Overview Of Tata Steel Pre Merger

Over sight Of Tata brand name Pre optical fusionTATA stain, earlier known as TISCO, is the iron and brand harvestion ph peerlessr which is the flagship concern of the TATA group, Indias largest private corporate group. Tata vane was established by Indian Parsi contrastman Jam boundji Tata in 1907. As of 2005, TATA mark was Asias largest private bea make caller-up. The company was similarly recognized as the e cunninghly concerns best blade maker by cosmea brace Dynamics in 2005.Tata sword has set an ambitious head to achieve a efficiency of 30 one trillion million million triiodothyronine by 2015. To this end it turnd Singapore nucleotided Nat sword in 2004 and acquired a 40% stake in Thailand based Millennium trade name. Through these devil sciences, TATA brace pass oned ab divulge 3.2 million tonne to its production capacity. As of 2006, TATA Steel had a production capacity of 5.3 million tonnes. After the Corus encyclopedism (18.2 million tonne), the wampum acquired capacity was 21.4 million tonne, and TATA Steel plans to add an otherwise 29 million tonne by this bureau of life. gum olibanum we chew the fat that TATA Steel seems to substantiate a definite strategy of increasing capacity by scholarship and is acting on it rapidly. At this point we aldepression for conduct a imagination based analysis of this strategy. A resource based view of strategy emphasizes the internal resources of a company in the formulation of strategy in order to achieve a sustain able competitive advantage. The avocation model makes this process clear-ResourcesResources are the in retch which an organization uses to escape out its activities. And yet organizations in the same labor might shit similar resources but ca-ca differing mathematical process, since they may utilize their resources differently.For a resource based view, Assets available to a business may be assort in the following form1(Resources in heed TRIZ, Business lev el)-TATA SteelParticularsPre MergerPost Merger unmistakable assets (in Rs. Crore)Fixed assets986511040Current assets21742332fiscal assets (in Rs. Crore)Assets (cash)288.397681.35Net Worth975514096IntangibleLocationJamshedpurJamshedpurSizeWorld 5sixth largestWorld 5th largestCompetitionNone domesticallyNone domesticallyThus we fundament see that prior to the merger TATA Steel was a precise large domestic sword shammer, in fact the largest in India. The berth advantage conferred by the rig existence in Jamshedpur was aptly put by Mr. Ratan Tata, who said that the owners of iron ore go forth be the rulers of the mark industry. Its captive raw material resources and state of the art 5 million tonne plant at Jamshedpur gives at a competitive edge. This capacity is slated to go up to 7 million tonne. In addition, TATA stigma has full(prenominal)ly good relations with the government in the role by righteousness of its long standing outgrowthal efforts in the region. As a g o away, TATA Steel has acquired a great(p) fill out of goodwill among the local population and consequently, the government. This is spare in the Green athletic field confounds which the group is setting up in the region-6 million tonne plant in Orissa (India)12 million tonne in Jharkhand (India)CapabilitiesHowever, the best resources in themselves are of no real note nurture to a company in and of themselves. The organization must constitute the dexterity to employ these resources properly. It is these distinctive capabilities of an organizations resources which result in a competitive advantage. scarcely this advantage is sustainable only if this capability places from round characteristic other firms do not possess.TATA Steel is one of the lowest salute steel makers in the world. It is also one of the flush fewer steel companies which are EVA positive. It has an ope evaluation profit margin of besidely 40%2(avg. = 16%). As an indication, only ii manufacturers in U SA (and none in India) have higher margins. At the same time, growth rate for sales was 232% and sugar income was 590%3.Adding this information to its captive raw materials resources as explained previously, we net see that TATA Steel had a unique position as an ut experimental conditionost(a)ly low bell steel producer in an clearingly fast developing region of the world.Tata Steel holds a very(prenominal) vital place in Indian business history, because it has introduced close to of the unique concepts like 8-hour working daylights, leave with reconcile and pension system for the first time in India and the first player to start rapid industrialization process. In the later part, the concepts invented and implemented by the Tatas became law and compulsory practice for the Indian employees. A