Jigar gandhi grand project final report

A PROJECT TO

STUDY

ACQUISITION OF

TATA AND CORUS

0BY

Jigar Gandhi

Roll No- 11

PGDM - 4 TH semester

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INTRODUCTION –( MERGERS AND ACQUISITION )

In this changed business paradigm only those organization rule who visualize the possibilities

before they appear as plausible. Present Business environment, characterized by the

globalization and liberalization, accommodates organization that are coming up with

innovative strategies to survive and flourish.

Companies in the global economies climate are thriving to each the pinnacle of the successes

seeking competitive edge of over their rivals. While the waves liberalization and deregulation

have been shaking the corporate shore around the global the domestic organizations are

falling prey to the fierce competition and unprecedented challenges carried by this emerging

business scenario. The recessionary trend consequents to the wall Street tsunami has made for

the organization a maze with no exit .

Drowning in the luxury of producing goods only to keep life simple is suicidal, rather an un

quenched thirst must always prevailing that makes the quest for the value sustainable.

Existence of keen competition with number and volume also made the texture of the

competitor stronger shock absorber both finally and strategically creating a wide exposure for

the business enterprises to build armour for protecting themselves from the threats lying in

and forthcoming from the environment. Thus, organizations are left with no choice except

becoming excellent in all the respects, be it product or process, staff or shareholders,

customers or creditors. The aspiration for all the business comes now is “how to become

world class”.

Achieving business excellences and thereby creating value for a company is considered to be

most vital as well as significant objectives of today’s business enterprises with an aim to

ensure long run survival and sustainable growth over time. Keeping this objectives in mind,

the of corporate restructuring has emerged.

Corporate Restructuring usually implies restructuring the corporate sector from

multidimensional angles with a view to obtain competitive edge and thereby ensuring

business success

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MEANING AND DEFINITIONS

The word Structure is an economic context implies a specific, suitable relationship among the

elements of a particular function or process.

To restructure means the (hopefully) purposeful process of changing the structure of an

institution, a company, an industry, a market, a country, the world economy, etc.

This Structure defines constraints under which institutions function in their day to day

operations and their pursuit or better economic performance.

a)The term Restructuring as per as per Oxford Dictionary means, “to give a new structure to

bind or rearrange.”

b) Sander defines as “Restructuring is an attempt to change the Structure of an institution in

order to relax some or all of the short run constraints It is concerned with the changing

structures in pursuit of long run strategy.

c) Crum & Goldberg, defines Restructuring of a company as “A Set of discrete decisive

measures taken in order to increase the competitiveness of the enterprise and there by to

enhance its value.

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COPORATE RESTRUCTURING

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Expansion Contraction Corporate Control Changes In Ownership Structure

Mergers and Acquisitions

Tender officers

Asset Acquisition

Joint Ventures

Anti take over

defences

Share Repurchase

Exchange others

Proxy Contents

Spin o ff Split off Divestitures Equity Caved out

Spilt up

Leveraged Buyout

MLPs Going Private ESOPs

EXPANSATION

Expansion basically implies expanding or increasing the size and volume of business of the

firm. It generally includes Mergers and Acquisition (Mergers and Acquisition), Tender

officers, Assets acquisition and Joint Ventures.

a) Mergers and Acquisition

A transaction where 2 firms agree to integrate their corporation on a relatively on co-equal

basis is called merger. It defines the fusion of two or more companies through direct

acquisition of the net assets of other(s). It result when the shareholder of more than one

company, usually two, decide to pool the resources of the companies under common entity.

Accordingly, in a manager two or more companies combine into a single unit and lose

individual identities. Acquisition is a strategy where one firm buys a controlling or 100%

interest I another firm with intent of making the a subsidiary within its portfolio.

A takeover is an Acquisition where the target firm did not solicit the bid of the acquiring

firm. It is a strategy of acquiring control over the management. The objective is to

consolidate and acquire large share of the markets The regulatory framework of take over

listed companies is governed by the Securities and Exchange Board of India –SEBI

(substantial Acquisition of Share and Takeovers) Regulation, 1997.

In the case of mergers and consent of the majority of shareholders all companies involved

prerequisite, whereas, in the case of acquisition the controlling interest in a company is

bought with the consent of its manager.

b) Tender Offers

In case of Tender Offer, a public Offer is made for acquiring of the share of the share of the

target company. Here, the acquisition of shares of the target company indicates the

acquisition of management control in that company. For instance, India Cements giving an

open market for the share of Raasi cement.

c) Asset Acquisitions

Asset Acquisition imply buying the assets of another company. Such assets may be Tangible

Assets like; a manufacturing unit of the firm or Intangible Assets like brand, trade mark,

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etc..In the case of assets acquisitions, the acquire company may limit its acquisition to those

parts of the firm which match with the needs of the acquire company.

For instance, Laffarge of France acquired only the cement division of Tata Group. Laffarge

actually acquired only the 1.70 million tone cement plant and the assets related to such

division from Tata Group .Such assets may also be intangible in nature. For example, Coca-

Cola acquired some popular brands like Thumps-up, Limca, Gold Spot, etc, related to soft

drinks from pale and paid total consideration of Rs.170 crore. Ranbaxy Laboratory’s brand

acquisition from Gufic Laboratories must be one of the few cases here the revenues from the

Brands matched projection in the first year after the acquisition.

The four brand– Mox, Exel, Zole, Roxythro-acquired from Guficnelped notch up sales of Rs

72 crore in the first year a 20% improvement over their sales figure under Gufic.

d) Joint Venture

In case of Joint two companies enter onto an agreement and accumulate certain resources

with a view to achieve a particular common business goal. It generally involves fusion of

only a small part of activities of the companies involved in the agreement and usually for

limited period of time duration . The returns arising out of such venture are shared by

partners according to their prearranged agreement.

While entering into any foreign market, multinational companies pursue this strategy of Joint

Venture. For example, in order to manufacturing automobiles in India, Daewoo Motors and

DCM GROUP entered into a Joint Venture.

2) CONTRACTION

COTRACTION is the second form of restricting. In the case of contraction, generally the size

cc gets reduced. Contraction may take place in the form of Spin-Off, Spilt-Off, Divestitures,

Spilt-Ups and Equity-Carved Out.

a) Spin-Offs

A Spin- off is the type of transaction in which a company distributes all the shares owned by

it on its subsidiary to its own shareholders. Such distribution of the share among the

shareholder is made on pro-rata basis. As result, the proportional ownership of the share

shareholders becomes the same in the newegal subsidiary as well as the parent company. The

new entry has its own management and is operated independently without the intervention of

parent company. A Spin-off operated independently without the intervention For Example,

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by spinning of its investment division, Kotak Mahindra Finance Ltd. Formed a subsidiary

known as Kotak Mahindra Capital Corporation.

b) Split-Offs

In the case of Split-Offers, a new company is related in order to take over the operation of an

existing division or unit of company .A portion of existing division or unit of a company

obtain stock in the subsidiary (i.e. the new company) in exchange for stocks of the parent

company. As a result, the equity base of the parent is reduced representing the downsizing of

the firm.

Thus, shareholding of the new entity. Does not imply the shareholding of the parent

company. In the case of a split-off, there is no question of cash inflow to the parent company.

For example, the board of Directors of the Dabur India Ltd. decided to split-off the pharma

segment and transfer it to a new company for the financial year 2002-03. The demerge

proposal was a significant strategic decision reflecting corporate restructuring initiative and

was expected to provide greater focus on independence to the company’s two main

segments. The FMCG business, which would remain within Dabur India ltd., would

concentrate on its core competencies in personal care, health care and Ayurvedic Speciailitis.

The new pharmaceutical company Dabur Pharma Ltd. will focus on its expertise in

Allopathic, Oncology, Formulations and bulk Drugs.

c) Divestitures:

A divestiture involves the sales of a proportion or segment of the company to an external

party. Such sale may cover assets, products lines, subsidiaries or divisions of the undertaking.

A company may a choose to sell an undervalued operation which according to the company

is unrelated or non strategic to is core business activities. The sale produced arising out of

such sale may be utilized for investing in profitable investment opportunities that are

expected to offer potentially higher returns. Divestiture is considered to be a form of

expansion of the buying company and a form of construction on the part of the selling

company.

d) Equity Carved-Out:

A n equity carved-out implies the sale of segment or portion of the firm through an equity

offering to the external parties .Here new Shareholder of equity are sold to outsiders who, in

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turn give them ownership of the portion of the previously existing firm .In that case, a new

legal entity is created. The equity holders in the newly generated entity need not be the same

as the equity holders in the original seller.

e) Split-Ups:

In the case of a split –up, the entire company is broken up in series 0f spin-offs. As a result,

the parent company is broken up in spin –offers. As a result, the present company no longer

exists and only the new off-springs continue to survive.

