On January 31, 2007, Tata Steel Limited (Tata Steel), one of the leading steel producers in India, acquired

the
Anglo Dutch steel producer Corus Group Plc (Corus) for US$ 12.11 billion (€ 8.5 billion). The process of
acquisition concluded only after nine rounds of bidding against the other bidder for Corus - the Brazil based
Companhia Siderurgica Nacional (CSN).

This acquisition was the biggest overseas acquisition by an Indian company. Tata Steel emerged as the fifth
largest steel producer in the world after the acquisition. The acquisition gave Tata Steel access to Corus' strong
distribution network in Europe.

Corus' expertise in making the grades of steel used in automobiles and in aerospace could be used to boost Tata
Steel's supplies to the Indian automobile market. Corus in turn was expected to benefit from Tata Steel's
expertise in low cost manufacturing of steel. However, some financial experts claimed that the price paid by Tata
Steel (608 pence per share of Corus) for the acquisition was too high.

Corus had been facing tough times and had reported a substantial decline in profit after tax in the year 2006.
Analysts asked whether the deal would really bring any substantial benefits to Tata Steel. Moreover, since the
acquisition was done through an all cash deal, analysts said that the acquisition would be a financial burden for
Tata Steel.

Issues:

» Gain an in-depth knowledge about various corporate valuation techniques.

» Critically examine the rationale behind the acquisition of Corus by Tata Steel.

» Understand the advantages and disadvantages of cross-border acquisitions.

» Understand the need for growth through acquisitions in foreign countries.

» Study the regulations governing mergers & acquisitions in the case of a cross-border acquisition.

» Get insights into the consolidation trends in the Indian and global steel industries.

Introduction

On January 31, 2007, India based Tata Steel Limited (Tata Steel) acquired the Anglo Dutch
steel company, Corus Group Plc (Corus) for US$ 13.70 billion3. The merged entity, Tata-
Corus, employed 84,000 people across 45 countries in the world. It had the capacity to
produce 27 million tons of steel per annum, making it the fifth largest steel producer in the
world as of early 2007 (Refer Exhibit I for the top ten players in the steel industry after the
merger). Commenting on the acquisition, Ratan Tata, Chairman, Tata & Sons, said,
"Together, we are a well balanced company, strategically well placed to compete at the
leading edge of a rapidly changing global steel industry."4
Tata Steel outbid the Brazilian steelmaker Companhia Siderurgica Nacional's (CSN) final offer of 603 pence per
share by offering 608 pence per share to acquire Corus.

Tata Steel had first offered to pay 455 pence per share of Corus, to close the deal at US$ 7.6 billion on October
17, 2006. CSN then offered 475 pence per share of Corus on November 17, 2006.

Finally, an auction5 was initiated on January 31, 2007, and after nine rounds of bidding, Steel could finally clinch
the deal with its final bid 608 pence per share, almost 34% higher than the first bid of 455 pence per share of
Corus.

Many analysts and industry experts felt that the acquisition deal was rather expensive for Tata Steel and this
move would overvalue the steel industry world over.
Commenting on the deal, Sajjan Jindal, Managing Director, Jindal South West Steel said, "The price paid is
expensive...all steel companies may get re-rated now but it's a good deal for the industry." 6Despite the worries
of the deal being expensive for Tata Steel, industry experts were optimistic that the deal would enhance India's
position in the global steel industry with the world's largest 7and fifth largest steel producers having roots in the
country. Stressing on the synergies that could arise from this acquisition, Phanish Puram, Professor of Strategic
and International Management, London Business School said, "The Tata-Corus deal is different because it links
low-cost Indian production and raw materials and growth markets to high-margin markets and high technology
in the West.

The cost advantage of operating from India can be leveraged in Western markets, and differentiation based on
better technology from Corus can work in the Asian markets." 8

Background Note

Tata Steel

Tata Steel is a part of the Tata Group, one of the largest diversified business conglomerates in India. Tata Group
companies generated revenues of Rs. 967,229 million in the financial year 2005-06.

The group's market capitalization was US$ 63 billion as of July 2007 (only 28 of the 96 Tata Group companies
were publicly listed). In 1907, Jamshedji Tata established Tata Steel at Sakchi in West Bengal. The site had a
good supply of iron ore and water..

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.

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 (Refer Table I for
fund raising mix for the Corus' acquisition)...

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 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 (Refer Table III for the spread of Tata-Corus markets before and after the acquisition)...