Mergers and Acquisition, Arcelor_mittal

MERGERS AND ACQUISITIONSA CASE ANALYSIS ON ARCELOR-MITTAL

and TATA CORUS DEAL

• By:VIKRAM DAHIYA

IIM-ROHTAK

MERGER

• 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

INTRODUCTION

An acquisition is the purchase of one business or company by another company or other business entity.

ACQUISITION

• Gain market share • Economies of scale • Enter new markets • Acquire technology • Utilization of surplus funds • Managerial Effectiveness • Strategic Objective • Vertical integration

BENEFITS OF M&A

Trends in global steel industry

• Consumption of steel increased after 1950 and trend was continued till 1970

• Consumption of steel started decline from 70s to 80s• After 80s, demand for steel increased continually • International Iron and Steel Institute (IISI) forecasted increment

in demand for steel from 1.32 billion tones (in 2010)to 1.62 billion tones(in 2015)

• This demand will increase due to countries like India and china• To capture this demand, biggest steel producer of India (TATA

Steel ltd.) has been increased its production base by acquiring 4th largest steel producer of world(Corus steel)

TOP PRODUCERS: STEEL

Mittal Steel Company N.V. – CEO Lakshmi Mittal

Formed by the merger of

- LNM holdings & ISPAT International- International Steel Group Inc.

Headquartered in Rotterdam, Netherlands. 2005 Revenues was $28.10 billion

World’s largest steel producer by volume and also the largest in turnover

Major player in following products : Steel, Flat Steel products, Coated Steel, Tubes and Pipes

MITTAL STEEL

ARCELOR

Arcelor was the world's largest steel producer in terms of turnover before takeover. Second largest in terms of steel output.

Guy Dolle was the CEO of Arcelor and its headquarter was in Luxembourg city.

In 2005, Arcelor had revenues of $38.84 billion. Arcelor was created through the merger of three companies:

Arbed, Aceralia and Usinor

THE DEAL

• January 2006 : Mittal Steel offers the shareholders of Arcelor to create the world's first 100 million tonne plus steel producer.

• The deal valued at $22.7 billion offer to Arcelor’s shareholders

• The deal was split between Mittal Shares (75 percent) and cash (25 percent)

• But soon the deal landed into controversy

WHY ARCELOR? • An Attractive Target: Arcelor had 71% pre merger revenue share

from Europe while Mittal had only 34% While in North America The revenue share

for Arcelor was only 9% but Mittal had 42% So they had complementary industrial and

market footprint

CONTROVERSY Arcelor Management –

• The management was extremely hostile to Mittal Steel’s bid• The CEO of Arcelor dismissed Mittal Steel as a “company of

Indians” European governments –

• The French, Spanish and the government of Luxembourg was against the deal

• The French opposition was initially very fierce • But It was criticized in the British, American and Indian media

as double standards and economic nationalism in Europe

INDIAN GOVERNMENT STANCE

Deal was not getting pushed due to MITTAL’s Indian Nationality

The then Commerce Minister Kamal Nath raised the issue through various forums

But LN Mittal himself felt that there was no case of “racism”

He emphasized that Mittal Steel was a European company and NOT an Indian one.

THE FINAL DEAL

Deal finally clinched when the shareholders of Arcelor agreed to Mittal Steel’s offer – In June 2006 Mittal raised its valuation of Arcelor to $32.9 billion.

The Mittal family holds 43 percent of the combined group. The combined company holds 10 percent of the global market for steel.

TATA STEEL BACKGROUND Tata Steel is a part of the Tata group, one of the largest diversified

business conglomerates in India. Founded in 1907,by Jamshedji Nusserwanji Tata Tata Steel CEO in 2007 – Mr. Ratan Tata

Headquartered in Mumbai, Maharashtra, India.

In 2005-2006, the Tata Steel had revenues of Rs. 17,136.92 cr.

In 2011, the revenues of Tata Steel are Rs. 31,102.14 cr.

Products of Tata Steel include hot and cold rolled coils and sheets , wire and rods, construction bars, pipes, structural and forging quality steel

CORUS STEEL BACKGROUND Corus Group was formed on 6th October, 1999 Formed through merger of two companies-

British Steel Koninklijke Hoogovens

It had it’s headquarters in London Company consisted of four divisions which included: Strip

Products, Long Products, Aluminum and Distribution and Building Systems

In terms of performance, the company was regarded as the largest steel producer in the UK with £10,142 million of annual revenue (for 2005) and a work force of 50 000 employees

Why Corus decided to sell ?

• Total debt on Corus was $1.6bn• Saturated market of Europe• Though Corus had revenue of $18.06bn, its

profit was just $626mn (TATA STEEL revenue was $4.84bn and its profit was $824mn)

• Employee cost was 15% while of TATA STEEL was 9%

• Decline in market share and profit

Why TATA decided to buy Corus?

• To tap European market• Helped TATA to feature in top 10 Steel producer of

world• Cost of acquisition is lower than setting Green

field plant and distribution channel• TATA manufactures Low value long & fast steel

products while Corus produced high value Stripped product

• Technology Benefit, Economic of scale. Corus holds number of patents and R&D facilities

RACE FOR CORUS• October 20,2006:Tata steel picks up 100% stake in Corus at 455

pence in all cash deal, valued at $8.04 bn• November 19, 2006:CSN offers 475 pence per share and valued

Corus at $8.4 bn • December 11, 2006:Tata raises offer to 500 pence, CSN counters

with 515 pence per share, valuing at $9.6 bn• December 19, 2006: UK watchdog on merger and acquisitions

announced last date for revised offer for each Tata and CSN• January 31, 2007:UK watchdog panel announces the revised

offer of Tata steel for acquisition of Corus at 608 pence per share• April 2, 2007 : Tata Steel manages to win the acquisition to CSN

and has the full voting support form Corus’ shareholders

Financing the Deal

POST DEALS Whether the deals added value? Whether it was a good move? Industry and Market Reactions to the deals.We use the following measures to analyze the same:

Ratio Analysis Trend Analysis

Steel Industry Analysis Arcelor Mittal Tata Corus

Data Used: Balance Sheet and Income Statement

Year 2010 2009 2008 2007 2006Revenue 78,025.0 61,021.0 116,942.0 96,293.0 55,726.0Total Revenue 78,025.0 61,021.0 116,942.0 96,293.0 55,726.0           Cost of Revenue, Total 68,636.0 56,873.0 96,366.0 74,923.0 43,946.0Gross Profit 9,389.0 4,148.0 20,576.0 21,370.0 11,780.0           Selling/General/Administrative Expenses, Total

3,336.0 3,676.0 6,243.0 4,996.0 2,871.0

Research & Development 0.0 0.0 0.0 0.0 0.0Depreciation/Amortization 0.0 0.0 0.0 0.0 0.0Interest Expense (Income), Net Operating

0.0 0.0 0.0 0.0 0.0

Unusual Expense (Income) 2,448.0 1,942.0 2,373.0 2,408.0 1,740.0Other Operating Expenses, Total 0.0 0.0 0.0 0.0 0.0Operating Income 3,605.0 -1,470.0 11,960.0 13,966.0 7,169.0           Interest Income (Expense), Net Non-Operating

0.0 0.0 0.0 -912.0 -624.0

Gain (Loss) on Sale of Assets 0.0 0.0 0.0 0.0 0.0Other, Net 0.0 0.0 0.0 0.0 49.0Income Before Tax 1,856.0 -4,261.0 11,355.0 14,039.0 6,894.0

INCOME STATEMENT – AM

Key Figures

Company Mittal(MT)

Arcelor(Paris: LOR) Total

2005 Sales (bil.) $28.10 $38.84 $66.94

1-Year Sales Growth 27% 8%

2005 Net Income (bil.) $3.37 $4.58 $7.95

1-Year Net Income Growth -28% 66%

Employees 175,000 96,000 Soucre: Companies' statements

Arcelor and Mittal Before Merger

  Sales EBITDepreci

ation

Total Net

Income EPSTax Rate

(%)12/10 78,025.0 1,856.0 4,439.0 3,246.0 2.03 -79.6912/09 61,021.0 -4,261.0 5,024.0 214.0 0.15 0.012/08 116,942.0 11,355.0 5,316.0 9,258.0 6.68 9.7212/07 96,293.0 14,039.0 4,566.0 11,231.0 8.02 20.012/06 55,726.0 6,894.0 2,234.0 5,854.0 5.92 15.0912/05 28,132.0 4,676.0 1,113.0 3,301.0 4.79 18.84

Income Statement – 6 year Summary

Book Value/ Share

Debt/ Equity

Return on Equity

(%)

Return on Assets

(%)

Net Profit

Margin (%)

12/10 $40.31 0.42 5.2 2.5 4.212/09 $40.47 0.41 0.4 0.2 0.412/08 $40.45 0.62 16.8 7.0 7.912/07 $39.87 0.54 19.8 8.4 11.712/06 $30.43 0.63 13.9 5.2 10.512/05 $18.64 0.63 24.8 9.7 11.7

KEY RATIOS– 6 year Summary

Financial Analysis

Did the deal create value?

• Strong financial performance in the second half of 2006• Full-year (EBITDA) rose 2.1% to $15.27 billion from $14.96

billion in 2005• Combined sales slightly decreased in 2006 but had a quantum

jump in 2007• Sales figure for Mittal Steel more than doubled after the merger.• Net Income of the company has risen from $3.36 billion to $6.10

billion in 2006 and to $11.8 billion in 2007• Venture into new businesses and market like Luxembourg,

Senegal, Liberia• Enlarged brand portfolio

Key Financial Ratios Year

Net Profit Margin(%)

Return On Net Worth(%)

Asset Turnover Ratio

Earnings Per Share

Debt Equity Ratio

201122.81 14.68 0.98 71.58 0.64

201019.96 13.45 1.12 56.37 0.68

200921.09 21.1 1.22 69.7 1.34

200823.43 21.52 1.2 63.85 1.08

200723.53 29.95 1.09 72.74 0.69

2006 22.78 35.94 0.98 63.35 0.26

• Before the deal TATA STEEL was the 56th largest producer of steel.

• After the deal it became the 5th largest

TATA – CORUS DEAL EFFECTS

• The acquisition by Tata amounted to a total of 608 pence per ordinary share or ₤6.2 billion (US $12 billion) which was paid in cash

• The price that they paid represents a premium of over 68% over the average closing market share price over the twelve month period

• The day after the acquisition was officially announced, Tata Steel’s share fell by 10.7% on the Bombay stock market.

TATA – CORUS DEAL EFFECTS

• Full-year (PBDIT) rose 21.3 percent to Rs. 8830.95 cr. from Rs. 7275.87 cr. in 2008

• Combined sales increased 12.61 percent to Rs. 19654.41 cr.

• Profit of the company has risen from Rs. 3506 cr. to 4222 cr.

• Economies of Scale• Forward integration for Tata Steel• Increased presence in global markets

Did the deal create value?

Camparison between both deals

• In the Mittal Steel-Arcelor deal, the EV/EBITDA was 6.2 times while it was 9 times in case of Tata – Corus

• In terms of EV/tonne too, Tata Steel's price, at $700-710 per tonne was higher than what Arcelor commanded at $586 per tonne

• In case of Mittal Steel- Arcelor, the deal involved a share swap along with cash while Tata Steel had to shell out hard cash for Corus

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