MERGERS AND ACQUISITIONS A CASE ANALYSIS ON ARCELOR-MITTAL and TATA CORUS DEAL MERGERS AND ACQUISITIONS A CASE ANALYSIS ON ARCELOR-MITTAL and TATA CORUS DEAL By: VIKRAM DAHIYA IIM-ROHTAK

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

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

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

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 4 th largest steel producer of world(Corus 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 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

 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

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

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

 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

 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.

 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 , the Tata Steel had revenues of Rs. 17, cr.  In 2011, the revenues of Tata Steel are Rs. 31, 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 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

 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 Revenue78, , , , ,726.0 Total Revenue78, , , , ,726.0 Cost of Revenue, Total68, , , , ,946.0 Gross Profit9,389.04, , , ,780.0 Selling/General/Administrative Expenses, Total 3,336.03,676.06,243.04,996.02,871.0 Research & Development0.0 Depreciation/Amortization0.0 Interest Expense (Income), Net Operating 0.0 Unusual Expense (Income)2,448.01,942.02,373.02,408.01,740.0 Other Operating Expenses, Total0.0 Operating Income3, , , ,966.07,169.0 Interest Income (Expense), Net Non- Operating Gain (Loss) on Sale of Assets0.0 Other, Net Income Before Tax1, , , ,039.06,894.0

Key Figures Company Mittal (MT) Arcelor (Paris: LOR) Total 2005 Sales (bil.)$28.10$38.84$ Year Sales Growth27%8% 2005 Net Income (bil.)$3.37$4.58$ Year Net Income Growth-28%66% Employees175,00096,000 Soucre: Companies' statements

SalesEBIT Depreci ation Total Net IncomeEPS Tax Rate (%) 12/1078,025.01,856.04,439.03, /0961, , , /08116, ,355.05,316.09, /0796, ,039.04, , /0655,726.06,894.02,234.05, /0528,132.04,676.01,113.03,

Book Value/ Share Debt/ Equity Return on Equity (%) Return on Assets (%) Net Profit Margin (%) 12/10$ /09$ /08$ /07$ /06$ /05$

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

Before the deal TATA STEEL was the 56 th largest producer of steel. After the deal it became the 5 th largest

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.

Full-year (PBDIT) rose 21.3 percent to Rs cr. from Rs cr. in 2008 Combined sales increased percent to Rs cr. Profit of the company has risen from Rs cr. to 4222 cr. Economies of Scale Forward integration for Tata Steel Increased presence in global markets

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 $ 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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