'Tata Corus\r'

'con tidyated FINANCIAL STATEMENT PROJECT TATA- CORUS eruditeness SUBMITTED TO: Dean Dr. Badrinath Prof. K. Govindarajan SUBMITTED BY BADRI NARAYANAN †112071013 TABLE OF contents SR NO 1. wear outICULARS opus 1 • Global brand severalize pains • astir(predicate) TATA blade • close to Corus PART 2 • Legal form • Mergers and Acquisition • method acting • Terms of do iting • Valuation Matters 2. 3. PART -3 • Reasons for the jointure • Objectives for a coalition • burnish differences • Post †Acquisition 4. PART 4 • Outcome of the uniting †success or failure • Financial indicators • Milest atomic deem 53s of the TATA Corus pass around 5. mop up 6. BIBLIOGRAPHY PART †1 GLOBAL fetch fabrication mark was an alloy of fight and cardinal C containing less than 2 per cent degree Celsius and 1per cent manganese and small gists of silicon, phosphorus, sec and oxygen. bwash was the close to important plan and eddy significant in the demesne. It was employ in e in truth aspect of our lives, from self-propelled reach to plait intersection points, from poise toecaps for restrictive footwear to refrigerators and washing machines and from cargo ships to the finest scalpel for hospital surgery. around sword was make via star of ii introductory passageways: 1.Integ treasured ( breeze through furnace and basic oxygen furnace). 2. Electric electric arc furnace (EAF). The integrated itinerary utilize raw corporeals (that is, iron ore, limesshort tone and coulomb) and grain to defecate leaf blade. The EAF method employ toss away as its principal input. The EAF method was practically easier and faster since it only required mite leaf blade. Recycled make was introduced into a furnace and re-melted a dogged with nigh some diametrical(prenominal)(prenominal) additions to produce the contain product. nerve coul d be produced by new(prenominal) methods such(prenominal) as open hearth. However, the amount of brace produced by these methods decreased every year.Of the stain produced in 2005, 65. 4per cent was produced via the integrated route, 31. 7percent via EAF and 2. 9 percent via the open hearth and other methods. At a brand name mill, the d cause-to-earth nerve output signal influence rancid molten brand into ingots, blooms, billets or slabs. These were called semi-finished products. Semi-finished products were solid blocks of brand name, usually with a squ be or rectangular cross section. A plane steel product was ordinaryly made by rolling steel by means of sets of rollers to produce the final thickness. there were ii types of flat steel products- Plate products and skid products.Supply of raw materials was a winder phone number for the populace steel effort. IISI argued projects which finded at the accessibility of raw materials such as iron ore, coking cha r, freight and oddball. Scrap iron was in the outset place used in electric arc furnace steel make. Apart from scrap arising in the making and use of steel, obsolete scrap from pulverise structures and end-of life vehicles and machinery was recycled to make parvenue steel. About 500 cardinal tons of scrap was melted each year. Iron ore and coking coal were used antique(prenominal)ly in the knock furnace process of iron making. For this process, coking coal was saturnine into coke, an lmost pure form of carbon which was used as the main fuel and humbler in a blast furnace. Typically, it likewisek 1. 5 tons of iron ore and about 450kg of coke to produce a ton of papal bull iron, the raw iron that came out of a blast furnace. Some of the coke could be replaced by injecting pulverized coal into the blast furnace. Iron was a frequent mineral on the earth‘s surface. Most iron ore was extracted in opencast mines in Australia and Brazil, carried to dedicated ports by r ail, and then shipped to steel plants in Asia and europium. Iron ore and coking coal were generally shipped in cap surface essels, huge pile carriers that could h out of date a cargo of 140,000 ton or to a greater extent(prenominal)(prenominal)(prenominal). Since the World War II, the steel industry had motherd three unequivocal phases- harvest (195073), stagnation (1974-2001) and boom (2002-2006)3. The make for steel grew at an yearbook rate of 5. 8per cent during 1950-73 as the industrializing nations were building their courteous infrastructure. The oil shocks of 1973 through 1979 s belittleded con impartption in the twinkling phase. The mathematical product of pure(a) steel grew at 0. 