Mergers and Acquisitions – Case Study March 31, 2011Posted by Chetan Chitre in Mergers & Acquisitions.
Tata Corus Deal –
A good summary on the Tata Corus Deal is available online from London Business School. (Pl. click here)
It is important to understand the Deal Rationale for both Corus and Tata Steel. Also note that the deal rationale has to be understood in keeping in mind the history of both the Companies and the emerging Global Steel scenario.
So, the low levels of profitability and continued losses to the tune of 1.5 billion pounds in FY-2001 of Corus was one of the important reasons why it was looking for getting into the partnership with some low-cost steel producer. It realized that the reduction in losses in subsequent period was only on account of the excessive rise in steel prices, which may not be sustainable. Thus for long-term sustainability it had to do some fundamental re-thinking.
For Tatas, the ambition to be among the leading players in the world, entry into the European markets, etc. were major motivating factors for the deal. However, the most important issue perhaps was the Technology and opportunity to move up in the value chain in the auto and aviation industry.
An important aspect of the deal process was entry of CSN in the picture. This not only increased the value of the Deal by almost 50% but also led to the entire process getting prolonged. One has to appreciate transparency of the process and the eventual benefit of this going to the retail shareholders of Corus. The important role played by the legal and regulatory framework is clearly seen.
While the experts continue to debate over the valuation logic – what is clearly seen from this deal is the importance of perceptions in the valuation process. While the original management of the Company had almost sold the Company at 455 pence a share, there were at-least two other players in the market who thought that the value of the company was much higher. Beauty lies in the eyes of the beholder.
Also note here that the valuation perception was influenced by the fact that the steel prices during the period of the deal had shown an impressive rise. Different players would have different perceptions about the sustainability of the price rise and may therefore have different views on valuation.
Synergies with current operations of the buyer would also influence valuation arithmetic in important ways. If the synergies are high or strategic fit is strong, a buyer may offer better value than the other.
The way the Tatas Financed the Deal is also interesting. Note that out of the total Deal Value of USD 13 bn, the Tatas brought in only about USD 7 bn by way of various debt, equity and mezzanine instruments. The balance USD 6 bn was a non-recourse debt taken on the basis of the cash-flows of the target Company itself. The impact of this debt on the Balance-sheet of Tata Steel was further shielded by raising the debt in subsidiaries created for the purpose.
Bharti-MTN Deal –
This was another deal, which if successful would have made an excellent case study. However, possibly the deal failed because it would have raised a lot of regulatory issues. A good summary of the deal structure is available in the report by Angel Broking – (Pl. click here)
M&A Statistics –
For a summary of Global M&A statistics please click here