A split up basically involves the creation of a new class of stock for each of the parent

company no longer exists and only the new off-springs continue to survive. A split-up

basically involves the creation of a new class of stock for each of the parent’s operating

subsidiaries, paying current shareholders a dividend of each new class stock, and then

dissolving the parent company may exchange their stock in one or more of the spin-offs.

Restructuring of the Andhra Pradesh State Electricity Board (APSEB) is the good example of

Split-up. APSEB was split-up in 1999 part of the power sector. The power generation

division and transmission and distribution division of APSEB was transferred to two different

companies namely-APGENCo and APTRANACo respectively. As a result of such split-up,

the APSEB.

3) CORPORATE CONTROL

Corporate Restructuring may be done without necessarily new firms or divesting existing

organizations. Corporate control is another type of restructuring which involves obtaining

control over the management of firm. Controlling here, is basically defined as process

through which top managers influence other related members of an entity to implement the

predetermined organization strategies. The top managers and promoters group who stand to

lose from competitions in the market corporate control may use the democratic rules to

benefit themselves. Ownership and control are not always separated. A large block of shares

may give effective control even when there is no majority owners. Corporate control

generally includes Anti-takeover defence, share repurchases, exchange offers and proxy

contests.

a) Anti- Takeover Defence

It is a technique followed by a company to prevent forcefully acquiring of its managers.

With the high level of hostile takeover activity in recent years, various companies are

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reporting to takeover defences. Such takeover defences may be pre-bid or preventive

defences and post-bid or active defence. Pre-bid or preventive defences are generally

employed with a view to prevent a sudden, un expected hostile bid from obtaining control of

the company. When preventive takeover defences are implemented. Such takeover defenses

attempt at changing the corporate control position of promoters.

b) Share Repurchases

It involves repurchasing its own shares by a company from the market. Share may be

repurchased by following either the tender offer method or through open market method.

Share repurchased is at the also called buy back of the shares, leading to the reduction in the

equity capital of the company. Share buyback facilities in strengthening promoter’s

controlling position in the company by increasing their stake in the equity of the company. It

also used as a takeover to reduced the number of shares that could be purchased by the

potential acquirer.

c) Exchange Offers

Exchange Offers generally provides one or more classes of securities, the right or exchange a

portion or all of their holding for a different classes of securities of the firm. The terms of

exchange offered necessarily involve new securities of greater market value than the pre –

exchange offers announcement market value. Exchange offer includes exchanging common

stock for debt, which reduces leverage. Exchange offers a help company to change its capital

structure while holding the investment policy unaltered.

d) Proxy Contests

The Proxy Contest is a way to take control of a company without owning a majority of its

voting right. So it is an attempt made by a single shareholders or group of shareholder to

undertake control or bring proxy mechanized of corporate.

In a Proxy might, a bidder may attempt to use his voting rights and garner the support from

other shareholders with a view to expel the incumbent board or management. Proxy contests

are less frequently used than tender offer for effecting transfer of control. It provides an

alternative means of corporate control but cost of proxy challenges high. Inefficiency in

proxy context raises the question of adverse selection which is the main disadvantage of

corporate restructuring through proxy contest.

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4 ) CHANGES IN OWNERSHIP STRUCTURE

The fourth group of restructuring activities is the change in ownership structure, which

basically results in change in the structure of ownership in the company. The ownership

structure of a firm affects and its affected by other variables and these variables also

influence the market value .such variables include the levels of principal agent conflicts and

information asymmetry and their effects on other variables like the operating strategy of the

firm, dividend policy, capital structure etc. The various techniques of changing ownership are

leveraged as Buyout, Going Private, MLPs, ESOPs.

a) Leveraged Buyout (LBO)

Buyouts constitute yet another form of corporate restructuring. It happens, when a group of

persons gain control of a company by buying all a majority of its shares. There are two

common types of buyout : Leveraged buyout (LBO) and management buyout (MBO). LBO

is the purchase of assets or the equity of a company where the buyer uses a significant

amount of debt and very little equity capital of his own for the payment of the consideration

for acquisition. Since LBOs cause substantial financial risk. LBO will not be suitable from

corporate restructuring if the acquired firm already has a high degree of the Business risk.

b) Master Limited Partnerships (MLPs)

Master limited partnerships (MLPs) are formed of a general partner and one or more limited

partners. The general partner runs the business and bears unlimited liability. The limited

partnership provides an investor with a direct interest in a group of assets , usually, oil, coal,

gas, etc.. Master limited partnership units are traded publically the stock and thus provide

the investor more liquidity than ordinary limited partnership .

One of the most important advantage of MLP is its elimination of the corporate level and

shareholders are twice on their investment –once at the corporate level and another at the

distribution level of dividends However ,many companies use MLPs to redistribute assets so

that their returns are not subjected to double taxation.

c) Going Private

It is the repurchasing of a company’s outstanding stock by employees or a private investor.

As a result an initiative, the company stops being publically traded. Sometimes, the company

might have take on significant debt to finance the change in ownership structure.

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Companies might want to go private in order to structuring their businesses (when they feel

that the process might affect their stock prices poorly in the short run). They also want to go

private to avoid the expense and regulations associated with remaining listed on a stock

exchange.

d) Employee Stock Option Plan (ESOP)

The term employee stock option (ESOP) means the option given to the whole-time director,

or employee of the company the right to purchase or subscribe at the future date, the

securities offered by the company at a predetermined price. The basis objective of ESOP is to

motivate directors or employee to perform better and improve firm’s value. Apart from

giving financial gains to employees, they also create a sense of owner amongst directors and

employees. ESOPs tend to develop an entrepreneurial spirit among top level management

since they own stock and increase in the stock price, if the firm dose well and to their wealth.

ESOPs also helped companies to attract talent, motive employee by enabling to share the

long-term growth of he company.

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate

finance world. Every day, investment bankers arrange M&A transactions, which bring

separate companies together to form larger ones. When they're not creating big companies

from smaller ones, corporate finance deals do the reverse and break up companies through

spin-offs, carve-outs or tracking stocks. Not surprisingly, these actions often make the news.

Deals can be worth hundreds of millions, or even billions, of dollars or rupees. They can

dictate the fortunes of the companies involved for years to come. For a CEO, leading an

M&A can represent the highlight of a whole career. And it is no wonder we hear about so

many of these transactions; they happen all the time. Next time you flip open the newspaper’s

business section, odds are good that at least one headline will announce some kind of M&A

transaction. Sure, M&A deals grab headlines, but what does this all mean to investors? To

answer this question, this report discusses the forces that drive companies to buy or merge

with others, or to split-off or sell parts of their own businesses. Once you know the different

ways in which these deals are executed, you'll have a better idea of whether you should cheer

or weep when a company you own buys another company - or is bought by one. You will

also be aware of the tax consequences for companies and for investors

Defining M&A

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The Main Idea one 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.

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 Arcellor and Mittal ceased to exist when the two firms merged, and a

new company, DaimlerChrysler and Arcellor-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 CEOs agree 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

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in how the purchase is communicated to and received by the target company's board of

directors, employees and shareholders.

Synergy

Synergy is the magic force that allows for enhanced cost efficiencies of the new business.

Synergy takes the form of revenue enhancement and cost savings. By merging, the

companies hope to benefit from the following:

Staff reductions - As every employee knows, mergers tend to mean job losses. Consider

all the money saved from reducing the number of staff members from accounting,

marketing and other departments. Job cuts will also include the former CEO, who

typically leaves with a compensation package.

Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new

corporate IT system, a bigger company placing the orders can save more on costs.

Mergers also translate into improved purchasing power to buy equipment or office

supplies - when placing larger orders, companies have a greater ability to negotiate prices

with their suppliers.

Acquiring new technology - To stay competitive, companies need to stay on top of

technological developments and their business applications. By buying a smaller

company with unique technologies, a large company can maintain or develop a

competitive edge.

Improved market reach and industry visibility - Companies buy companies to reach

new markets and grow revenues and earnings. A merge may expand two companies'

marketing and distribution, giving them new sales opportunities. A merger can also

improve a company's standing in the investment community: bigger firms often have an

easier time raising capital than smaller ones.

That said, achieving synergy is easier said than done - it is not automatically realized once

two companies merge. Sure, there ought to be economies of scale when two businesses are

combined, but sometimes a merger does just the opposite. In many cases, one and one add up

to less than two. Sadly, synergy opportunities may exist only in the minds of the corporate

leaders and the deal makers. Where there is no value to be created, the CEO and investment

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bankers - who have much to gain from a successful M&A deal - will try to create an image of

enhanced value. The market, however, eventually sees through this and penalizes the

company by assigning it a discounted share price. We'll talk more about why M&A may fail

in a later section of this tutorial.