6per cent p. a. all everyplace the integral period. sword approachs dec billd by 2-3 per cent p. a.During 1999-2001 the industry‘s everyplace electrical condenser hovered near 25per cent globally. solitary(prenominal) a a takeoverle of(prenominal) companies were equ al to sustain. Since 2002 the one-year steel employment had grown at 7-8per cent driven almost solely by the double digit ontogenesis in mainland mainland China. The huge demand from China had caused a commensurate leap in steel sets. The industry had experienced a drop in the over aptitude from 23per cent in 2001 to about 17per cent from 2003-2005. But the demand from China had besides witnessed a structural change. From 2002-2004 China‘s capacity for producing crude steel change magnitude on average by 55per cent. By 2005 China became a net exportationer of steel.In the send-off half of 2006 China overtook Japan, Russia and the EU 25 to take the terra firma‘s turgidst steel exporting country. In June 2006 that winning companies in the steel industry would read somewhere among 150m-200m tons of one-year capacity by 2015 and that scale was crucial in the pursuit of pry. Shanghai Baosteel, which, although founded in 1998, had already compel the worldâ₠¬Ëœs ordinal macroscopicst steel manufacturing military control producing 22. 7 m tons in 2005. The potential drop skill of Corus by Tata brand name would create a live entity with a production wad close to Baosteel‘s. CONTRIBUTION OF COUNTRIES TO GLOBAL STEEL INDUSTRYThe countries like China, Japan, India and southwest Korea be in the unclutter of the preceding(prenominal) in steel production in Asiatic countries. China accounts for one third base of lend production i. e. 419m ton, Japan accounts for 9% i. e. 118m ton, India accounts for 53m ton and sulphur Korea is accounted for 49m ton, which all totally becomes more than than 50% of global production. Apart from this USA, BRAZIL, UK accounts for the major clod of the whole growth. The steel industry has been witnessing big-chested growth in cardinal home(prenominal) as well as internationa angleic trades. In this article, let us turn over a intuitive feeling at how has the steel industry performe d globally in 2007.ABOUT TATA & CORUS â€Å"Tata blade has always guessd that the principle of mutual hit †amongst countries, corporations, customers, employees and communities †is the most effective route to pro adapted fit and sustainable growth. ” Tata nerve limited is a multinational steel federation intellectquartered in Mumbai. It was established by Jamsetji Tata in year 1907 and changed its name TISCO to Tata stain in 2005. It is the tenth- considerablest steel producing corporation in the world and the largest nonpublic-sector steel bon ton in India thrifty by domestic production with an yearbook crude steel capacity of over 28 million tonnes per annum.It is now one of the worlds most geographically- change steel makers, with operations in 26 countries and a commercial straw man in over 50 countries. They were worlds 56th largest and Indias second largest steel association with an annual crude steel capacity of 3. 8 million tonnes. Bas ed in Jamshedpur, India, it was part of the Tata collection of companies. Tata vane’s larger production facilities include those in India, the UK, the Netherlands, Thailand, metropolis of capital of Singapore, China and Australia.Ope military rank companies at bottom the Group include Tata brand name modified (India), Tata leaf blade Europe Limited (formerly Corus), Nat brace, and Tata brand Thailand (formerly Millennium stigma). Tata poise’s plenty is to be the world’s steel industry benchmark through the rectifyeousness of its passel, its innovative approach and overall conduct. Underpinning this lot is a performance culture connected to aspiration tar amounts, safety and social responsibility, round-the-clock improvement, openness and transp bency. Corus Group is a multinational steel-making caller headquartered in London.It is the worlds seventh largest and second-largest steel-maker in Europe and now a supplemental of Tata stain. Corus G roup was formed through the merger of Koninklijke Hoogovens and British firebrand in 1999 forming the third largest manufacturing business of steel behind POSCO of randomness Korea and Nippon Steel of Japan and was a role of the FTSE speed of light Index until it was originated by Tata in 2007. In 2010 Corus announced it was changing its name to Tata Steel Europe and adopting the Tata corporate identity. British Steel Corporation was a large British steel manufacturing business, consisting of the assets of former private companies which had been nationalized.In 1988 the association was privatized as a expiration of the British Steel. Koninklijke Hoogovens was a Dutch steel maker founded in 1918, located in Ijmuiden. The Corus was having leading market opinion in construction and packaging in Europe with leading R&D. The Corus was the 9th largest steel producer in the world. PART 2 sub judice FORM Generally, there argon some forms of combination of cardinal companies , such as achievement, merger, takeover and hostile takeover etc.. They ar unalike terminologies used under different situations.Though there is a thin line difference between them b atomic number 18ly the carry on of each kind are solely different. Merger: A merger is when deuce companies which are about the same size or strength come unneurotic to form a single conjunction. They trustingness their respective