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
4th largest steel producer of world(Corus steel)
Mittal Steel Company N.V. – CEO LakshmiMittal

 Formed by the merger of

- LNM holdings & ISPAT International

- International Steel Group Inc.

Headquartered in Rotterdam, Netherlands. 2005 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.

Arcelorwas 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 KamalNath 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 JamshedjiNusserwanji Tata
 Tata Steel CEO in 2007 – Mr. Ratan Tata

 Headquartered in Mumbai, Maharashtra, India.

 In 2005-2006, the Tata Steel had revenues of Rs. 17,136.92 cr.

 In 2011, the revenues of Tata Steel are Rs. 31,102.14 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
 KoninklijkeHoogovens
 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 50 000
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
ArcelorMittal
 Tata Corus
 Data Used:
 Balance Sheet and Income Statement
Year 2010 2009 2008 2007 2006
Revenue 78,025.0 61,021.0 116,942.0 96,293.0 55,726.0
Total Revenue 78,025.0 61,021.0 116,942.0 96,293.0 55,726.0

Cost of Revenue, Total 68,636.0 56,873.0 96,366.0 74,923.0 43,946.0

Gross Profit 9,389.0 4,148.0 20,576.0 21,370.0 11,780.0

Selling/General/Administrative
3,336.0 3,676.0 6,243.0 4,996.0 2,871.0
Expenses, Total
Research & Development 0.0 0.0 0.0 0.0 0.0
Depreciation/Amortization 0.0 0.0 0.0 0.0 0.0
Interest Expense (Income), Net
0.0 0.0 0.0 0.0 0.0
Operating
Unusual Expense (Income) 2,448.0 1,942.0 2,373.0 2,408.0 1,740.0
Other Operating Expenses, Total 0.0 0.0 0.0 0.0 0.0
Operating Income 3,605.0 -1,470.0 11,960.0 13,966.0 7,169.0

Interest Income (Expense), Net Non-

0.0 0.0 0.0 -912.0 -624.0
Operating
Gain (Loss) on Sale of Assets 0.0 0.0 0.0 0.0 0.0
Other, Net 0.0 0.0 0.0 0.0 49.0
Key Figures
Mittal Arcelor
Company Total
(MT) (Paris: LOR)
2005 Sales (bil.) $28.10 $38.84 $66.94
1-Year Sales Growth 27% 8%
2005 Net Income (bil.) $3.37 $4.58 $7.95
1-Year Net Income Growth -28% 66%
Employees 175,000 96,000
Soucre: Companies'
statements
 Total
Depreci Net Tax Rate
Sales EBIT ation Income EPS (%)
12/10 78,025.0 1,856.0 4,439.0 3,246.0 2.03 -79.69
12/09 61,021.0 -4,261.0 5,024.0 214.0 0.15 0.0
12/08 116,942.0 11,355.0 5,316.0 9,258.0 6.68 9.72
12/07 96,293.0 14,039.0 4,566.0 11,231.0 8.02 20.0
12/06 55,726.0 6,894.0 2,234.0 5,854.0 5.92 15.09
12/05 28,132.0 4,676.0 1,113.0 3,301.0 4.79 18.84
 Net
Book Return Return
Debt/ Profit
Value/ on Equity on Assets
Equity Margin
Share (%) (%)
(%)
12/10 $40.31 0.42 5.2 2.5 4.2
12/09 $40.47 0.41 0.4 0.2 0.4
12/08 $40.45 0.62 16.8 7.0 7.9
12/07 $39.87 0.54 19.8 8.4 11.7
12/06 $30.43 0.63 13.9 5.2 10.5
12/05 $18.64 0.63 24.8 9.7 11.7
• 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
Net Profit Return On Net Asset Turnover Earnings Per Debt Equity
Year Margin(%) Worth(%) Ratio Share Ratio

22.81 14.68 0.98 71.58 0.64

2011
19.96 13.45 1.12 56.37 0.68
2010
21.09 21.1 1.22 69.7 1.34
2009
23.43 21.52 1.2 63.85 1.08
2008
23.53 29.95 1.09 72.74 0.69
2007

2006 22.78 35.94 0.98 63.35 0.26

• Before the deal TATA STEEL was the 56th
largest producer of steel.
• After the deal it became the 5th 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. 8830.95
cr. from Rs. 7275.87 cr. in 2008
• Combined sales increased 12.61 percent to Rs.
19654.41 cr.
• Profit of the company has risen from Rs. 3506 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
$700-710 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
THANK YOU