G. L.

BAJAJ
INSTITUTE OF TECHNOLOGY & MANAGEMENT
Approved by A.I.C.T.E. & Affiliated to AKTU, Lucknow

Plot No. 2, Knowledge Park III, Greater Noida Uttar Pradesh-201308

RESEARCH PROJECT REPORT

ON

Impact of Mergers & Acquisitions on Shareholders Wealth

& Performance of the Company
Submitted for

Partial fulfillment of the award of degree of Master of Business Administration (MBA)

From

Dr A P J Abdul Kalam Technical University, Lucknow

UNDER THE GUIDANCE OF: SUBMITTED BY

Mr. SARVENDU TIWARI SAURABH VERMA

Assistant Professor 1419270041

(Department of Management Studies) 2014-16

1
 G. L. BAJAJ
INSTITUTE OF TECHNOLOGY & MANAGEMENT

GLBITM Approved by A.I.C.T.E. & affiliated to Dr. A.P.J Abdul Kalam Technical University

Dated: 20th April 2016

CERTIFICATE
This is to certify that Mr. / Ms Saurabh Verma has
undertaken this Research project work entitled "Impact of
Mergers & Acquisitions on Shareholders Wealth &
Performance of the Company"

For the partial fulfillment of the award of Master of

Business Administration degree from Dr. A P J Abdul
Kalam Technical University, Lucknow (U. P.).
As per best of my knowledge this Research project work is an
original piece of work and has not been submitted or
published elsewhere.

I wish him/ her all the best for his/her bright future ahead.

Mr. Sarvendu Tiwari

Assistant Professor
2
 Department of Management Studies

ACKNOWLEDGEMENT

There is always a sense of gratitude which one expresses to others for the help or needy
service they render during all phases of life. I would like to express my gratitude towards all
those who have been helpful to me in taking this mighty task of live project to a successful
end.

First of all, I consider it a pleasant duty to express my heartfelt appreciation, gratitude and
indebtedness to my guide Mr.Sarvendu Tiwari for keen interest, invaluable pain taking and
excellent guidance, patience, endurance, encouragement and thoughtful advice throughout the
project work duration.

I would want to take this opportunity to thank all my family members for their help and
suggestions during the course of my project work. I am thankful to all my friends who gave
me constant and continuous inspiration to complete this project.

SAURABH VERMA

MBA (2014-16)

G.L. Bajaj Institute of Technology and Management

3
 Table of Contents

S. No Chapter Page No.

1. Executive Summary 5

2. Mergers& Acquisitions: An Overview 8

3. Research Methodology 24

4. Review of Literature 26

5. Steel Industry: An Overview 35

6. Tata – Corus Deal 46

7. Conclusion & Findings 64

8. Bibliography & References 75

4
Executive Summary

5
Even though mergers and acquisitions (M&A) have been an important element of corporate
strategy all over the globe for several decades, research on M&As has not been able to
provide conclusive evidence on whether they enhance efficiency or destroy wealth. There is
thus an ongoing global debate on the effects of M&As on firms. Mergers and acquisitions
have become common in India today. However, very little appears to be known about the
long-term post-merger performance of firms in India, and the strategic factors that affect this
performance. Our study attempts to fill this gap in knowledge about

The performance of mergers has been gauged in two ways in this study – by determining
whether the long-term post-merger financial performance has changed significantly, and by
assessing the wealth gains to shareholders of the acquiring, acquired and the combined firms
on the announcement of mergers. It is found that the merged firms demonstrate improvement
in long-term financial performance after controlling for pre-merger performance, with
increasing cash flow returns post merger, at an annual rate of 4.3%. This improved operating
cash flow return is on account of improvements in the post-merger operating margins of the
firms, though not of the efficient utilization of the assets to generate higher sales. Increase in
market power also appears to be driving gains through mergers in India. As far as wealth
gains on merger announcement are concerned, only the shareholders of the acquired firms
appear to be enjoying significant positive share price returns of 11.6%. The shareholders of
the acquiring firms and the combined firms do not seem to be witnessing any significant
change in returns. With regard to the strategic factors affecting long-term post-merger
financial performance, related mergers seem to be performing 5.4% lower than unrelated
mergers. Both the transfer of corporate control from the acquired firm to the acquiring firm,
and the business health of the acquired firm are positively related to the long-term post-
merger performance of the firms. The relative size of the acquired firm and the method of

6
payment for the acquired firm do not appear to be playing a role in affecting post-merger
performance.

In the case of the effect of the strategic factors on the wealth gains on merger announcement,
we find that the mergers in which there is no transfer of corporate control seem to be
conferring significant positive share price returns of 21.1% on the shareholders of the
acquired firms. This is not the case for the shareholders of the acquiring firms and the
combined firms. In the case of mergers where there is a transfer of management control, none
of these three groups of shareholders witnesses any abnormal returns on announcement of the
merger. The wealth gains to acquired firm shareholders on announcement of a merger are
positively influenced by the relative size and the pre-merger performance of the acquired
firm. The transfer of corporate control from the acquired firm to the acquiring firm is
negatively associated with these abnormal share price returns. The level of industry-
relatedness of the acquired and the acquiring firms, the method of payment for the acquired
firm and the business health of the acquired firm do not appear to be playing a role in
affecting the share price returns to the acquired firm shareholders, on announcement of a
merger.

7
Mergers&
Acquisitions: An
Overview

8
The research pertains to the analysis of mergers and acquisition in India, Cross Border and
International Arena with focus on analysis of stock prices pre and post merger and the wealth
of the shareholders.

A merger occurs when two companies combine to form a single company. The combining of
two or more companies, generally by offering the stockholders of one company securities in
the acquiring company in exchange for the surrender of their stock. A merger may be sought
for a number of reasons, some of which are beneficial to the shareholders, some of which are
not. One use of the merger, for example, is to combine a very profitable company with a
losing company in order to use the losses as a tax write-off to offset the profits, while
expanding the corporation as a whole. Increasing one's market share is another major use of
the merger, particularly amongst large corporations. By merging with major competitors, a
company can come to dominate the market they compete in, giving them a freer hand with
regard to pricing and buyer incentives. This form of merger may cause problems when two
dominating companies merge, as it may trigger litigation regarding monopoly laws. Another
type of popular merger brings together two companies that make different, but
complementary, products. This may also involve purchasing a company which controls
an asset your company utilizes somewhere in its supply chain.

Major manufacturers buying out a warehousing chain in order to save on warehousing costs,
as well as making a profit directly from thepurchased business, is a good example of this.
PayPal's merger with eBay is another good example, as it allowed eBay to avoid fees they
had been paying, while tying two complementary products together.

A merger is usually handled by an investment banker, who aids in transferring ownership of

the company through the strategic issuance and sale of stock. Some have allegedthat this
relationship causes some problems, as it provides an incentive for investment banks to push
existing clients towards a merger even in cases where it may not be beneficial for the
stockholders.

9
The Main Ideaone plus one makes three: this equation is the special alchemy of a merger or
an acquisition. The key principle behind buying a company is to create shareholder value
over and above that of the sum of the two companies. Two companies together are more
valuable than two separate companies - at least, that's the reasoning behind M&A. This
rationale is particularly alluring to companies when times are tough. Strong companies will
act to buy other companies to create a more competitive, cost-efficient company. The
companies will come together hoping to gain a greater market share or to achieve greater
efficiency. Because of these potential benefits, target companies will often agree to be
purchased when they know they cannot survive alone.

Definitions
The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate
strategy, corporate finance and management dealing with the buying, selling and combining
of different companies that can aid, finance, or help a growing company in a given industry
grow rapidly without having to create another business entity.

Merger
Merger is defined as combination of two or more companies into a single company where one
survives and the others lose their corporate existence. The survivor acquires all the assets as
well as liabilities of the merged company or companies. Generally, the surviving company is
the buyer, which retains its identity, and the extinguished company is the seller.

Merger is also defined as amalgamation. Merger is the fusion of two or more existing
companies. All assets, liabilities and the stock of one company stand transferred to Transferee
Company in consideration of payment in the form of:

 Equity shares in the transferee company,

 Debentures in the transferee company,

 Cash, or

 A mix of the above modes.

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Acquisition
Acquiring control of a corporation, called a target, by stockpurchase or exchange, either
hostile or friendly, also called takeover.

Methods of Acquisition
An acquisition may be affected by

a) Agreement with the persons holding majority interest in the company management
like members of the board or major shareholders commanding majority of voting
power;

b) Purchase of shares in open market;

c) To make takeover offer to the general body of shareholders;

d) Purchase of new shares by private treaty;

e) Acquisition of share capital through the following forms of considerations viz. Means
of cash, issuance of loan capital, or insurance of share capital.

Types of Acquisition
 Buyer buys the shares, and therefore gains the control over the target company. This
type of transaction carries with it all of the liabilities accrued by that business over its
past and all of the risks that company faces.
 Buyer buys all the assets of the target company. The cash the target company receives
from the buyer is paid back to its shareholders through dividend or liquidation. If the
buyer buys out the entire assets the company looks like an empty shell.

A buyer usually structures the transaction as an asset purchase to "cherry-pick" the assets that
it wants and leave out the assets and liabilities that it does not. It can be important where
liabilities may include future, employee benefits or terminations, or environmental damage. A
disadvantage of this structure is the tax that many jurisdictions, impose on transfers of the

11
individual assets, whereas stock transactions can be structured as -kind exchanges or other
arrangements that are tax-free for the shareholders of both seller and buyer.

Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were
synonymous, the terms merger and acquisition mean slightly different things. When one
company takes over another and clearly established itself as the new owner, the purchase is
called an acquisition. From a legal point of view, the target company ceases to exist, the
buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense
of the term, a merger happens when two firms, often of about the same size, agree to go
forward as a single new company rather than remain separately owned and operated. This
kind of action is more precisely referred to as a "merger of equals." Both companies' stocks
are surrendered and new company stock is issued in its place. For example, both Daimler-
Benz and Chrysler or Arcelor and Mittal ceased to exist when the two firms merged, and a
new company, DaimlerChrysler and Arcelor-Mittal, was created. In practice, however, actual
mergers of equals don't happen very often. Usually, one company will buy another and, as
part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger
of equals, even if it's technically an acquisition. Being bought out often carries negative
connotations, therefore, by describing the deal as a merger, deal makers and top managers try
to make the takeover more palatable.

A purchase deal will also be called a merger when both CEOsagree that joining together is in
the best interest of both of their companies. But when the deal is unfriendly - that is, when the
target company does not want to be purchased - it is always regarded as an acquisition.
Whether a purchase is considered a merger or an acquisition really depends on whether the
purchase is friendly or hostile and how it is announced. In other words, the real difference lies
in how the purchase is communicated to and received by the target company's board of
directors, employees and shareholders.

 When one company takes over another and clearly established itself as the new
owner, the purchase is called an acquisition.

12
 A merger is, often of about the same size, agree to go forward as a single new
company rather than remain separately owned and operated. Both the companies
stocks surrender the stocks and new company stock is issued in its place.

 Merger: A merger usually happens when at least one firm ceases to exist and the
assets of that firm are transferred to a surviving firm so that only one separate legal
entity remains.

Acquisition: A transaction in which both firms in the transaction survive but the
acquirer increases its percentage ownership in the target. Consolidation: The
combination of two or more firms to form a completely new corporation

 Regardless of their category or structure, all mergers and acquisitions have one
common goal: they are all meant to create synergy that makes the value of the
combined companies greater than the sum of the two parts.

Types of Mergers
Merger or acquisition depends upon the purpose of the offeror company it wants to achieve.
Based on the offeror’s objectives profile, combinations could be vertical, horizontal, circular
and conglomeratic as precisely described below with reference to the purpose in view of the
offeror company.

(A) Vertical combination:

A company would like to takeover another company or seek its merger with that company to
expand espousing backward integration to assimilate the resources of supply and forward
integration towards market outlets. The acquiring company through merger of another unit
attempts on reduction of inventories of raw material and finished goods, implements its
production plans as per the objectives and economizes on working capital investments. In
other words, in vertical combinations, the merging undertaking would be either a supplier or
a buyer using its product as intermediary material for final production.

The following main benefits accrue from the vertical combination to the acquirer company
i.e.

13
 1. It gains a strong position because of imperfect market of the intermediary products,
scarcity of resources and purchased products;
2. Has control over products specifications.

(B) Horizontal combination:

It is a merger of two competing firms which are at the same stage of industrial process. The
acquiring firm belongs to the same industry as the target company. The mail purpose of such
mergers is to obtain economies of scale in production by eliminating duplication of facilities
and the operations and broadening the product line, reduction in investment in working
capital, elimination in competition concentration in product, reduction in advertising costs,
increase in market segments and exercise better control on market.

(C) Circular combination:

Companies producing distinct products seek amalgamation to share common distribution and
research facilities to obtain economies by elimination of cost on duplication and promoting
market enlargement. The acquiring company obtains benefits in the form of economies of
resource sharing and diversification.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like DCM and Modi
Industries. The basic purpose of such amalgamations remains utilization of financial
resources and enlarges debt capacity through re-organizing their financial structure so as to
service the shareholders by increased leveraging and EPS, lowering average cost of capital
and thereby raising present worth of the outstanding shares. Merger enhances the overall
stability of the acquirer company and creates balance in the company’s total portfolio of
diverse products and production processes.

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Advantages of Merging

 Obtaining quality staff or additional skills not present in your current workforce
 Additional knowledge of your industry or sector

 Business intelligence that may differ from your own experiences and knowledge

 Access to assets for new product and business development

 Gaining a wider customer base, therefore increasing your market share

 Diversification of the products, services and long term prospects of your business

 Possibly reducing your costs and overheads

 Reducing competition

Disadvantagesof Merging

 Slower implementation,
 required changes in both companies and

 A major integration effort.

Impact on staff

Mergers or acquisitions create an air of uncertainty and change, and in a lot of cases staff see
this as a threat. The impact on moral and performance of such activity should not be
underestimated. Regular and open communication is one of the key factors in minimizing
staff uncertainty, as is including as many staff as possible in the process. You need to identify
who your key staff are and work hard to keep them informed and involved in order to
minimize the risk of them leaving. This could be achieved via special communication with
details over and above those received by regular staff, inclusion in the due diligence process
15
or incentivizing them with a scheme that runs beyond the expected date of any deal being
struck. If your business is of sufficient size you could also consider consulting with a change
management professional. A change management professional can act as an adviser to the
management team and/or as a communication and support mechanism for employees.

Doing the Deal

Start with an Offer When the CEO and top managers of a company decide that they want to
do a merger or acquisition; they start with a tender offer. The process typically begins with
the acquiring company carefully and discreetly buying up shares in the target company, or
building a position. Once the acquiring company starts to purchase shares in the open market,
it is restricted to buying 5% of the total outstanding shares before it must file with the SEC.
In the filing, the company must formally declare how many shares it owns and whether it
intends to buy the company or keep the shares purely as an investment.

Working with financial advisors and investment bankers, the acquiring company will arrive at
an overall price that it's willing to pay for its target in cash, shares or both. The tender offer is
then frequently advertised in the business press, stating the offer price and the deadline by
which the shareholders in the target company must accept (or reject) it.

The Target's Response

Once the tender offer has been made, the target company can do one of several things:

 Accept the Terms of the Offer - If the target firm's top managers and shareholders are
happy with the terms of the transaction, they will go ahead with the deal.

 Attempt to Negotiate - The tender offer price may not be high enough for the target
company's shareholders to accept, or the specific terms of the deal may not be attractive.
In a merger, there may be much at stake for the management of the target - their jobs, in
particular. If they're not satisfied with the terms laid out in the tender offer, the target's
management may try to work out more agreeable terms that let them keep their jobs or,
even better, send them off with a nice, big compensation package. Not surprisingly,
highly sought-after target companies that are the object of several bidders will have

16
 greater latitude for negotiation. Furthermore, managers have more negotiating power if
they can show that they are crucial to the merger's future success.

 Execute a Poison Pill or Some Other Hostile Takeover Defense – A poison pill scheme
can be triggered by a target company when a hostile suitor acquires a predetermined
percentage of company stock. To execute its defense, the target company grants all
shareholders - except the acquiring company - options to buy additional stock at a
dramatic discount. This dilutes the acquiring company's share and intercepts its control of
the company.

 Find a White Knight - As an alternative, the target company's management may seek out
a friendlier potential acquiring company, or white knight. If a white knight is found, it
will offer an equal or higher price for the shares than the hostile bidder.

Mergers and acquisitions can face scrutiny from regulatory bodies. For example, if the two
biggest long-distance companies in the U.S., AT&T and Sprint, wanted to merge, the deal
would require approval from the Federal Communications Commission (FCC). The FCC
would probably regard a merger of the two giants as the creation of a monopoly or, at the
very least, a threat to competition in the industry.

Closing the Deal

Finally, once the target company agrees to the tender offer and regulatory requirements are
met, the merger deal will be executed by means of some transaction. In a merger in which
one company buys another, the acquiring company will pay for the target company's shares
with cash, stock or both. A cash-for-stock transaction is fairly straightforward: target
company shareholders receive a cash payment for each share purchased. This transaction is
treated as a taxable sale of the shares of the target company. If the transaction is made with
stock instead of cash, then it's not taxable. There is simply an exchange of share certificates.
The desire to steer clear of the tax man explains why so many M&A deals are carried out as
stock-for-stock transactions. When a company is purchased with stock, new shares from the
acquiring company's stock are issued directly to the target company's shareholders, or the
new shares are sent to a broker who manages them for target company shareholders. The
shareholders of the target company are only taxed when they sell their new shares. When the

17
deal is closed, investors usually receive a new stock in their portfolios - the acquiring
company's expanded stock. Sometimes investors will get new stock identifying a new
corporate entity that is created by the M&A deal.

Valuation Matters

Investors in a company that is aiming to take over another one must determine whether the
purchase will be beneficial to them. In order to do so, they must ask themselves how much
the company being acquired is really worth.

Naturally, both sides of an M&A deal will have different ideas about the worth of a target
company: its seller will tend to value the company at as high of a price as possible, while the
buyer will try to get the lowest price that he can. There are, however, many legitimate ways to
value companies. The most common method is to look at comparable companies in an
industry, but deal makers employ a variety of other methods and tools when assessing a target
company. Here are just a few of them:

1.Comparative Ratios - The following are two examples of the many 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 will give the acquiring company good guidance
for what the target's 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 revenues, again, while being aware of the price-to-
sales ratio of other companies in the industry.

2. Replacement Cost

In a few cases, acquisitions are based on the cost of replacing the target company. For
simplicity's sake, suppose the value of a company is simply the sum of all its equipment and
staffing costs. The acquiring company can literally order the target to sell at that price, or it
will create a competitor for the same cost. Naturally, it takes a long time to assemble good
management, acquire property and get the right equipment. This method of establishing a
18
price certainly wouldn't make much sense in a service industry where the key assets - people
and ideas - are hard to value and develop.

