Strategic management Tata acquisition of corus

• 1. Acquisition A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy whereby it is more beneficial to take over an existing firm's operations and niche compared to expanding on its own. TYPES OF ACQUISITION Friendly acquisition Both the companies approve of the acquisition under friendly terms. There is no forceful acquisition and the entire process is cordial. Reverse acquisition A private company takes over a public company. Back flip acquisition A very rare case of acquisition in which, the purchasing company becomes a subsidiary of the purchased company. Hostile acquisition The smaller company is either driven to such a condition that it has no option but to say yes to the acquisition to save its skin or the bigger company just buys off all its share, their by establishing majority and hence initiating the acquisition.

2. THE CASE The following case is about acquisitions and results thereafter. In this case, we are going to analyze the situation of Tata steel of India acquiring Corus of UK in the year 2007. This acquisition was smooth acquisition and brought huge effects to Indian steel market. The problem are - 1. To analyze the acquisition whether it was a success or a failure 2. To recommend future plans and strategy 3. TATA STEEL Established in 1907 Asia's first integrated private sector steel company Annual crude steel capacity of over 29 million tonnes per annum World's second-most geographically-diversified steel producer Operations in 26 countries and a commercial presence in over 50 countries Turnover of Rs 1, 48,614 crores in FY 14 Over 80,000 employees across five continents Fortune 500 company Operating companies within the Group include o Tata Steel Limited (India) o Tata Steel Europe Limited (formerly Corus), o Tata Steel Singapore o Tata Steel Thailand Vision is to be the worlds steel industry benchmark in Value Creation and Corporate Citizenship 4. CORUS Ninth largest steel manufacturer in the world Formed through the merger of British Steel and Koninklijke Hoogovens (Hoogovens) on October 1999 Standalone steel manufacturing capacity was 18.3 million tonnes More than 3 times that of Tata Steel 48,600 employees average coke consumption was lower in Corus possibly due to use of secondary route of manufacturing steel 5. HISTORY AND EVOLUTION 1907: Tata Iron & Steel Co Ltd established by Jamsetji Tata. 1911: Blast Furnace operation at Sachi begins. 1912: Jamsetji Tata's plant produces its first steel ingot. 1912: 8 hour day introduced to maintain employee well-being. 1920: Leave-with-pay introduced. This practice was rare pre-1940s. 1924: TISCO close to closure as a result of 1920s Depression. 1951: Modernisation plan launch - with Kaiser Engineering support. 1971: Government attempt to nationalize TISCO fails. 1987: Collaboration started with Timken in bearings production. 1996: JV with Inland International - creation of Tata Ryerson. 2004: Acquisition of Singapore based NatSteel for ~$486m. 2004: Creation [with SAIL] of the mjunction online trading platform. 2005: Acquisition of 40% stake in Thailand's Millennium Steel. 2005: TISCO changed its name to Tata Steel. 2005: MoU signed for 5mt integrated plant at Jagdishpur. 2007: Tata Steel wins bid for Corus against Brazil's CSN. 2007: Acquisition of controlling stake in 2 Vietnamese rolling mills. 6. 2010: Partial mothballing begins at Tata's TCP plant at Teesside. 2011: Tata Steel's Teesside Cast Products (TCP) plant sold to SSI. 2011: Llanwern hot strip mill in the UK temporarily mothballed. 2012: Blast furnace relit at former Corus Redcar steel plant. 2012: Rebuild commences of blast furnace No 4 in Port Talbot, UK. 2012: Retirement of Ratan Tata - Cyrus Mistry is new Chairman. 2013: Tata Steel Europe reports record GBP 1.2 bn loss. 2014: Plan announced to increase capacity 60% to 16 mt by 2020. 7. Automotive Body, Chassis, Powertrain, Gear Box, Wheels & Tyres Galvatite, Tata Wiron, Tata Bearings, Tenform Construction Structural frame , Infrastructure, Building envelope, internal fit out applications , partition walls Colorcoat Prisma, Tata Tiscon, Tata Wiron, Tata Shaktee Consumer Goods Domestic appliances, Lighting, Racking and shelving,Battery cases Enamel-coated applications, Hot rolled coil through Magizinc,Tata Steelium,Tata Wiron PRODUCTS & BRANDS Steel is an essential material used in many industries Backbone to countless products, structures and services Shape the everyday lives of people throughout the world 8. Engineering Hot rolled and cold rolled sheets Wire rod and wire, Sections, Plate, Bearings & Tubes Tata Wiron, Celsius 355, Tata Steelium Packaging Food and beverage cans Paint, Aerosols, Promotional packaging Large and intermediary steel drums and small pails, Bulk Container frame Protact Lifting & Excavation Heavy construction and earth moving