Group6 Tata Europe

8/4/2019 Group6 Tata Europe

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TATA STEEL EUROPE CORUS

ACQUISITION

GROUP - 6

PRASOON MAJUMDARPRIYANKAR BISWAS

RAHUL JAIN

HARI SHANKER

KAVYA S

NAVEEN VYAS


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Introduction

Tata Steel Europe formerly Corus is a

subsidiary of Tata Steel, India

It is headquartered London, U.K.

Second largest steel manufacturer in Europe

Arcelor-Mittal leads the pack

Post acquisition it was among the Top10 steelmakers globally


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Acquisition History

30 January 2007, Tata Steel, part of India's Tata Group, purchased a 100%stake in the Corus Group at 608 pence per share in an all cash deal,cumulatively valued at (USD 12.04 Billion) On 19 November 2006, the Brazilian steel company CSN launched a counter

offer for Corus at 475 pence per share, valuing it at $8.4 Billion.

On 10 December 2006, Tata preemptively upped the offer to 500 pence (the

Revised Tata Acquisition). On 11 December 2006, CSN announced a formal offer for the Company at an

offer price of 515 pence per Corus Share (the CSN Acquisition), valuing thedeal at $ 9.6 Billion

On 31 January 2007, following the lack of agreement on an offer, thepreviously mentioned auction process was triggered. Following the conclusionof the auction process (at an unprecedented length of nine rounds) conductedby the Panel in accordance with Rule 32.5 of the Code (the "Auction"), TataSteel announced the proposed acquisition of Corus Group at 608p per share,(The 6.7 billion deal includes 500 million of debt.


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Expected Synergies

Low cost and Source of Raw material

Tata was one of the lowest cost steel producers in the world and had self-sufficiency in raw material

Corus was fighting to keep its productions costs under control and was on thelookout for sources of iron ore

Strong retail and distribution network

Tata had a strong retail and distribution network in India and SE Asia. Thiswould give the European manufacturer an in-road into the emerging Asianmarkets

Technology transfer

Cultural and Core Values

Tata steel's Continuous Improvement Program Aspire with the core values:

Trusteeship, integrity, respect for individual, credibility and excellence Corus's Continuous Improvement Program The Corus Way with the core

values: code of ethics, integrity, creating value in steel, customer focus,selective growth and respect for our people


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Synergies for Corus

Global Reach

Total debt of Corus as on the date of acquisition-GBP1.6 Billion

Corus needed supply of raw materials at lower cost Though Corus had revenues of $18.06bn, its profit was

a mere $626mn compared

to Tatas revenue of $4.84bn and profit of $824mn

Production facilities of Corus were relatively old withhigh cost production

Employee cost is 15% (Tata 9%)


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Synergies for Tata Steel

Tata has been looking to manufacture finished products inmature markets like Europe

Diversified product mix

Reduces risks

Higher end products will add to bottom line Corus holds a number of patents and R&D facilities and

immediate access to advanced technology Greenfield plant

Cost

Time

Will catapult Tata from 55th largest producer to 5th largest.

Will make it difficult for other companies to make a hostile bidfor Tata Steel


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After Merger Efforts

A Strategic and Integration Committee (SIC) was set upto facilitate what was envisioned to beam "light touch"integration across Corus and Tata Steel

Chaired by Ratan Tata and acted like a virtual

organization encompassing both businesses goal was to develop common agenda for the group

focusing on:

Continuous Improvement

Sharing of best practices, Manufacturing excellenceCross fertilization of R&D capabilities

Rationalization of costs across the businesses


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After Merger Efforts

Several teams having representation from bothcompanies were set up to handle integration andstrategic work streams

In January 2008, an umbrella management team or

"group centre" was created. It consists of senior CorusGroup and Tata Steel executives, and is co-chaired byTata Steel's managing director Mr B. Muthuraman andCorus CEO Philippe Varin

To avoid duplication and ensure a common approachacross key functions - technology, integration, finance,strategy, corporate relations, communications andglobal minerals.


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Issues After Merger

Contract workers strike at TATA Steel plant:Some 70 members of UK union Community,blocked two entrances to TATA's Corus Strip

Products mill in Port Talbot because a livingwage has not been paid them since June 2010.