3. Discounted Cash Flow (DCF)

A key valuation tool in M&A, discounted cash flow analysis determines a company's current
value according to its estimated future cash flows. Forecasted free cash flows (operating
profit + depreciation + amortization of goodwill – capital expenditures – cash taxes - change
in working capital) are discounted to a present value using the company's weighted average
costs of capital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this
valuation method.

Synergy: The Premium for Potential Success

For the most part, acquiring companies nearly always pay a substantial premium on the stock
market value of the companies they buy. The justification for doing so nearly always boils
down to the notion of synergy; a merger benefits shareholders when a company's post-merger
share price increases by the value of potential synergy. Let's face it, it would be highly
unlikely for rational owners to sell if they would benefit more by not selling. That means
buyers will need 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 company's future
prospects. For buyers, the premium represents part of the post-merger synergy they expect
can be achieved. The following equation offers a good way to think about synergy and how to
determine whether a deal makes sense. The equation solves for the minimum required
synergy:

In other words, the success of a merger is measured by whether the value of the buyer is
enhanced by the action. However, the practical constraints of mergers, which discussed often,

19
prevent the expected benefits from being fully achieved. Alas, the synergy promised by deal
makers might just fall short.

What to Look for - It's hard for investors to know when a deal is worthwhile. The burden of
proof should fall on the acquiring company. To find mergers that have a chance of success,
investors should start by looking for some of these simple criteria given as below.

 A reasonable purchase price - A premium of, say, 10% above the market price seems
within the bounds of level-headedness. A premium of 50%, on the other hand, requires
synergy of stellar proportions for the deal to make sense. Stay away from companies that
participate in such contests.

 Cash transactions - Companies that pay in cash tend to be more careful when calculating
bids and valuations come closer to target. When stock is used as the currency for
acquisition, discipline can go by the wayside.

 Sensible appetite – An acquiring company should be targeting a company that is smaller

and in businesses that the acquiring company knows intimately. Synergy is hard to create
from companies in disparate business areas. Sadly, companies have a bad habit of biting
off more than they can chew in mergers.

Mergers are awfully hard to get right, so investors should look for acquiring companies with
a healthy grasp of reality.

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21
Largest M&As in Steel Industry

22
Major M&As in India:

 Tata Steel’s takeover of European steel major Corus for $12.2 billion. The biggest
ever for an Indian company. This marked the arrival of India Inc on the global stage.

 Vodafone’s purchase of 52% stake in Hutch Essar for about $10 billion. Essar group
still holds 32% in the Joint venture.

 Hindalco of Aditya Birla group’s acquisition of Novellis for $6 billion.

 Ranbaxy’s sale to Japan’s Daiichi for $4.5 billion. Sing brothers sold the company to
Daiichi and since then there is no real good news coming out of Ranbaxy.

 ONGC acquisition of Russia based Imperial Energy for $2.8 billion.

 NTT DoCoMo-Tata Tele services deal for $2.7 billion. The second biggest telecom
deal after the Vodafone.

 HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion.

 Tata Motors acquisition of luxury car maker Jaguar Land Rover for $2.3 billion.

 Wind Energy premier Suzlon Energy’s acquisition of RE Power for $1.7 billion.

 Reliance Industries taking over Reliance Petroleum Limited (RPL) for 8500 Crores or
$1.6 billion.

23
Research
Methodology

24
Objective of the Study

 Impact of M&A on firm’s performance

 Analysis of Valuation Strategies of both the Firms

 Gains/Losses to Shareholders of Both Target and Bidding Companies

 Critically examine the rationale behind the acquisition of Corus by Tata Steel.

Research Methodology
 Secondary Research: The study is a completely a secondary one with no primary
source included. It will be consisting of data collected from various journals, internet,
books, magazines etc.

Data Collection

For this study, data from various websites, journals, magazines, newspaper, and annual
reports has been taken for the purpose of the study.

Limitations to Study

 The study is limited to secondary data only.

 There was a time constraint for the project.

 Data available on the websites may not be accurate and reliable.

25
Review of Literature

26
In an increasingly globalize world, Mergers & Acquisitions ("M&A") is assuming more and
more significance, with many companies viewing consolidation as an efficient and effective
growth strategy. While Indian companies have traditionally been attractive targets for
acquisition by international companies, a stronger emerging trend is that of Indian
corporations scouting for international targets, especially in the US and Europe, in the quest
of market share and other efficiencies. This trend is visible primarily in the IT, steel,
aluminum, pharmaceutical and life sciences and automotive sectors, and is beginning to
extend to other sectors as well.

Merger and acquisitions schemes have been regarded as strategic planning measures for
enlarging the corporate business activities in order to maximize the profitability of the entities
involved in the scheme of amalgamation. The principal objective of any scheme of merger is
to penetrate in to newer markets to take advantage of the expanded market base and also
extend the business horizons in various other countries .The other advantages resulting from
the mergers and acquisitions are, gaining improvement in the technical and managerial skills
so that these skills and techniques can be used to improve the working on the organizations to
result in increased financial resources and improved profitability. The important objective of
the schemes of mergers and acquisitions thus are to ensure the growth and sustaining the
growth achieved. However studies reveal that more than 50 percent of the mergers and
acquisition schemes have proved unsuccessful without resulting in any tangible benefits for
the companies involved (Business Week) Moreover, according to Mercer Management
Consulting (Cited in Smith Hershman, 1997, in the 1990s, mergers and acquisitions have
been proved successful only in respect of about 50 percent of the companies involved. 57
percent of the schemes prove as failure during the 1980s. Despite the lower success rates,
mergers and acquisitions are being increasingly used by the US corporations as the most
favorite vehicle of growth. It is important that the top management of the company that
intends to acquire another company should make a thorough examination of the issues
involved in the pre -acquisition stage and also the prospective benefits that may accrue to the
company after the acquisition is effected. There should also be a clear understanding of the
objectives for which the acquisition is proposed to be undertaken. In fact the acquirer should
make a review of probable synergies that may arise out of the acquisition and its impact on
the growth of the combined entity. According to Sirower (1997) in spite of a wide

27
development of research and empirical studies in the area of corporate acquisitions still there
is no clear thoughts could be evolved by the managers as to how the acquisition process can
improve the profitability of the companies. This implies that the process of acquisition is so
complex that the managers should ensure that a considerable thought process should be
evolved before the acquisition activity is undertaken .Despite the problems of getting a clear
picture of the outcomes of the merger and acquisition schemes, they have been employed as
an important structure for attempting the amalgamation of the activities of
different companies in order to achieve the objective of expanding the business opportunities.
With the advent of economic globalization the schemes of mergers and acquisitions have
been regarded as prominent means for ensuring corporate growth world over .The mergers
and acquisition schemes encourage increased competition .They also help in expand into new
countries by breaking the geographical trade barriers.

Current Issues in Merger Enforcement: Thoughts on Theory, Litigation Practice, and

Retrospectives by THOMAS O. BARNETT Assistant Attorney General Antitrust Division
U.S. Department of Justice. His study regarding the antitrust agencies are adapting both in
substantive analysis and in procedural approaches: (I) substantive merger issues involving
unilateral effects, coordinated effects, and differentiated products; (ii) litigation issues; (iii)
retrospective studies; and (iv) the efficiency of the review process.

His Findings

I. Substantive Issues in Merger Review

The Evolution in Unilateral and Coordinated Effects Claims The agencies formally
introduced the specific terminology of unilateral effects analysis in the 1992 revision to the
Horizontal Merger Guidelines. Since that time, my perception is that agency use of these
theories has changed significantly. While I have not attempted to go all the way back to 1992,
the last seven years are illustrative. The Division filed 58 merger complaints during the
period from fiscal year 2001 to the present. Forty-one included only a unilateral effects claim,
six included only a coordinated effects claim, and the remaining eleven contained both. There
seems little doubt that recent merger challenges have focused more extensively on unilateral
effects claims than was the case prior to 1992. It is worth examining the reasons for this
apparent shift. I perceive at least two key factors.

28
First, the economy has evolved in a direction that makes unilateral effects more likely to be a
relevant concern. Our world has become increasingly complex, with increasingly
sophisticated and differentiated products and services to match. We no longer live in a world
where products in a given category are virtually identical in terms of functionality, with the
principal differences being price and perhaps reliability. Instead, customer relationship
management, technological innovations, and other developments have led to customized,
massed produced products, which I know sounds like an oxymoron. But consider the
dizzying variety of choices now available for mobile phones (e.g., voice, data, camera,
internet, GPS), cola soft drinks (regular, diet, caffeine free, or diet and caffeine free), or even
different types of corn flake breakfast cereals.

As a result, there is a risk that we will not pay as much attention to potential coordinated
effects as we should. We are by no means ignoring coordinated effects and continue to
investigate such concerns on a regular basis. My point is to remind us all that the agencies
and courts need to remain vigilant to the possibility of coordinated effects, particularly where
only a few competitors will remain in a market. Further, we need to strive to improve our
ability to assess and prove the possibility of coordination.

Defining Product Markets in a World of Differentiated Products

The increase in product differentiation has another effect on antitrust analysis: it increases the
difficulty of product market definition. There are at least three reasons why this is so.

First, because products are often differentiated in multiple dimensions, the agencies may find
it hard to provide a clear and succinct verbal or empirical description of the characteristics of
the market. It is often difficult to articulate the clean break between the products/services that
are "in" and "out" of the market, for which the courts tend to look. This is a significant
challenge. For example, there is no doubt that the Division's reliance on a large number of
product features to define the "high function" software at issue in Oracle/PeopleSoft was a
complicating factor in its efforts to persuade the court that Oracle, PeopleSoft and SAP
competed in a separate relevant market for such software products.