direct result of these employee friendly practices is the goodwill which TATA Steel enjoys among its workforce. In consequence, the Jamshedpur plant furnaces have never been closed do wn due to industrial strife.Thus we can see the two major capabilities which enable TATA Steel to employ its resources in effect extreme operating efficiency and employee friendly policy.Another point of note is the extremely cash rich status of the organization even prior to the science with an pastime coverage ratio of 32, and a growth rate of 380% for net cash flow from trading operations.Competitive advantageAt this point we can clearly see the sources of competitive advantage for TATA Steel prior to the merger. indeed let us render its position in the market prior to the merger, with the Porters five forces model.1) bane of entry of naked competitorsThe steel industry is one which has a very high entry barrier. In addition, established players already enjoy customer loyalty, and and then it will be difficult for fresh players to agnise market share. On the other hand, the sector promises high returns in future.2) Intensity of competitive rivalryIn harm of price, prime(a) and alteration TATA Steel had no domestic disceptation as of 2005-06. However, on a orbicular scale, it was just so small in terms of hoi polloi that it could not bring into play the economies of scale of the truly major players.3) Threat of substitute productsThis threat is well nigh negligible with measure to steel.4) talk terms power of customersThe steel industry is one of periodic swings in demand. However, with an second-rate growth rate of 7% expected in countries like India, chinaware and Brazil in the foreseeable future, we can safely assume that price of steel will continue to rise. In fact, the price of steel has two-fold over 2006-20084. However, it is also accepted that consolidation in the steel industry will lead to stabilisation of world steel prices and higher negociate power. This is necessary because the buyers are consolidating e.g. auto makers are consolidating with six to seven global majors.5) Bargaining power of suppliersThe three major iro n ore suppliers CVRD, Rio Tinto and BHP Billiton have a 75% market share and 40% margins. Clearly, small players are at a distinct disadvantage.StrategyIn this context, let us examine the strategy of acquisition as proceeded upon by the TATA Steel management. First, TATA Steel had law of proximity to low salute iron ore, and the capability to take advantage of it. As a result, TATA Steel had acquired leadership status in the Indian market. In terms of the BCG Matrix, it would be shell outed a star. However, if it does not grow into the international it would, preferably rather than later, become a cash cow. In order to breathe a star, it would have to grow its capacity and become a world major. However, before the Corus acquisition, it was only at 56th position in capacity.In terms of the world market, TATA Steel would find market penetration in atomic number 63 or America extremely difficult. In addition, as explained via the Porters five forces model, steel producers are on t he wrong side of the equation twain with honor to the buyers as well as suppliers, who are well consolidated and hence in a position to dictate terms. Hence, it is necessary for global steel players to consolidate as well, and thereby acquire a position of strength. This would come price fluctuations and increase earnings multiples.Hence, considering resources (cash, technology) present with the company, the competitive advantage it enjoyed (low apostrophize, high margin) and the market conditions (consolidation), acquisition of nigh major manufacturer and jump into the king-sized league was the only choice.Strategic Decision UndertakenThe strategic last we will be considering for the purpose of this project is Tata Steels decision to acquire Corus and the how they went about the inherent process. The reasons behind the takeover will be viewed in detail on with a resource based view of the resources so collated by the fresh create company now known as Tata Europe.I truly believe that the owners of iron ore are going to rule the industry. They will be OPEC of the steel industry. (Ratan Tatas interview to McKinsey Quarterly quoted by Wheatley in Financial Times, January 29, 2007). This asseveration made by Ratan Tata expresses in clear words the original reason behind the adoption of this strategy.Corus- An overviewCorus headquarter in London, Europes second largest producer of steel and the 9th largest in the world was founded in the October 1999 via a merger between two companies British Steel and Koninklijke Hoogovens. This merger was a result of the privatization