Tata Acquires Corus: A case Study


Research Paper (postgraduate), 2012
18 Pages

Excerpt

Abstract

Purpose: The case explores the issues of sustainability and long-term feasibility of cross-border, big-ticket acquisitions. It gives some idea to the readers as to how well the companies in the emerging market are expanding overseas to become multinationals.

Methodology/Approach: The case study is based upon secondary sources of information including company annual reports, financial results, Newspapers, Business Magazines, Internet, other reports. It gives leads to the readers in many directions and the case can hence be analyzed from two angles viz. the strategic approach and the financial approach.

Research Limitations/Implications: Since the paper is based upon secondary sources of information, it has limitations in terms of those things which are not revealed by the companies. Some more insights could have been brought in if the top management of the companies might have been involved (though feasibility was an issue).

Practical Implications: Will act as a guide for practitioners and researchers while approaching such cases of acquisition from the point of view of a strategy for going global.

Keywords: Mergers & Acquisitions, Acquisitive Growth, Growth Strategy, Going global. Steel, India.

Paper Type: Case Study

“The proposed acquisition represents a defining moment for Tata Steel and is entirely consistent with our strategy of growth through international expansion”

- Chairman Ratan Tata on the proposed acquisition in Oct. 2006[1]

Introduction

January 31, 2007, added a shining feather in the cap of corporate Tata Steel which was celebrating its centenary year 2006-07. This day Tata Steel acquired the ninth largest steel producer of the world Corus in an all-cash deal of $12.15 billion (around Rs. 55,000 crore) and catapulted itself from the 56th largest steel producer in the world to 6th largest steel producer in the world. It became the largest acquisition by an Indian company and the second largest in the industry after Mittal Steel’s $38.3 billion acquisition of Arcelor. By offering 608 pence per share (pps), which beat a price of Brazilian company Companhia Siderurgica Nacional (CSN) of 603 pps, was 33.6% higher than its original bid. By some measures, it exceeded the price paid in other recent industry deals, such as Mittal Steel’s acquisition of Arcelor last year. In its centenary year of 2007, Tata Steel, a subsidiary of Tata Group - India’s largest private sector company, was aiming to touch the production figure of 7 million tonnes but the acquisition would bring the total capacity of the group to around 23 million tonnes, making it the sixth largest steel producer in the world[2].

Background

The Indian Multinational in making: Tata Steel

Tata Steel is India’s largest private sector company with 2005/06 revenues of $5.0 billion, a current market capitalization of $6.4 billion and crude steel production of 5.3 million tonnes across India and South-East Asia. It is a vertically integrated manufacturer and is one of the world’s most profitable and value-creating steel companies. Tata Sons, Tata Steel and other Tata companies had combined revenues in 2005/06 of approximately $22 billion. Tata Sons’ current investments are valued at approximately $50 billion[3].

Tata Steel intended to pursue a “de-integrated” business model for its future growth where the steel making facilities are located in proximity to the raw material source, and the finishing capacities are located close to the consumers. For over ninety years, Tata Steel concentrated primarily on its domestic market. However, over the past two years, it has shifted its focus to take advantage of the fast growing steel market in South East Asia. Tata Steel has acquired finishing capacities in Asia – through NatSteel Asia in February 2005, which has a capacity of approximately 2mtpa of finished steel and, in March 2006, a 67% equity stake in Millennium Steel, Thailand which has a capacity of 1.7 mtpa of steel – and how has the operations spanning eight South East Asian and Pacific Rim countries.

Tata Steel’s sales mix comprises approximately two thirds flat products and approximately one third long products. The flat products comprise of hot rolled, cold rolled and coated products. Tata Steel also manufactures Ferro-chrome and Ferro-manganese products from its integrated chrome ore mines, and other products such as bearings. The long products comprise value-added finished products such as wires, wire rods and merchant bars, and also semi-finished products in the form of billets[4].

Tata Steel’s strategic intention was to focus on high-end and fast growing automotive sector and the expanding construction industry. It is pursuing an extensive expansion programme including targeted capacity expansion in its plants and a wide range of Greenfield projects in India, Bangladesh, South Africa and Iran. Furthermore, with its wire manufacturing facilities in India, Sri Lanka, and Thailand, Tata Steel intends to play a significant role in the global wire business.

For the year ended 31st March 2006, Tata Steel reported revenues of $5.0 billion, earnings before interest, tax, depreciation and amortization (EBITDA) of $1.5 billion and profit after tax of $0.8 billion.