29
Second, the sale of differentiated products may involve price discrimination, which can
complicate traditional market definition by (1) making it harder to distinguish between
products that are in and out of the market, because the distinction only applies to a subset of
the parties' customers, and (2) implicating in more extreme cases the rarely-discussed
substantiality issue, i.e., how many or what percentage of customers must a merger harm to
constitute a Section 7 violation. For example, Oracle could be viewed as a price
discrimination case. Oracle and PeopleSoft sold largely the same product to thousands of
customers, most of whom did not demand all of the functionality available in the software.
For those that did not want the most sophisticated functionality, the government agreed that
the relevant market included a number of competitors in addition to Oracle, PeopleSoft and
SAP. The government argued that Oracle charged a price that depended in part on how much
of the functionality that each customer needed. This complex competitive process was not
easy to investigate or convey to the court.

II. Litigation: How we do it and How We're Doing

The Division has been extremely successful in obtaining remedies for transactions that
threaten to harm the competitive process. The annual total of merger enforcement matters is
set forth in Figure 1, below:

Figure 1

30
Since FY2001, the Division has identified problems with 112 transactions. One is in active
litigation today. For the remaining 111, the Division has obtained appropriate relief in 109 of
those matters.(8) This amounts to a 98% success rate since FY2001, and since 2004, our win
record is--so far--unblemished; we have obtained relief in 100 percent of the transactions in
which a problem was identified during that period.

III. Merger Retrospectives

A key benefit to retrospective studies is that they provide facts rather than uninformed
opinions. One sometimes sees statements from an outside expert offering an opinion on the
likely competitive effects of a particular transaction without access to the evidence from the
agency's investigation. Because they are not based on the evidence upon which the agencies
and courts rely to make merger enforcement decisions, such statements are, at best,
meaningless. Similarly, attempts to assess merger enforcement based on the total number of
cases filed or upon the number of contested cases are fundamentally and irretrievably flawed.

Figure 2

31
 Figure 3

Energy Use (kwh/yr.)

Sample Min Mean Medium Max

1 230 478 524 668

2 212 393 413 629

3 21 384 413 514

4 179 380 408 503

Samples: (1) October 2005 (premerger); (2) March 2007; (3) December 2007; (4) June 2008

These results, while not dispositive, are consistent with the predictions made based on our
investigation that sufficient competition would remain and that the merger would enable
significant efficiencies, which could offset other cost increases, such as the rise in the price of
steel.

This exercise also illustrates some of the difficulties in conducting a merger retrospective. As
an initial matter, there is the difficulty of gathering the information necessary to conduct an
ex post evaluation of the impact of a transaction. There are legal obstacles (i.e., the Division
lacks authority to compel production of information for such a study), there are burden
concerns for both the respondents and the agency, and there may be multiple forces at work
in a market that render it difficult to discern the separate impact of the transaction.

IV. Update on Merger Process Reforms

Electronic Production Issue: I want to switch gears now and talk about the administrative side
of merger review, including electronic production issues and our merger process reforms. I'll
start with the challenges we face with the revolution in electronic data-keeping and its cousin,
electronic production and discovery. The information technology revolution not only has
made sharing information quicker, but also has vastly increased the amount of information
that business entities can produce, analyze and store. By and large this is a good thing: more
information shared better and analyzed by ever more powerful tools, plays a major role in the
increased efficiency and productivity of the modern economy. More information and faster

32
analytical tools are also good things for the Division staff conducting merger reviews. But
storing and sifting the information is a major challenge for everyone involved in the process.

In FY1998, the Antitrust Division had just enough electronic storage capacity to support
typical second requests, which in total brought in about 0.5 terabytesof electronic production.
Five years later in 2003, the need for electronic storage capacity had grown exponentially to
12 terabytes. Currently in FY2008, we have increased electronic data storage capacity to
support 70 terabytes of information. The related expenditures made from FY2005 through
FY2007 totaled over $2.1 million. The Division anticipates that its electronic storage capacity
requirements will grow to 180 terabytes by FY2013--a 36,000% increase in electronic data
storage capacity in just 10 years. We obviously devote large resources to stay on top of the
issue. And, of course, we are well aware that firms and their counsel are incurring costs to
generate and store the information before it ever gets to us.

Merger Review Process Reforms

On a related topic, I provide a brief update about merger process reforms. In 2001 the
Division released its Merger Review Process Initiative and in 2006 it announced the first
major revision to that initiative. One of the most significant revisions is the new "Process &
Timing Agreement" merger review option, under which parties may be able to limit
document searches required by a Division second request to certain central files and a
targeted list of 30 employees whose files must be searched for responsive documents. This
option will be made available to companies that provide certain critical information to the
Division early in the investigation, agree to an investigation schedule, and agree to a
sufficient period for the Division to conduct post-complaint discovery should the
investigation become one of the few that result in contested litigation. To date, only one
company has taken advantage of this agreement. This could mean that, despite the burdens of
second request productions, parties believe those burdens are worth bearing rather than to
agree to a post-complaint discovery process. It also could mean that parties believe that they
can obtain much of the reduced burden through our general investigative process, which is
something that we strive to achieve in any event.

Mergers and Acquisitions: The Home Depot, 2007

33
Acquisitions are the absorption of a smaller firm by a larger firm, while a merger is the
combination of two firms to form a single entity. In a merger, there is often an exchange of
stock between the companies where one company issues shares to the shareholders of the
other company at a certain ratio. The firm whose shares continue to exist is generally referred
to as the acquiring firm while the other is the target firm. Except for synergies, the post-
merger value of the two firms is equal to the pre-merger value (Brealey, Myers, & Marcus,
2007, 598). The target firm’s shareholders, however, often benefit because they are paid a
premium for their shares.

There are three ways that an organization can be acquired: a merge of all the assets and
liabilities from a target firm into the acquiring firm, purchase the stock of the target company
also known as a tender offer, and the purchase of individual assets of the target. “A merger
adds value only if synergies, better management, or other changes make the two firms worth
more together than apart” (Brealey, Myers, & Marcus, 2007, 592).

Synergies are revenue enhancements and cost savings gained through the merger/acquisition.
Many merger decisions are made without regard to differences in culture between firms,
especially in international mergers. However, there is much evidence to suggest that cultural
differences are a major reason why many mergers eventually fail. Cultural integration is also
a very important factor. Each company will have its own distinct culture and this need to be
carefully considered when conducting a merger (Brealey, Myers, & Marcus, 2007, 599).

Home Depot is the largest home improvement store chain in U.S. and like many other
corporations; it is focused on becoming a global entity. In December of 2006, Home Depot
signed a deal to acquire the Chinese-based company The Home Way.

34
Steel Industry: An
Overview

Global Steel Industry

In global steel industry the consumption of steel has been decreased drastically in 2007, in

35
comparison to 2006. According to International Iron and Steel Institute(IISI) till 2010 the
average demand for steel would be 4.9 percent per year. But during 2010 and 2015 the
growth is expected to be 4.2 percent. In fact IISI forecasts the global steel demand would be
1.32 billion tones by 2010 and 1.62 billion tones by 2015 .Much of this demand grow this
expected to be generated from countries like China and India. Among the major steel
producing countries the production of steel has increased from 2005-2006 except Brazil.
China is the highest steel producing country in the world with a production of 355.8 million
tons in 2005 and 418.8 million tones in 2006. And for this increasing demand of steel market
it is not possible for a single company to capture the market alone. In that production process
Tata may play a vital role .For that reason IISI is giving its opinion in favor of Tata.

For 2007, S&P projects GDP growth of 2.4%, versus GDP growth of 3.3%in 2006. Through
April 2007, motor vehicle sales fell 3.0% while motor vehicle production declined 5.5%.In
2006, motor vehicle sales fell 2.6%, while production was down 2.8%. As predicted, lower
sales for all of 2007 will lead to reduced demand from this key end market for steel.
Presumably, car manufacturers will be working to reduce unsold car inventory and will be
cutting production, which will reduce demand for steel. According to the numerical data,
through May, 2007 the S&P Steel Index increased 35.1%, compared to a 6.6% increase for
the S&P 1500 Index and a14.9% rise in the S&P.

Materials Index In 2006, the S&P Steel Index increased 58.2%, versus a 13.3% increase for
the 1500 and a 16.6% increase in the S&P Materials Index. In the long term, there is a strong
possibility for the industry to benefit from greater pricing power resulting from further
expected consolidation, a lower cost structure, and a continuation of the cyclical decline of
the U.S. dollar.

Capacity

36
The global crude steel production capacity has grown by around 7% to 1.6 bn in 2007 from
1.5 bn tonnes in 2006. The capacity has shown a growth rate of 7% CAGR since 2003. The
additions to capacity over last few years have ranged from 36 m tonnes in 2004 to 108 m
tonnes in 2007. Asian region accounts for more than 60% of the total production capacity of
world, backed mainly by capacity in China, Japan, India, Russia and South Korea. These
nations are among the top steel producers in the world.

Production

Total crude steel production for the 66 countries reporting to the World Steel Association in
January 2010 was estimated to be 109.2 million tonnes, an increase of 25.9% on January
37
2009. If China is excluded, the remaining 65 countries showed a 32.8% rise in crude steel
production. Most countries recorded an increase in steel production in January.