of Steel producing companies by the U.K government. In the course of instruction 2005 its revenues s alsod at 9.2 gazillion. Corus had a divisional structure which comprised the funnies Products division, the Long Products division, Aluminum Division and the Distribution Building division. Corus customer base ranges across countries of the world and its core businesses include the manufacturing, development and allocation of steel aluminum products as well as operate. It has a diversified product services portfolio which comprise manufacturing of electrical steel, narrow strip, plates, packaging steel, plated steel strip, semi-finished steel, electron tube products, wire rod and rail products and services and also design, technology and consultancy services. To livelihood this elaborate array of products services, Corus employed about 42,600 employees in sales services centers across 40 countries. The main strength of the company lay in its international expertise with local customer service and its brand which stood for quality and strengthThrough the period of 200 2006 Corus grew via a number of acquisitions which did add to its large pool of long term debts, but nevertheless it has a wide range of customer segments ranging from commercial and military aerospace ventures, the automotive, construction, engineering, defense and security, as well as th e rail and shipbuilding industry. any(prenominal) of the Financial teaching available in respect to Corus in the year 2005 has been put in annexure 1. scholarship Based Dynamic CapabilitiesTata Steel has often used the Acquisition strategy to expand their products and markets or gain other advantages and have in most cases been good at it. Looking at this strategic decision from Acquisition Based Dynamic Capabilities approach we find that over the long time the Tatas have well groomed these capabilities into their system. in that respect are three factors to consider hereAcquisition Selection Capability- Tata steel was correct in clock the merger as it was due to emerging trends in the world steel industry with the increasing consolidation in the market. With a eat or be eaten mentality it was essential for this strategy to be adopted in order to become the 5th largest producer of steel and give competition to post merger entities like Arcelor-Mittal etc. Also there would be multi ple points of contact with their firms existing resources and those of Corus owing to the long list of synergies as listed in the following scallywags of the report.Acquisition Identification Capability- The most appropriate target for the Tatas was definitely Crus as there was the horizontal desegregation with respect to the R D capabilities that the Tatas were keenly interested in adding to their resource base. The Due applications programme was well carried out as though there were certain ethnic issues in the way, the top management of the Tatas were fact to act in a manner to resolve the issues. Some of the steps they took involved retention of important exe geldedives of Corus to help in a smoother integration process and also aid in running the new-fashionedly formed entity. Also the Tatas did not over pay for the believe as the market value of it exceed the price they remunerative, and the yearly savings expected from it were substantial. Apart from that they were ab le to gain entrance money to wider distribution entanglements and newer markets.Acquisition Reconfiguration Capability- This is one of the most crucial aspects which can determine the success of failure of a merger. It involves the acquirer to be able to merger its resources with the new ones acquired and do so in a copious and efficient manner in order to enhance the functioning of operations etc.Tata Corus MergerTata steel started the acquisition process in the year 2005 but since Corus had been involved in a number of its own acquisition processes the read was finally closed with the acquisition of Corus on the 2nd April 2007 as per official records. The price paid or the same was considered to be too high at an overwhelming $12 million out of which the Tatas financed the plug with only $4 billion. This strategic decision undertaken by Tata Steel raise their rank from the 56th to being the 5th largest steel producing company in the world. In all fairness it is necessary to note that this acquisition did not come to the Tata with ease, as though the bidding started at 455pence per share, by the time the deal came to a close it had resulted in gaining a price of 608pence per share. This 33% hiker in bidding rate was caused due to the emergence of another bidder, the Brazilian Steel maker Companhia Siderurgica Nacional (CSN).The Counter BidsThe deal so