Reasons

The contract cleaners and Community call on OCS to

make a pay offer that exceeds UK's minimum wage.Many OCS workers at TATA are paid as little as GBP 5.75an hour


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Issues After Merger

Management by a foreigneris a concern:

Major issues usually which occurs with such

acquisition is that people in the company do

not like to work under foreign management asfear of firing, cost cutting and the different

style of management can be prevalent in

employees mind.


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Issues After Merger

Moving away production from UK to low cost

India market: Post-acquisition UK trade

unionists warned there would be impending

trouble for Corus employees if Tata movedproduction away from the UK to lower-cost

India markets. If in future TATA plan to shift

production to India it can potentially create abig issue.


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Recent Status

Tata is planning to rename Corus in Europe as Tata Steel

Tata Steel proposes to close or mothball part of its Scunthorpe plant, putting at risk 1,200 jobs. Theplans would also see 300 jobs lost at its Teesside site.

A very senior manager from Tata Steel who was sent to push things along in UK returned homecompletely frustrated by the bureaucracy

None of the British managers would listen to any kind of advice; he confided to a senior executive Iknew on a flight way back from UK. And Bombay House was in no hurry to enforce its writ

TATA did nothing to attack bureaucracy in the initial years, despite the fact that they may haveoverpaid for the two acquisitions, buying, as they did, at the top of the cycle

TATA themselves do not have a cadre of international managers who were trained to handle suchcomplex post merger integration.

TATA consciously left management to the existing European managers to lead the charge.

Kirby Adams arrived as the new CEO did the process of restructuring and culture change at Corusbegin in right earnest

Adams cut 6,000 jobs across Europe and thereby helped stop some of the bleeding at Corus. Not

surprisingly, Adams stepped down in October 2010 and was replaced by his COO Karl-Ulrich Khler,who had come in from German steelmaker ThyssenKrupp.

Adams made no efforts to integrate the European operations with the Indian ops


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Cultural Mapping

Using Hofstedes Cultural mapping model, we

have five parameters which are as following:

Power Distance

Individualism Vs Collectivism

Uncertainty Avoidance

Masculinity Vs Femininity Long term orientation


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Cultural MappingPower Distance

S.No. Characteristics Indian Scenario U.K. Scenario

Centralization High Low

Organizational Pyramid Tall Flatter

Supervisory Activities More Fewer

Wage Differential Larger Smaller

Importance of Job White collar jobs are

valued more than blue

collar jobs

Equal importance is

given to both type of

jobs

Uncertainty Avoidance


Structuring of Activities Medium Low

Written Rules Comparatively high LowVariability Low Low

Risk taking abilities Low High

Ritualistic Behaviour Comparatively high Low


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Cultural Mapping

Masculinity - FemininityS.No. Characteristics Indian Scenario U.K. Scenario

Sex based differentiation in Roles High Low

Interference in private life Low Comparatively high

No. of women in qualified job Low Comparatively high

Consideration to soft skills Low High

Individualism Collectivism


Orientation towards

organizations

Formal way of doing job Highly formal

Individual Vs Group activity More group works are

preferred

Individual initiatives

are encouraged

Sense of duty More Less

Individualist Vs Collectivist More collectivist

Individually more united

Ties between

individuals are loose


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Cultural Mapping

Post acquisition strategies, questions on leadershipstyle, communication, organizational structure andresources

A seven member integration committee

Marco-level decisions looked by the top management Several Task forces were also setup to smoothen the

transactions(power distance differential)

Tata Steel planned to reduce costs from future

operations and in turn provide benefits to Corusemployees and management, who in turn wereseeking a sustainable long term solution that yieldedbenefits with participation.


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Financial Analysis of Corus acquisition

At the time of merger TataSteel and Corus weretouted as the fifth largeststeel manufacturerglobally but in 2009 and2010 it clearly appears

Tata Steel is losing itsranking and is now No 11.

This is not only due tocompetition from Arcelor-Mittal but due toemergence of Asian

players in China, Koreawho have steadily creptup the ranking.