Varieties of Mergers

From the perspective of business structures, there is a whole host of different mergers. Here

are a few types, distinguished by the relationship between the two companies that are

merging:

Horizontal merger - Two companies that are in direct competition and share the same

product lines and markets.

Vertical merger - A customer and company or a supplier and company. Think of a cone

supplier merging with an ice cream maker.

Market-extension merger - Two companies that sell the same products in different

markets.

Product-extension merger - Two companies selling different but related products in the

same market.

Conglomeration - Two companies that have no common business areas. There are two

types of mergers that are distinguished by how the merger is financed. Each has certain

implications for the companies involved and for investors:

Purchase Mergers - As the name suggests, this kind of merger occurs when one

company purchases another. The purchase is made with cash or through the issue of some

kind of debt instrument; the sale is taxable. Acquiring companies often prefer this type of

merger because it can provide them with a tax benefit. Acquired assets can be written-up

to the actual purchase price, and the difference between the book value and the purchase

price of the assets can depreciate annually, reducing taxes payable by the acquiring

company. We will discuss this further in part four of this tutorial.

Consolidation Mergers - With this merger, a brand new company is formed and both

companies are bought and combined under the new entity. The tax terms are the same as

those of a purchase merger.

Acquisitions

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An acquisition may be only slightly different from a merger. In fact, it may be different in

name only. Like mergers, acquisitions are actions through which companies seek economies

of scale, efficiencies and enhanced market visibility.

Unlike all mergers, all acquisitions involve one firm purchasing another - there is no

exchange of stock or consolidation as a new company. Acquisitions are often congenial, and

all parties feel satisfied with the deal. Other times, acquisitions are more hostile. In an

acquisition, as in some of the merger deals we discuss above, a company can buy another

company with cash, stock or a combination of the two. Another possibility, which is common

in smaller deals, is for one company to acquire all the assets of another company. Company X

buys all of Company Y's assets for cash, which means that Company Y will have only cash

(and debt, if they had debt before). Of course, Company Y becomes merely a shell and will

eventually liquidate or enter another area of business. Another type of acquisition is a reverse

merger, a deal that enables a private company to get publicly-listed in a relatively short time

period. A reverse merger occurs when a private company that has strong prospects and is

eager to raise financing buys a publicly-listed shell company, usually one with no business

and limited assets. The private company reverse merges into the public company, and

together they become an entirely new public corporation with tradable shares. 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. The success of a merger or acquisition depends on whether this synergy

is achieved.

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:

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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

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

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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

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.

Doing the Deal

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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

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.

20

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

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.

Break Ups

As mergers capture the imagination of many investors and companies, the idea of getting

smaller might seem counterintuitive. But corporate break-ups, or de-mergers, can be very

attractive options for companies and their shareholders.

Advantages

The rationale behind a spin-off, tracking stock or carve-out is that "the parts are greater than

the whole." These corporate restructuring techniques, which involve the separation of a

business unit or subsidiary from the parent, can help a company raise additional equity funds.

A break-up can also boost a company's valuation by providing powerful incentives to the

people who work in the, making it more difficult to attract interest from institutional

investors. Meanwhile, there are the extra costs that the parts of the business face if separated.

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When a firm divides itself into smaller units, it may be losing the separating unit, and help the

parent's management to focus on core operations. Most importantly, shareholders get better

information about the business unit because it issues separate financial statements. This is

particularly useful when a company's traditional line of business differs from the separated

business unit. With separate financial disclosure, investors are better equipped to gauge the

value of the parent corporation. The parent company might attract more investors and,

ultimately, more capital. Also, separating a subsidiary from its parent can reduce internal

competition for corporate funds. For investors, that's great news: it curbs the kind of negative

internal wrangling that can compromise the unity and productivity of a company. For

employees of the new separate entity, there is a publicly traded stock to motivate and reward

them. Stock options in the parent often provide little incentive to subsidiary managers,

especially because their efforts are buried in the firm's overall performance.

Disadvantages

That said, de-merged firms are likely to be substantially smaller than their parents, possibly

making it harder to tap credit markets and costlier finance that may be affordable only for

larger companies. And the smaller size of the firm may mean it has less representation on

major indexes synergy that it had as a larger entity. For instance, the division of expenses

such as marketing, administration and research and development (R&D) into different

business units may cause redundant costs without increasing overall revenues.

Restructuring Methods

There are several restructuring methods: doing an outright sell-off, doing an equity carve-out,

spinning off a unit to existing shareholders or issuing tracking stock. Each has advantages

and disadvantages for companies and investors. All of these deals are quite complex.

Sell-Offs

A sell-off, also known as a divestiture, is the outright sale of a company subsidiary.

Normally, sell-offs are done because the subsidiary doesn't fit into the parent company's core

strategy. The market may be undervaluing the combined businesses due to a lack of synergy

between the parent and subsidiary. As a result, management and the board decide that the

subsidiary is better off under different ownership. (IPO) of shares, amounting to a partial sell-

off. A new publicly-listed company is created, but the parent keeps a controlling stake in the

newly traded subsidiary. A carve-out is a strategic avenue a parent firm may take when one

22

of its subsidiaries is growing faster and carrying higher valuations than other businesses

owned by the parent. A carve-out generates cash because shares in the subsidiary are sold to

the public, but the issue also unlocks the value of the subsidiary unit and enhances the

parent's shareholder value. The new legal entity of a carve-out has a separate board, but in

most carve-outs, the parent retains some control. In these cases, some portion of the parent

firm's board of directors may be shared. Since the parent has a controlling stake, meaning

both firms have common shareholders, the connection between the two will likely be strong.

That said, sometimes companies carve-out a subsidiary not because it's doing well, but

because it is a burden. Such an intention won't lead to a successful result, especially if a

carved-out subsidiary is too loaded with debt, or had trouble even when it was a part of the

parent and is lacking an established track record for growing revenues and profits. Carve-outs

can also create unexpected friction between the parent and subsidiary. Problems can arise as

managers of the carved-out company must be accountable to their public shareholders as well

as the owners of the parent company. This can create divided loyalties.

Equity Carve-Outs

More and more companies are using equity carve-outs to boost shareholder value. A parent

firm makes a subsidiary public through a raider’s initial public offering stock dividend

meaning they don't grant shareholders the same voting rights as those of the main stock. Each

share of tracking stock may have only a half or a quarter of a vote. In rare cases, holders of

tracking stock have no vote at all. Like carve-outs, spin-offs are usually about separating a

healthy operation. In most cases, spin-offs unlock hidden shareholder value. For the parent

company, it sharpens management focus. For the spin-off company, management doesn't

have to compete for the parent's attention and capital. Once they are set free, managers can

explore new opportunities. Investors, however, should beware of throw-away subsidiaries the

parent created to separate legal liability or to off-load debt. Once spin-off shares are issued to

parent company shareholders, some shareholders may be tempted to quickly dump these

shares on the market, depressing the share valuation.

Tracking Stock

A tracking stock is a special type of stock issued by a publicly held company to track the

value of one segment of that company. The stock allows the different segments of the

company to be valued differently by investors. Let's say a slow-growth company trading at a

low (P/E ratio) happens to have a fast growing business unit. The company might issue a

23

tracking stock so the market can value the new business separately from the old one and at a

significantly higher P/E rating. Why would a firm issue a tracking stock rather than spinning-

off or carving-out its fast growth business for shareholders? The company retains control

over the subsidiary; the two businesses can continue to enjoy synergies and share marketing,

administrative support functions, a headquarters and so on. Finally, and most importantly, if

the tracking stock climbs in value, the parent company can use the tracking stock it owns to

make acquisitions. Still, shareholders need to remember that tracking stocks are price-

earnings ratio class B.

Why They Can Fail

It's no secret that plenty of mergers don't work. Those who advocate mergers will argue that

the merger will cut costs or boost revenues by more than enough to justify the price premium.

It can sound so simple: just combine computer systems, merge a few departments, use sheer

size to force down the price of supplies and the merged giant should be more profitable than

its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry.

Historical trends show that roughly two thirds of big mergers will disappoint on their own

terms, which means they will lose value on the stock market. The motivations that drive

mergers can be flawed and efficiencies from economies of scale may prove elusive. In many

cases, the problems associated with trying to make merged companies work are all too

concrete.

Flawed Intentions

For starters, a booming stock market encourages mergers, which can spell trouble. Deals

done with highly rated stock as currency are easy and cheap, but the strategic thinking behind

them may be easy and cheap too. Also, mergers are often attempt to imitate: somebody else

has done a big merger, which prompts other top executives to follow suit. A merger may

often have more to do with glory-seeking than business strategy. The executive ego, which is

boosted by buying the competition, is a major force in M&A, especially when combined with

the influences from the bankers, lawyers and other assorted advisers who can earn big fees

from clients engaged in mergers. Most CEOs get to where they are because they want to be

the biggest and the best, and many top executives get a big bonus for merger deals, no matter

what happens to the share price later. On the other side of the coin, mergers can be driven by

generalized fear.