Tata Steel is a vertically integrated Steel company whose principal business is the manufacture of semi-finished carbon steel products at plants in India and South-East Asia. Tata Steel is also involved in mining ore in India, to satisfy its downstream production needs. Some two-thirds of its turnover is realized in India and at present it has very limited steel turnover in the EU. The group has spent almost $12 billion for acquiring companies.

Tata Steel acquired Singapore’s NatSteel in early 2005 at $ 486 million. This gave it an access to markets in China, Thailand, Vietnam, the Philippines, Australia and Malaysia. Shortly after that it snapped up Millennium Steel, the largest steel company in Thailand at $ 404 million. It also acquired a 5% stake in the Carborough Downs Coal project in Queensland, Australia. The globalization has a Greenfield component too. Tata Steel has signed a memorandum of understanding with the Persian Gulf Special Economic Zone to set up a 3 million tonne gas-based steel plant at Bander Abbas. In Richards bay (South Africa), the company is working on a 1, 35,000 tonnes per annum ferrochrome plant. And the Tata’s are negotiating with the government of Bangladesh for a Steel plant in the western part of the country[5].

Other group companies were also not far behind. Tata Tea was actually the first off the block company when it took over Tetley (which was twice its size) in 2000 for $407 million. At that time it was the biggest foreign acquisition by an Indian company. In June 2006, Tata Coffee, a subsidiary of Tata Tea, signed an agreement to acquire Eight O’ Clock Coffee for $ 220 million. In August 2006, Tata Sons and Tata Tea announced a plan to invest $ 677 million for a 30% stake in energy brands, a manufacturer of Vitamin water. In October 2006, Tata tea took a 33% stake in South African Tea Company Joekels tea Packers[6].

The European Giant: Corus

Corus was formed in 1999 when British Steel and Koninklijke Hoogovens of the Netherlands combined to form a new entity which they named Corus. Philippe Varin who was appointed as Chief Executive of Corus in May 2003 launched the “Restoring Success” programme, designed to deliver a Rs. 5,796 crore (£680 million) EBITDA improvement in Corus’ financial performance[7]. This programme, completed at the end of 2006, underpinned the significant improvement in Corus’ financial performance, delivering saving through cost reductions and improved operational efficiency. It also delivered significant improvements in safety performance and customer service levels. As per Corus’ estimates it was the ninth largest producer of Steel in the world till December 30, 2006 (Table I).

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Table I Source: Metal Bulletin

With an annual turnover of over £10bn and major operating facilities in the UK, the Netherlands, Germany, France, Norway and Belgium, it produced 18.34 million tonnes of Crude Steel (Table II), employed around 47,300 people throughout the world (Tables III & IV). It was a manufacturer of semi-finished and finished carbon steel products at plants in Europe, including in the UK and the Netherlands. Approaching 80% of its turnover was realised in the European Union (Table V).

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Table II Source: www.corus.com

* Steelmaking at Stocksbridge ceased during 2005. The production capacity figure for 2005 includes Stocksbridge for half the year.

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Table III Source: www.corus.com

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Table IV Source: www.corus.com

The company comprised four divisions, viz. Strip Products, Long Products, Distribution & Building Systems and Aluminium, and had a global network of sales offices and services centers. Building and Construction was the largest market sector for Corus[8]. Having secured a very important position in commercial and industrial construction, new opportunities were being explored in major potential areas like residential, health and education (Table VI).

[...]


[1] Economic Times, October 20, 2006.

[2] Steel World, February 2007. pp11-14.

[3] Tata Steel Press Release on 20.10.2006

[4] Tata Steel Press Release on 20.10.2006, 10.11.2006

[5] http://www.tata.com/company/articles/inside.aspx?artid=DAPpgprjgis=

[6] As per reports published by Tata Steel

[7] Corus Annual Report 2003-04.

[8] www.corus.com

Excerpt out of 18 pages

Details

Title
Tata Acquires Corus: A case Study
Course
Strategic Management
Author
Year
2012
Pages
18
Catalog Number
V197610
ISBN (eBook)
9783656264118
ISBN (Book)
9783656265108
File size
619 KB
Language
English
Notes
The Case depicts implementation of Growth Strategy by acquisition of another company in a totally different business environment and cultural setup. The Case Study was tested in a class of Post Graduate Diploma in Management at Calcutta Business School as a part in the course on Marketing Strategy in 2012.
Tags
M&A, Strategy, Steel, Cross Border acquisition, Leveraged Buyout (LBO)
Quote paper
Shiv S Tripathi (Author), 2012, Tata Acquires Corus: A case Study, Munich, GRIN Verlag, https://www.grin.com/document/197610

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