TATA-CORUS

Detailed case study

On January 31, 2007, India based Tata Steel Limited (Tata Steel) acquired the Anglo Dutch steel company, Corus Group Plc (Corus) for US$ 12.20 billion. The merged entity, Tata-Corus, employed 84,000 people across 45 countries in the world. It had the capacity to produce 27 million tons of steel per annum, making it the fifth largest steel producer in the world as of early 2007.

Before the acquisition, the major market for Tata Steel was India. The Indian market accounted for sixty nine percent of the company's total sales. Almost half of Corus' production of steel was sold in Europe (excluding UK). The UK consumed twenty nine percent of its production.

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

Commenting on the acquisition, Ratan Tata, Chairman, Tata & Sons, said, "Together, we are a well balanced company, strategically well placed to compete at the leading edge of a rapidly changing global steel industry"

Financing the deal

Tata Steel outbid the Brazilian steelmaker Companhia Siderurgica Nacional's (CSN) final offer of 603 pence per share by offering 608 pence per share to acquire Corus.

Tata Steel had first offered to pay 455 pence per share of Corus, to close the deal at US$ 7.6 billion on October 17, 2006. CSN then offered 475 pence per share of Corus on November 17, 2006.

Finally, an auction was initiated on January 31, 2007, and after nine rounds of bidding, TATA Steel could finally clinch the deal with its final bid 608 pence per share, almost 34% higher than the first bid of 455 pence per share of Corus.

Expert’s opinion

Many analysts and industry experts felt that the acquisition deal was rather expensive for Tata Steel and this move would overvalue the steel industry world over.

Commenting on the deal, Sajjan Jindal, Managing Director, Jindal South West Steel said, "The price paid is expensive...all steel companies may get re-rated now but it's a good deal for the industry." Despite the worries of the deal being expensive for Tata Steel, industry experts were optimistic that the deal would enhance India's position in the global steel industry with the world's largest and fifth largest steel producers having roots in the country. Stressing on the synergies that could arise from this acquisition, Phanish Puram, Professor of Strategic and International Management, London Business School said, "The Tata-Corus deal is different because it links low-cost Indian production and raw materials and growth markets to high-margin markets and high technology in the West.     

The cost advantage of operating from India can be leveraged in Western markets, and differentiation based on better technology from Corus can work in the Asian markets."

Tata Steel Vs CSN: The Bidding War

There was a heavy speculation surrounding Tata Steel's proposed takeover of Corus ever since Ratan Tata had met Leng in Dubai, in July 2006. On October 17, 2006, Tata Steel made an offer of 455 pence a share in cash valuing the acquisition deal at US$ 7.6 billion. Corus responded positively to the offer on October 20, 2006.

Agreeing to the takeover, Leng said, "This combination with Tata, for Corus shareholders and employees alike, represents the right partner at the right time at the right price and on the right terms." In the first week of November 2006, there were reports in media that Tata was joining hands with Corus to acquire the Brazilian steel giant CSN which itself was keen on acquiring Corus. On November 17, 2006, CSN formally entered the foray for acquiring Corus with a bid of 475 pence per share. In the light of CSN's offer, Corus announced that it would defer its extraordinary meeting of shareholders to December 20, 2006 from December 04, 2006, in order to allow counter offers from Tata Steel and CSN...       

Synergies

There were many likely synergies between Tata Steel, the lowest-cost producer of steel in the world, and Corus, a large player with a significant presence in value-added steel segment and a strong distribution network in Europe. Among the benefits to Tata Steel was the fact that it would be able to supply semi-finished steel to Corus for finishing at its plants, which were located closer to the high-value markets...   

The Pitfalls

Though the potential benefits of the Corus deal were widely appreciated, some analysts had doubts about the outcome and effects on Tata Steel's performance. They pointed out that Corus' EBITDA (earnings before interest, tax, depreciation and amortization) at 8 percent was much lower than that of Tata Steel which was at 30 percent in the financial year 2006-07