24

Globalization, the arrival of new technological developments or a fast-changing economic

landscape that makes the outlook uncertain are all factors that can create a strong incentive

for defensive mergers. Sometimes the management team feels they have no choice and must

acquire a rival before being acquired. The idea is that only big players will survive a more

competitive world.

The Obstacles to making it Work

Coping with a merger can make top managers spread their time too thinly and neglect their

core business, spelling doom. Too often, potential difficulties seem trivial to managers caught

up in the thrill of the big deal. The chances for success are further hampered if the corporate

cultures of the companies are very different. When a company is acquired, the decision is

typically based on product or market synergies, but cultural differences are often ignored. It's

a mistake to assume that personnel issues are easily overcome. For example, employees at a

target company might be accustomed to easy access to top management, flexible work

schedules or even a relaxed dress code. These aspects of a working environment may not

seem significant, but if new management removes them, the result can be resentment and

shrinking productivity. More insight into the failure of mergers is found in the highly

acclaimed study from McKinsey, a global consultancy. The study concludes that companies

often focus too intently on cutting costs following mergers, while revenues, and ultimately,

profits, suffer. Merging companies can focus on integration and cost-cutting so much that

they neglect day-to-day business, thereby prompting nervous customers to flee. This loss of

revenue momentum is one reason so many mergers fail to create value for shareholders. But

remember, not all mergers fail. Size and global reach can be advantageous, and strong

managers can often squeeze greater efficiency out of badly run rivals. Nevertheless, the

promises made by deal makers demand the careful scrutiny of investors. The success of

mergers depends on how realistic the deal makers are and how well they can integrate two

companies while maintaining day-to-day operations.

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26

TATA STEEL

27

28

Founder : Jamsedji Tata

Founded : 1907

Head Quarter : Mumbai

Area Served : World wide

Product : Steel, Long Steel, wire products

Employees : 81,000

Plant Location : Jamshedpur

Stock Exchange : Recognized by BSE, NSE

TISCO ( Tata Iron and Steel Company) formerly called :

Is an Indian Multinational company

10th largest steel producing with annually having 23.5 metric tones steel capacity

Tata Steel has been ranked #401 in Fortune Global 500

Tata Steel has a presences in around 50 countries with a manufacturing operations in 26 countries till date

Major Competitors are Arcelor Mittal, Essar Steel, JSW (Jindal Steel Work), SAIL etc

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Tata Steel Background

• Tata Steel a part of the Tata group, one of the largest diversified business conglomerates in India.

• Founded in 1907,by Jamshedji Nusserwanji Tata.

• Started with a production capacity of 1,00,000 tones, has transformed into a global giant

• In the mid- 1990s, Tata steel emerged as Asia’s first and India’s largest integrated steel producer in the private sector.

• In February 2005, Tata steel acquired the Singapore based steel manufacturer NatSteel, that let the company gain access to major Asian markets and Australia.

• Tata steel acquired the Thailand based Millennium Steel in December 2005.

Tata Steel generated net sales of Rs.175 billion in the financial year 2006-07. • The company’s profit before tax in the same year was Rs. 64.14 billion while its

profit after tax was Rs. 42.22 billion.

30

CORUS

31

Founder : Karl Ulrich Kohler

Founded : 1985

Head Quarter : London, UK

Corus Group : Koninklijke Hoogovens & British Steel (1999)

Employees : 50,000

Area Served : World-Wide.

Rating : It is world 6th largest company

2 nd in Europe

1 st in United Kingdom

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our group was formed through the merger of Koninklijke and British Steel in year October 1999

The plants are located at United Kingdom and at the Netherland.

The company was recognized as the world's best steel producer by World Steel Dynamics.

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LITERATURE REVIEW – THE STEEL INDUSTRY

THE GLOBAL STEEL INDUSTRY

The current global steel industry is in its best position in comparing to last decades. The price

has been rising continuously. The demand expectations for steel products are rapidly growing

for coming years. The shares of steel industries are also in a high pace. The steel industry is

enjoying its 6th consecutive years of growth in supply and demand. And there is many more

merger and acquisitions which overall buoyed the industry and showed some good results.

The subprime crisis has lead to the recession in economy of different Countries, which may

lead to have a negative effect on whole steel industry in coming years. However steel

production and consumption will be supported by continuous economic growth.

CONTRIBUTION OF COUNTRIES TO GLOBAL STEEL INDUSTRY

Fig-1

The countries like China, Japan, India and South Korea are in the top of the above in steel

production in Asian countries. China accounts for one third of total production i.e. 419m ton,

Japan accounts for 9% i.e. 118m ton, India accounts for 53m ton and South Korea is

34

accounted for 49m ton, which all totally becomes more than 50% of global production. Apart

from this USA, BRAZIL, UK accounts for the major chunk of the whole growth.

The steel industry has been witnessing robust growth in both domestic as well as international

markets. In this article, let us have a look at how has the steel industry performed globally in

2007.

Capacity: 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.

Fig-2

Production: The global steel production stood at 1.3 bn tonnes in 2007, showing an increase

of 7.5% as compared to 2006 levels. The global steel production showed a growth of 8%

CAGR between 2003 and 2007. China accounts for around 36% of world crude steel

production followed by Japan (9%), US (7%), Russia (5%) and India (4%). In 2007, all the

top five steel producing countries have showed an increase in production except US, which

showed a decline.

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

35

1 China 489 36.0%

2 Japan 120 9.0%

3 US 98 7.0%

4 Russia 72 5.0%

5 India 53 4.0%

6 South Korea 51 3.5%

Source: JSW Steel AR FY08

Table-1

Consumption: The global steel consumption grew by 6.6% to 1.2 bn tonnes as compared to

2006 levels. The global finished steel consumption showed a growth of 8% CAGR, in line

with the production, between the period 2003 and 2007. The finished steel consumption in

China and India grew by 13% and 11% respectively in 2007. The BRIC countries were the

major demand drivers for steel consumption, accounting for nearly 80% of incremental steel

consumption in 2007.

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

1 China 408 36.0%

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%

Source: JSW Steel AR

FY08

Table-2

Outlook: As per IISI estimates, the finished steel consumption in world is expected to reach

a level of 1.75 bn tonnes by 2016, growth of 4% CAGR over the consumption level of 2007.

The steel consumption in 2008 and 2009 is estimated to grow above 6%

Indian Steel Industry

India, which has emerged among the top five steel producing and consuming countries over

the last few years, backed by strong growth in its economy.

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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.

Fig-3

Production: Steel production has registered a growth of 6% to reach a level of 54 m tonnes

in FY8. The production has grown nearly in line with the capacity expansion and registered a

growth of 7% CAGR with an average capacity utilization of 92% between the period FY04

and FY08. India is currently the fifth largest producer of steel in the world, contributing

almost 4% of the total steel production in world. The top three steel producing companies

(SAIL, Tata Steel and JSW Steel) contributed around 45% of the total steel production in

FY08.

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Fig-4

Consumption: Steel consumption has increased by 10% to 51.5 m tonnes in FY08.

Consumption growth has been exceeding production growth since past few years. It grew at a

CAGR of 12% between FY04 and FY08. Construction & infrastructure, manufacturing and

automobile sectors accounted for 59%, 13% and 11% for the total consumption of steel

respectively in FY08. Although steel consumption is rapidly growing in the country, the per

capita steel consumption still stands at 48 kgs. Moreover, in the rural areas in the country, it

stands at a mere 2 kg. It should be noted that the world’s average per capita steel

consumption was 189 kg and while that of China was 309 kg in 2007.

Fig-5

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Trade equations: India became net importer of steel in FY08 with estimated net imports of

1.9 m tonnes. In the past few years, its exports have remained at more or less the same levels

while on the other hand, imports have increased on the back of robust demand and capacity

constraints in the domestic markets. The imports showed a growth of around 48% while

exports declined by around 6% in FY08.

Outlook: As per IISI estimates, the demand for steel in India are expected to grow at a rate of

9% and 12% in 2008 and 2009. The medium term outlook for steel consumption remains

extremely bullish and is estimated at an average of above 10% in the next few years.

TATA Vs. CORUS

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

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.

CSN (Companhia Siderurgica Nacional)

CSN (Companhia Siderurgica Nacional) was incorporated in the year 1941. The company

initially focused on the production of coke, pig iron castings and long products. The company

was having three main expansions at the Presidente Vargas Steel works during the 1970’s and

1980’s. The first completed in the year 1974, increased installed capacity to 1.6 million tons

of crude steel. The second completed in 1977, raised capacity to 2.4 million tons of crude

39

steel. The third completed in the year 1989, increased capacity to 4.5 million tons of crude

steel. The company was privatized by the Brazilian government by selling 91 % of its share.