made was a 100% acquisition and the newly formed entity now renamed Tata Europe is being run by one of the subsidiaries of Tata Steel. As Corus had been looking to make an exit, Tatas acquisition proved to be a profitable opportunity. The expected synergies deemed the deal to be beneficial for the Tatas as although some said that the Tatas overpaid, it was clearly communicated by the Tatas that they had paid much less than the replacement court (market value) of all the assets they were able to acquire via this merger.Reasons For This Merger Strategy- The Global TrendsThe Steel market in the world had been witnessing some very strong trends which called for such a merger. there are a series of mergers which happened in the world steel industry which include some of the followingIn 2004, Mittal bought International Steel Group, an American company which include assets of the previous Bethlehem Steel.Mittals merger with Arcelor ($36.1 billion offer) in 2006 created the largest steel company in the world.In October, 2006, Russian steelmaker Evraz Group bought Oregon Steel mill around of the U.S. for $2.3 billion.Nucor, the second largest US steel producer, acquired Harris Steel Group of Canada for $1.07 billion in January 2007.Severstal, the largest Russian steelmaker had invested $800 million in a new plant in Mississippi and $900 million in a plant near Detroit.Essar Group of India has made a $1.6 billion investment in Algoma Steel of Canada (2007) as well as $4.65 billion offer to buy atomic number 25 Steel Industries.On May 4, 2007, Swedish steelmaker, SSAB, made a $7.7 billi on cash offer to acquire Ipsco of Canada.Global Steel Production in 2005Hence we see that the environment of the steel industry was amenable to consolidation. There was a strong desire among key players to gain efficiencies resulting from steel production. Some of the reasons for such a trend towards acquisitions wereObtaining access to new and growing marketsEnhancing buy power with respect to suppliers and buyersGrowing economy of China and India during mid-2000sHigher story of price stability better marginsAttractive to InvestorsEat or be eaten mentalityA desire amongst the key players to gain efficiencies resulting from scaleSteel prices have been on an upward trend as can be seen in the following graph. This phenomenon started in the year 2004 and slowed down due to the economical crisis in 2009. But a great deal of volatility has been witnessed in the market and had been another major reason to consolidate so as to have a greater hold on the market dynamics. There was also lot of speculation in the market about China, the worlds largest producer of steel to increase its capacity resulting in a dip in world prices of steel. Growing economies like China and India did make up for a major demand for steel and to meet this requirement China was even importing steel from outside. Following is the graph of 2006-2008Prior to the beginning of the deal negotiations, both Tata Steel and Corus were interested in entering into an MA deal due to several reasons. The official press release issued by both the company stated that the feature entity will have a pro forma crude steel production of 27 million tons in 2007, with 84,000 employees across four continents and a joint presence in 45 countries, which makes it a serious rival to other steel giants.Post- Acquisition ScenarioA Resource Based PerspectiveBeforeAfterEBITDA13%25% subject matter7 MTPA25 MTPAPosition566Business Resources with sub-categories in Management- TRIZConcrete LevelBusiness particular LevelTan gible AssetsFixed AssetsAssets 23741.48 crCutting edge technology- providing metal solutionsLow cost upstream Tata facilities with high end downstream processing facilities of CorusRD facilities of CorusIntangible Assets charitableDistribution networks, Research and Development capability of Corus to be leveraged for Tata Steels green field projects in Orissa, Bihar and JharkandFinancesCapital, Obligations and SavingsTo finance the deal worth $12 billion the following sources were usedEquity by Tata Steel $ 3.88 billionBank loans $ 8.12 billion by Credit Suisse, ABN Amro and Deutsche BankLong term loans obligation to be paid by Corus cash flowsObligationsTotal interest obligation $ 640 million to the already existing interest obligation of Corus amounting to $ four hundred millionPension liabilities of Corus $ 24 billionCost SynergiesProduction cost $ 710/ton which is far less than a green Field project which would cost around $ 1200-1300 per tonSavings of $350 million per year thro ugh synergyGeneral CharacteristicsLocation of OperationMain Center India UK, Netherlands and southernmost East AsiaMarketsInnovative solutions