Tata Steel, Indias leading steel maker acquired UK based Anglo Dutch steel maker Corus group for 4.3 billion. The Boards of Directors of both the companies approved the acquisition of Corus at a price of 455p per share in cash resulting in the worlds fifth largest entity with a capacity of 23.05 million tonnes per year. Tata Steel in a vertically integrated manufacturer and is one of the worlds most profitable and value creating steel companies whereas Corus is Europes largest steel producer with 9.2 billion revenues in 2005 and 18.02 million of crude steel production. (Pratiyogita Darpan, 2006) The PHD Chamber of Commerce and Industry stated that the acquisition of Corus by Tata was the first by any Indian company which placed India on the global scenario from Tata Steel ranked 56th before the deal became the fifth largest producer of steel. (Mahendra Gaur,2005) The process of bid went through nine rounds along with the other contender CSN from Brazil, which increased the price 34 above Tata Steels initial offer to 11.3 billion. Tata Steel proposed to finance the deal using debt approach and the decision resulted in 11 fall in shares.
The costliest bid, as agreed by analyst, led to re-rating and valuation of the other industries in the Indian market. However, Tata Steel was able to clinch the deal from Brazilian Steel giant CSN that forced Tata Steel to increase its bid by 33.6 from its initial bid of 455 pence to 608 pence, 5 pence more than CSNs bid. (Pankaj Hambarde) According to analysts, Tata was paying too much for the Corus and that debt incurred to acquire the company would affect companys performance and future earnings. (Micheal A.H et al, 2008) Pratap G. (2008) states that Tata Steel adopted an LBO route to finance the acquisition and planned to raise over 10 billion for financing the deal. The entire financing structure was broken into two parts - 3.5 billion raised from Tata Steel and the remaining amount to be raised through LBO structure. The financial statement for both the companies shows that revenues of Corus were three and half times higher than Tata Steel in the year 2006 and will similar net income rate. The deal was financed through equity contributions from Tata Steels 3.88 billion, the consortium was lead by Credit Suisse which financed 45 further joined by ABN AMRO and Deutsche Bank each financing 27.5 of the required 8.12 billion to complete the entire process.(Pankaj Hambarde)
The Tata takeover marked the beginning of the growth of manufacturing sector, providing the industry with necessary push which was essential to facilitate a sustaine GDP growth. Amit Mishra, Secretary General, Federation of Indian Chambers of Commerce and Industry said that the acquisition was a milestone marking the beginning of realization of Indias dream of becoming the third largest economy in the 21st century. (Mahendra Gaur, 2005) The acquisition offered Tata Steels the opportunity for taking advantage of synergies and doubling the present national average earnings before interest, taxation, depreciation and amortization of the new company to about 25. (Great Britain, Parliament, House of Commons, Welsh Affairs Committee, 2009) Adrian and Alison (2008) mentioned that firms can take advantage of synergies between their different operations and product lines. The acquisition fits in with the Tata Steels strategy of achieving global reach in Europe and synergies with low cost intermediaries in India. (Brian and Nandini, Business Week) Through acquisition of Corus in 2007, Tata Steel was able to gain access to Corus Rolling Mills and distribution channels in Europe, while Corus gained access to Tata Steels in house sources of iron ore. The takeover by Tata Steel has led to its prominence in the global steel industry in terms of reach and production.
A senior analyst tracking the group said that the acquisition process is safe at least in terms of investment as Corus was six times bigger than Tata Steel, ranked ninth in the world before acquisition and three times bigger than Tata Steel in production. (Justin and Ramneek, 2008) But due to the recent slowdown or credit crisis, the industry experts viewed the timing of acquisition turning out to be wrong and most of them opined that deal was done at the peak valuation as almost all asset classes started declining from late 2007 onwards.
The acquisition was the biggest by any Indian company of the overseas industry. This placed Indian industry on the global arena with Tata Steel ranking 5th in the list of worlds largest steel manufacturers. Tata Steel with the acquisition of Corus got entry into European market and other synergies also.
Part II
Acquisition is the process when one company takes over another and clearly establishes as the new owner. Legally, the target company ceases to exist the buyers swallows the business and the buyers stock continues to be traded. The process includes purchase of asset, business, share and apportionment of risks. The process of acquisition starts with finding a target company, appointing advisors, negotiating terms, due diligence, exchange of contracts and completion. While finding a new target business, synergy operations, entry into new markets, vertical integration and achieving the strategic objectives of the organization are the important points to consider. (Pankaj Hambarde) Merger and Acquisition perspectives are based on economics, organizational theory, finance and strategy. According to Jensen (1987) market for corporate control is benefiting shareholders, society and the corporate form for organization. Corporate control transactions and the restructuring accompanying the merger and acquisition can be wrenching events in the lives of those involved in organizations managers, employees, customers, suppliers and residents of surrounding communities.