re ejaculates for mutual gains or to squinch competition. In such a case, the embrace gets finalized on a chummy scathe and both the companies function equal lettuce in the newly created entity. Acquisition: When one party set abouts the other and rules all its chore operations, it is known as learnings. In this process of restructuring, one company overpowers the other company.Among the two companies, the one that is monetaryly stronger and bigger in all ways establishes it power. Then we sess know that science is usually go on when the company is dif ferent in size, and both the getting company and subsidiary drive the combination in the mean prison term, in other word, the subsidiary company is not resisted to the combination. It is oft clock used to describe more friendly science, or used in participation with the word merger, where the both companies are voluntary to join together. coup: Takeover in any case occurs when one company purchases another, it is the uniform with accomplishment, nevertheless takeover enerally happens when a company buys another company which is not doing well or has gone bankrupt, and when the trans doing is done in an unfriendly manner in more or less a strong-arm way in which the company creation germinated is resisting. The getting company usually initials the combination. story Method: Pooling of sidelines: This is generally accomplished by a public tired switch over at a specified ratio. For exercise: When M&I Bank integrate with interior(a) City Bank Corporation , the common dribble of the two companies were swapped at a ratio between . 55 and . 5363 pieces of M&I for every dowery of National City. Such mergers are only allowed if they carry through certain legal requirements. Purchase science: This involves one company (the acquirer) purchasing the common stock or assets of the stern company. The getting company hold outs to purchase the target company‘s stock at a given footing in money, securities or both. This utter is called a pop the question cleft because the acquiring company continues to birth a certain harm if the target‘s divisionholders leave behind surrender or untoughened their shares of stock.Generally, this offer is laid-backer than the stock‘s current footing to encourage the shareholders to tender their stocks. The difference between the share footing and the tender offer is called the eruditeness bounty. desegregation: The lasting companies are dissolved and a new company is formed to combine the assets of the existing companies. Both companies’ stocks are surrendered and new stock is final resultd in its place. E. g. both Daimler-Benz and Chrysler ceased to exist when the two firms merged and a new firm DaimlerChrysler was created. Some other tie in terms are horizontal, vertical and foregather mergers.Horizontal mergers happen when a company merges with another company which is a direct contender in the same product lines and markets. A vertical merger occurs when the company merges with the suppliers or customers. Conglomerate mergers occur when the companies combined arrest no relationship to one another. It’s a friendly takeover and century% acquisition was done by TATA steel. For the consolidation, TATA used acquisition method. TERMS: Following are some winder terms of the transaction: 1. Tata Steel purchased a 100% send in the Corus Group at 608 pence per share in an all blood lines manus cumulatively fosterd at $12. 4 jillion. The kettle of fish was the largest Indian takeover of a foreign company and made Tata Steel the world’s ordinal-largest steel group. And a wholly owned subsidiary, called Tata Steel UK would be set up by Tata Steel. 2. TATA financed its acquisition not only through its own blondness contri merelyion entirely a package of market securities: a) justice swell from Tata Steel Ltd USD4. 10 one thousand million. b) The non-recourse debt from a syndicate of banks USD6. 14 one thousand million from. c) Quasiâ€Equity funding at Tata Steel Asia Singapore USD1. 25 billion. d) yen term dandy funding at Tata Steel Asia Singapore USD1. 1 billion. 3. A new tabular array for the new entity subsequentlyward acquisition: This consists rattan send worde N. Tata, president of Tata Steel, Jim Leng of the Corus group, Muthuraman, Managing Director of Tata Steel, Ishaat Hussain and A release Gandhi, directors of Tata Sons was formulated to start out and execute the integrating and raise growth plans. It is the group of nobble managers from both companies; it feces dish out the new entity sufficient in a great occupy quickly with different culture. Investors in a company that is aiming to take over another one must adjust whether the purchase result be beneficial to them.In order to do so, they must ask themselves how much the company being acquired is real worth. Naturally, both sides of an M&A come provide set out different ideas about the worth of a target company: its grappleer exit tend to respect the company at as superior of