Rank Country Production (mn tonnes) World share (%)

1 China 489 37.0%

2 Japan 120 9.0%

3 US 98 8.0%

4 Russia 72 5.0%

5 India 53 4.0%

6 South Korea 51 3.5%

CONTRIBUTION OF COUNTRIES TO GLOBAL STEEL INDUSTRY

Consumption

Rank Country Consumption (mn tonnes) World share (%)

1 China 408 36.0%

38
 2 US 108 9.0%

3 Japan 80 6.7%

4 South Korea 55 4.6%

5 India 51 4.2%

6 Russia 40 3.3%

IndianSteelIndustry& Tata Steel

India is currently the fifth largest steel-producing nation in the world with production of over 54
million tonnes (MT). However, it has a very low per capita consumption of steel of around 46 kgs
as against an average of 198 kgs of the world. This wide gap in relative steel consumption
indicates that the potential ahead for India to raise its steel consumption is high

 Being a core sector, steel industry tracks the overall economic growth in the long term. Also,
steel demand, being derived from other sectors like automobiles, consumer durables and
infrastructure, its fortune is dependent on the growth of these user industries

39
 The Indian steel sector enjoys advantages of domestic availability of raw materials and cheap
labour. Iron ore is also available in abundant quantities. This provides major cost advantage
to the domestic steel industry, with companies like Tata Steel being one of the lowest cost
producers in the world.

 However, Indian steel companies have to bear additional costs pertaining to capital
equipment, power and inefficiencies (low per employee productivity). This has resulted in the
erosion of the edge they would have otherwise enjoyed due to availability of cheap labour
and raw materials.

 The government reinstated basic customs duty on steel imports in order to protect India from
dumping of cheap steel products. It has also provided series of benefits to auto, housing and
real estate sector in order to counter the slowdown in the economy.

Sector Wise Steel Demand

SECTORS TOTAL DEMAND (%)

Construction and Infrastructure 59
Manufacturing 13
Automobiles 11
Others 17

Capacity

Steel capacity increased by 6% to 60 m tonnes in FY08. It registered a robust growth of 8%

CAGR between the period FY04 and FY08. The capacity expansion in the country was
primarily through brown field expansions as it requires lower investments than a Greenfield
expansion.

40
Production
Steel production reached 28.49 million tonne (MT) in April-September 2009.

The National Steel Policy has a target for taking steel production up to 110 MT by 2019–20.
Nonetheless, with the current rate of ongoing Greenfield and brownfield projects, the
Ministry of Steel has projected India's steel capacity is expected to touch 124.06 MT by
2011–12. In fact, based on the status of memoranda of understanding (MoUs) signed by the
private producers with the various state governments, India's steel capacity is likely to be 293
MT by 2020.
41
The production of steel in India touched 27.49 million tonne in 2009 to meet the growing
demand for total steel utilized in kitchen appliances, airports, retail stores, trains, etc. The
demand for steel and its consumption is predicted to grow by 17% per annum till 2012. The
increase in demand will be triggered by construction schemes valued around US$ 1 trillion.

Indian steel industry features among the world's largest iron-ore producers and saw a massive
rise in its iron ore exports in 2009 by more than 20%. The sharp expansion of the industry has
attracted an astounding FDI of over USD 237 billion.

Consumption
India accounts for around 5 per cent of the global steel consumption. Almost 70 per cent of
the total steel used is for kitchenware. However, its use in railway coaches, wagons, airports,
hotels and retail stores is growing immensely.

India's steel consumption rose by 6.8 per cent during April-November 2009 over the same
period a year ago on account of improved demand from sectors like automobile and
consumer durables.

A Credit Suisse Group study states that India's steel consumption will continue to grow by 16
per cent annually till 2012, fuelled by demand for construction projects worth US$ 1 trillion.

42
The scope for raising the total consumption of steel is huge, given that per capita steel
consumption is only 35 kg – compared to 150 kg across the world and 250 kg in China.

Steel players like JSW Steel and Essar Steel are increasing their focus on opening up more
retail outlets pan India with growth in domestic demand. JSW Steel currently has 50 such
steel retail outlets called JSW Shoppe and is targeting to increase it to 200 by March 2010.
They expect at least 10-15 per cent of their total production to be sold by their retail outlets.

Consolidation in Indian Steel Industry

The Indian Steel Industry is under consolidation phase due to following reasons-

1. Surge in demand of steel from various sectors like infrastructure, automobiles,

Construction, consumer goods, oil & gas industry, etc. Demand can be bridged in
twoways i.e. either through setting up of new plants (Greenfield investment) or
throughacquisition of other companies (Brownfield investment). Setting up
Greenfieldinvestment takes up lot of time and capital to be fully operational and
hence, Indiancompanies are taking the comparative shorter route of M&A to capture
the growingdemand. Hence, growth in the merger and acquisition deals in Indian
Steel sector ispicking up.

1. Secondly, the cyclical nature of the industry means that low-volume, high-
costproducers have to generate sufficient cash or create a strong enough
borrowingposition during market peaks to survive the market troughs. The sector is
still veryfragmented and cannot, therefore, control its raw materials costs or the price
of itsfinished goods. Hence, the only way to counteract the situation is to acquire
othersteelmakers and become a larger player on the global scene, thereby
obtaininggreater bargaining power with suppliers and customers, and increased
43
 operatingflexibility. It will ultimately ensure they are better able to survive, even if
iron oreprices keep soaring.

2. Thirdly, the concern with respect to new steel capacities cropping up across theglobe
have become common, as this development would lead to significant pressureon steel
prices going forward. So in order to arrest the spiraling prices, there isincrease in
M&A activity.

3. Fourthly, the biggest disruption in the growth pattern in the industry could be froman
expected slowdown in Chinese steel consumption, which would make available agood
amount of excess steel for world consumption. It will lead to import of steel inIndia
and other markets and thus, hitting the margins of the local Indian companies.Since
the companies has realized the threat of excess supply, they are looking atM&A
option to retain market share and improve margins.

4. Fifthly, India’s major market for steel and steel items include USA, Canada,Indonesia,
Italy, West Asia, Nepal, Taiwan, Thailand, Japan, Sri Lanka and Belgium.The major
steel items of export include HR coils, plates, CR and galvanized products,pipes,
stainless steel, wire rods and wires. With the fall in prices along withdepressed
domestic demand, India has been increasing exports to overcome theexcess supply
situation. This has resulted in antidumping actions being taken bydeveloped countries
like USA, EU and Canada. The trade action by some countriesagainst Indian steel
industry has, to some extent, affected India’s exports t these countries. The Indian
steel producers are taking inorganic route of M&A for growthand combating such
actions.

The M&A activity is not only limited to acquisition of one Indian company by another but
acquisition of companies overseas by the Indian corporate. The Tata Group has led the pack
in this activity also. It acquired Singapore’s NatSteel in year 2004 with enterprise value of Rs.
1313 crore and then acquired Anglo-Dutch steel major, Corus for a whopping sum of $12.1
billion in the year 2007, an highest ever price paid by an Indian company for overseas
acquisition.

Recent Financial Crisis and Indian Steel Industry

We have witnessed in last few months, the unfolding of financial crises starting from United
States and expanding world over. The exact magnitude and extent of the crises is fiercely
debated among the financial experts. However, this real impact on economy can easily be
observed across many, if not all sectors.

The steel industry has not been spared with the impacts of the financial crises. The total
market valuation of Arcelor Mittal, Nippon steel and JEE has dropped by approx $165
44
billion. The price of billet in Dubai market has dropped from its height of $125/ton in June
2008 to a recent low of $350 /ton. One of the steepest drops witnessed in recent history. The
wide spread drop in demand for all types of steel required companies to cur production
globally. Arcelor Mittal, one of the largest steel producers, alone has recently announced
more than 30% reduction in production.

It is only human to be frustrated and uncertain of the future. However, over long term, do we
really need to be? We explored the steel production data going back to 1900 during last 100
years the worst drop (13.52%) in steel industry accrued between 1979 and 1982. This four
year drop in global steel production is horrendous. However, if we look at year over year
growth changes in steel industry during a 100 year period from 1900 to 2000 a more
optimistic picture emerges. There is not even one instance when industry saw a consecutive
four year of negative year over year growth. The worst case situation is three years of
declining year over year growth during 1930-32, 1944-46, and 1980-82.

Extending the past patterns of data to predict future is fraught with peril. It is none the less an
important reminder to us that during tumultuous 100 year period the steel industry has been
able to successfully weather world wars ,recession and crises of all the genre. Steel is a
resilient industry.

It is not to say that the current financial crises should not be taken seriously. It should be
however, if history holds the chances the impact of current crises extending beyond 2009 are
low. The leading steel companies should take these opportunities to improve their
operational efficiency and effectiveness to better prepare themselves for impending growth in
coming years.

45
 Tata – Corus Deal

Tata Steel

Tata steel, India’s largest private sector steel company was established in the 1907.The Tata
steel which falls under the umbrella of Tata sons has strong pockets and strong financials to
support acquisitions. Tata steel is the 55th in production of steel in world. The company has
committed itself to attain global scale operations.

Production capacity of Tata steel is given in the table below:-

46
The product mix of Tata steel consist of flat products and long products which are in the
lower value chain. The Tata steel is having a low cost of production when compared to Corus.
The Tata steel was already having its capacity expansion with its indigenous projects to the
tune of 28 million tones.

Corus

The Corus was created by the merger of British Steel and Dutch steel company, Hoogovens.
Corus was Europe’s second largest steel producer with a production of 18.2 million tonnes

47
and revenue of GDP 9.2 billion (in 2005). The product mix consisted of Strip steel products,
Long products, Distribution and building system and Aluminum. With the merger of British
Steel and Hoogovens there were two assets the British plant asset which was older and less
productive and the Dutch plant asset which was regarded as the crown jewel by every one in
the industry. They have union issues and are burdened with more than $ 13 billion of pension
liabilities. The Corus was making only a profit of $ 1.9 billion from its 18.2 million tonnes
production per year (compared to $ 1.5 billion form 8.7 million tone capacity by Tata).