Jensen (1987) states that many factors force the process of acquisition which include deregulation, synergies, economies of scale, and scope taxes, managerial incompetence, and increasing globalization. It is further mentioned that the agency costs associated with conflicts between managers and shareholders over the payout of free cash flow, which is one of the major cause for acquisition, has received little attention. Agency costs are the total costs that arise during the process of corporate strategy which include the costs of monitoring the managerial behavior and other inevitable costs incurred due to the conflicts. Myers and Majluf (1984) argue that financial flexibility can be achieved when a firms manager have better information than the outside investors. The theory explains how debts for stock exchanges reduce the organizational inefficiencies fostered by substantial cash flow how debt can substitute dividend why diversification programs are in the same line of business, why mergers with in an industry and liquidation motivated takeovers will generally create larger gains etc. (Jensen, 1987)
Jensen (1993) mentioned that cash flow in excess of that required funding all projects that have a positive that have a positive net value when discounted at the relevant cost of all, the amount should be returned to shareholders for maximum efficiency instead the managers prefer to fund increased growth through expansion or diversification. The Free Cash Flow theory as mentioned by Jensen (1987) assumes that managers of the firms with unused borrowing power and large free cash flows are more likely to undertake low benefit or even value destroying mergers. Diversification programs generally fit this category, and the theory predicts that they will generate lower gains. Merger and Acquisition benefits shareholders of target companies like premiums in hostile offers exceed 30 on average, in past and presently 50. The acquiring firm shareholders on average earn about 4 in hostile takeovers.
Further it is also reported that managers receive handsome incentives for investing free cash flow for growth diversification in form of increased power, compensation and firm size positively correlated, promotion opportunities are greater in bigger companies, social prestige, diversifying employment risk, management entrenchment. It is further mentioned that firms with positive free cash flow, the theory predicts that stock prices will increase with unexpected increase in payouts to shareholders and decrease with unexpected decreases in payouts.
Coase (1992716) states that businessmen have to take into account the transaction costs while deciding on their ways of doing business. It is also stated transaction costs may prevent large part of economic activity. The various types of transaction costs include negotiating, writing and enforcing agreements contracts costs of opportunistic behavior preventing the same measurement, haggling, search, coordination, checking, etc. The advisors were involved in negotiating terms related to financial strength, nature of the fit, strategic intent, sharing of resources and legal documentation regarding transfer of shares, employees, tangible and intangible assets, liabilities, etc. (Pankaj Hembarde) Transaction costs are favorable in alliances if they involve impediments, are complex, non routine, excessively costly for one party to do it themselves, market opportunity is transitory or uncertain in duration, etc. (Chris Smith)
It is important to mention here that holdup between the negotiations can result in more difficult negotiations and more frequent negotiation, as in case of Tata Steel, investments to improve ex post bargaining positions, distrust and reduced investments in relation specific assets. (Chris Smith) It is further stated that if acquisitions are well planned, executed and necessary precautions are taken for the deal a company can achieve its strategic objective and ensure its continuous growth. Thus, Tata Steel, through acquiring Corus, can confidently target becoming one of the top 3 steel makers in the world by 2015.
The costliest bid, as agreed by analyst, led to re-rating and valuation of the other industries in the Indian market. However, Tata Steel was able to clinch the deal from Brazilian Steel giant CSN that forced Tata Steel to increase its bid by 33.6 from its initial bid of 455 pence to 608 pence, 5 pence more than CSNs bid. (Pankaj Hambarde) According to analysts, Tata was paying too much for the Corus and that debt incurred to acquire the company would affect companys performance and future earnings. (Micheal A.H et al, 2008) Pratap G. (2008) states that Tata Steel adopted an LBO route to finance the acquisition and planned to raise over 10 billion for financing the deal. The entire financing structure was broken into two parts - 3.5 billion raised from Tata Steel and the remaining amount to be raised through LBO structure. The financial statement for both the companies shows that revenues of Corus were three and half times higher than Tata Steel in the year 2006 and will similar net income rate. The deal was financed through equity contributions from Tata Steels 3.88 billion, the consortium was lead by Credit Suisse which financed 45 further joined by ABN AMRO and Deutsche Bank each financing 27.5 of the required 8.12 billion to complete the entire process.(Pankaj Hambarde)
The Tata takeover marked the beginning of the growth of manufacturing sector, providing the industry with necessary push which was essential to facilitate a sustaine GDP growth. Amit Mishra, Secretary General, Federation of Indian Chambers of Commerce and Industry said that the acquisition was a milestone marking the beginning of realization of Indias dream of becoming the third largest economy in the 21st century. (Mahendra Gaur, 2005) The acquisition offered Tata Steels the opportunity for taking advantage of synergies and doubling the present national average earnings before interest, taxation, depreciation and amortization of the new company to about 25. (Great Britain, Parliament, House of Commons, Welsh Affairs Committee, 2009) Adrian and Alison (2008) mentioned that firms can take advantage of synergies between their different operations and product lines. The acquisition fits in with the Tata Steels strategy of achieving global reach in Europe and synergies with low cost intermediaries in India. (Brian and Nandini, Business Week) Through acquisition of Corus in 2007, Tata Steel was able to gain access to Corus Rolling Mills and distribution channels in Europe, while Corus gained access to Tata Steels in house sources of iron ore. The takeover by Tata Steel has led to its prominence in the global steel industry in terms of reach and production.