The Mission of CNS is to increase value for the shareholders. Maintain position as one of the

world’s lowest-cost steel producer. Maintain a high EBITDA and strengthen position as a

global player. CNS is having fully integrated manufacturing facilities. The crude steel

capacity was 5.6 million tons. The product mix consisted of Slabs, Hot and Cold rolled

Galvanized and Tin mill products. In 2004 CSN sold steel products to customers in Brazil

and 61 other countries. In 2002, 65 % of the steel sales were in domestic market and

operating revenues were 70 %. In 2003, the same figures were 59 % and 61 % and in 2004

the same figures were 71% and 73 %. The principal export markets for CSN were North

America (44%),Europe(32%) and Asia(11%).

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:-

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Table-3

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.

Indian Scenario

After liberalization, there have been no shortages of iron and steel materials in the country.

Apparent consumption of finished (carbon) steel increased from 14.84 Million tonnes in

1991-92 to 39.185 million tonnes (Provisional) in 2005-06. The steel industry which was

facing a recession for some time has staged a turn around since the beginning of 2002.

Demand has started showing an uptrend on account of infrastructure boom. The steel industry

41

is buoyant due to strong growth in demand particularly by the demand for steel in China. The

Steel industry was de-licensed and de-controlled in 1991 & 1992 respectively. Today, India is

the 7th largest crude steel producer of steel in the world. In 2005-06, production of Finished

(Carbon) Steel was 44.544 million tonnes. Production of Pig Iron in 2005-06 was 4.695

Million Tonnes. The share of Main Producers (i.e. SAIL, RINL and TSL) and secondary

producers in the total production of Finished (Carbon) steel was 36% and 64% respectively

during the period of April-November, 2006.

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’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.

Tata Steel Vs CSN: The Bidding War

There was a heavy speculation surrounding Tata Steel's proposed takeover of Corus ever

since Ratan Tata had met Leng in Dubai, in July 2006. On October 17, 2006, Tata Steel made

an offer of 455 pence a share in cash valuing the acquisition deal at US$ 7.6 billion. Corus

responded positively to the offer on October 20, 2006.

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Agreeing to the takeover, Leng said, "This combination with Tata, for Corus shareholders

and employees alike, represents the right partner at the right time at the right price and on the

right terms." In the first week of November 2006, there were reports in media that Tata was

joining hands with Corus to acquire the Brazilian steel giant CSN which was itself keen on

acquiring Corus. On November 17, 2006, CSN formally entered the foray for acquiring Corus

with a bid of 475 pence per share. In the light of CSN's offer, Corus announced that it would

defer its extraordinary meeting of shareholders to December 20, 2006 from December 04,

2006, in order to allow counter offers from Tata Steel and CSN...

Financing the Acquisition

By the first week of April 2007, the final draft of the financing structure of the acquisition

was worked out and was presented to the Corus' Pension Trusties and the Works Council by

the senior management of Tata Steel. The enterprise value of Corus including debt and other

costs was estimated at US$ 13.7 billion

The Integration Efforts

Industry experts felt that Tata Steel should adopt a 'light handed integration’ approach, which

meant that Ratan Tata should bring in some changes in Corus but not attempt a complete

overhaul of Corus'systems (Refer Exhibit XI and Exhibit XII for projected financials of Tata-

Corus). N Venkiteswaran, Professor, Indian Institute of Management, Ahmedabad said, “If

the target company is managed well, there is no need for a heavy-handed integration. It

makes sense for the Tatas to allow the existing management to continue as before.

The Synergies

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.

The Pitfalls

Though the potential benefits of the Corus deal were widely appreciated, some analysts had

doubts about the outcome and effects on Tata Steel's performance. They pointed out that

43

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.

The Road Ahead

Before the acquisition, the major market for Tata Steel was India. The Indian market

accounted for sixty nine percent of the company's total sales. Almost half of Corus'

production of steel was sold in Europe (excluding UK). The UK consumed twenty nine

percent of its production.

After the acquisition, the European market (including UK) would consume 59 percent of the

merged entity's total production.

Tata - Corus: Visionary deal or costly blunder?

After four months of twists and turns, Tata Steel has won the race to acquire Corus Group.

The bidding war between Tata Steel and Brazilian company CSN was riveting and ended in a

rapid-fire auction. Initial reactions to the deal were highly diverse and retail investors were

completely puzzled by the market reaction.

Going by the stock market reaction, the acquisition was a big blunder. The stock tanked 10.5

per cent after the deal was announced and another 1.6 per cent. Investors were worried about

the financial risks of such a costly deal.

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

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.

Was the acquisition too costly for Tata Steel? Was price the only criterion while evaluating

an acquisition? Should managers focus on keeping shareholders happy after every quarter or

should they focus on the long-term, big picture? These are tough questions and,

unfortunately, answers would be clear only after many years - at least in this case.

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When could the steel cycle turn?

The last few years were some of the best ever for the global steel industry as robust demand

from emerging economies like China pushed up prices. Profits of steel manufacturers across

the globe swelled and their market capitalizations have multiplied many times.

Global Steel output

(in million tonnes)

Country 2005 2006 % change

China 355.8 418.8 17.7

Japan 112.5 116.2 3.3

US 94.9 98.5 3.8

Russia 66.1 70.6 6.8

South Korea 47.8 48.4 1.3

Germany 44.5 47.2 6.1

India 40.9 44.0 7.6

Ukraine 38.6 40.8 5.7

Italy 29.4 31.6 7.5

Brazil 31.6 30.9 (2.2)

World production 1,028.8 1,120.7 8.9

Table-4

How long will the good times last? Tata Steel believes the steel cycle is in a long-term up

trend and the risk of a downturn in prices is low. In fact, managing director B Muthuraman

said the global steel industry might witness sustained growth as during the 30-year period

between 1945 and 1975.

The massive post-war infrastructure build-up in Western countries led to the sustained steel

demand growth in that period. The coming decades would see similar infrastructure spending

in emerging economies and steel demand would continue to grow, according to this view.

The International Iron and Steel Institute (IISI), a respected steel research body, corroborates

this in its outlook. The growth in demand for global steel would average 4.9 per cent per year

45

till 2010 according to the IISI. Between 2010 and 2015, demand growth is expected to

moderate to 4.2 per cent per annum according to IISI forecasts. Much of this demand growth

would come from China and India, where the IISI estimates growth rates to be 6.2 per cent

and 7.7 per cent annually from 2010 to 2015.

Now let’s consider steel prices. Expectations of sustained demand growth have already led to

massive capacity additions, mostly in emerging markets. Chinese steel capacity has expanded

significantly over the last decade while a large number of mega steel plants are being planned

in India. Capacity additions by Russian and Brazilian steelmakers would also be significant in

future as they have access to raw material.

Would the capacity additions outrun the demand growth and lead to subdued steel prices?

Under normal circumstances, that could have been a very strong possibility. But many

industry leaders believe that the global steel industry would see a structural shift in the

coming years.

Some of the inefficient steel mills in mature markets would face closure while others would

shift production to high value-added products using unfinished and semi-finished steel

supplied by steel mills in locations like India, Russia and Brazil with access to raw material.

This would limit aggregate supply growth and keep prices stable in future.

Major global steel makers are also not unduly worried about the possibility of large-scale

exports from China, which would depress international steel prices. Chinese capacity is

expected to continue to grow in the coming years, but so would the demand.

Besides, Chinese steel plants are not expected to emerge very efficient as they depend on

imported raw materials, which limit their pricing power. Many steel analysts expect

significant consolidation in the Chinese steel industry as margins erode further in future. The

Chinese government has already started squeezing the smaller units by withdrawing their raw

material import permits.

The need for scale

Going by the IISI forecasts, global steel demand would be 1.32 billion tonnes by 2010 and

1.62 billion tonnes by 2015. Even Arcelor-Mittal, the largest global steel player by far, has a

present capacity, which is just 6.8 per cent for projected demand in 2015. To maintain its

current share, Arcelor-Mittal would have to add another 50 million tonnes of capacity by

then. This confirms the view that there is still considerable scope for consolidation in the steel

industry.

