Dr.

Rakesh Kumar Sharma

 Tata Steel: Tata Steel is India’s largest private sector
steel company with revenues of US$ 5.0 billion and
crude steel production of 5.3 million tonnes (MT)
across India and South-East Asia in FY05-06. It is a
vertically integrated manufacturer and is world’s lowest
cost producer and one amongst the few value creating
steel companies. The company has rich iron, dolomite,
chromium and manganese mining and related assets in
India and even abroad. It currently produces
approximately 9 MT of iron ore.
 Corus was an international company, providing
steel and aluminium products and services to
customers worldwide. The company was world’s
seventh largest and Europe’s second largest steel
producer with revenues of £9 billion (approx. US$
11.55 bn) and crude steel production of 18.2 MT
in 2005. It had approximately 50% of the UK
carbon steel market and around 11% of the
European (including UK) carbon steel market.
 The company was comprised of four divisions,
Strip Products, Long Products, Distribution &
Building Systems and Aluminium, and had a
global network of sales offices and service
centers. It had got manufacturing operations in
many countries, with major plants located in
the UK, The Netherlands, Germany, France,
Norway and Belgium.
 Merger: The acquisition had taken take place through
a wholly owned indirect subsidiary of Tata Steel, Tata
Steel UK. The estimated cost of acquisition is US$ 8.1
billion. Tata Steel was inject US$3.5 billion in Tata
Steel UK for funding the acquisition while the balance
had been mobilized through debt. The company had
made upfront cash payment of US$ 237 million to
bridge the current deficit or shortfall in Corus' pension
funds. It had also agreed to increase future pension
contributions to 12% from the current 10%.
 Tata Steel was leapfrog from the fifty-sixth largest steel
producer in the world to the fifth position.
 The company have better geographical mix. Tata steel have
access to 40 countries across the globe, transforming it into a
major global player from a domestic player.
 It was also achieve access to highly-developed markets and
premium customer base.
 There was a transfer from Europe to India, of technology
and expertise, research and development capabilities in the
automotive, packaging and construction sectors, increased
procurement knowledge and in effect, a better bargaining
power.
 Corus did not have any significant mining
interest or asset since the second half of 2002,
when it sold off its minority holding in Avesta
Polarit to Outokumpu. On the other hand, the
link-up with a low-cost producer with access to
raw materials will enable Corus to compete on
a global scale.
 Tata Steel’s interest in acquiring Corus was in line with
its growth objective of entering new, higher end
markets and acquiring sophisticated customer base. The
logic behind the acquisition is de-integration, the
powerful combination of low cost upstream production
in India with the high-end downstream processing
facilities in end-user markets. Corus has strong
relationships with customers in continental Europe,
especially in high margin segments like construction,
automobile and aerospace industry, the benefits of
which eventually will be passed on to Tata Steel.
 The combined entity, Tata Steel-Corus had benefit
from the deal but the concern remains with the
cost synergies of the acquisition. The combined
entity had enjoyed synergies in procurement,
distribution and logistics, it was not clear as to
how and over what time period, the production
costs are likely to come down. In medium to short
term, synergies were less likely to be seen, but
long-term prospects were good.
 Further, Corus had high exposure to spot prices
and a higher operational gearing among the
larger European steel companies. In contrast,
Tata Steel had about 70% of its supplies routed
through long-term contracts. The combine is,
thus, likely to reduce the element of volatility
associated with pricing, one of the key
elements in determining profitability of a
commodity company.
 Like with any other acquisition, this too had its share of
soft issues like the speed at which integration takes
place and how fast the synergies could be exploited,
differences in working culture of the two companies
and this too is likely to test the mettle of Tata Steel. On
the financial front, if the steel prices soften considerably
from hereon, servicing the debt could put a strain on the
cash flows of the company. Hence caution needs to be
exercised to that extent. As mentioned earlier, long-term
prospects of the alliance does look bright (Economic
Times 2006)
 There were a lot of apparent synergies between
Tata Steel which was a low cost steel producer
in fast developing region of the world and
Corus which was a high value product
manufacturer in the region of the world
demanding value products. Some of the
prominent synergies that could arise from the
deal were as follows :
 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 production cost under control and was on the look
out for sources of iron ore.
 Tata had a strong retail and distribution network in India and
SE Asia. This would give the European manufacturer an in-
road into the emerging Asian markets. Tata was a major
supplier to the Indian auto industry and the demand for value
added steel products was growing in this market. Hence
there would be a powerful combination of high quality
developed and low cost high growth markets
 There would be technology transfer and cross-fertilization of
R&D capabilities between the two companies that specialized
in different areas of the value chain
 There was a strong culture fit between the two organizations
both of which highly emphasized on continuous improvement
and ethics. 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.
Key Financial Ratios 2001-02 2002-03 2003-04 2004-05 2005-06 Mean S.D
Profitability Ratio
31.34 5.93
Gross Profit Ratio (%) 23.32 30.42 31 40 32
21.218 12.24
Operating Profit Ratio (%) 3.70 14.39 26 35 27

