the time of the acquisition Ratan Tata's opening Speech “Today marks the end of a journey that commenced quite sometimes ago and I think when it started Tata Steel saw a strategic fit with Corus in the UK and Netherlands, which would give it a global reach in Europe; synergies with low cost intermediates in India and when we made our first bid to acquire the company, many thought it was an audacious move because an Indian company making a bid for a European steel company much larger in tonnage size which is something that had not happened before.”
Muthuraman's Speech “We have always been telling you that over the last three years, Tata Steel has had a strategy for this future, in terms of creating Greenfield capacities in India and one or two places internationally also where our raw materials and energy sources are available. Acquisitions in countries where raw material is not available but there are markets either developed mature or growing markets. Infact, that is the fundamental reason why we went and acquired NatSteel and Millennium steel in the last couple of years. Getting more from steel in terms of branding, distribution and finding current and construction solutions and so on. Looking at logistics and how to reduce logistics cost, so there is a set of strategic objectives that Tata Steel has evolved for its journey from where we are today to where we want to be in the next ten-fifteen years time. The initiatives that we took to look at Corus and to make Corus a part of Tata Steel is in line with these objectives.”[6]
Construction of Task Force Post Acqisition construction of task force and their assigned duties, Post Tata Corus merger, Tata Steel had access to considerable IP and expertise in construction from UK/EU based models. The key driver was 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 was being formed with immediate effects Members from Corus: Mr. Matthew Poole (Director Strategy Long Products Corus) Mr. Colin Ostler (GM Corus Construction Centre)
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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 was 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. [7]
Shareholders
The acquisition was initially not supported by the share holders of Tata Steel. Corus was 4 times the size of Tata Steel when the acquisition was carried out. Tata Steel’s share fell by INR55 on January 31, 2007, closing 10.66% down at ` 463.95 and wiping off ` 3,215 crore in investor wealth at one go. Meanwhile, Corus shares rose 6.8% to 601.5 pence in intra-day trading on the London Stock Exchange on January 31, 2007. On the same day CSN’s shares rose 5.3% to 64.96 Brazilian reals on Sao Paulo’s Bovespa exchange as the news came as a relief to CNS’s investors who feared a CSN-Corus deal would burden the joint company with mounting debt. [8]
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COMPETITORS
Top 10-World's Largest Steel Companies: Ranking 1 2 3 4 5 6 7 8 9 10 [9] Company Name ArcelorMittal Nippon Steel Baosteel Posco Hebei Iron & Steel Group JFE Holdings Wuhan Iron & Steel Group (Wisco) Tata Steel Jiangsu Shagang Group U.S. Steel Country Luxembourg Japan China South Korea China Japan China India China USA Crude Steel Output per year (MT) 10,33,00,000 3,75,00,000 3,54,00,000 3,47,00,000 3,33,00,000 3,30,00,000 2,77,00,000 2,44,00,000 2,33,00,000 2,32,00,000
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OTHER MAJOR INDIAN PLAYERS IN STEEL INDUSTRY
Steel Authority of India Limited (SAIL)
Steel Authority of India Limited is the leading steel-making company in India. It is a fully integrated iron and steel maker, producing both basic and special steels for domestic construction, engineering, power, railway, automotive and defence industries and for sale in export markets. SAIL is also among the five Maharatnas of the country's Central Public Sector Enterprises. The company has the distinction of being India’s second largest producer of iron ore and of having the country’s second largest mines network. This gives SAIL a competitive edge in terms of captive availability of iron ore, limestone, and dolomite which are inputs for steel making.
Jindal Steel and Power Limited (JSPL)
Jindal Steel and Power Limited is one of India’s major steel producers with a significant presence in sectors like Mining, Power Generation and Infrastructure. In terms of tonnage, it is the third largest steel producer in India. The company manufactures and sells sponge iron, mild steel slabs, ferro chrome, iron ore, mild steel, structural, hot rolled plates and coils and coal based sponge iron plant. The company is also involved in power generation.
Essar Steel
Essar Steel is a global producer of steel with a footprint in India, Canada, USA, the Middle East and Asia. Essar Steel is a fully integrated flat carbon steel manufacturer — from iron ore to ready-to-market products with a current capacity of 8.6 million tonnes per annum (MTPA). With our aggressive expansion plans in India, as well as Asia and the Americas, we aim to achieve a capacity of 14 MTPA by 2011-12. Essar products find wide acceptance in highly discerning consumer sectors, such as automotive, white goods, construction, engineering and shipbuilding.Essar Steel is one of India's largest exporters of flat products, exporting to the highly demanding US and European markets, and to the growing markets of South East Asia and the Middle East.