46

Global steel ranking

Company Capacity (in million tonnes)

Arcelor – Mittal 110.0

Nippon Steel 32.0

Posco 30.5

JEF Steel 30.0

Tata Steel – Corus 27.7

Bao Steel China 23.0

US Steel 19.0

Nucor 18.5

Riva 17.5

Thyssen Krupp 16.5

As the industry consolidates further, Tata Steel - even with its planned greenfield capacity

additions - would have remained a medium-sized player after a decade. This made it

absolutely vital that the company did not miss out on large acquisition opportunities. Apart

from Corus, there are not many among the top-10 steel makers, which would become

possible acquisition targets in the near future.

ata Steel - Corus : Present capacity (in million tonnes per annum)

Corus Group (in UK and The Netherlands) 19

Tata Steel - Jamshedpur 5

Nat Steel – Singapore 2

47

Millennium Steel - Thailand 1.7

Aggregate present capacity 27.7

Tata Steel - Corus : Projected capacity(in million tonnes per annum)

Corus Group (in UK and The Netherlands) 19

Tata Steel - Jamshedpur 10

Tata Steel – Jharkhand 12

Tata Steel – Orissa 6

Tata Steel - Chhattisgarh 5

Nat Steel – Singapore 2

Millennium Steel - Thailand 1.7

Aggregate projected capacity 55.7

With Corus in its fold, Tata Steel can confidently target becoming one of the top-3 steel

makers globally by 2015. The company would have an aggregate capacity of close to 56

million tonnes per annum, if all the planned greenfield capacities go on stream by then.

Neat strategic fit

Corus, being the second largest steelmaker in Europe, would provide Tata Steel access to

some of the largest steel buyers. The acquisition would open new markets and product

segments for Tata Steel, which would help the company to de-risk its businesses through

wider geographical reach.

A presence in mature markets would also provide Tata Steel an opportunity to go further up

the value chain as demand for specialized and high value-added products in these markets is

48

high. The market reach of Corus would also help in seeking longer-term deals with buyers

and to explore opportunities for pushing branded products.

Corus is also very strong in research and technology development, which would add to the

competitive strength for Tata Steel in future. Both companies can learn from each other and

achieve better efficiencies by adopting the best practices.

But at what cost?

Now that Tata Steel has achieved its strategic objective of becoming one of the major players

in the global steel industry and steel demand growth is likely to be robust over the next

decade, has the company paid too much for Corus? Even those analysts and industry

observers who agree on the positive outlook for steel demand growth and the need to achieve

scale believe so.

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.

Corus Financials

Year 2004 2005 Jan-Sep 2006

49

Revenues 18.32 19.91 14.10

EBITDA 1.91 1.86 1.12

EBITDA Margin (%) 10.44 9.34 7.96

Operating Profits 1.30 1.17 0.75

Operating Profit Margin (%) 7.09 5.89 5.29

Net Profit 0.87 0.72 0.25

Net Profit Margin (%) 4.73 3.63 1.77

Figures in $ Billion

Table-8

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

fund requirement to service this debt would be around $1.5 billion - assuming a 10-year

repayment horizon.

50

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.

No wonder investors are deeply worried!

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.

Tata and Corus:

In addition to Tata Steel's bid for Corus, the largest private sector steel producer in India has

made a mark and consolidated it is presence in the foreign land, through acquisition his latest

one's being in Indonesia. In case of Corus, only time will tell whether Tata Steel would

succeed or not, but in other endeavours the company has already succeeded in acquiring

some steel plants. Tata Steel, the country's largest private sector steel company, was in talks

with Anglo American of South Africa to acquire its 79 per cent stake in Highveld Steel.

While the Highveld acquisition is still going through the evaluation process. According to

analysts, if the acquisition of Highveld Steel goes through to completion, Tata Steel's

production capacity will go up to 6 million tonne from the current level of 5 million tonne.

Highveld, the largest vanadium producer in the world, manufactures steel, vanadium

51

products, Ferro-alloys, carbonaceous products and metal containers and closures. Analysts

observe a clear trend in Tata Steel's plans to expand capacities. But Highveld was not

supposed to be the first global acquisition for Tata Steel. In February 2005, the company

completed the acquisition of Singapore's largest steel company, NatSteel Asia, which has a

two-million tonne steel capacity with presence across Singapore, Thailand, China, Malaysia,

Vietnam, the Philippines and Australia. As per the deal, the enterprise value of NatSteel Asia

was pegged at Rs 1,313 crore. Tata Steel has plans to establish steel manufacturing units in

Iran and Bangladesh too. With a stated vision to become a 20-25 million tonne company by

2015, the company has also signed a few joint ventures and announced organic expansion

plans.

Over all scenario

Tata Steel acquiring Corus throws up several interesting questions on emerging

multinationals and traditional multinationals in the steel industry and particularly the

complexities of the acquisition in the above context. What has been surprising in the above

case is that how could a small steel maker, Tata Steel from a developing country like India

buy up a large steel company, Corus PLC from the United Kingdom. Prior to the acquisition,

Corus was four times bigger than Tata Steel. However, the operating profit for Tata Steel was

$840 million (sale of 5.3 million tons), whereas in case of Corus it was $860 million(sale of

18.6 million tons) in the year 2006. It is also interesting to find out why a large global steel

maker, Corus decided to sell itself off to a small steel maker from a developing country.

Many questioned if the Tatas were wise in acquiring Corus that had accumulated huge debt

burden, made operational losses and whose share price had drastically come down. The

intriguing issue of this acquisition has been on how the final bidding price of the Corus rise up

to 70% over the stock price of Corus prior to the bidding. Most importantly, how did Tata

Steel organize the huge capital for the acquisition? It appears that several external players

participated in the acquisition process and so how were they all involved in the bidding

process. Further, the issues of post acquisition are also unique in this case as the context and

culture of the acquirer and the acquired companies are different.

Until the 1990s, not many Indian companies had contemplated spreading their wings abroad.

An Indian corporate or group company acquiring a business in Europe or the U.K. seemed

possible only in the realm of fantasy. In addition to these issues, Indian companies in general

52

have had huge liabilities of origin in term of poor quality, service and reliability in the

international markets. At the same time many the global steel industry was getting restructured

from a large number of smaller steel makers to a fewer large steel conglomerates through the

worldwide mergers and acquisition. The steel companies in India were also wondering on how

to go about in these circumstances. In the above context, how did the top management of Tata

Steel and the Tata Group Perceive the acquisition of Corus? When Tata Steel began bidding

higher price on Corus plc, many wondered how the Tatas manage the huge financial deal and

whether it will be good for the financial health of Tata Steel.

Tata acquired Corus on the 2nd of April 2007 for a price of $12 billion making the Indian

Company the world’s sixth largest steel producer. This acquisition process has started long

back in the year 2005. However, Corus itself was involved in a considerable number of

Merger & Acquisition (M&A) deals and joint ventures (JVs) beginning in the year2000. In a

period of seven years Corus was involved in 14 deals. In 2006, the Tata first offered 455 pence

per share of Corus but by the end of the bidding process in 2007, Tata offered 608 pence per

share, which is 33.6% higher than the first offer. For this deal, Tata has financed only $4

billion, though the total price of this deal was $12billion. Given below are the reactions of

Ratan Tata and B. Muthuraman on what they felt about the acquisition.

Tata steel financial status post merger

Post Acquisition Management:

There has been a great deal of suspicion on how well the two entities, viz., Tata Steel and

Corus plc integrate in the post acquisition situation. This concern has been expressed since the

culture and perspectives of the two companies and the people are seemingly very different

from each other. Ratan Tata however, has been confident that the post acquisition

management will not be too difficult as the two organizational cultures will be effectively

integrated.

Ratan Tata has said he is confident the two companies will have “a cultural fit and similar

work practices.”

53

Nearly 30 years ago J.R.D Tata had lured away a young engineer from Corus’s predecessor

company, British Steel, to work at Tata Steel. That young Sheffield-educated engineer – Sir

Jamshed J. Irani (knighted by the Queen 10 years ago) – was Tata Steel’s Managing Director

until six years ago.

Tata Corus has made developed some management structure to deal with the smooth operation

of the two entities. It has also adopted several system integrations in both the entities to

smoothen the transactions between the two entities. 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. Members of the integration committee from Tata Steel include

Managing Director B Muthuraman, Deputy Managing Director (steel) T Mukherjee, and chief

financial officer Kaushik Chatterjee. The Corus group is represented in the committee by CEO

Phillipe Varin, executive director(finance) David Lloyd, and division director (strip products)

Rauke Henstra.

The company has also created several Taskforce Teams to ensure integration specific set of

activities in the two entities for smoother transaction. For instance, the company has created a

task force to integrate the UK/EU model in construction to the Indian market.

Tata Corus Task force

Post Tata Corus merger, Tata Steel has access to considerable IP and expertise in Construction

from UK/EU based models. The key driver is to find ways to utilize this knowledge and assist

the capture of value for Tata Steel in the construction market in India. To achieve, a taskforce

comprising of following executives from both the entities is being formed with immediate

effects.

Members from Corus

Mr. Matthew Poole (Director Strategy Long Products Corus)

Mr. Colin Ostler (GM Corus Construction Centre)

Mr. Darayus Shroff (Corus International)

Members from Tata Steel:

Mr. Sangeeta Prasad (CSM South, Flat Products)

Mr. Pritish Kumar Sen (Market Research Group)

54

Mr. Rajeev Sahay (Head Planning & Scheduling, TGS)

The scope of the taskforce will be to:

1. Ensure smooth market knowledge exchange between Tata Corus and Tata Bluescope and

identify Knowledge gaps.

