January 31, 2007, added a shining feather in the cap of corporate Tata Steel which was celebrating its centenary year 2006-07. This day Tata Steel acquired the ninth largest steel producer of the world Corus in an all cash deal of $12.15 billion (around Rs. 55,000 crore) and catapulted itself from the 56th largest steel producer in the world to 6th largest steel producer in the world. It became the largest acquisition by an Indian company and the second largest in the industry after Mittal Steel’s $38.3 billion acquisition of Arcelor. By offering 608 pence per share (pps), which beat a price of Brazilian company Companhia Siderurgica Nacional (CSN) of 603 pps, was 33.6% higher than its original bid. By some measures, it exceeded the price paid in other recent industry deals, such as Mittal Steel’s acquisition of Arcelor last year. In its centenary year of 2007, Tata Steel, a subsidiary of Tata Group - India’s largest private sector company, was aiming to touch the production figure of 7 million tonnes but the acquisition would bring the total capacity of the group to around 23 million tonnes, making it the sixth largest steel producer in the world.
Table of Contents
Introduction
Background
The Indian Multinational in making: Tata Steel
The European Giant: Corus
Key competencies of Corus
Developments
European Union Clears the bids
The Financing
The Future
Objectives and Topics
The case study explores the sustainability and long-term feasibility of cross-border, big-ticket acquisitions, specifically focusing on the acquisition of Corus by Tata Steel as a strategic move toward becoming a global multinational corporation.
- Strategic analysis of cross-border acquisitions
- Financial restructuring and leveraged buyout mechanisms
- Sustainability and growth strategies in the global steel industry
- Integration challenges, including organizational culture and operational synergy
- Analysis of emerging market companies expanding into developed economies
Excerpt from the Case Study
The Financing
The Enterprise Value (EV) of the Corus acquisition was around Rs. 59,850 crores (US $ 13.75 billion), which included its continuing debt of Rs. 3,700 crores (US $0.85 billion). The Enterprise value/tonne of the Corus acquisition works out to be around Rs. 32,700/tonne ($751/tonne) based on Corus’ actual crude steel production of 18.3 million tonnes in 2006 and Rs. 28,250/tonne ($649/tonne) based on its crude steel capacity.
The financial tool through which Tata financed the Corus’ acquisition was Leveraged Buy Out or LBO. It was one of the most infamous tools of financing because it caused a string of failures in the late 1980s and early 1990s.
In case of Corus, Tata steel was paying an interest rate of 50 basis points over Libor on its current external debt of $1.5bn (Rs. 6150 crore). The bankers whom the VP – Finance Koushik Chatterjee approached for the $7bn (Rs. 28,700 crore) he needed to fund the Corus takeover, demanded 372 bps over Libor. With Tata Steel’s finances already stretched by a massive $6.75bn (Rs. 27,675 crore) domestic expansion plan, this wasn’t exactly the option the company was looking for. Chatterjee wanted to convince the banks to lend Tata Steel, which produces 5mn tonnes of steel annually, the LBO money it needed to buy Corus, which makes 22 million tonnes of steel annually, at corporate loan rates. But no one was biting.
Summary of Chapters
Introduction: This section provides an overview of the landmark $12.15 billion acquisition of Corus by Tata Steel in January 2007, marking a shift in the global steel industry rankings.
Background: Examines Tata Steel's position as a vertically integrated Indian multinational and its strategic "de-integrated" business model focused on global expansion.
The European Giant: Corus: Details the history, operational scale, and production capabilities of Corus, alongside its market significance within the European Union.
Key competencies of Corus: Highlights the technical expertise, customer relationships, and collaborative research initiatives that established Corus as a competitive force.
Developments: Traces the strategic drivers behind the acquisition, including the pressure to scale for global competitiveness and the bidding process against the Brazilian company CSN.
European Union Clears the bids: Discusses the regulatory perspective on the transaction and the impact on market concentration within the EEA.
The Financing: Explains the complex financial engineering, including the use of a Leveraged Buy Out (LBO) and the negotiation of interest rates to secure funding.
The Future: Analyzes the post-acquisition outlook, potential growth synergies, and the integration management committee tasked with strategic priorities.
Keywords
Mergers & Acquisitions, Acquisitive Growth, Growth Strategy, Going global, Steel, India, Leveraged Buy Out, LBO, Tata Steel, Corus, Multinational, Cross-border, Synergy, Integration, Corporate Finance.
Frequently Asked Questions
What is the core focus of this case study?
The case study focuses on the strategic and financial implications of the cross-border acquisition of the European steel producer Corus by the Indian firm Tata Steel.
What are the primary themes discussed?
Key themes include global expansion strategies, the financial complexities of large-scale leveraged buyouts, industrial integration, and managing organizational cultural differences.
What is the main objective of the research?
The objective is to analyze the feasibility and sustainability of big-ticket acquisitions for companies based in emerging markets attempting to become global leaders.
Which methodology was employed for this analysis?
The study relies on secondary data sources, including annual reports, financial disclosures, business magazines, news media, and official company press releases.
What does the main body cover?
The main body covers the background of both companies, the rationale behind the acquisition, the competitive bidding process, the funding structure, and the post-acquisition outlook for the enlarged entity.
Which keywords define the work?
The most relevant keywords include Mergers & Acquisitions, Acquisitive Growth, Growth Strategy, Tata Steel, Corus, Leveraged Buy Out, and Global Integration.
Why was the Leveraged Buy Out (LBO) approach considered risky?
The LBO approach was viewed as risky because it is a financing tool historically associated with corporate failures, and Tata Steel faced significant pressure from lenders due to its existing domestic expansion debt.
How did Tata Steel differentiate itself from other bidders during the auction?
Tata Steel successfully outbid its competitor, Companhia Siderurgica Nacional (CSN), by adjusting its offer in the final rounds of the auction managed by the UK Takeover Panel.
What are the identified potential challenges for the post-acquisition entity?
The primary challenges include integrating two distinct organizational cultures, managing the debt burden, and achieving the targeted $350 million per annum in operational cost savings.
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- Shiv S Tripathi (Autor:in), 2012, Tata Acquires Corus: A case Study, München, GRIN Verlag, https://www.hausarbeiten.de/document/197610