Bhushan Steel Ltd
Bhushan Steel Ltd formerly known as Bhushan Steel & Strips Ltd. is a globally renowned one of the leading prominent player in Steel Industry. Backed by more than two decades, of experience in Steel making, Bhushan Steel is one of the largest Secondary Steel Producer company in India with an existing steel production capacity of 2 million tonnes per annum’s (approx.).The dynamic reason of awesome and unparallel growth of BSL, is rapid integration on the Steel value chain; conceivably, it would be its unwavering focus on acquiring the latest technology and knowhow, also the BSL’s commitment to provide its customers with the best quality products.
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KEY LEADERS OF TATA STEEL
Jamsetji Nusserwanji Tata: In his lifetime J.N.Tata was captivated and led by the three guiding stars - building an iron and steel company, generating hydro-electric power and creating an institution that offer the best education in science. Jamsetji Tata had started his quest for steel way back in 1882 but it was twenty-five years later, in December 1907 that the explorers found their way to Sakchi - at the confluence of the rivers Subarnarekha and Kharkai. On 27th February 1908 when the first stake was driven into the soil of Sakchi the dream had come alive.When Tata’s issued shares on 26th August 1907, for the first time in the financial history of the country, the Indian people - the masses, the affluent and the common people -joined hands to put up the first truly Indian enterprise. The Tata family contributed the remaining 11% shares of the Tata Iron and Steel Company Limited. It did not take long for work to begin thereafter. In 1908 the plant became functional and the next year, in 1909 the blast furnaces, steel furnaces, coke ovens, powerhouse and machine shops were laid down. Land for the site, mines and quarries were acquired in 1910. The Government contributed their bit by connecting railway to Gorumahisani. The first steel ingot was rolled on 16th February 1912 - a momentous day in the history of industrial India. Sir Dorabji Tata: He was the elder son of Hirabai and Parsi Zoroastrian Jamsetji Nusserwanji Tata. Dorabji was intimately involved in the fulfilment of his father's ideas of a modern iron and steel industry, and agreed to the necessity for hydroelectric electricity to power the industry. Dorab is credited with the establishment of the conglomerates Tata Steel in 1907 and Tata Power in 1911, which are the core of the present-day Tata Group. Dorabji is known to have personally accompanied the mineralogists who were searching for iron fields, and it is said that his presence encouraged the researchers to look in areas that would otherwise have been neglected. Under Dorabji's management, the business that had once included three cotton mills and the Taj Hotel Bombay grew to include India's largest private sector steel company, three electric companies and one of India’s leading insurance companies. [10] Sir Nowroji Saklatvala: He was born on September 10, 1875. He was educated at St. Xavier’s School and College. He joined the Tata organisation in 1899 as a clerk in the Svadeshi Mills. On the death of Sir Dorab Tata, he was elected as Chairman of Tata Sons in 1932. Being an ordained priest he led a simple life style and was sympathetic towards the helpless and the poor. As Chairman of Tata Steel (TISCO) he was greatly responsible for the profit sharing scheme for the employees. As Chairman of Sir Dorabji Tata Trust, he encouraged several charitable institutions. [11] Sir Jehangir Jivaji Ghandy: He was born on November 18, 1896, at Bombay, his father Jivaji Dinshaw Ghandy being a Solicitor of repute, and a Director of Tata Sons Limited and several other Tata Companies. After graduating, Sir Jehangir went to Jamshedpur in 1917 - and the association between the man and the place was to continue uninterrupted for 55 years. He joined Tata Steel for practical training when the capacity of the plant was about 100,000 tons of steel per year. The following year he left for the U.S. for studies in business administration as well as in Metallurgical and Steel Works Engineering. He returned three years later to rejoin Tata Steel and a systematic climb in responsibility led to his being the first Indian General Manager of the Tata Steel plant in 1938. He piloted the Company through the years of the Depression and in