2. Complete mapping of construction sector for Indian market using external

resource if necessary.

3. Understand key drivers for construction through knowledge gained from

stakeholders of the construction community.

4. Map key competencies of Tata Corus against market drivers/ requirements.

5. Develop a five- year strategy.

The taskforce members will report to Mr. Paul Lormor (Director Construction Development).

The engagement of the members of the taskforce will be on part time basis and they will

continue to discharge their current responsibilities.

The taskforce will continue till June 2008, by which time it is expected to taskforce prepare

the business case and place it before the board for approval

Corus Acquisition Financing

Tata steel is pleased to announce the refinancing of its GBP 3,620 million acquisition bridge

facility and revolving credit facility which had been provided by Credit Suisse, ABN AMRO

and Deutsche Bank to fund its acquisition of Corus Group plc that was completed on April 2,

2007.

The refinancing is by way of non recourse Facilities totaling GBP 3,170 million

(the“Refinancing Facilities”) which are being Arranged by a syndicate led by Citigroup, ABN

AMRO and Standard Chartered Bank. This refinancing provides significant benefits and

flexibility over the term of financing to the group.

The Refinancing Facility comprises a five year GBP 1670 million amortizing loan which will

be syndicated by the joint book runners to relationship banks of Tata steel and Corus and a

seven year minimally amortizing term loan of GBP 1500 million that will be syndicated to

institutional investors and banks in the USA, Europe and Asia. The balance amount of the

acquisition bridge is being repaid by an additional equity contribution by Tata Steel/ Tata Steel

Asia which had been previously disclosed on April 17, 2007.

Subsequent to the conclusion of the discussions on the commercial terms of the financing, the

process to discuss the security package for the above transaction will commence with the

55

Trustees of the UK Pension Funds in continuation of the dialogue with the Trustees from

October 2006. Concurrently, Corus will engage in the consultative process with the Corus

Netherlands Works Council to seek their advice on the above financing.

Tata Steel is one of India’s largest companies and is amongst the world’s lowest cost steel

producers and most profitable steel companies. Corus Group plc is Europe’s second largest

steel producer and the combined entity is the fifth largest steel producer in the world with an

installed capacity of 28 million tons p.a.

Group Strategy Function - Tata Corus

The Tata Steel Group has the ambition to become a bench mark in the global steel industry in

terms of value creation and corporate citizenship. The group strategy function will be

organized to support the delivery of the group ambition. The main responsibilities of the group

strategy function are as follows:

To originate the group strategy i.e. portfolio management, market sector positioning,

industrial foot print, partnerships and alliances, and translate the Group strategy into

strategy action plans.

To organize and support the strategic planning process across the group

To originate and assess corporate business development initiatives i.e. corporate

partnerships/alliances.

To monitor the steel industry which includes macro economic trends, steel market

dynamics, competitive arena, technology, standards and regulations

THE DETAILS ABOUT THE COMPANY’S PERFORMANCE

Balance sheet

Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06

Sources of funds

Owner's fund

Equity share capital 887.41 730.79 730.78 580.67 553.67

Share application money - - - 147.06 -

56

Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06

Preference share capital - 5,472.66 5,472.52 - -

Reserves & surplus 36,281.34 23,501.15 21,097.43 13,368.42 9,201.63

Loan funds

Secured loans 2,259.32 3,913.05 3,520.58 3,758.92 2,191.74

Unsecured loans 22,979.88 23,033.13 14,501.11 5,886.41 324.41

Total 62,407.95 56,650.78 45,322.42 23,741.48 12,271.45

Uses of funds

Fixed assets

Gross block 22,306.07 20,057.01 16,479.59 16,029.49 15,407.17

Less : revaluation reserve - - - - -

Less : accumulated

depreciation10,143.63 9,062.47 8,223.48 7,486.37 6,699.85

Net block 12,162.44 10,994.54 8,256.11 8,543.12 8,707.32

Capital work-in-progress 3,843.59 3,487.68 4,367.45 2,497.44 1,157.73

Investments 44,979.67 42,371.78 4,103.19 6,106.18 4,069.96

Net current assets

Current assets, loans &

advances13,425.27 11,591.66 38,196.34 14,671.91 4,997.00

Less : current liabilities &

provisions12,003.02 11,899.95 9,755.78 8,279.70 6,913.83

Total net current assets 1,422.25 -308.29 28,440.56 6,392.21 -1,916.83

Miscellaneous expenses not

written- 105.07 155.11 202.53 253.27

Total 62,407.95 56,650.78 45,322.42 23,741.48 12,271.45

Notes:

Book value of unquoted

investments44,243.24 41,665.63 3,790.47 5,793.46 3,477.38

Market value of quoted

investments4,397.79 1,491.89 3,260.65 2,979.00 4,079.52

Contingent liabilities 13,184.61 12,188.55 9,250.08 7,185.93 3,872.34

57

Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06

Number of equity

sharesoutstanding (Lacs)8872.14 7305.92 7305.84 5804.73 5534.73

Profit loss account

  Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06

Income

Operating income 24,940.65 24,348.32 19,654.41 17,452.66 15,132.09

Expenses

Material consumed 8,491.42 8,279.44 6,024.80 5,679.95 4,661.53

Manufacturing expenses  3,803.33 3,349.96 2,693.73 2,589.24 2,364.40

Personnel expenses 2,361.48 2,305.81 1,589.77 1,454.83 1,351.51

Selling expenses 82.17 61.49 52.53 64.71 80.75

Adminstrative expenses 1,622.77 1,518.83 1,224.54 986.20 902.30

Expenses capitalised -326.11 -343.65 -175.50 -236.02 -112.62

Cost of sales 16,035.06 15,171.88 11,409.87 10,538.91 9,247.87

Operating profit 8,905.59 9,176.44 8,244.54 6,913.75 5,884.22

Other recurring income 331.59 305.36 347.28 485.14 256.95

Adjusted PBDIT 9,237.18 9,481.80 8,591.82 7,398.89 6,141.17

Financial expenses 1,848.19 1,489.50 929.03 251.25 168.44

Depreciation  1,083.18 973.40 834.61 819.29 775.10

Other write offs - - - - -

Adjusted PBT 6,305.81 7,018.90 6,828.18 6,328.35 5,197.63

Tax charges  2,168.50 2,114.87 2,380.28 2,040.47 1,734.38

Adjusted PAT 4,137.31 4,904.03 4,447.90 4,287.88 3,463.25

Non recurring items 909.49 297.71 239.13 -123.02 -4.37

Other non cash adjustments - - - 57.29 47.50

Reported net profit 5,046.80 5,201.74 4,687.03 4,222.15 3,506.38

Earnigs before appropriation 14,555.78 11,589.20 9,281.01 7,198.31 5,296.59

Equity dividend 709.77 1,168.95 1,168.93 943.91 719.51

58

Preference dividend 45.88 109.45 22.19 - -

Dividend tax 122.80 214.10 202.43 160.42 100.92

Retained earnings 13,677.33 10,096.70 7,887.46 6,093.98 4,476.16

Cash flow

  Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06

Profit before tax 7,214.30 7,315.61 7,066.36 6,261.65 5,239.96

Net cashflow-operating activity 8,369.22 7,397.22 6,254.20 5,118.10 3,631.39

Net cash used in investing activity -5,254.84 -9,428.08 -29,318.58 -5,427.60 -2,464.59

Netcash used in fin. activity -1,473.13 3,156.42 15,848.07 7,702.46 -1,125.13

Net inc/dec in cash and equivlnt 1,641.25 1,125.56 -7,216.31 7,392.96 41.67

Cash and equivalnt begin of year 1,592.89 465.04 7,681.35 288.39 246.72

Cash and equivalnt end of year 3,234.14 1,590.60 465.04 7,681.35 288.39

DIVIDEND

Year Month Dividend (%)