toConstruction, Packaging, Automotive, AerospaceEnergy, engineer, Defense and Security, Consumer Products, Ship Building, groomGreater access to market and Significant presence in over 25 countries or regionsProductsBar billet, Business services, Construction products services, Electrical steels, Packaging steels, Plates, Plated steel strip, Pre-finished steels, Rail products services, Sections, Semi finished steel, Specialty, Strip products, Support products, Tube Products, Wire poleSizePost Acquisition Sales Rs 8105.30 crProduction Capacity 26 million MTPACompetition Position5th largest Steel nobleman with a production capacity of about 26 Million lots Per AnnumStrengthened position in construction, automotive and packaging construction sectorManagement Resources with sub-categories in Management TRIZConcrete Level ManagementSpecif ic LevelPlanning and CoordinatingStrategic Planning- For the growth and globalization the route of acquisitions was taken up and the logic has been explained before. Post acquisition the top management of the acquired company was retained for effective integration of processesOperational Planning-. The Tata Steel and Corus operations were being run as one virtual company with mental process improvement tasks being undertaken in each location. The aim was cross-fertilization of research, development of capabilities across functionalities and transfer of best practices from Europe to India.Organization-Company Operational Structure- 15-18 teams were formed with 3-4 members each with joint representation in teams to look at unlike synergistic avenuesCompany Organizational Structure-CorusTata SteelIntegration Team- 7 membersSeveral Task throw Teams were also constituted for integration.Organization and Environment-Government and society- The acquisition had a very positive response f rom India, Indians felt patriotic towards this investment. In fact the Indian Trade and Commerce minister Kamal Nath commented that the global perception of India is now changing. This way the Indian government and society was quite supportive of the deal, in smart of critics commenting that the deal was over-priced. The historical ties between India and UK were also becoming stronger, Trade and labor were looking up.Markets- the Tata Steel stock attained a 52 workweek high of 721 on March 2007, showing positive investor response. SPs credit rating also improvedInformal OrganizationCulture- Both the organizations had similar performance culture with respect to aspirational targets, safety and social responsibility, continuous improvement and desolation and transparency. However, there were some cultural issuesInherent in the mind of the employees. impudence of being governed and managed by a former British colony jeopardy of production centers shifted out of the UK to low-cost centers. The labor unions in Europe embossed their concern regarding this.Other CharacteristicsCompensation mismatch18.5 % employee expense (Corus)7.9 % employee expense (Tata Steel) upstart developmentsIn 2010 Tata Group has announced that the name and logo of TATA Steel will be used use for Corus.The transition also signifies that Tata Sons, which controls the use of the Tata brand, is quelled that operations at Corus are now aligned with the characteristics of the Tata brand.The workers understand this is a name change and also realize that the Tata board has been supportive of the employees.It implies that synergies are being attained and that cultural integration is on the right path. leadershipCommon organization values for Tata Steel and CorusContinues improvement programIntegrity, respect for individual and world class governancePost- AcquisitionThe company had effectively retained the top management of the acquired company to facilitate effective integration and to take c are of the above stated cultural issues of the employees. This move join with effective communication has instilled confidence amongst the employees2010 Current Executive committee which manages day to day operations of Tata Steel Europe (new name for Corus under Tata Steel) order Chain PerspectiveThere were significant effects that were seen on some parts of the value concatenation of mountains post Tatas acquisition of Corus. As already detailed above, Tata saw Corus as a strategic acquisition and took some immediate and long term steps to make the acquisition a success.Operations This part of the value chain witnessed a saving of a whopping $103 million in 2008 09 post the integration process. Performance usefulness Teams (PITs) in 15 different areas were identified. These teams engaged in various new cost related projects in the wake of the economic recession and trim down volumes. The most important