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1954, as Director-in-Charge of the Tata Iron and Steel Company; he participated in expanding its capacity to two million tons per annum. His role in Tata's industrial enterprises became closer with his appointments to the Boards of Tata Industries in 1945, the year he was knighted, and of the parent firm of Tata Sons in 1959. Sir Jehangir's interest in industry went beyond the making of steel and he was one of the first of the new breed of technocrats who saw the steel industry only as the base of a growing mushroom of industrial and engineering activity. [12] Jehangir Ratanji Dadabhoy Tata: He was born in Paris, France, the second child of Parsi father Ratanji Dadabhoy Tata and his French wife, Suzanne "Sooni". His father was a first cousin of Jamsetji Tata, a pioneer industrialist in India.JRD Tata joined Tata & Sons as an unpaid apprentice in 1925. In 1938, at the age of 34, JRD was elected Chairman of Tata & Sons making him the head of the largest industrial group in India. For decades, J R D directed the huge Tata Group of companies, with major interests in Steel, Engineering, Power, Chemicals and Hospitality. He was famous for succeeding in business while maintaining high ethical standards - refusing to bribe politicians or use the black market. Under his chairmanship, the assets of the Tata Group grew from $100 million to over $5 billion. He started with 14 enterprises under his leadership and half a century later on July 26, 1988, when he left, Tata & Sons was a conglomerate of 95 enterprises which they either started or in which they had controlling interest. In 1945, he founded Tata Motors. In 1956, JRD Tata initiated a program of closer 'employee association with management' to give workers a stronger voice in the affairs of the company. He firmly believed in employee welfare and espoused the principles of an eighthour working day, free medical aid, workers' provident scheme, and workmen's accident compensation schemes, which were later, adopted as statutory requirements in India. In 1968, he founded Tata Consultancy Services. In 1979, Tata Steel instituted a new practice: a worker being deemed to be "at work" from the moment he leaves home for work till he returns home from work. This made the company financially liable to the worker for any mishap on the way to and from work. With his charismatic leadership, Tata has contributed to the industrial development of India for over 53 years. He passed on the Chairmanship of Tata Sons to his younger colleague, Ratan N. Tata, on March 25, 1991 and was unanimously elected by the Board of Tata Sons as Chairman Emeritus for life. [13] Mr. Russi Mody: He joined Tata Steel in 1939 and has worked in various positions in different departments of the company. He served the Company for several years before he made his first internal shift into the newly established Personnel Division in 1947. Within a few years of being into the division he was promoted to the position of Director of Personnel in 1953. In the year 1955, Mr. Mody was made the Deputy Agent in Calcutta. Adding more to his experience within the various section of the company Mr. Mody took up the position of the Director of Raw Materials in 1965. In 1970, he was appointed as Director of Operations and in 1972. Mr. Mody became the Joint Managing Director. It was almost after 35 years of experience within the company that Mr. Mody became the Managing Director of the organization in 1974 where he served till 1992. Mr. Russi Mody has also served as the Chairman of Tata Steel from 1984 to 1993. Kunnisseri Parmeswar Mahalingam: He served Tata Steel with distinction for 37 years in an era when Tata Steel was Tisco, and steel making involved working in the searing heat of open hearth furnaces. Radical changes have transformed the company since the time when Mahalingam’s career took wing — from graduate trainee to technical adviser to the MD, and finally, to director of technical services in 1974.Mahalingam’s nurturing and talent spotting skills were also, at least in part, responsible for the current Tata Steel managing director B Page 9 of 25
Muthuraman made a career with the Group. He was a member of the selection committee that in 1966 spotted the potential in a greenhorn graduate trainee who was destined to lead the company. Balasubramanian Muthuraman: He was the Managing Director of Tata Steel, India's largest steel manufacturer. Mr. Muthuraman is known for his leadership, courage, foresight and his successful strategies that have brought about a positive change in not just Tata Steel and the industry, but also ushered in great optimism in the Indian industrial sector. Having started as a "graduate trainee" in Tata Steel right after graduation, he spent some time in the engineering and iron & steel making side of the company before moving to sales and marketing to understand better the interface with the distribution chain and the customers. He has spent most of his career in sales and marketing. He saw the company through the worst of recessions in the industry in the early nineties as the head of the sales and marketing team. For 20 years he honed his skills and developed enduring relationship with the customers. Mr. Muthuraman with his all-round experience was selected to spearhead the prestigious Cold Rolling Mill project of Tata Steel as Vice President in 1995. Successful completion of this project led to higher responsibility for Mr. Muthuraman to serve as the main change agent in the organisation through major diversification projects as Executive Director (Special Projects) in August 2000. Recognising Mr. Muthuraman's considerable contribution to the organisation and his potential to make Tata Steel a market oriented and customer focused organisation he was appointed Managing Director in July 2001.Under his dynamic leadership Tata