CASE STUDIES

By Prof. Vijay P. Singh

CORPORATE INDIA MARCHING AHEAD.

“When we first talked about acquiring Cores, many thought it

was an audacious move for an Indian Company to make a bid
for a European steel company much larger than itself. That
was something which had not happened before… This will be
the first step in ensuring that Indian Industry can step outside
the shores of India in an International Market and acquit itself
as a global player”, said Ratan Tata.

For US$ 12.1 Billion, Rs. 54,000 crores if you will, Tata it
wanted so badly that of Anglo- Dutch steel maker Corus,
forged out of what was once the mighty British Steel – to
carve out a chunk of the global steel industry for itself.
This acquisition makes the 100-year Old Tata Steel the fifth
largest steel producer in the world, with an annual output of
about 28 million tones and 87,000 employees on its rolls- a
dramatic departure from only a day ago when it was ranked
56th.

The acquisition also marks the emergence of India inc. as a

potent force in global business. It was only last year that
Mittal Steel headed by Lakshmi Mittal forged a block buster $
32.4 billion deal to create Arcelor Mittal, the world’s largest
steel company. “I believe this will be the first step in ensuring
that Indian Industry can step outside the shores of India in an
International Market and acquit itself as a Global Player”. Said
Ratan Tata, chairman, Tata Group.
The nerve-wracking auction, where bids were put in from
different locations by e-mail, started at 10pm (IST) on Monday
and ran the full course of nine rounds, the outer limit
mandated by UK’s Take over panel. The entire process lasted
a tense seven and a half hours and at close to 5.30 am IST,
The Indian steel company outbid Brazil’s CSN when if offered
608 pence a share, five pence more than what CSN finally
offered before throwing in the towel. “We have not slept a
wink all night.” Said a visibly ebullient Ratan Tata. The final
price Tata Steel has agreed to pay at 608 Pence represents a
premium of 33.6% over what it had originally offered. This
price is marginally outside the outer limit analysts had
reckoned Tata Steel would be prepared to pay for Corus.

Tata to pay US$12.1Bn. to acquire Corus at 608 pence

(Rs.526) per share, which is about 34% higher than its original
offer of 455p (Rs.389) made on Oct.20th 2006. It’s also 70%
higher than Corus’ average share price over the year prior to
the Original Tata offer. Tata Steel’s share price, at the end of
trading on 31st Jan 2007, is about 9% down from when it made
the first offer while Corus’ is up 27%. Tata steel share holders
have lost, at least in the short-term, while Corus shareholders
have gained big-time with shares at a seven – year high.

It’s by far the biggest take over in the history of India Inc. 2 nd
Biggest acquisition in global steel, behind Mittal Steel’s US$
32.4Bn take over of Arcelor last year. Lifts Tata Steel from 56th
to 5th in Global steel sweepstakes with combined revenue of
24.4Bn.

Advantages:
1. Industry where consolidation appears inevitable in order to
leverage scales.
2. gives it access to high-value European market; also it
can ride on the back of a renowned brand.
3. Acquisitions cost is about $710 per tonne where as
Greenfield would have cost $1200 per tonne, says
Tata.
Dangers:

1. Tatas have paid a heavy price. The final offer is nine

times Corus’ earning before Interest and Tax.

2. It now needs to service a very large debt burden.

3. Integration can be a problem in such acquisitions,

because of both distance and cultures.
4. Markets are not happy. CLSA, One of the largest foreign
brokerage house in India, has put a “sell” advice on Tata
Steel, saying it had paid too much for Corus. Tata Steel
stock closed almost 11% lower at Rs. 464 from 2 days
trading.

5. Unions are also not happy. UK’s largest steel and metal
industries union has vowed to oppose job cuts tooth
and nail.

Funding:

Minutes after the multi-billion dollar deal was

announced, a fairly straight forward questions cropped up
in every body’s mind. Where on earth was Tata Steel going
to find the US$ 12.1Bn it needs to fund the buyout?
Sources say, the Tatas have adopted a three pronged
strategy to complete the transactions.

1. A special purpose vehicle, now christened Tata Steel UK

will be created. This SPV will be fully owned by Tata
Steel Singapore, a subsidiary of the parent Tata Steel.

2. The equity component in this vehicle will be $ 4.1 Billion.

Tata Steel will take a bridge loan from ABN Amro
corporate finance and Standard Chartered Bank.

3. For the remaining $8bn, the group intends to raise as

debt from the market.
US$4Bn will be raised abroad against Corus Group’s
balance sheet. ABN AMRO, CREDIT SUISSE and
Deutsche Bank have given firm commitments that they
 will arrange the funds. The remaining US$4 Billion will
be raised by selling Bonds of Corus to investors in
London. These Bonds will be traded in the UK Bond
Market.

Questions:

1. Is this a wise decision of Tata to acquire Corus?

2. Foreign Brokers are also not happy for paying higher

amount in Corus by Tata . Could Tata prove
themselves in Stock market?

3. Do a SWOT analysis of Tata’s in this acquisition.

THE END!!!