A senior analyst tracking the group said that the acquisition process is safe at least in terms of investment as Corus was six times bigger than Tata Steel, ranked ninth in the world before acquisition and three times bigger than Tata Steel in production. (Justin and Ramneek, 2008) But due to the recent slowdown or credit crisis, the industry experts viewed the timing of acquisition turning out to be wrong and most of them opined that deal was done at the peak valuation as almost all asset classes started declining from late 2007 onwards.
The acquisition was the biggest by any Indian company of the overseas industry. This placed Indian industry on the global arena with Tata Steel ranking 5th in the list of worlds largest steel manufacturers. Tata Steel with the acquisition of Corus got entry into European market and other synergies also.
Part II
Acquisition is the process when one company takes over another and clearly establishes as the new owner. Legally, the target company ceases to exist the buyers swallows the business and the buyers stock continues to be traded. The process includes purchase of asset, business, share and apportionment of risks. The process of acquisition starts with finding a target company, appointing advisors, negotiating terms, due diligence, exchange of contracts and completion. While finding a new target business, synergy operations, entry into new markets, vertical integration and achieving the strategic objectives of the organization are the important points to consider. (Pankaj Hambarde) Merger and Acquisition perspectives are based on economics, organizational theory, finance and strategy. According to Jensen (1987) market for corporate control is benefiting shareholders, society and the corporate form for organization. Corporate control transactions and the restructuring accompanying the merger and acquisition can be wrenching events in the lives of those involved in organizations managers, employees, customers, suppliers and residents of surrounding communities.
Jensen (1987) states that many factors force the process of acquisition which include deregulation, synergies, economies of scale, and scope taxes, managerial incompetence, and increasing globalization. It is further mentioned that the agency costs associated with conflicts between managers and shareholders over the payout of free cash flow, which is one of the major cause for acquisition, has received little attention. Agency costs are the total costs that arise during the process of corporate strategy which include the costs of monitoring the managerial behavior and other inevitable costs incurred due to the conflicts. Myers and Majluf (1984) argue that financial flexibility can be achieved when a firms manager have better information than the outside investors. The theory explains how debts for stock exchanges reduce the organizational inefficiencies fostered by substantial cash flow how debt can substitute dividend why diversification programs are in the same line of business, why mergers with in an industry and liquidation motivated takeovers will generally create larger gains etc. (Jensen, 1987)
Jensen (1993) mentioned that cash flow in excess of that required funding all projects that have a positive that have a positive net value when discounted at the relevant cost of all, the amount should be returned to shareholders for maximum efficiency instead the managers prefer to fund increased growth through expansion or diversification. The Free Cash Flow theory as mentioned by Jensen (1987) assumes that managers of the firms with unused borrowing power and large free cash flows are more likely to undertake low benefit or even value destroying mergers. Diversification programs generally fit this category, and the theory predicts that they will generate lower gains. Merger and Acquisition benefits shareholders of target companies like premiums in hostile offers exceed 30 on average, in past and presently 50. The acquiring firm shareholders on average earn about 4 in hostile takeovers.
Further it is also reported that managers receive handsome incentives for investing free cash flow for growth diversification in form of increased power, compensation and firm size positively correlated, promotion opportunities are greater in bigger companies, social prestige, diversifying employment risk, management entrenchment. It is further mentioned that firms with positive free cash flow, the theory predicts that stock prices will increase with unexpected increase in payouts to shareholders and decrease with unexpected decreases in payouts.
Coase (1992716) states that businessmen have to take into account the transaction costs while deciding on their ways of doing business. It is also stated transaction costs may prevent large part of economic activity. The various types of transaction costs include negotiating, writing and enforcing agreements contracts costs of opportunistic behavior preventing the same measurement, haggling, search, coordination, checking, etc. The advisors were involved in negotiating terms related to financial strength, nature of the fit, strategic intent, sharing of resources and legal documentation regarding transfer of shares, employees, tangible and intangible assets, liabilities, etc. (Pankaj Hembarde) Transaction costs are favorable in alliances if they involve impediments, are complex, non routine, excessively costly for one party to do it themselves, market opportunity is transitory or uncertain in duration, etc. (Chris Smith)
It is important to mention here that holdup between the negotiations can result in more difficult negotiations and more frequent negotiation, as in case of Tata Steel, investments to improve ex post bargaining positions, distrust and reduced investments in relation specific assets. (Chris Smith) It is further stated that if acquisitions are well planned, executed and necessary precautions are taken for the deal a company can achieve its strategic objective and ensure its continuous growth. Thus, Tata Steel, through acquiring Corus, can confidently target becoming one of the top 3 steel makers in the world by 2015.
No comments:
Post a Comment