Steel achieved rapid all round growth developing new products and markets through branded products in line with the changing customer requirements. Mr. Muthuraman played a significant role in strengthening quality focus and customer orientation in Tata Steel. Outstanding entrepreneur Mr. Muthuraman led Tata Steel to successfully acquire organisations in England, Singapore and Thailand to expand its base beyond Indian boundaries to develop new technologies and serve larger customer base. Through personal touch and with humility Mr. Muthuraman successfully integrated the operations of diverse organisations from different nations to imbibe the Tata culture of empathy and contribution to all stakeholders particularly sharing the gains with the society. [14][15] Ratan Naval Tata: He (born 28 December 1937) is the present chairman of Tata Sons and therefore, Tata Group. He is also the chairman of major Tata companies such as Tata Steel, Tata Motors, Tata Power, Tata Consultancy Services, Tata Tea, Tata Chemicals, The Indian Hotels Company and Tata Teleservices. When he returned to India in 1962 after turning down a job with IBM on the advice of JRD, he was sent to Jamshedpur to work on the shop floor at Tata Steel with other blue-collar employees, shovelling limestone and handling the blast furnace. In 1981, JRD Tata stepped down as Tata Industries chairman, naming Ratan as his successor. He was heavily criticized for lacking experience in running a company of the scale of Tata Industries. In 1991, he was appointed group chairman of the Tata group. As group chairman, he has been responsible for converting "the corporate commonwealth" of different Tata-affiliated companies into a cohesive company. He has been responsible for the acquisition of Tetley, Jaguar Land Rover and Corus, which have turned Tata from a largely India-centric company into a global business, with 65% revenues coming from abroad. He also pushed the development of Indica and the Nano. He is widely credited for the success of the Tata Group of companies, especially after the liberalization of controls after the 1990s. In August 2007, Ratan Tata led Tata Group's acquisition of British steel maker Corus. At that time, this was the largest takeover of a foreign company by an Indian company, and resulted in Tata Group becoming the fifth largest Page 10 of 25
steel producer in the world. He's packing his bags -- again. December 2012, when he turns 75, is the third scheduled retirement for Rattan Tata.
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REASONS OF TATA GOING FOR CORUS
Tata Steel's case for the acquisition is that its low-cost plants in India would use Corus's finishing plants to supply and expand the latter's high-end customer franchises in Europe. Tata Steel has the same strategy for 1.8 million tons at NatSteel in Singapore and Millennium Steel in Thailand, companies it has bought over the past two years for a combined $653 million. While Tata Steel now has tremendous growth opportunities, it also faces significant challenges. Maintaining its low-cost advantages by securing captive raw materials as it expands capacity is one; another is tempering its bet on the current high steel prices with the prospect that they could soften over time. Imminent consolidation in China, the rise of new rivals as a result of consolidation, and cartelization among the top producers are transforming the global steel business. Low Bargaining power: Tata Steel's stated argument, however, is rooted in its captive iron ore and coal resources. The distribution of the world's iron ore resources strengthens that case. The world's top five iron ore producers control an overwhelming 90% of the market, according to a Tata Steel presentation. In contrast, the top five steel producers command less than 20% of the world market. What's clear in those numbers is the relatively low bargaining power of steel producers vis-à-vis their ore suppliers. 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. 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." Tata Steel, too, may have found it difficult to penetrate the lucrative construction, packaging and automobile markets in Europe without Corus's help to open doors. If Tata steel meets the technical specifications of customers and at a slightly lower cost, it can break into that market more easily with Corus in tow. Tata-Corus's advantage lies in low-cost raw materials, "the benefits will come mainly from being a one-stop shop for all kinds of steel, which could help the company get orders from customers across wider geographies." they can improve economies of scale and scope and have greater distribution for Tata and Corus products in geographies where they are not present." Two parties will have to work together for technology transfer and coordinating supply chains. What works in favour of Tata-Corus is the friendly nature of the deal, and the strong Anglo-Indian link Reducing waste: (lean tech) is looking to reduce waste in its plate manufacturing process. It has adopted the concept of “flow”. This means that the products are “pulled” through the process according to customer demand. All parts of the production process, from the supply of raw steel (slab) to the finished steel plate, are carefully planned. Scheduling for each element of the process ensures that bottlenecks are kept to a minimum. Each process is paced (known as “takt”