equipment, Mining machinery Cranes and fork lift trucks, Agricultural and forestry equipment Trailers, High strength strip, Coil, quenched and tempered plate Special profiles for track shoe and forklift masts, Engineered steel bar and tubes Tenform XK, Ympress Energy & Power Aerospace Shipbuilding Rail Defence & Security 9. Product Portfolio 10. TATA CORUS ACQUISITION Tata acquired Corusn 31st January 2007 US $ 12.11 Billion Nine rounds of bidding against Companhia Siderurgica Nacional (CSN). Biggest overseas acquisition by an Indian company Tata Steel Vs CSN: The Bidding War Heavy speculation surrounding 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 CSN offered 475 pence per share of Corus on November 17, 2006 Competition between Tata Steel and CSN led to an auction mechanism CSN offers its final bid of 603 pence nearing $11.82 billion which was lesser than Tata Steels winning bid of 608 pence per share totalling $12.1 billion 11. A holding company was setup by Tata in Singapore to acquire Corus. Idea was to have all foreign acquisitions under one holding company. Singapore has a favorable Tax jurisdiction and gave Tata Steel an easy avenue for raising global resources and funds Tata Steel India Tata Steel Holdings Asia (Singapore) Tata Steel UK (SPV) Corus Group Ltd. (UK) 12. FINANCIAL OUTLOOK Equity capital from Tata Steel $4.10 billion Long-term debt from consortium of banks $6.14 billion Quasi-equity funding at Tata Steel Asia Singapore $1.25 billion Long-term capital funding at Tata Steel Asia Singapore $1.41 billion Total $12.90 billion Tata Steel provided $4.1 billion from the various sources indicated above and invested the above quantum through its wholly owned indirect subsidiary Tata Steel UK. Non-recourse debt financing arranged by a consortium of banks of $6.14 billion directly at Tata Steel UK. Balance amount of $2.66 billion has presently been raised in the form of bridge finance in Tata Steel Asia Singapore 13. NEED FOR ACQUISITION Manufacturing: Greater productivity leading to increased output and market size Procurement: Economies of scale leading to cost reduction through combined buying Research and Development: Cross fertilization of Research and Development capabilities and operational best practices, leading to greater innovation and operational efficiencies Finance and Corporate: Restructuring of organization and refinancing 14. BENEFITS TATA STEEL Emerged as the fifth largest steel producer in the world Access to Corus' strong distribution network in Europe Expertise in making the grades of steel can boost supplies to the Indian automobile market CORUS Expertise in low cost manufacturing of steel.. Use own RM Make low cost raw steel Ship to Corus Finish goods at Corus plants Earn higher margins 15. Financial Details for Tata Steel 16. Ratios Years 2014-2013 2013-2012 2012-2011 Financial Ratio Current Ratio 0.57 0.86 0.93 Debt Equity Ratio 0.43 0.47 0.45 Inventory Turnover ratio 6.94 7.27 6.98 Debt Turnover Ratio 53.21 44.91 51.10 17. Porters Five Forces Model Buyers Power(low) Increasing Demand for Steel. Low customer preference. Suppliers Power(high) High Raw Material Prices. Lack of Transportation. Fragmented Coke Suppliers. Competitive Rivalry(very high) Competition from Foreign Players. Spurt in Merger and Acquisition Activities. Threat of New Entrants (moderate) High Cost of Basic Inputs and Services. Industry is Capital Intensive. Threat of Substitutes(moderate) Use of Aluminium, Plastic, Carbon Fibre. 18. Internal Analysis 19. Balance Scorecard Financial Turnover at 1,34,712 crores by 2013 EBITDA is at 12,654 crores by 2013 PAT is at -7058 crores by 2013. India leads in geographical distribution of revenue at 29% and in capital employed by geographies by 46% for Tata Steel. Customer Diversified customer base. Automotive ,Construction , Engineering , Consumer goods industries etc are major customers. Increasing marketing efforts in industries like Railways , Ship Building , Defense etc. 20. Internal business processes Kar Vijay Har Shikhar ,a Continuous improvement programme, a well-defined six step process involving TQM and statistical tools for improving quality. Some of the key themes through which process improvements are taken up are Throughput, Value-in-use, Energy Efficiency, Opportunistic Plays, Logistics & Supply Chain Adoption of National Voluntary Guidelines to enforce transparency , ethics and care for the community. Learning and Growth Presence of four research centers supporting cutting edge R&D in steel. Tata Steel Group Process Improvement Teams deployment for continuous process improvements. Growth of the company as a whole has been affected by weak global economy in 2013. 21. Internal Factor Evaluation Matrix Weighted score is 2.56.Tata Steel is internally somewhat strong. 