The Corus was having leading market position in construction and packaging in Europe with
leading R&D. The Corus was the 9th largest steel producer in the world. It opened its bid for
100 % stake late in the 2006. Tata (India) & CSN (Companhia Siderurgica Nacional)
emerged as most powerful bidders

Why go for Merger?

48
Corus decides to sell Reasons for decision:
 Total debt of Corus is 1.6bn GBP
 Corus needs supply of raw material at lower cost
 Though Corus has revenues of $18.06bn, its profit was just $626mn (Tata Steel’s
revenue was $4.84 bn & profit $824mn)
 Corus facilities were relatively old with high cost of production
 Employee cost is 15 % (Tata Steel- 9%)

Tata Decides to bid: Reasons for decision:

 Tata is looking to manufacture finished products in mature markets of Europe.
 At present manufactures low value long and flat steel products while Corus produces
high value stripped products
 A diversified product mix will reduce risks while higher end products will add to
bottom line.
 Corus holds a number of patents and R & D facility.
 Cost of acquisition is lower than setting up a green field plant and marketing and
distribution channels
 Tata is known for efficient handling of labour and it aims at reducing employee cost
and improving productivity at Corus
 It had already expanded its capacities in India.
 It will move from 55th in world to 5th in production of steel globally.

The Deal

The deal between Tata & Corus was officially announced on April 2nd, 2007 at a price of 608
pence per ordinary share in cash. This deal is a 100% acquisition and the new entity will be
run by one of Tata’s steel subsidiaries. As stated by Tata, the initial motivebehind the
completion of the deal was not Corus’ revenue size, but rather its marketvalue. Even though
Corus is larger in size compared to Tata, the company was valuedless than Tata (at
approximately $6 billion) at the time when the deal negotiations started.But from Corus’

49
point of view, as the management has stated that the basic reason forsupporting this deal were
the expected synergies between the two entities.

Corus has supported the Tata acquisition due to different motives. However, with the
Tataacquisition Corus has gained a great and profitable opportunity to make an exit as
thecompany has been looking out for a potential buyer for quite some time. The total value of
this acquisition amounted to ₤6.2 billion (US$12 billion). Tata Steel the winner of the auction
for Corus declares a bid of 608 pence per share surpassed the final bid from Brazilian Steel
maker Companhia Siderurgica Nacional (CSN) of 603 pence per share. Prior to the beginning
of the deal negotiations, both Tata Steel and Corus were interested in entering into an M&A
deal due to several reasons. The official press release issued by both the company states that
the combined entity will have a pro forma crude steel production of 27 million tones in 2007,
with 84,000 employees across four continents and a joint presence in 45 countries, which
makes it a serious rival to other steel giants.

The official declaration of the completed transaction between the two companies was
announced to be effective by Court of Justice in England and Wales and consistent with the
Scheme of Arrangement of the Tata Steel Scheme on April 2, 2007. According the Scheme
regulations, Tata Steel is required to deliver a consideration not later than 2 weeks following
the official date of the completion of the transaction. The process has started on September
20, 2006 and completed on July 2, 2007. In the process both the companies have faced many
ups and downs.

The details of this process havebeen described on the next page.

September 20, 2006: Corus Steel has decided to acquire a strategic partnership with
aCompany that is a low cost producer

October 5, 2006: The Indian steel giant, Tata Steel wants to fulfil its ambition toexpand its
business further.

October 6, 2006: The initial offer from Tata Steel is considered to be too low bothby Corus
and analysts.

October 17, 2006: Tata Steel has kept its offer to 455p per share.
50
October 18, 2006: Tata still doesn’t react to Corus and its bid price remains thesame.

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 investmentbank to offer
advice on possible counter-offer to Tata Steel’s bid.

October 27, 2006: Corus is criticized by the chairman of JCB, Sir AnthonyBamford, for its
decision to accept an offer from Tata.

November 3, 2006: The Russian steel giant Severstal announces officially that it willnot
make a bid for Corus

November 18, 2006: The battle over Corus intensifies when Brazilian group CSNapproached
the board of the company with a bid of 475p pershare

November 27, 2006 : The board of Corus decides that it is in the best interest of its
willshareholders to give more time to CSN to satisfy the preconditionsand decide whether it
issue forward a formal offer

December 18, 2006: Within hours of Tata Steel increasing its original bid for Corus to500
pence per share, Brazil's CSN made its formal counter bid forCorus at 515 pence per share in
cash, 3% more than Tata Steel'sOffer.

January 31, 2007: Britain's Takeover Panel announces in an e-mailed statement thatafter an
auction Tata Steel had agreed to offer Corus investors608 pence per share in cash

April 2, 2007: Tata Steel manages to win the acquisition to CSN and has the fullvoting
support form Corus’ shareholders

51
Structuring and Pricing the deal

Financing Structure Financing India's largest leveraged buyout comprised of a $3.88 billion
equity contribution from Tata Steel, a fully underwritten non-recourse debt package of $5.63
billion, and a revolving credit facility of $669 million.

As per the acquisition plan a special purpose vehicle, a wholly owned subsidiary, called Tata
Steel UK would be set up by Tata Steel. The acquisition was proposed to be effected under
section 425 of the English Companies Act 1985 and upon approval from the Corus
shareholders. Tata Steel UK would offer a price of 455 pence per Corus share valuing Corus
at £4.3b ($8.04b). This price represented a multiple of 7.9 times the EBITDA of Corus from
continuing operations for the twelve months to July 1, 2006. The acquisition was to be
structured as a 100 percent leveraged buy out funded through cash resources and loans raised
by Tata Steel and the SPV. Under the plan Tata Steel UK would arrange a loan of £1.6 b
($3056m), a revolving credit facility and a bridge loan and the rest would come from Tata
Steel (to the SPV).

Tata Steel appointed Credit Suisse, ABN Amro and Deutsche Bank to arrange financing. Of
52
the £3.3 billion of financing being raised at the SPV level, Credit Suisse would provide 45%
and ABN AMRO and Deutsche 27.5% each. The $1.8 billion bridge debt being raised at the
Tata Steel level in India would be shared between Standard Chartered and ABN AMRO.

In line with the Tata Group’s approach to acquisitions, Tata Steel announced its intention to
continue with the senior management of Corus. Appointments to the Tata Steel and Corus
were to provide common platform for strategy and integration. According to the plan Ratan
Tata would be the chairman of both Tata Steel and Corus and Jim Leng would serve as deputy
chairman of Tata Steel and Corus. Three board members (including the CEOs) of each
company would serve on the other company’s board. A strategic and integration committee
comprising of Ratan Tata, the CEOs and senior management professionals of both companies
was formed to develop and execute the integration plan and further growth plans. Appropriate
cross functional teams were to be formed to execute the integration plan.

Strategy Muthuraman, the Managing Director of Tata Steel had a number of things to
consider in negotiating a deal for Corus. First of all, Tata Steel could not make an all cash
offer and assume the assets and liabilities of Corus on its balance sheet because of the sheer
size. Second, both companies had to convince their shareholders about the strategic and
financial benefits to the companies. Shareholders would be concerned about the size of the
premium and the potential dilution in earnings per share.

Integration Efforts
One of the biggest concerns Tata executives had was whether the inevitable cultural conflicts
between the organizations would pose significant operating problems. Integrating a large
company that operated on a different continent with diverse cultures and operating
environments was going to be no small task. Exacerbating this problem was the fact that
Corus itself was formed by the merger of English and a Dutch company that had different
cultures and profitability. In line with the Tata Group’s approach to acquisitions, Tata Steel
announced its intention to continue with the senior management of Corus. Appointments to
the Tata Steel and Corus were to provide common platform for strategy and integration.
According to the plan, Ratan Tata would be the chairman of both Tata Steel and Corus and
Jim Leng would serve as deputy chairman of Tata Steel and Corus. Three board members
(including the CEOs) of each company would serve on the other company’s board. A strategic
and integration committee comprising of Ratan Tata, the CEOs and senior management
professionals of both companies was formed to develop and execute the integration plan and
further growth plans. Appropriate cross functional teams were to be formed to execute the
integration plan.

Finance Plan of Tata

53
The Synergies

54
 Most experts were of the opinion that the acquisition did make strategic sense for Tata Steel.
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 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.

Tata Steel optimism regarding the synergies that could be generated after merger with Corus
was strong. B Muthuraman, MD, Tata Steel said, “In terms of synergies, we see synergies in
improvement of operating practices in many areas. We have had a reasonably good look at in
the limited time that we had with Corus. We see synergies in procurement of materials,
market place, in shared services, in improvements of our operations In India using what
Corus has in some areas better than us. In terms of total synergies, we believe it is roughly
about US$ 300-350 mn per year, which is something, which we will be able to bring to the
bottom line of the combined entity. It will take a little bit of time; it will start at a lower value
for the first one or two years. From thethird year onwards, we expect to realize the full
synergies.”

According to industry experts, Tata Steel would have two options with regard to steel
production after the acquisition, The first option would be to continue with its primary steel
production close to its iron ore deposits, and the ship semi-finished steel for finishing at
Corus’s plant that were close to foreign consumer markets. The second option would be to
shift a part of Corus’ steelmaking capacity to India, where Tata Steel was already planning a
massive expansion to cater to the rapidly growing demand of steel in the country. Corus’
expertise in making better grades of steel used in automobiles and in aerospace could be used
to boost Tata Steel’s supplies to thegrowing Indian automobile market.