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time) to control the amount of product in each stage of the process. This ensures that processes operate smoothly without overload or delay and keep the desired output and quality. Culture: everyone can put forward ideas and have a say in how processes can change for the better. This is known as engagement. Global Player: We are looking at how Tata Steel should position itself in the globalising steel industry, so that we do not remain a very good but small regional player." Tata Steel is advantageously poised to make the entire world its playing field. Natural resources like iron ore and ferrous alloys are not available in too many geographical locations and India has them in plenty. As the global steel industry is fragmented and awash with extra capacity worth 15 to 20 per cent of consumption, setting up Greenfield ventures may not always be a justifiable strategy. So Tata Steel plans to take the acquisition route to globalisation in the immediate future. The business mission is to provide large international customers with a comprehensive supply chain management service for steel and associated products and services. Access to raw material: Indian firms are blessed with a dependable domestic supply of iron ore Searching for R&D: Indian steelmakers operate relatively dated manufacturing facilities and do not produce the sophisticated finished steel products for which expanding markets such as the automobile industry are raising demand Seeking new markets: The third motivation for foreign investment is to gain access to new markets. Despite their low cost of production, Indian steelmakers have never been major global suppliers of finished steel, so an interest in foreign markets can be expected for local companies looking to diversify their businesses
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PERFORMANCE PRE AND POST MERGER
Financial Analysis of Tata-Corus Merger
Performance of TATA Steel before and after merger 2010-11 Sales 118753 cr 2009-10 2007-08 2006-07 (merger) 102393 cr 147329 cr 132110 cr 25650 cr 4951 cr 69.45 0.78 12350 cr 66.80 0.81 4177 cr 65.28 (0.15) 2008-09 200506 17144 cr 3506 cr 63.35 0.29 200405 15877 cr 3474 cr 62.77 0.54
PAT 8983 cr (2009) cr Earnings 75.63 60.26 per share debt/equity 1.55 1.77 Source: Company Reports
Conclusion: Immediately after acquisition of Corus, Tata Steel’s overall revenue increased many times and profit after tax also increased but in subsequent years profit has not shown the same growth. Rather, profits are decreasing and in financial year 2009-10 company showed a loss of Rs. 2009 crores. As far as earnings per shares are concerned, there is nothing much to boast about. Earnings per share have not shown any improvements. As far as financial analysis is concerned, company has not performed well and has not gained much to strengthen its balance sheet. But with a view of following the strategic plan laid down it went ahead with the acquisition of Corus. Six-pronged strategy outlined by Tata Steel in 2003 1. Expand into an Rs1, 000-crore Company by 2008-09 and to increase capacity from 4 million tonne then to 30 million tonne by 2015. 2. The company will acquire and develop more port terminals in the country, both on the east and the west coasts. 3. Third, the company now uses only one mobile crane at Haldia, but has plans to add a few more to improve cargo handling efficiency and thus reduce the turnaround time, which in turn reduces the ocean freight, which customers have to pay in foreign exchange. 4. It plans to start non-vessel operations by reserving slots in container vessels owned by others for certain sectors. 5. It would acquire more containers with an aim to increase container service in the years to come.
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6. It would soon open new offices in Pune and Nagpur, and then at Surat and Coimbatore, to increase its customer base.
Performance of Corus before merger 2006(pounds) 2005(pounds) Turnover 9733 10140 mn Profit After 229 451 tax Earnings per 10p 10.17p share Net debt at NA 821 the end of the period Source: Company Reports 2004(pounds) 9332 mn 441 10.07p 842 2003 7953 mn -305 9.25p 1013 2002 7188 mn -458 14.23p 1236
Conclusion: it can be clearly seen that Corus was facing financial crisis. Its debt was all time high and it was in losses. Thus with Tata steel pursuing its strategic plan of expansion and going for entering into new markets acquired Corus at 603p per share which was 49% higher than the most recent closing price. Thus the reasons why Corus agreed to be sold to a relatively smaller company are, a. A chance to bail out of debt and financial stress b. Access to cheap high quality iron ore from India c. Corus had high cost of production
d. Though Corus was having high turnover than Tata steel but its profit were lower than those of Tata steel.