project that the teams worked on was the use of low cost coal for coke pr oduction and recycling of steel plant waste. merchandise and Sales The acquisition of Corus gave Tata access to European markets in a very time efficient and cost efficient manner. Tata got access to the distribution network of Corus which was instrumental for its expansion in Europe. With the help of new capacity new products were introduced to cater to an expanding market in Europe. Post the acquisition, the company added flat products to Corus portfolio and thus laceed Tatas position in the Automotive and consumer product segments. Tata globally became the 6th biggest player in the steel industry.Outbound Logistics This function of the integrated company has underdone for(p) significant computerization and has led to more efficient supply chain management. The IT teams of Tata Steel Europe (Erstwhile Corus) are working in coordination with the IT teams of Tata Steel India to strengthen the IT support to this vertical. Both are also working to create online profile of the opera tional performance of the organization.Procurement This support function has seen significant cost savings driven by the increase in scale of the combined entity. Post the acquisition, Tata Steel Europe has appointed Lead Buyers for high value items and thus has streamlined the processes to a large extent. Contracts have been renewed for these suppliers and a resultant savings of over $40 million have been realized. engine room Development The acquisition has provided Tata access to the latest technology and state of the art Research and Development setup. Tata has always been known for its technological excellence amongst the Indian peers but Corus took it to international standards. Post this deal, the total RD strength of the company has gone up to 1000 people. Process improvement teams have been set up leveraging the expertise of Corus for better process technologies. Through this RD set up TSE (Tata Steel Europe) has been working with various strategic partners one of them bein g the UK ministry of Defense. compassionate Resource Management To increase efficiencies and in the wake of the economic downswing faced by the organization in FY 09, the company decided to cut its manpower costs by 20%. The target departments were IT, Finance and humanity Resources. This undercutting was done through leveraging of Tata Steel Groups capabilities.A Performance profit Committee was set up during the integration phase and it still is trusty for knowledge transfer across the organization and adapting of best practices, which has to a great extent to Tata Steel Europe.Firm Infrastructure Substantial steps have been taken in this regard in various departments such as finance, plants etc. This has been the pivotal point of addition in the value chain of the new company.Finance Substantial expansion in the equity and debt resources was witnessed in order to acquire a big company as Corus. As the acquisition was essentially financed by raising substantial debt ($7.3 billi on), the gross debt of the Tata Steel group stood at $10.54 billion in 2008 and increased to $11.78 billion by close of 2009. Restructuring of the debt has been witnessed in the recent past but the debt equity ratio still stood at 1.65 as at the end of FY 2009 from a low of 0.06 in FY 2006.Asset Restructuring, Integration and Divestment With the acquisition of Corus, Tata Steel was the owner of an asset base that was thrice he size of the original Tata Steel and therefore was the need for integration of assets, divesting the obsolete assets and pairing down of overlapping assets. agile steps taken included closure of 4 plants and mothballing of 2 plants out of the 15 plants of Corus group. The expansion of the hot strip mill capacity at Port Talbot to 4mt. is on the table and a decision to restructure the Corus Engineering Steels has been taken. All of this was done under the Fit for Future initiative undertaken at the merged company.SourcesTata Steel Annual storey 2007 08Tata St eel Annual Report 2008 09Achieving Global Growth through Acquisition Tatas Takeover of Corus, Journal of berth Research and in Business and EconomicsTatas Acquisition of Corus A Quantum Leap, Rashmi Malapur, The ICFAI University struggle (2007)Achieving Global Growth through Acquisition Tatas Takeover of Corus by Kimberly, Suresh and Jessicahttp//www.mumbaimirror.com/index.aspx?page=articlesectid=5contentid=201007022010070215213931780a91fb3http//indiaearnings.moneycontrol.com/sub_india/compnews.php?autono=264760http//www.tatasteeleurope.com/en/company/management/executive_committee/http//www.financialexpress.com/news/tata-steelcorus-synergy-realises-76-mn-in-fy08/347487/