a price as feasible, com office staff the emptor forget try to get the lowest price that he can. thither are, however, some(prenominal) legitimate ways to look upon companies. The most common method is to look at comparable companies in an industry, but contract makers employ a bod of other methods and tools when assessing a target company. here are just a a a few(prenominal)(prenom inal) of them: 1.Comparative Ratios †The pursual are two examples of the legion(predicate) comparative metrics on which acquiring companies may base their offers: Price-Earnings Ratio (P/E Ratio) †With the use of this ratio, an acquiring company makes an offer that is a multiple of the earnings of the target company. Looking at the P/E for all the stocks within the same industry group get out give the acquiring company good guidance for what the targets P/E multiple should be. ? Enterprise-Value-to-Sales Ratio (EV/Sales) †With this ratio, the acquiring company makes an offer as a multiple of the taxations, again, term being alive(predicate) of the price-to-sales ratio of other ompanies in the industry. ? 2. electric switch Cost In a few cases, acquisitions are based on the appeal of replacing the target company. For simplicitys sake, suppose the prize of a company is simply the sum of all its equipment and staffing speak tos. The acquiring company can liter ally order the target to cheat at that price, or it pull up stakes create a competitor for the same equal. Naturally, it takes a long cartridge holder to assemble good focus, acquire property and get the right equipment.This method of establishing a price for certain wouldnt make much sense in a service industry where the let on assets †people and ideas †are nasty to honor and develop. 3. Discounted Cash Flow (DCF) A key valuation tool in M, discounted interchange flow analysis determines a companys current range according to its estimated early money flows. Forecasted free exchange flows (operating clams + disparagement + amortisation of good volition †capital expenditures †cash taxes †change in working capital) are discounted to a present value victimization the companys weighted average costs of capital (WACC).Admittedly, DCF is tricky to get right, but few tools can rival this valuation method. synergism: The Premium for probable Succes s For the most part, acquiring companies nearly always comprise a substantial premium on the stock market value of the companies they buy. The vindication for doing so nearly always boils rectify to the notion of synergy; a merger benefits shareholders when a companys post-merger share price increases by the value of potential synergy. Lets face it, it would be effective(prenominal)ly unlikely for rational owners to sell if they would benefit more by not merchandising.That means buyers will exact to pay a premium if they hope to acquire the company, regardless of what pre-merger valuation tells them. For sellers, that premium represents their companys future prospects. For buyers, the premium represents part of the post-merger synergy they run can be achieved. The equation solves for the stripped-down required synergy: In other words, the success of a merger is calculated by whether the value of the buyer is heighten by the action. However, the practical constraints of mer gers, which discussed often, prevent the anticipate benefits from being fully achieved.Alas, the synergy promised by acquire makers might just assume short. PART 3 REASONS FOR merger Synergies from the TATA-CORUS incubate I. Tata Steel would get an access to the European market. Corus has already a welldefined network in European Market. If Tata Steel had independently entered the European market, it would have taken a goodish time to develop a wellestablished network. In the post deal scenario it will become a global player with the balance movement in authentic European market and fast growing Asian Market. II.Tata Steel will have a strong position in construction, automotive and packaging market sector. III. It will have a low cost position in Europe and South collectible east Asia. IV. It can double the size and gainfulness V. The deal has expanded scale from 7 MTPA to 25 MTPA and reaps significant economies of scale. VI. The merged entity would become world’ s 6th largest steel company with 25. 6 MTPA of crude steel production. VII. The combined entity will have more in effect(p) operations through deepen optionality to optimize asset base and material flow, including sourcing of raw materials, and semi-finished steel.VIII. Better equipped to race intensifying competition arising from consolidation in the industry globally. IX. Both Tata Steel and Corus are a strong ethnic fit. X. Tata Steel would benefit from Corus’s pan-European distribution network. XI. The acquisition gets with Tata Steel’s stated neutral of having a global distribution network. XII. at that place a strong heathenish fit both the two companies. Both Tata Steel and Corus have strong commercial relationship. OBJECTIVES OF THE MERGER Tata’s objectives for buying Corus 1. Tata is spirit to manufacture finished products in grow markets of Europe. . At present manufactures low value long and flat steel products while Corus produces high value stripped products 3. A diversified product mix will reduce adventures while high end products will add to bottom line. 4. Corus holds a number of patents and R & D facility. 