Calculation of valuation of synergy for merger Inputs Current risk free rate = Risk Premium = 7.00% 9.70%
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Beta Pre-tax cost of debt Tax rate Debt to Capital Ratio Revenues Operating (EBIT)
Acquiring firm(TATA ) 1.12 8.00% 34.00% 68.00%
Target Firm(CORUS ) 0.50 8.00% 34.00% 25.00% $12,845.00 $610.35 36.93% 0.00% 4
After merger 1.12705 5.00% 30.00% 68.00% $16,729.00 $1,187.00 36.93% 80.00% 4
In terminal year 1.13342542
$3,884.00 Income $1,187.00 36.93% 80.00% 4 17.86% 5.28% 9.31% 24.37% 80.00% 19.50%
Pre-tax return on capital Reinvestment Rate = Length of growth period Cost of Equity = After-tax cost of debt = Cost of capital =
11.85% 5.28% 10.21% 24.37% 0.00% 0.00% $1,271.21 $4,222.67 $4,133.69
17.93% 3.50% 8.12% 25.85% 80.00% 20.68% $881.58 $23,171.78 $17,839.06
17.99% 3.50% 8.14%
After-tax return on capital = Reinvestment Rate = Expected growth rate=
Value of firm PV of FCFF in high growth $787.10 = Terminal value = $18,366.74 Value of firm today = $13,653.06 Value of Synergy Value of independent firms Value of combined firm Value of synergy $17,786.74 $17,839.06 $52.32
After studying balance sheets of TATA and Corus, retrieving information from corporate websites and using spreadsheets provided by Aswath Damodran, Professor of Finance at the Stern School of Business at New York University we arrived at a positive synergy value of $52.32 and it demonstrates that the merger should be a successful one as it takes into account various financial inputs like revenues, debt, dividend payout ratio etc. and arrives at value of both acquiring and target firm and accordingly determine the synergy value.
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Comparison Of Performance of Tata-Corus With Steel Majors
Acquirer Tata Steel Bharti Airtel Hindalco Tata Motors ONGC Videocon Target company Corus Zain Novelis Land Rover & Jaguar Imperial energy Deal value($mn) 12000 10700 5982 2300 1900 729 597 500 293 290 Industry Steel Telecom Steel Automobile Oil and Gas Electrnoics Pharmaceutical Oil and Gas Steel Electronics Year 2007 2005 2006 2005 2009 2006 2008 2010 2005 2005
Daewoo Electronics Dr. Reddy’s lab Betapharm HPCL Kenya Petroleum Refinery Ltd. Tata Steel Natsteel Videocon Thomson SA Source: www.ibef.org
Conclusions: Tata Steel’s acquisition has been the biggest acquisition till now in the history of India. The deal is the largest Indian takeover of a foreign company and will create the world's fifthlargest steel group ($7.6 billion takeover bid from Tata Steel)
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Target Arcelor NKK Corp LNM Holdings Krupp AG Corus Dofasco
Buyer Mittal Steel Kawasaki Steel Ispat Intl Thyssen Tata Steel Arcelor
Value ($bn) 32.2 14.1 13.3 8.3 8.0 5.2
Year 2006 2001 2004 1997 2006 2005
Intl Steel
Mittal Steel
4.8
2005
Performance of steel companies in India (2010), POSCO Mittal TATA Steel SAIL Jindal ISPAT industries Uttam Galva Revenue($) 31.6 bn 28.132 bn 22.741 bn 9.629 bn 4.210 bn 2.36 bn 1 bn Profit($) 2.8 bn 3.365 bn 2.75 bn 1.52 bn 354 mn -0.07 bn 22.85 mn Employees 29648 320000 34101 131910 7669 3000 18000 Capacitytonnes) 12 mn NA 31 mn 13.5 mn NA 14.3 mn NA
Thus looking at the acquisition history in India and post merger performances, TATA Corus deal shows positive results though initially TATA had to bear losses. Still TATA steel is 5 th largest steel company in the world and posses one of the largest capacity.
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Some of the other notable achievement of TATA steel are
a. Ranked 56th producer in the world before acquisition and ranked 5th after acquisition.
b. It is the largest private sector steel company in India in terms of domestic production. c. Currently ranked 410th on Fortune Global 500. d. Tata Steel is the 8th most valuable brand according to an annual survey conducted by Brand Finance and The Economic Times in 2010. e. Tata Steel holds a very vital place in Indian business history, because it has introduced some of the unique concepts like • 8-hour working days, • leave with pay and pension system for the first time in India, and • The first player to start rapid industrialization process.