2010 May 80

2009 Jun 160

2008 Jun 160

2007 May 155

2006 May 130

2005 May 130

2004 May 100

2003 May 80

2002 April -

59

2001 May 40

2000 May 50

1999 May 40

1998 May 40

1997 May 45

Annual results in brief

  Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06

Sales 25,021.9

8

24,315.77 19,693.2

8

19,762.57 17,144.22

Operating profit 8,952.09 9,133.43 8,223.54 6,973.27 5,931.51

Interest 1,508.40 1,152.69 878.70 173.90 118.44

Gross profit 8,297.48 8,289.01 7,679.84 7,233.04 6,067.83

EPS (Rs) 56.87 71.18 64.14 72.71 63.33

Annual results in details

Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06

Other income 853.79 308.27 335.00 433.67 254.76

Stock adjustment 134.97 -289.27 -38.73 -82.47 -104.91

Raw material 5,494.74 5,709.91 3,429.52 3,121.46 2,368.30

Power and fuel 1,268.28 1,091.37 - - 819.17

Employee expenses 2,361.48 2,305.81 1,594.77 1,456.83 1,353.01

Excise - - - 2,210.55 2,004.83

Admin and selling expenses - - - - -

Research and development - - - - -

60

expenses

Expenses capitalised - - - - -

Other expenses 6,810.42 6,364.52 6,484.18 6,082.93 4,772.31

Provisions made - - - - -

Depreciation 1,083.18 973.40 834.61 819.29 775.10

Taxation 2,167.50 2,113.87 2,379.33 2,039.50 1,733.58

Net profit / loss 5,046.80 5,201.74 4,687.03 4,222.15 3,506.38

Extra ordinary item - - 221.13 -152.10 -52.77

Prior year adjustments - - - - -

Equity capital 887.41 730.79 730.78 580.67 553.67

Equity dividend rate - - - - -

Agg.of non-prom. shares (Lacs) 6051.62 4825.23 4825.87 4033.17 4051.91

Agg.of non promotoHolding (%) 68.53 66.05 66.06 69.48 73.21

OPM (%) 35.78 37.56 41.76 35.29 34.60

GPM (%) 32.07 33.66 38.34 35.81 34.87

NPM (%) 19.50 21.12 23.40 20.91 20.15

The Acquisition Process:

The acquisition process 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 the process of

acquisition are provided in the Exhibit 1 After the final round of bidding and when the results

were awaited Ratan Tata seemed to have asked Muthuraman to prepare two speeches viz., (a)

on conceding defeat and (b) on winning the bid. A group of executives from Tata Steel

described on what Muthuraman had to say about his writing the two speeches

Exhibit 1: Key Milestones of the Tata Corus Deal

September 20, 2006:-Corus Steel has decided to acquire a strategic partnership with a

61

Company that is a low cost producer

October 5, 2006 :- The Indian steel giant, Tata Steel wants to fulfill its ambition to Expand its

business further.

October 6, 2006 :- The initial offer from Tata Steel is considered to be too low both by Corus

and analysts.

October 17, 2006:- Tata Steel has kept its offer to 455p per share.

October 18, 2006:- Tata still doesn’t react to Corus and its bid price remains the same.

October 20, 2006:- Corus accepts terms of £ 4.3 billion takeover bid from Tata Steel.

October 23, 2006:- The Brazilian Steel Group CSN recruits a leading investment bank to offer

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

October 27, 2006:- Corus is criticized by the chairman of JCB, Sir Anthony

Bamford, for its decision to accept an offer from Tata.

November 3, 2006:- The Russian steel giant Severstal announces officially that it will not

make a bid for Corus.

November 18, 2006:- The battle over Corus intensifies when Brazilian group CSN approached

the board of the company with a bid of 475p per share.

November 27, 2006:- The board of Corus decides that it is in the best interest of its will

shareholders to give more time to CSN to satisfy the pre- conditions and 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 for

Corus at 515 pence per share in cash, 3% more than Tata Steel's Offer.

January 31, 2007:- Britain's Takeover Panel announces in an e- mailed statement that after an

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auction Tata Steel had agreed to offer Corus investors

608 pence per share in cash

April 2, 2007:- Tata Steel manages to win the acquisition to CSN and has the full voting

support form Corus’ shareholders

When Mr. Muthuraman tried to write the speech on conceding defeat; he could not write

anything for long; his hand writing which is usually neat and beautiful was illegible with

number of overwriting. After a lot of attempts he was able to write one. Whereas, he could

smoothly and in beautiful hand writing wrote the winning speech. During the final rounds of

bidding, the top management team of the Tata’s Including Ratan Tata, Muthuraman, Kaushik

Chaterjee and their key support staff were in a secluded location that was inaccessible to

others. Further, all their communication devices were changed in order that the competitors of

the bidding or the rivals had any access to the discussion of the negotiating team of the Tatas.”

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. 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.

According the Scheme regulations, Tata Steel was required to deliver a consideration not later

than 2 weeks following the official date of the completion of the transaction.

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 tons 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 deal between Tata & Corus was officially announced on April 2 nd, 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 steel subsidiaries. As stated by Tata, the initial motive behind the

completion of the deal was not Corus’ revenue size, but rather its market value. Even though

Corus is larger in size as compared to the Tatas, the company was valued less than Tata (at

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approximately $6.2 billion) at the time when the deal negotiations started.

But from Corus’ point of view, as the management has stated that the basic reason for

supporting this deal were the expected synergies between the two entities. What were the

various motivations for Corus to have upported the acquisition by the Tatas? Was it because

of better price offered by the Tatas? Was this deal the best way for the shareholders of Corus

to exit from the loss making steel business?

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. 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.

The complexity of the deal especially from the financial implications of the acquisition has

gripped many.

Time line of events:

Oct 5, 2006 - Tatas confirm interest in acquiring Corus

Oct 17 - Tatas propose a $7.6 billion bid for Corus at 455 pence a share in cash

Oct 20 - Corus Board approves Tata bid

Nov 17 - CSN makes indicative bid of 475 pence a share

Nov 27 - Corus adjourns extraordinary shareholders' meeting from Dec 4 to Dec 20 to allowCSN more time

Dec 10 - Tata Steel raises its bid to $9.2 billion

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Dec 10 - Tata Steel raises bid to $9.2 billion at 500 pence per Corus share; Corus BoardRecommends offer.

Dec 11 - CSN makes a formal bid of $9.6 billion at 515 pence a share in cash; Corus BoardRecommends offer

Dec 19 - UK Takeover Panel watchdog sets a January 30 deadline for Tata Steel and CSN tomake revised offers

Dec 22 - Tata Steel wins approval from the European Commission to buy Corus

2007Jan 26 - Takeover Panel says it will launch an auction on January 30

Jan 29 - EU clears CSN bid for Corus

Jan 30 - Auction for Corus starts

Jan 31 - Tatas outbid CSN with 608 pence a share offer; says expects to close transaction bymiddle of March 2007.

Tata Steel wins Corus with a $11.3 billion offer

Financing StructureTata Steel Equity- $2056m 100%

Tata Steel Asia Holdings Bridge/Mezzanine Debt - $1824m Pte Ltd 100%

Tata Steel UK Ltd Acquisition Debt- $5635m

Senior Debt- $3056m 100% High Yield Debt - $2579m

Revolving Credit Facility- $669m

Corus Group Places

Findings of Merger and Acquisitions

Operational and financial advantages of mergers and acquisitions:

The operational and financial advantages of mergers and acquisitions are widely documented

and may also present the face of M&A activity to shareholders, the public, corporate appeals

to legislators etc.

Merger and Acquisition is advantageous in following ways:

It increases market share,

It lower down the cost of production,

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It increases the competitiveness,

It acquires research and development process ,know how and patents. 

 Some of the potential disadvantages facing consumers in regard to mergers are the

following. 

It increases cost to consumers

It Decreases corporate performance and/or services

It Potentially lowered industry innovation

Suppression of competing businesses

Decline in equity pricing and investment value 

Shareholders may also be disadvantaged by corporate leadership if it becomes too content or

complacent with its market positioning.

In other words, when M&A activity reduces industry competition and produces a powerful

and influential corporate entity, that company may suffer from non-competitive stimulus and

lowered share prices.

Lower share prices and equity valuations may also arise from the merger itself being a short-

term disadvantage to the company.

BIBLIOGRAPHY

Sources:

1) http://www.nvca.org/index.php?

option=com_docman&task=doc_download&gid=368&Itemid=93

2) http://www.economicshelp.org/microessays/competition /benefits-mergers.html

3) http://www.economicshelp.org/microessays/competition /uk-mergers.html

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4) http://www.investopedia.com/university/mergers/merge rs5.asp

5) http://legal-dictionary.thefreedictionary.com/Merger s+and+Acquisitions

6) http://www.gbata.com/docs/jgbat/v1n2/v1n2p1.pdf

7) http://www.oag.state.ny.us/media_center/2009/apr/pdf s/BofAmergLetter.pdf  

8) Jarrod McDonald, Max Coulhard, and Paul De Lange.(Fall, 2005) 'Planning for a

Successful Merger: A Lesson form an Australian Case Study.' Journal of Global Business and

Technology, Volume 1, Number 2

Conclusion

Mergers and acquisitions can be:

Costly due to the high legal expenses

The cost of acquiring a new company that may not be profitable in the short run.

More of strategic corporate decision than a tactical maneuver.

Moreover, if a poison pill unknowingly emerges after a sudden acquisition of another

company's shares, this could render the acquisition approach very expensive and/or

redundant.

Elimination of healthy competition

Concentration of economic power

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Monopoly effecting the customer and suppliers

Adverse effect as national economy.

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