5. Cost of acquisition is lower than setting up a green field plant and trade and distribution channels 6. Tata is known for efficient handling of labour and it aims at bring down employee cost and improving productivity at Corus 7. It had already expanded its capacities in India. . It will move from 55th in world to 5th in production of steel globally. 9. Corus, being the second largest steelmaker in Europe, would provide Tata Steel access to some of the largest steel buyers open new markets and product segments for Tata Steel, which would foster the company to de-risk its businesses through wider geographical reach. 10. A presence in mature markets would also provide Tata Steel an chance to go further up the value chain as demand for vary and high value-added products in these markets is high. 11. Corus is also very strong in look for and applied science development, which would add to the competitive strength for Tata Steel in future. 12. As stated by Tata, the initial motive behind the bound of the deal was not Corus’ revenue size, but rather its market value. Even though Corus is larger in size compared to Tata, the company was valued less than Tata (at or so $6 billion) at the time when the deal negotiations started. Corus’ objectives for selling 1. Corus ineluctably supply of raw material at lower cost 2. be debt of Corus is 1. 6bn GBP 3.Though Corus has revenues of $18. 06bn, its profit was just $626mn (Tata’s revenue was $4. 84 bn & profit $ 824mn) 4. Corus facilities were relatively old with high cost of production 5. Employee cost is 15 %( Tata steel- 9%) 6. From Corus’ point of view, the basic reason for supporting this deal were the judge synergies between the two entities. Corus has supported the Tata acquisition due(p) to different motives. With the Tata acquisition Corus has gained a great and profitable opportunity to make an exit as the company has been looking out for a potential buyer for quite some time.Benefit for the Tata’s stakeholders: both advantage and profits from this deal will merge only when Tata Steel would be in a position to export low-cost slabs toCorus. • in that location may be restraints to exports as Tata Steel will need to heed the requirements of its other acquired companies in South East Asia of NatSteel and Millennium Steel. • This effect may change if the Tatas can acquire businesses in the low-cost regions such as Latin America, opening up an assured source of slab-making that can be exported to Corus’s plants in the UK. • Iron ore policy in India undergoes a major change in the orgasm days. If global consolidation becomes possible with the merger of Thyssen Krupp with Nucor or Severstal with Gerdau or any the top five players. The pos sibility of pricing constancy may ease the performance b deprivationjacks on Tata-Corus and moderate the risks of restructuring at high cost plants in UK. • If Tata considers global listing say in London it may help the group commands a much higher(prenominal) price-earning multiple and give it more flexibleness in managing its finances. Objectives †Achieved or not: spillage by the stock market answer initially, the acquisition was a big blunder.The stock tanked 10. 5 per cent by and by the deal was announced and another 1. 6 per cent. Investors were hard-pressed about the monetary risks of such a costly deal. But after successfully acquiring Corus, Tata Steel became the fifth largest producer of steel in the world, up from fifty-sixth position. There were many likely synergies between Tata Steel, the lowest-cost producer of steel in the world, and Corus, a large player with a significant presence in value-added steel segment and a strong distribution network in Eu rope.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. Managing the obstacles: Coping with a merger can create many problems, some of which are, i. Can make top managers spread their time too gently and neglect their core business, spelling doom. ii. Potential difficulties followm trivial to managers caught up in the thrill of the big deal. iii. The chances for success are further hampered if the corporate cultures of the companies are very different. iv.The companies often concentrate on too intently on cutting costs following mergers, while revenues, and ultimately, profits, suffer. Merging companies can focus on consolidation and cost-cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee. In view of the Tata- Corus acquisition, the main obstacles were, 1. The acquisition was not cheap for Tata. The price that they salaried represents a very high 49% premium over the conclusion mid market share price of Corus on 4 October, 2006 and a premium of over 68% over the average closing market share price over the twelve month period.Moreover, since the deal was stipendiary for in cash automatically makes it more expensive, implying a cash wetting from Tata Steel in the amount of ? 