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OPERATION AND STRATEGY
Tata Steel has successfully improved its operations. They have taken various initiatives like total operational performance (TOP), total productivity maintenance (TPM), knowledge management (KM), operation research and decision support systems (OR and DSS), and Six Sigma. Various initiatives have resulted in improved utilization of raw materials like coal with high ash content and blue dust, which was converted into a byproduct. It benchmarked its norms against the best plants in the world. It can be best explained by the example, “the production of sinter plant was increased by 60 per cent which was as good as having one sinter plant free.”[16] But having faced with the global economic crisis, it was the inherent resilience of Tata Steel that could sustain the company through the tough phase. The key issues in operations in 2009-10 were thus related to the macro economic situation. In the following paragraph the flexibility in operations and the responsiveness of employees is emphasized as the factors that key to Tata Steel. The collapse in private business investment and decline in consumption levels due to high unemployment rates led to low capacity utilisation in the steel industry in the first half of the 2009-10. In order to match the reduced demand, steel companies, especially in the US and Europe, reduced their capacity utilisation by temporarily taking capacity off stream. However in emerging economies like India, the credit shortage was not as acute as in the western world and so demand conditions continued to be relatively stable, even though prices dropped significantly in line with the global pricing scenario. [17] In early part of 2009-10, the European operations of Tata Steel declined by almost 35% due to lower volumes and increasing prices, but very significant measures to bring about operating cost savings were undertaken to offset some of the resulting losses. Cost reduction is a continuing activity across the businesses of Tata Steel in Europe, as is productivity improvement and working capital management. These enormous achievements have been realised despite very serious challenges in the market. It is imperative to have a look at the underlying logic of Tata Steel adopting the strategy of Globalisation. The company plans to produce 30 million tons of steel by 2015. This Objective cannot be achieved by organic growth alone. So acquisition had to be one of the strategies to
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achieve the mission. At the time of acquisition it was expected that with more consolidation and fewer players in the market, the sharp declines and fluctuations in the cycle would ease, increasing earnings multiples and finally, valuations. The main reason for this is resource geography, or which is a de-integrated method of steel making. This means that the steel production takes place in a place where it makes most economic sense. It is not wrong to assume that it has in fact been the way it was expected. It works in two ways. One, low cost steel producing countries like India is building a lot of slab capacity because of their proximity to iron ore. They thus want to expand globally, especially where they can produce finished steel using their raw output in mature markets. But having operations in Europe is costlier than, say in Brazil, Russia or India but the most effective way for Tata Steel now to grow is looking for markets where costs are higher, simply because their low cost slabs can afford that. [18]
The other strategic issue is the reduction in the labour cost. The reason it is being treated as an issue is because of the involvement of the Trade Union. Tata steel says that to achieve competitiveness cost needs to be reduced and that would be done by closing certain plants that does not fit into the strategy of Tata Steel Europe. The jobs at risk are in operational, functional and management positions. A 90-day consultation process is followed up with affected employees and union representatives. The company has made efforts and continue to do so to achieve the job losses through voluntary redundancies. However, it is important that critical skills are retained enabling the business to increase output should the markets recover. A comprehensive range of redundancy packages and outplacement support services have been made available to those leaving the company. Full consultations with employees and their representatives are done throughout the process.
One of the issues in operations was the Supply Chain process in the European operations. They identified this problem and are now in a continuing process of improving this. Improving operations has been the major objective in the year 2010-11. It must be noted that Corus was rebranded as Tata Steel Europe (TSE) after it was taken over by Tata Steel in 2010.TSE continuously works towards higher levels of operational excellence through improving asset performance in respect of quality, reliability and cost. The major objective was to improve the customer service level by improving the supply chain. In an effort to improve the operations