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Situation in 2006 - EUROPE It is clear from Annual Report of Corus in 2006 that they were

expecting global prices of steel to rise in line with growing globaldemand. But there is clearly a doubt whether this trend will sustain in the

second half of 2007

Iron prices rose by 72% in 2005 and 19% in 2006.

US economy was growing at 3.6% and EU at 3.8%.

UK economic growth jumped from 1.9% to 2.7%. Capital expenditure was estimated at 500 MN a year.

European Steel demand growing by 5% each year

Arcelor-Mittal had a capacity in excess of 100m tons and was planningon expansion. Consolidation was the theme now.

The steel industry unlike other mining industries is not concentrated with CR5

of less than 10%. It must be seen competition is from local European players as well as

that of players from Korea, Russia, Ukraine, Brazil, China etc

What was Tata expecting in 2006?


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Tatas Expectations in 2006 on future

The price paid for the acquisition reflects what were

Tatas expectations of growth in 2006 to 2015 We can estimate it at 7% a year with net debt levels of 10%

(as targeted by Tata)

Premium was paid to the tune of 69%

Operating margins were expected to remain around 7% It was expecting realization of the following synergies

Scale economies and relationships with global suppliersand customers;

Access to particular markets and/or raw materials;

Sharing best practice and accelerating development; and Developing global supply chains.

Let us look at the calculations


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How it turned out? (2011)

Tata Steel did not get what it expected

It lost its rank from 5 and is 11 now globally

It has not been able to generate value asexpected by as much as 13000 crores INR

The valuations were arrived using a optimisticexpected growth of 4% in Europe till 2015 (TataSteel Annual Report 2010-11)

Thus value generated could have been even lesser

Intense competition from Asian Players likeKorea, China and Taiwan

Let us look at the calculations


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Reasons for Failure Tata Steel assigned reasons as economic slowdown in EU

Fall in steel prices However, we believe the reasons were more than this

Tata Steel over-estimated the demand as well as the growth in European markets

It did not anticipate the wave of competition from Asian manufacturers from China andKorea, leading it to over value the supposed synergies.

It has not been able to increase its production capacity as planned rather it has sold off aplant in UK which has lead to considerable tensions among the union and management.

It has not been able to realize the potential for exports though freight rates haveactually flattened during the time after 2008. Further, it is not expected to riseimmediately. This can be a potential area where volumes can be made up by exportswith transportation costs being low.

The Tata Steel Group has fallen in ranking from 5 to 11 now and this can be attributedmainly to the problems faced in Europe, highlighting why adjusting to culture andbusiness practices in certain regions is so important

Steel prices have remained solid and have in fact strengthened since 2006. Thus showingeven in recession the demand for steel has been more than the supply. Tata Steel hasnot been able to leverage this fact and show high growths as shown by Chinesecompetitors.


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Tata could not develop capacity unlike

Arcelor-Mittal


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Peer Comparison Arcelor-Mittal

Arcelor-Mittal also lost some value in 2006-2011 buttheir loss is relatively less.

But their cost of production though it has risen but hasrecovered after 2009 They have been able to increase capacity and realize

economies of scale Tatas may lead in plant capacity utilization yet the lag

may be attributed to sudden addition of capacity andnot on operational inefficiency


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What can be done?

The Corus deal was over-valued and hasplaced significant strain on resources (esp.debt). We suggest that Europeanoperations focus more on the Near Eastand Eastern Europe. With low shipping rates and the availability of

world class port facilities in Western Europe

focus can be more on exports to thesemarkets

Expand into and look for opportunities inUkraine and Turkey where productionvolumes are surging.

Tata Steel Europe does not have asignificant presence in Germany which

accounts for 30% of EU regions economy(Source: IMF 2010). The fundamentals remain strong in Germany

and thus they can plan capacity additions inGermany to come close to the 2015 targets


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More emphasis must be placed on cultural alignmentand understanding of business practices.

In this regard, the business models of Arcelor-Mittal maybe replicated

where organizational change was made mainly at the topmanagement level rather than restructure at the bottom since anycultural change requires a top management revamp.

There is also a need of immediate debt restructuringprogram

considering that net debts levels of 5xEBITDA is highcompared to 2-3 in the industry.

This will measures will regain shareholder confidence

What can be done?


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Thank You

THANK YOU!

Group6 Tata Europe

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