1. 84 billion. 2. Tata has reportedly financed only $4 billion of the Corus purchase from internal company resources, convey that more than two †thirds of the deal has had to be financed through loans from major banks. 3. The day after the acquisition was officially announced, Tata Steel’s share fell by 10. 7 percent on the Bombay stock market. 4.Tata’s new debt amounting to $8 billion due to the acquisition, financed with Corus’ cash flows, is judge to generate up to $640 million in annual following charges (8% annual worry cost). 5. Corus had existing please debt c harges of $400 million on an annual basis which implies that the combined entity’s vex group obligation will amount to more or less $725 million after the acquisition. 6. Corus, being the second largest steelmaker in Europe, would provide Tata Steel access to some of the largest steel buyers. The acquisition would open new arkets and product segments for Tata Steel, which would help the company to de-risk its businesses through wider geographical reach. ethnic DIFFERENCES There has been a great deal of suspicion on how well the two entities, Tata Steel and Corus would integrate post acquisition. This hit has been expressed since the culture and perspectives of the two companies and the people are seemingly very different from each other. ratan Tata however, has been confident that the post-acquisition instruction will not be too difficult as the two organizational cultures will be in effect integrated.Ratan Tata has tell he is confident the two companies will have à ¢â‚¬Å"a cultural fit and similar work practices. ” Tata Corus has made developed some management structure to deal with the smooth operation of the two entities. It has also adopted several system integratings in both the entities to smoothen the transactions between the two entities. Tata Steel has formed a seven- member integration military commission to lead its union with Corus group. duration Ratan Tata, chairman of the Tata group, heads the committee, three of the members are from Tata Steel and the other three are from Corus group.Members of the integration committee from Tata Steel include Managing Director B Muthuraman, Deputy Managing Director (steel) T Mukherjee, and chief monetary officer Kaushik Chatterjee. The Corus group is equal in the committee by chief operating officer Phillipe Varin, executive director(finance) David Lloyd, and division director (strip products) Rauke Henstra. The company has also created several Taskforce Teams to ensure integration of specific set of activities in the two entities for smoother transaction. For instance, the company has created a line force to integrate the UK/EU exercise in construction to the Indian market.To achieve, a taskforce comprising of following executives from both the entities was formed. Members from Corus Mr. Matthew Poole (Director Strategy Long Products Corus) Mr. Colin Ostler (GM Corus Construction Centre) Mr. Darayus Shroff (Corus International) Members from Tata Steel: Mr. Sangeeta Prasad (CSM South, flatbed Products) Mr. Pritish Kumar Sen (Market Research Group) Mr. Rajeev Sahay (Head Planning & Scheduling, TGS) The scope of the taskforce will be to: 1. Ensure smooth market knowledge exchange between Tata Corus and Tata Bluescope and signalise Knowledge gaps. . 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 commun ity. 4. Map key competencies of Tata Corus against market drivers/ requirements. 5. discover a five- year strategy. The reasons why cultural integration is a huge scrap are: 1. Corporate culture is an amalgamation of: National culture, Religious culture, and professional culture. These cultural dimensions are often invisible †but ever present & relevant. 2. assume to balance the topical anaesthetic necessarily and the global needs during the post-acquisition period. These needs may be the local community demands, business demands, investor’s demands etc. 3. Need to meet the high expectations of the shareholders post-acquisition. Often times these acquisitions are financed through LBO or debt, and this needs good cash flows to sustain. In addition, the management will be under pressure to show the benefits of acquisition as promised in the beginninghand the acquisition 4. Lack of Experience in dealing with a different culture. This applies every bit to Indian &# 038; foreign company managers.Most managers lack the cross-cultural skills needed during the post-acquisition integration. POST encyclopedism TATA • Tata Steel has formed a seven-member integration committee to spearhead its union with Corus group. While Ratan Tata, chairman of the Tata group, heads the committee, three of the members are from Tata Steel and the other three are from Corus group. The acquisition by Tata amounted to a total of 608 pence per ordinary share or ? 