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and make it flexible to market demands they have taken several initiatives. The blast furnaces at Wales were not in the best of conditions. To improve operations £ 185 million was invested in rebuilding it. A fund of £ 100 million was also set up to for short payback capital projects to improve operations. One major aim of TSE is to strategize to handle the Fluctuating demand and changing environmental regulations. To take care of the environment in which it operates and to meet the objective it commissioned a BOS gas recycler that reduces emission of CO2 by 250000 tons. [19]
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ANNEXURE I: Time Line of Merger Activities
September 20, 2006 : Corus Steel has decided to acquire a strategic partnership with a Company that is a low cost producer October 5, 2006 : The Indian steel giant, Tata Steel wants to fulfil its ambition to Expand its business further. October 6, 2006: The initial offer from Tata Steel is considered to be too low both by Corus and analysts. October 17, 2006: Tata Steel has kept its offer to 455p per share. October 18, 2006 : Tata still doesn’t react to Corus and its bid price remains the same October 20, 2006 : Corus accepts terms of £ 4.3 billion takeover bid from Tata Steel October 23, 2006: The Brazilian Steel Group CSN recruits a leading investment bank to offer advice on possible counter-offer to Tata Steel’s bid. October 27, 2006: Corus is criticized by the chairman of JCB, Sir Anthony Bamford, for its decision to accept an offer from Tata. November 3, 2006: The Russian steel giant Severstal announces officially that it will not make a bid for Corus November 18, 2006: The battle over Corus intensifies when Brazilian group CSN approached the board of the company with a bid of 475p per share November 27, 2006: The board of Corus decides that it is in the best interest of its will shareholders to give more time to CSN to satisfy the preconditions and decide whether it issue forward a formal offer December 18, 2006: Within hours of Tata Steel increasing its original bid for Corus to 500 pence per share, Brazil's CSN made its formal counter bid for Corus at 515 pence per share in cash, 3% more than Tata Steel's Offer. January 31, 2007: Britain's Takeover Panel announces in an e- mailed statement that after an auction Tata Steel had agreed to offer Corus investors 608 pence per share in cash April 2, 2007: Tata Steel manages to win the acquisition to CSN and has the full voting support form Corus’ shareholders
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REFERENCES
1. Tata Steel. Available at: http://www.tatasteel.com/about-us/company-profile.asp. Accessed on 13-Aug 2011 2. Business Standard 2010. Available at: http://businesstoday.intoday.in/story/tata-steelhistory/1/16465.html. Accessed on 13-Aug 2011
3. Tata Steel, Available at: http://www.tatasteel100.com/heritage/history/history18.asp.
Accessed on 14 Aug 2011
4. Tata Steel 2009. Available at: http://www.tatasteel.com/investorrelations/main-q4-06-
07.asp. Accessed on 14 Aug 2011
5. Rajesh Mahapatra (2007), “India’s Tata Steel Calls Corus Acquisition Strategic; Some
Raise Concern Over Deal’s High Cost” Available at: http://www.wallst.net/news/news.asp?Source=APNEWS&id=48880. Accessed on 17Aug 2011
6. Business Standard 2007. Transcript of Press Conference for CORUS Acquisition, 31st
January 2007
7. Nayak Amar K J R, Kummer, Christoper B 2006, Case Study : Tata Steel Acquiring
Corus plc: A Case of an Emerging MNE Acquiring a Traditional European MNE, 8. Malapur, Rashmi (2007). Case Study: Tata’s Acquisition of Corus: A Quantum Leap
9. World’s Largest Steel Companies. Available at:
http://www.steelads.com/info/largeststeel/TOP30-Worlds-Largest-Steel-Companies.html. Accessed on 17-Aug 2011 10. Building on a cherished legacy - Sir Dorabji Tata, Available at: http://www.dorabjitatatrust.org/about/history.aspx. Accessed on 17th Aug 2011 11. SIR NAOROJI SAKLATVALA. Available at: http://www.tatacentralarchives.com/history/biographies/07%20ndsaklatvala.htm. Accessed on 17th Aug 2011 12. SIR JEHANGIR GHANDY. Available at: http://www.tatacentralarchives.com/history/biographies/11%20jjgandhy.htm. Accessed on 17th Aug 2011 13. J.R.D. TATA. Available at: http://www.tatacentralarchives.com/history/biographies/15%20jrdtata.htm. Accessed on 17th Aug 2011 14. Mr B Muthuraman (Vice Chairman). Available at: http://www.tatasteel100.com/people/leadership-muthuraman.asp. Accessed on 17th Aug 2011 15. Jamshedji Tata Award for Lifetime Achievement for Quality – 2008. Available at : http://www.isqnet.org/Awds%20Citation/JamshedjiMr.%20B.%20Muthuraman.pdf. Accessed on 20 July 2011
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16. Production at Sinster Plant 2009. Available at: http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=cbcce0ac-7c9d-460a-a1a5cf70b3ae7f87%40sessionmgr112&vid=4&hid=111. Accessed on August 15, 2011, 17. Tata Steel. Available at: http://www.tatasteel.com/investors/annual-report-200910/annual-report-2009-10.pdf. Accessed on August 15, 2011 18. New prospects of Tata Steel. Available at: http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=49c01bd8-a8e8-4a80-bf1e087ad4583e51%40sessionmgr111&vid=6&hid=7. Accessed on August 17, 2011 from 19. Tata Steel. Available at: http://www.tatasteel.com/investors/annual-report-201011/annual-report-2010-11.pdf. Accessed on Aug 15, 2011
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doc_458497915.doc