Corus consultancy services based in New Port, South Wales, provided iron, steel, and metal
related consultancy, right from the stage from core mining to that of marketing the finished
products. It was planned that this would be synergized with an automation unit that Tata had
in India. Muthuraman sais, “Apart from steel, there are a lot of other strength Corus has, that
can be tapped by Tata Steel in consultancy and other areas. We will try to increase these
synergies.”

 Tata Steel's acquisition of Corus was a bold and smart move. Complementarities in
scale, market geography, financials, technology and raw materials offered a strong
rationale for the deal.

 Acquisition of Corus has been timely. Given the rising momentum of consolidation
in the industry and rising valuations of steel companies, had Tata Steel not acted
when it did, the opportunity could have been lost forever.

The Pitfalls

55
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.

Post Acquisition Phase of Tata Steel

 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 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 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
percent on the Bombay stock market. Despite its four times smaller size and smaller
capacity, Tata Steel’s operating profit for 2006, earning $840 million on sales of 5.3
million tones, 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 expected to generate up to $640 million in annual interest charges (8%
annual interest cost). This amount combined with Corus’ existing interest debt charges
of $400 million on an annual basis implies that the combined entity’s interest
obligation will amount to approximately $725 million after the acquisition.

56
  The debate whether Tata Steel has overpaid for acquiring Corus is most likely to be
certain, since just based on the numbers 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’s shares.

Another pressing issue resulting for this deal that has created a dilemma between experts and
analysts opinions is whether this acquisition was 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 beginning period.

Spread of Markets

57
Financials before Acquisition

TATA STEEL CORUS

58
 2012-13 31st Dec,2012

(in mn $) (in mn $)

Turnover 4546 18979

EBITDA 1704 1846

PBT 1440 610.35

PAT 971 446

Net Profit Margin 23% 2.35 %

EPS 1.70 0.41

Dividend 254 134

TATA Steel before and after Acquisition

2011-12 2012-13 2013-14

(after acquisition) (after acquisition)

EBITDA/Turnover 31.14% 14.08 % 12.55 %

PBT (In Crores Rs) 6313 16371 6743

59
 PAT(In Crores Rs) 4165 12321 4849.24

PBT/Turnover 24.61 % 12.39 % 7.43 %

Interest Coverage Ratio 16.35 3.46 4.32

EPS 64.66 177.18 66

Debt /Equity 0.71 1.99 1.65

P/E 6.95 3.91 3.12

60
Valuation of Firms

61
Valuation of Tata Steel and Corus was done to find the enterprise value of the companies
individually as well valuation of Tata Steel after acquisition of Corus plc.

Using the above data, we arrive at cost of equity by using CAPM formula:

Tata (for first five years) – 20%

Corus (for first five years) – 10.68%

Tata (next five years) – 16%

Corus (next five years) – 10%

Weighted Average Cost of Capital (WACC):

WACC for individual companies = (Proportion of Debt * Cost of Debt) + (Proportion of
Equity * Cost ofEquity)

WACC for combined entity = (WACC for Corus for first five years * Present Value of Corus)
+ (WACC for Tata for first five years * Present Value of Tata) / Value of Combined firm
without synergy

Enterprise Value

62
The following formula is used to calculate the Enterprise value of the entities-

{EBIT (1-t) - (Capex-Depreciation)-Changes in Working Capital} *{1+g} / {1+ WACC} n

After doing the valuations of both the entities with synergy and without synergy, we arrive at
a positive value of synergy. This leads us to the conclusion that M&A activity, incase of Tata
Corus deal will lead to enhancement in the value of the acquirer firm.

63
Conclusion &
Findings

64
Tata acquired Corus, which is 4 times larger than its size and the largest steel producer in the
U.K. The deal, which creates the world’s fifth largest steelmaker, is India’s largest ever
foreign takeover and followsMittalSteel’s $32 billion acquisition of rival Arcelor in same
year.

Tata acquires Corus on the 2nd of April 2007 for a price of $12 billion. The price per share
was 608 pence, which is 33.6% higher the first offer which was 455 pence.

Equity contribution from Tata Steel - $3.88 billion Credit Suisse leaded, joined by ABN
AMRO and Deutsche provided bank in the consortium.

In 2005, Tata Steel was only the world's 56th biggest steel producer and its takeover of Corus
represents its first expansion outside Asia.

Some of the advantages of this deal are:-

 Big impact globally

 Producing good quality at lower prices

 Pricing power

 Market capitalization

After successfully acquiring Corus, Tata Steel became the 5 thlargest producer of steel in the
world, up from 56thposition. 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.

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.

Going by the stock market reaction, the acquisition was a big blunder. The stock tanked 10.5
per cent after the deal was announced. Investors were worried about the financial risks of
such a costly deal.

65
• Operating Profit as a percentage of Revenue (pre-Corus)= 25.10%
• Operating Profit as a percentage of Revenue (post-Corus)=10.48%

66
• PAT as a percentage of Revenue (pre-Corus)= 16.28%
• PAT as a percentage of Revenue (post-Corus)=9.34%

67
Media reaction to the deal had been just the opposite. Almost all the reports were adulatory
while editorials praised the coming of age of Indian industry. A prominent financial daily
presented the deal almost as revenge of the natives against the old colonial masters with a
68
picture of London covered in our national colours. Its editorial warned the market 'not to bet
against Tata', citing the previous instances when skeptics were proved wrong by the group.
Official reaction had been no different and the finance minister even offered all possible help
to the Tata Group.

The enterprise valuation of Corus at around $13.5 billion appears too steep based on the
recent financial performance of Corus. Tata Steel is paying 7 times EBITDA of Corus for
2005 and a higher 9 times EBITDA for 12 months ended 30 September 2006. In comparison,
Mittal Steel acquired Arcelor at an EBITDA multiple of around 4.5. Considering the fact that
Arcelor has much superior assets, wider market reach and is financially much stronger than
Corus, the price paid by Tata Steel looks almost obscenely high. Tata Steel's B Muthuraman
has defended the deal arguing that the enterprise value (EV) per tonne of capacity is not very
high. The EV per tonne for the Tata-Corus deal was around $710 is only modestly higher than
the Mittal-Arcelor deal. Besides, setting up new steel plants would cost anywhere between
$1,200 and $1,300 per tonne and would take at least five years in most developing countries.
But, are the manufacturing assets of Corus good enough to command this price? It is a well-
known fact that the UK plants of Corus are among the least efficient in Europe and would
struggle to break even at a modest decline in steel prices from current levels.

Recent financial performance of Corus would dent the hopes of Tata Steel shareholders even
further. EBITDA margins, after adjusting for one-time incomes, have steadily declined over
the last 3 years. For the 9-month period ended September 2006, EBITDA margins of Corus
were barely 8 per cent as compared to around 40 per cent for Tata Steel.

The price of an asset is more a factor of its future earnings potential than its past earnings
record. Operating margins of Corus can be significantly improved if Tata Steel can supply
slabs and billets. Tata Steel is targeting consolidated EBITDA margins of around 25 per cent
as and when it starts supplying crude steel to Corus. If the company can sustain such margins
on the enlarged capacities, it would be quite impressive.

But that is a long way off as Tata Steel would have sufficient crude steel capacity only when
its proposed new plants become operational. Till then, the company is targeting to maximize
gains through possible synergies between the two operations, which are expected to yield up
to $350 million per annum within three years. In the meanwhile, Tata Steel has to make sure
that cash flows from Corus are sufficient to service the huge amount of debt, which is being
availed to finance the acquisition. According to the details available so far, Tata Steel would
contribute $4.1 billion as equity component while the balance $9.4 billion, including the re-
financing of existing debt of Corus after adjusting for cash balance, would be financed
through debt. The debt facilities are believed to be structured in such a way that they can be
serviced largely from the cash flows of Corus.

Interest rates on credit facilities for such buy-outs are often higher than market rates because
of the risks involved. At an expected interest rate of 7 per cent per annum, the interest outgo
alone would be over $650 million per year. Along with repayment of principal, the annual
69
fund requirement to service this debt would be around $1.5 billion - assuming a 10-year
repayment horizon.

The current cash flows of Corus are barely sufficient to cover this, even after considering the
synergy gains. If international steel prices decline even modestly, Tata Steel would have to
dip into its own cash flows or find other sources like an equity dilution to service the debt.

Besides, funds may also be required for upgrading some of the Corus plants to improve
efficiencies. Tata Steel would have to manage all this without jeopardizing its Greenfield
expansion plans which may cost a staggering $20 billion over the same 10-year period.

To its credit, the Tata Steel management has acknowledged that it would not be an easy task
to manage the next five years when Corus would have to hold on to its margins without the
help of cheaper inputs supplied by Tata Steel. If the group can survive this initial period
without much damage, life may become much easier for the Tata Steel management.

Investors would consider Corus a burden for Tata Steel until such time there is a perceptible
improvement in its margins. That would keep the Tata Steel stock price subdued and any
decline in steel prices would have a disproportionately negative impact on the stock.

However, long-term investors would appreciate that right now steel manufacturing assets are
costly and Corus was a prized target which made it even more costly. With the strategic
importance of such a large deal in mind, Tata Steel management has taken the plunge. If it
can pull it off, even after a decade, the Corus acquisition would become the deal, which
would transform Tata Steel.

