Land Alloy!

• At over $12 billion, it's the largest M&A deal by an Indian business group
  
• Tatas paid 608 pence a share for Corus, a third more than its initial bid
  
• Tata Steel becomes the fifth largest steelmaker in the world
  
• The deal adds 19 million TPA to Tata Steel's installed capacity
  
• The deal values Corus at 9 times its EBIDTA, or nearly 50 per cent higher than Mittal-Arcelor
  
• Tata Steel feels it can extract synergies worth $300-315 mn a year
  
• Tata Steel can export slabs to Corus' units to convert them into high-margin, value-added products
  
• At a valuation of $710 per tonne, the deal cost is lower than the cost of setting up a new greenfield plant
  
• Lower global steel prices this year can upset Tata Steel's calculations

The Synergy Trap

Consider how the operational synergies will work in the Tata Steel-Corus case. For example, it makes immense sense for Tata Steel to send slabs to Corus' units in Europe to convert them into value-added finished products to be sold in the European markets. But Tata Steel's plan to build a slab-making plant in Orissa has just fructified, and will take four years to be completed. "That's the biggest threat...no one seems to be able to build steel plants in India these days. If Tatas can't build one, they can't supply slabs to Corus," explains Robert Jones, editor, Metal Bulletin. "So the Tatas will be dependent on Corus to somehow continue to make profits."

his may well happen if global steel prices stay firm, or even rise from the current levels. Or if, as Muthuraman says, the annual global steel demand continues to grow at an average of over 5 per cent, as it did in 2001-06. However, analysts are predicting a 10 per cent fall in steel prices this year, along with other metals. Basically, they feel this is the near-end of the crest in the current price cycle and it's time for steel to cool down. As Jones puts it, "Anything can happen. Steel demand in the UK and Europe can go into serious decline, prices of raw materials can go up, electricity and energy costs can rise. Corus is anyway a fragile company working with very thin margins."

Yet another problem area in multi-billion cross-border M&As relate to the integration process between the two merging entities. As a general rule, a 2004 analysis by Albert Banal-Estanol and Jo Seldeslachts argued, "concrete discussions and actions during the integration phase are likely to be plagued by confusion and misunderstandings. A prime example of this is the much touted merger between Daimler-Benz and Chrysler in 1998. The combined entity expected annual synergies of $1.4 billion; it went on to incur a loss of $5.8 billion in 2001".

One major issue there related to the communication gap between the German and American executives. As a Daimler-Chrysler executive revealed in 2001, "In Europe, and particularly Germany, the expectation was that you tell them what you want, then they'll act that way. It was completely different from what we were doing at Chrysler, where we had a more in-depth way to communicate with our employees. But we didn't realise it until it was too late that we couldn't communicate the same thing and expect that everyone would receive it the same way."

Therefore, Ratan Tata was right when he said that Muthuraman, who's responsible for the integration, "will have his hands full". He's still confident that Tata Steel will sail through the initial hiccups, saying the success of the takeover has to be gauged over a longer period—unlike the stockmarket that damns a company the year it makes a loss and applauds it when it makes extraordinary profits the next year. And even as he is grappling with Tata-Steel and Corus, he isn't ruling out the possibility of another big takeover. "The principle guiding us is that if you want to grow and can't do so in your country, you go to other geographies," he said. So, is Ratan Tata looking West or East now? Probably, it's North.