22. External Analysis 23. SITUATIONAL ANALYSIS (PESTC) Social Factor: In FY15 government is targeting promotion of housing for low medium income group Reviewing road sector by setting a target of constructing 8500 kms. Rehabilitation of people in mining areas. Technological Factor: Continuous casting machines. Application of SML(Steel Mark up language) Popularity of Steel portals. Economic Factor: Increase in custom duty on coal from nil to 2.5% could create negative impact on major steel producers like JSW , TATA STEEL and SAIL which are dependent on imports. GDP growth rate. Political Factor: Mining scam e.g. Goa Recommendations on Captive Mines. 24. Factors Score(S) Weighta ge(W) Total weighted value(S*W) Threats Technology Risks 1 0.15 0.15 Raw Materials Security and Price Volatility 2 0.12 0.24 Forex, Credit, Liquidity and Counterparty Risk 2 0.07 0.14 Regulatory and Compliance Risks 2 0.06 0.12 Health, Safety and Environmental Risks 3 0.11 0.33 Opportunities Macro environment 4 0.18 0.72 Industry Cyclicality 3 0.15 0.45 Growth Projects 3 0.12 0.36 Financing 3 0.08 0.24 2.75 External Factor Evaluation Matrix Weighted score is 2.75 Tata Steel is externally somewhat strong. 25. Competitive Market Analysis 26. Major players in Steel Sector Main Producers (SAIL plants, Tata Steel and Vizag Steel/RINL), Major Producers (Essar Steel, Jindal Steel & Power and Ispat Industries) Other Producers Total production value : Sector Production Public Sector 12.579 M tonnes Private Sector 38.015 M tonnes Total 50.594(89% cap util) 27. NAME MAJOR PRODUCTS TOTAL CAPACITY (million tonnes) REVENU E (Billion US$) Tata Steel wire rods, bars, and steel flats 28 6.9 Jindal Steel & Power mild steel slabs and sponge iron 20 3.2 Essar Steel sponge iron, steel and iron ore pellets 14 5.6 Rashtriya Ispat Nigam Ltd liquid steel 30 1.7 Bhushan Power & Steel Ltd iron Ore beneficiation 12 (incl of the expansions) 1.32 Lloyds Steel corrugated sheets and steel coils Steel Authority of India Limited Stainless steel and iron 25 7.8 Mahindra Ugene Steel Corporation 1.8 0.210 Major player in Steel Sector 28. Competitive Profile Matrix 29. The INTERNAL-EXTERNAL (IE) MATRIX is used to analyze working conditions and strategic position of a business. Its based upon internal and external factors of the organization. The IE matrix used to plot the organization divisions in nine cell diagram, each cell have some meaning associated which suggest strategies. IE matrix is a continuation of the EFE matrix and IFE matrix. Internal External Matrix 30. II AND III BUILD IV HOLD v VI MAINTAIN VII HARVEST VIII OR IX DIVEST EFE SCORE 4.0 1.0 4.0 1.0 STRONG AVERA GE WEAK HIGH MEDIU M LOW IFE SCORE 2.75 2.56 31. ANSOFF MATRIX helps a firm decide their market growth as well as product growth strategies. Market Penetration- when the firm has an existing product and needs a growth strategy for an existing market. Market Development- when the firm targets a new market with existing. Product development firms which have a good market share in an existing market and therefore might need to introduce new products for expansion. Product development mainly happens when you have a good customer base and you know that the market for your existing product has reached saturation. Diversification when the product is completely new and is being introduced in a new market. ANSOFF MATRIX 32. MARKET PENETRATION Tata bearings Tata tubes Tata wiron PRODUCT DEVELOPMENT Steel coils Corrugated steel MARKET DEVELOPMENT Internationalization Alliance Mergers DIVERSIFICATION Aerospace Shipbuilding Defense & security EXISTING PRODUCTS NEW PRODUCTS NEW MARKE TS EXISTING MARKET S 33. HIGH LOW HIGH LOW INDUSTRY SALES GROWTH RATE RELATIVE MARKET SHARE POSITION 34. GE MATRIX OR MCKINSEY MATRIX is a strategic tool for portfolio analysis, initially developed by GE and McKinsey. Compares different businesses on "Business Strength" and "Market Attractiveness" variables. The GE matrix has nine cells. Based on its position, a strategic business unit can make any of the three resource allocation recommendations: Grow Hold Harvest GE MATRIX OR MCKINSEY MATRIX 35. GROW TATA WIRON GROW TATA TISCON HOLD BI-STEEL GROW TATA BEARINGS HOLD TATA TUBES HARVEST TATA GALVANO HOLD MAGIZINC HARVEST PROTACT HARVEST NICOR HIGH MEDIUM LOW HIGH MEDIUM LOW BUSINESS UNIT STRENGTHINDUSTRYATTRACTIVENESS GE/ Mc KINSEY MATRIX 36. INTERNAL EXTERNAL STRENGTH WEAKNESS OPPORTUNITIES SO STRATEGY (Use strengths to take advantage of opportunities) Goodwill of TATA brand Existing dealers and service networks Large shareholders base for capital needs Loyal employees Innovation done by Tata with respect to its s competitors. Excellent corporate governance WO STRATEGY (Overcome weakness by taking advantage of opportunity) Lack of competence Lacks expertise on the new technology Degradation of brand value due to job losses(recently they fired 400 employees in UK , dated-16.07.2014) THREATS ST STRATEGY (Use strengths to avoid threats) Using good corporate governance Tata steel is controlling the international competition as they have acquired Corus. With access to Corus talent pool they are using advanced technology that will lead to competitive advantage WT STRATEGY (Minimize weaknesses) Usage of technology so that they could forecast the future demands. TOWS MATRIX 37. Turnaround is a restructuring strategy. Here, a loss-bearing company is transformed into a profit-earning company, by making systematic efforts. It tries to remove all weaknesses to help a sick company once again become strong, stable and a profit-making institution. It tries to reverse the position from loss to profit, from declining sales to increasing sales, from weakness to strength, and from an instability to stability. It helps the sick company to stand once again in the market. 38. Tata steel before year 2007 was low in capacity and its market presence was limited to Asia only. It was at 56th position in steel producers. In order to turnaround the situation it acquired Corus of U.k. By acquiring Corus it gained huge benefits such as Access to Europe Market. Helped in making global presence. Increased capacity. Increased Product portfolio. Access to better technology. Access to Corus talent pool. Thus all these benefits coupled with Tata capability to produce low cost steel made it to 5th largest producer of steel. This acquisition came out to be the turnaround strategy for Tata steel 39. The following points can be attributed: TATA Steel Group rose to 5th position from 56th The production capacity increased from 4million tones to 28million tones by 2011 Standard & Poors Rating cut it credit Rating to BB from BBB and removed them from the negative watch list Benefits :- Strong Research & Development Unit Several Patents to its credit Produces high end steel Large Customer base 40. QuantitativeStrategicPlanningMatrix 41. TATA STEEL INDIA Reduced growth, reduced consumption Long steel growth remain prospective, Cash cows TATA STEEL EUROPE Fall in demand; increase in diversified product offering Star question mark TATA STEEL ASIA High demand, High growth opportunity, High y-o-y growth Star NAT STEEL Automation implementation, up gradation of production units, increased performance, obtained multiple projects Question mark Iron Ore Project Canada Ramping up of coal production, succesful completion of Direct shipping Ore project Question mark (2013) TATA STEEL GLOBALLY 42. Brownfield expansion Increase in capacity, more production, more dedicated production to flat steel Cash Cows Global wire business Largest wire manufacturer, Revenue US$ 496 M Cash Cows TATA growth shop Increased savings Agrico Present in market for over 80 yrs, high popularity, high product diversification Cash Cows Tinplate Company of India Ltd Largest producer, high growth opportunities y-o-y 14% Star cash cows TATA Sponge Iron Ltd Improve synergies, future alternative Question mark star GreenField expansion Future growth opportunity for furthur product diversification Question Mark 43. Business Model Analysis Key Partners Nat Steel Millenniu m Steel Corus Key Activities Mining Extraction Manufacturing Value Proposition Trusted Brand Highly valued by all stakeholders Customer Relationships Strong Base Value driven Customer Segments Automotive Constructio n Engineering Consumer goods Key Resources Access to Raw Material Strategic Alliances Channels Traditional supply channels direct to customers Cost Structure Processing Costs Interest on Debts Revenue Streams Steel, Tubes and Alloys Sale of minerals & bearings Sale of Power and water 44. Conclusion Tata Corus deal was one of the largest deals that India has ever seen. The deal value was $12.1 billion. Tata Steel became worlds fifth largest steel producer following this deal. The acquisition of Corus by Tata Steel has many synergistic benefits Although Tata Steel Group has succeeded in its efforts of integrating with Corus but, it has paid a very high price for the acquisition. Also, the synergistic advantages that were foreseen after the deal have not been fruitful up to expectations till date. Further, the margins that were supposed to increase have gone down even after 4 years of the deal. So far, Tata Steel still has to wait for few more years for the deal to be profitable if everything goes well. 45. External factor recommendations Updating frequently on the latest technological advancements Improving storage facilities Cash management and treasury management techniques Internal factor based decisions Improving operational efficiency. Merging with high technology foreign companies in similar line of business. Incentivizing employees for long term association with the company. Recommendations 46. 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