14.17 7.72
Net Profit Margin (%) 2.59 11.28 16 23 18
22.65 15.10
Return on capital Employed(%) 2.59 13.64 23.55 40.73 32.74

35.60 21.11
Return on Net Worth (%) 4.40 26.56 45.35 60.02 41.70

41.31 24.79
Earning per Share(Rs.) 5.51 27.44 47.48 62.77 63.35
Financial Position Ratios

1.202 0.24
Current Ratio(times) 1.53 1.35 1.19 0.99 0.95
0.7 0.14
Quick Ratio(times) 0.87 0.83 0.65 0.51 0.64
0.814 0.59
Debt Equity Ratio(times) 1.75 1.02 0.65 0.38 0.27

Debt Coverage Ratio

15.19 12.67
Interest coverage Ratio(times) 1.68 5.14 13.27 24.01 31.86

Management Efficiency Ratio

4.7 0.65
Inventory Turnover Ratio(times) 4.82 5.30 5.12 3.62 4.64

6.94 2.06
Debtor Turnover Ratio(times) 4.23 5.36 8.02 7.92 9.20

0.91 0.17
Fixed Assets Turnover Ratio(times) 0.73 0.83 0.88 0.93 1.20

0.509 0.074
Total Assets Turnover Ratio 0.43 0.50 0.475 0.51 0.63
Key Financial Ratios 2000-01 2001-02 2002-03 2003-04 2004-05 Mean S.D.

Profitability Ratio
11.63 5.93
Gross Profit Ratio (%) 9.84 8.52 10.42 14.78 14.6
0.55 6.05
Operating Profit Ratio (%) -4.89 -5.37 -0.74 6.65 7.10
-1.28 5.46
Net Profit Margin Ratio (%) -5.44 -6.37 -3.83 4.78 4.46

0.794 13.58
Return on capital Employed (%) -9.52 -11.18 -5.95 18.61 12.01

-9.448 23.35
Return on net worth(%) -20.20 -33 -24.6 20.69 9.87
47.25 1.20
Earning per Share(₤) 46.40 48.1

Financial Position Ratios

1.808 0.120
Current Ratio (times) 1.67 1.74 1.84 1.99 1.80
0.97 0.059
Quick Ratio(times) 0.91 0.92 0.96 1.05 1.01
1.595 1.08
Debt Equity Ratio(times) 1.82 2.52 2.70 0.65 0.285

Debt Coverage Ratio

0.308 3.790
Interest coverage Ratio(times) -2.97 -2.88 -1.35 5.01 3.73

Management Efficiency Ratio

4.818 0.449
Inventory Turnover Ratio(times) 5.25 4.95 5.20 4.42 4.27

6.194 0.65
Debtor Turnover Ratio(times) 5.51 5.45 6.70 6.70 6.61

2.568 0.291
Fixed Assets Turnover Ratio(times) 2.26 2.29 2.61 2.72 2.96

1.064 0.051
Total Assets Turnover Ratio(times) 1.00 1.04 1.14 1.07 1.07
 2006-07 2007-08 2008-09 Mean S.D

Key Financial Ratios

Profitability Ratio and Return Ratio

37.07 9.48
Gross Profit Ratio 39.84 37.70 33.69
39.74 22.03
Operating Profit Ratio 39.61 41.94 37.68
22.68 1.38
Net Profit Margin 23.53 23.43 21.09
20.01 6.73
Return on capital Employed 27.71 17.11 15.21
24.19 4.99
Return on net Worth 29.95 21.52 21.10
33.73 31.14
Earning per Share 15.50 16.00 69.70

Financial Position Ratios

2.14 1.501
Current Ratio 1.69 3.81 0.91
2.13 1.50
Quick Ratio 1.37 3.52 0.57
1.03 0.32
Debt Equity Ratio 0.69 1.08 1.34

Debt Coverage Ratio

13.63 10.91
Interest coverage Ratio 26.19 8.35 6.37

Management Efficiency Ratio

9.29 1.57
Inventory Turnover Ratio 7.69 10.84 9.36
31.20 1.96
Debtor Turnover Ratio 29.81 33.45 30.35
1.32 0.31
Fixed Assets Turnover Ratio 1.68 1.20 1.10
0.54 0.17
Total Assets Turnover Ratio 0.74 0.43 0.45
 What kind of Merger and Acquisition between Tata
Steel & Corus?
 Discuss the main objectives acquisition of Corus
by Tata Steel.
 How Tata steel achieved low cost efficiency in
upstream activities.?
 Why Corus group was ready for acquisition by
Tata Steel? (while it was world world’s seventh
largest and Europe’s second largest steel producer ).
 Discuss the economic and financial
consequences of this acquisition.
 How this acquisition affected the performance
of Tata Steel.
 Why acquisition was taken place as wholly
owned indirect subsidiary of Tata steel.?