The combined entity of Tata-Corus will have a tremendous beneficial reach and scale of 24
million tonne per annum and many synergies, but the market is not willing to wait for the
benefits to come through. Besides, at an EV/EBITDA (enterprise value/earnings before
interest, tax and depreciation) of more than 8 times CY06 financials on consensus estimates
and a replacement value of $679 per tonne, analysts believe the transaction valuation is
stretched. In the Mittal Steel-Arcelor deal, the EV/EBITDA was 6.2 times. In terms of
EV/tonne too, Tata Steel's price, at $700-710 per tonne is higher than what Arcelor
commanded at $586 per tonne. Also, in case of Mittal Steel-Arcelor, the deal involved a share
swap along with cash. Tata Steel will have to shell out hard cash for Corus. And that means
not just more debt on the Tata Steel balance sheet, but also an equity dilution. The company’s
gearing is low at around 0.26:1, so it is in a position to take on debt of around Rs 8,000 crore,
without the debt-equity ratio going for a toss. As for the equity dilution, Tata Steel has issued
warrants to Tata Sons in July 2006, Tata Sons was issued 2.7 crore shares of Rs 10 each at a
price of Rs 516 per share aggregating Rs 1,393 crore. The leading steel groups that follow
Arcelor Mittal are quite a distance from owning 50 million tonne capacity each. In an
industry with a capacity of nearly 1.3 billion tonne, the ideal scene would be half the capacity
being owned by not more than ten groups. Tata Steel's audacious, but successful bid for
Corus at an enterprise value of £6.7 million, including debts of £500 million, gives it a
capacity of 28 million tonne, including 8.7 MT of its own. But the immediate stock market
reaction to Tata Steel running away with the trophy in a head to-head bidding with Brazil's
70
CSN was negative, as market participants thought Corus at 608 pence, representing a
premium of 153 pence on the opening offer, was an expensive buy. Whether the Tatas are
paying an inflated price for Corus will remain a subject of debate for some time. Ratan Tata is
emphatic that he is not paying anything that is beyond prudence. It may not look so at this
point, but the acquisition cost for the Tatas will be justified, as the valuation of steel assets
around the world will keep on rising. Corus got sold at 9 times its earnings (EBITDA). Some
months ago, Mittal muscled his way into Arcelor by paying 6.2 times the target company's
earnings. To put it differently, Corus costs the Tatas $700 for each tonne of steel against
Mittal's payment of $670 a tonne for Arcelor. But, we know that a recent steel deal in the US
was clinched at nearly $1,000 a tonne.

Short-Term Implications
Investors with a one-to-two year perspective may find the Tata Steel stock unattractive at
current price levels. While the potential downside to the stock may be limited, it may
consolidate in a narrow range, as there appears to be no short-term triggers to drive up the
stock. The formalities for completing the acquisition took three to four months, before the
integration committees got down to work on the deal.

Equity Dilution
The financing of the acquisition is unlikely to pose a challenge for the Tata group, but the
financial risks associated with high-cost debt may be quite high. Though the financing pattern
is yet to be spelt out fully, initial indications are that the $4.1 billion of the total consideration
will flow from Tata Steel/Tata Sons by way of debt and equity contribution by these two and
the balance $8 billion, will be raised by a special investment vehicle created in the UK for
this purpose. Preliminary indications from the senior management of Tata Steel suggest that
the debt-equity ratio will be maintained in the same proportion of 78:22, in which the first
offer was made last October.

The Corus steel factory in Ijmuiden, the Netherlands

Based on this, a 20-25 per cent equity dilution may be on the cards for Tata Steel. The equity
component could be raised in the form of preferential offer by Tata Steel to Tata Sons, or

71
through GDRs (global depository receipts) in the overseas market or a rights offer to
shareholders.

This dilution is likely to contribute to lower per share earnings, whose impact will be spread
over the next year or so. As Tata Steel also remains committed to its six-million-tonne
Greenfield ventures in Orissa, its debt levels may rise sharply in the medium term.

Margin Picture
Short-term triggers that may help improve the operating profit margin of the combined entity
seem to be missing. In the third quarter ended September 2006, Corus had clocked an
operating margin of 9.2 per cent compared with 32 per cent by Tata Steel for the third quarter
ended December 2006. In effect, Tata Steel is buying an operation with substantially lower
margins.

This is in sharp contrast to Mittal's acquisition of Arcelor, where the latter's operating margins
were higher than the former's and the combined entity was set to enjoy a better margin.
Despite that, on the basis of conventional metrics such as EV/EBITDA and EV/tonne,
Arcelor Mittal's valuation has turned to be lower than Tata Corus. On top of that, Tata is
making an all-cash offer for Corus vis-à-vis the cash-cum-stock swap offer made by Mittal
for Arcelor.

Corus has been working on the "Restoring Success" programme aimed at closing the
competitive gap that existed between Corus and the European steel peers. The gap in 2003
was about 6 per cent in the operating profit level when measured against the average of
European competitors. And this programme is expected to deliver the full benefits of 680
million pounds in line with plan. With this programme running out in 2006 and being
replaced by `The Corus Way', the scope for Tata Steel to bring about short-term
improvements in margins may be limited.

Even the potential synergies of the $300-350 million a year expected to accrue to the bottom-
line of the combined entity from the third year onwards, may be at lower levels in the first
two years. As outlined by Mr. B. Muthuraman, Managing Director of Tata Steel, synergies are
expected in the procurement of material, in the marketplace, in shared services and better
operations in India by adopting Corus's best practices in some areas.

Long-Run Picture
Whenever a strategic move of this scale is made (where a company takes over a global major
with nearly four times its capacity and revenues), it is clearly a long-term call on the

72
structural dynamics of the sector. And investors will have to weigh their investment options
only over the long run.

Over a long time-frame, the management of the combined entity has far greater room to
maneuver, and on several fronts. If you are a long-term investor in Tata Steel, the key
developments that bear a close watch are:

Research shows that steel-makers in India and Latin America, endowed with rich iron ore
resources, enjoy a 20 per cent cost advantage in slab production over their European peers.
Hence, any meaningful gains from this deal will emerge only by 20011-12, when Tata Steel
can start exporting low-cost slabs to Corus.

This is unlikely to be a short-term outcome as neither Tata Steel's six-million-tonne greenfield

plant in Orissa nor the expansion in Jamshedpur is likely to create the kind of capacity that
can lead to surplus slab-making/semi-finished steel capacity on a standalone basis.

Second, there may be further constraints to exports as Tata Steel will also be servicing the
requirements of NatSteel, Singapore, and Millennium Steel, Thailand, its two recent
acquisitions in Asia.

However, this dynamic may change if the Tata’s can make some acquisitions in low-cost
regions such as Latin America, opening up a secure source of slab-making that can be
exported to Corus's plants in the UK. Or if the iron ore policy in India undergoes a change
over the next couple of years, Tata Steel may be able to explore alternatives in the coming
years.

The raison d'etre for this deal for Tata Steel is access to the European market and
significantly higher value-added presence. In the long run, there is considerable scope to
restructure Corus' high-cost plants at Port Talbot, Scunthorpe and the slab-making unit at
Teesside.

The job cuts that Tata Steel is ruling out at present may become inevitable in the long run.
Though it may be premature at this stage, over time, Tata Steel may consider the possibility
of divesting or spinning off the engineering steels division at Rotherham with a production
capacity of 1 million tonnes. The ability of the Tatas to improve the combined operating
profit margins to 25 per cent (from around 14 per cent in 2005) over the next four to five
years will hinge on these two aspects.

In my view, two factors may soften the risks of dramatic restructuring at the high-cost plants
in UK. If global consolidation gathers momentum with, say, the merger of Thyssenkrupp with
Nucor, or Severstal with Gerdau or any of the top five players, the likelihood of pricing
stability may ease the performance pressures on Tata-Corus.

73
Two, if the Tata’s contemplate global listing (say, in London) on the lines of Vedanta
Resources (the holding company of Sterlite Industries), it may help the group command a
much higher price-earnings multiple and give it greater flexibility in managing its finances.

“I believe this will be the first step in showing that Indian industry can in fact step outside the shores
of India in an international marketplace and acquit itself as a global player.”

Ratan Tata

74
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 BBC: www.bbc.co.uk

 CNN: http://europe.cnn.com/

 Reuters: www.reuters.co.uk

 The Guardian: http://www.guardian.co.uk/

 The Financial Times: www.ft.com

 The Independent: http://www.independent.co.uk/

 The Times: http://www.timesonline.co.uk/

 The Sunday Times: http://www.timesonline.co.uk/

 The Irish Independent: http://www.unison.ie/irish_independent/

 The New York Times: http://www.nytimes.com/

 The Washington Post: http://www.washingtonpost.com/

 The Wall Street Journal : http://online.wsj.com/public/us

 Moscow Times (in English): www.moscowtimes.ru

 Sydney Morning Herald: www.smh.com.au

 To browse other newspapers from across the world, go to: http://www.newsdirectory.com/

Magazines
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 Business Week: www.businessweek.com

 The Economist: www.economist.com

 Harvard Business Review: www.harvardbusinessonline.com

Journals

 Journal of Applied Econometrics: http://qed.econ.queensu.ca/jae/

 Journal of Money Credit and Banking: http://economics.sbs.ohio-state.edu/jmcb/volumes.html

 American Economic Review: http://www.aeaweb.org/aer/contents/previss.html

 Applied Economics: http://www.tandf.co.uk/journals/routledge/00036846.html

 Development and Change: www.blackwellpublishers.co.uk

 Economica: http://www.blackwellpublishing.com/journal.asp?ref=0013-0427&site=1

 European Economic
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 Fiscal Studies: www.ifs.org.uk

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