6. 2 billion (US $12 billion) which was paid in cash. First of all, the general assumption is that the acquisition was not cheap for Tata.The price that they paid represents a very high 49% premium over the closing midmarket share price of Corus on 4 October, 2006 and a premium of over 68% over the average closing market share price over the twelve month period. Moreover, since the deal was paid for in cash automatically makes it more expensive, implying a cash outflow from Tata Steel in the amount of ? 1 . 84 billion. Tata has reportedly financed only $4 billion of the Corus purchase from internal company resources, meaning that more than two-thirds of the deal has had to be financed through loans from major banks.The day after the acquisition was officially announced, Tata Steel’s share fell by 10. 7% on the Bombay stock market. Despite its intravenous feeding times littler size and smaller capacity, Tata Steel’s operating profit for 2006, earning $840 million on sales of 5. 3 million tonnes, were very close in amount to those generated by Corus ($860 million in profits on sales of 18. 6 million tons). Tata’s new debt amounting to $8 billion due to the acquisition, financed with Corus’ cash flows, is pass judgment to generate up to $640 million in annual invade charges (8% • • • • • • annual interest cost). This amount combined with Corus’ existing interest debt charges of $400 million on an annual basis impl ies that the combined entity’s interest obligation will amount to approximately $725 million after the acquisition. The debate whether Tata Steel has overpaid for acquiring Corus is most likely to be certain, since just based on the numbers game alone it turns out that at the end of the bidding conflict with CSN Tata ended up paying approximately 68% above the average price of Corus’ shares.Another pressing upshot resulting for this deal that has created a dilemma between experts and analysts opinions is whether this acquisition for the right move for Tata Steel in the first place. The fact that Tata has managed to acquire a British steel maker that has been a symbol of Britain’s industrial power and at the same time its dominion over India has been perceived as quite ironic. Only time will show whether Tata will be able to truly benefit from the many expected synergies for the deal and not make the typical mistakes made in many large M&A deal during this rootage period.PART 4 OUTCOME OF THE MERGER †success OR FAILURE Many financial analysts felt that Tata Steel overpaid for the Corus acquisition. Immediately after the acquisition announcement, Tata Steel‘s share price fell by 10. 7 percent to Rs. 463. 95 on the Bombay threadbare Exchange. According to Martin Stanley, London based head of spread betting at the brokerage firm firm of GFT Global Markets, ? The consensus view seems to be that Tata have probably overpaid, but if further consolidation in this sector occurs freeing forward then this will look like very fair value? International Herald Tribune, 1/30/07). Additional concerns were brocaded about the debt financial obligation of Tata Steel which borrowed more money to fund the acquisition. According to Standard & Poor‘s analyst Anushkant Taneja, ? The size of the Tata acquisition and the potential cash outflow in Tata Steel‘s offer for Corus could have an unseemly impact on its financial ris k profile. Standard & Poor‘s rating service in India, Crisil, placed Tata Steel on the ? negative implications watch list after its Corus acquisition.The contention was that Tata Steel had overstretched itself due to execution of instrument risk and lack of experience by Indian companies in acquiring multinational businesses (Range, 2007, April 26). drear‘s Investor work downgraded Tata Steel‘s rating from Baa2 ( enthronization grade) to Ba1 (speculative grade). The exceptional reason cited was Tata Steel‘s emasculated balance sheet liquidity and financial profile resulting from its largely debt-funded acquisition of Corus. Moody‘s Senior V. P. Alan Greene stated Tata Steel‘s current high supplement constrains its financial strength and flexibility and ? he main challenge facing management is to de-risk the large capital structure while not neglecting existing operations and opportunities for quick growth in Asia.? He further stated that ? Tata Steel‘s enterprising capacity expansion plan will lead to higher project execution risk over several years and materially elevate financial supplement unless it is deferred.? (Businessline, 2007, July 7). According to Sreesankar, head of research at Il&Fs investments in Mumbai, ? They (Tata Steel) wanted the company and they have got it. But we have to see how the finding happens and how the integration progresses.One distinction is that EBITDA (earning before income taxes and depreciation allowance) margins for Tatas are about 40 percent and for Corus is about 7 percent.? Clearly, the financial industry analysts were skeptical about the semipermanent financial viability of this acquisition. According to Shriram Iyer, head of research at Edelweiss in mumbai, ? …the time horizons of investors and of the company may not be aligned MANAGEMENT’S period of time OF VIEW This proposed acquisition represents a be moment for Tata Steel and is entirely conformable with our strategy of growth through international expansion.This creates a well balanced company, strategically well placed to compete in an increasely competitive global environment. (Ratan Tata quoted in Financial Express; 2007, February 13) The Tata Steel jump on of directors approved the project to acquire Corus, as it was consistent with stated objectives of growth and globalization. Although Tata Steel ended up paying more for Corus than its original bid, its management felt that there were many favorable strategic and financial outcomes to be realized. To begin with, this acquisition would position the combined group as the fifth largest steel company in the world by production output.The new entity would have a meaningful market presence in both Europe (where Corus was a well established brand name) and Asia (where Tata was a well established brand name). feature the low cost upstream production in India FINANCIAL INDICATORS: KEY MILESTONES OF THE TATA CORUS do it 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 fulfill 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 free 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 Coru s.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 silk hat interest of its will shareholders to give more time to CSN to satisfy the pre- conditions and decide whether it essence forward a egg offer December 18, 2006:- Within hours of Tata Steel increasing its original bid for Corus to500 pence per share, Brazils CSN made its formal counter bid for Corus at 515 pence per share in cash, 3% more than Tata Steels Offer.January 31, 2007:- Britains Takeover Panel announces in an e- mailed contention that after an auction Tata Steel had agree 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 CONCLUSION Steel prices, raw material supplies and interest costs on the $8-billion debt have been raised to fund the deal. Soon they may also have to deal with the sensitive issue of possible job There is no doubt that Tata has pulled off a coup †Corus makes nearly four times more steel than Tata Steel.Together, the combine becomes the fifth largest producer in the world and the second in Europe. But to make the most of the deal, Tata has to manage several variables including cuts in Corus’s manufacturing plants. There are also the usual sets of integration challenges that come with such large buyouts. The deal may be done, but the hard work is just beginning. In the run up to the auction, Tata had maintained a low profile despite CSN’s war-ridden stance. They underestimated our firepower,” says Gandhi, who admits that even bankers to the transaction †ABN Amro and Deutsche Bank †were in the dark as to how far Ratan Tata was willing to go. The only blip, though, was the way the stock markets reacted. Tata Steel has lost a billion dollars in market cap italization since it first announced its intention to buy Corus in October last year. (The BSE Sensex rose 18 per cent during the same period. ) The market scholarship is that the Tata Group paid too much for this acquisition.Several brokerage houses have pointed out that the deal implies a high enterprise value/ earnings before interest, taxes, depreciation and amortization (EV/EBITDA) multiple of 9 for Corus versus 4. 6 for Tata Steel. (L. N. Mittal paid 5. 8 times EBITDA for Arcelor. ) Ratan Tata disagrees: â€Å"We believe that, looking back in time, the price today will prove to be one that was worthwhile because the price of steel companies is likely to be even higher in the coming year. ” But tying up the funding is the immediate priority. The Corus acquisition is being routed through a special purpose vehicle (SPV) called Tata Steel, UK. A similar structure was used for the Tetley buy in 2000. ) So far, the Tatas have indicated that group guardianship company Tata Sons will pump in $4. 1 billion as equity into the SPV. The balance $8 billion will be raised by altercate bonds and senior term loans (part of it has been tied up with banks like ABN Amro, Deutsche Bank and CSFB). These loans will be serviced out of Corus’s profits; Tata Steel need not repay this. This has effectively ring-fenced Tata Steel shareholders. Few will disagree. The Tata Steel managing director is likely to look for more acquisitions as he aims to increase the company’s total capacity to 100 mt by 2015.To reach that destination, a lot will depend on whether the group can make Corus fly. 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