Merger & AcquisitionOf

Steel industry

Merger

• Merger is a financial tool that is used for enhancing long-term profitability by expanding their operations.

• Mergers occur when the merging companies have their mutual consent as different from acquisitions, which can take the form of a hostile takeover. 

• Mergers may be horizontal, vertical, conglomerate ,depending or the nature of the merging companies.

Acquisition

• Acquisitions or takeovers occur between the bidding and the target company.

• There may be either hostile or friendly takeovers.

• Reverse takeover occurs when the target firm is larger than the bidding firm.

• In the course of acquisitions the bidder may purchase the share or the assets of the target company.

Tata

• The Tata Iron and Steel Company Limited was formed in 1907 at Mumbai.

• The Company manufactures rails, fishplates, bars, light structural, heavy structural, plates, black sheets, galvanised sheets, tin bars

Corus

• Corus is a british steel giant, having operation in four continent with a presence more than in 45 countries.

• Corus Construction & Industrial (CCI), a business unit of Corus, has steel manufacturing facilities in Scunthorpe, Teesside, Scotland and France.

Arcelor

• Arcelor was created in 2002 through merger of three major European steel companies, Arbed (Luxembourg), Aceralia (Spain) and Usinor (France). The idea was to leverage their technical, industrial, and commercial resources in order to create a global leader in the steel industry.

Mittal ISG

• Mr. Lakshmi Mittal founded Mittal Steel in 1976 in India. After a few years, Mr. Mittal found that it would take him long to grow to a significant size and wanted a way to grow fast.

• In 2005, when Mittal Steel acquired the American steel company, ISG, it overtook Arcelor as the world’s largest steel maker.

Hindalco acquired Novalis

• Aditya Birla Group’s Hindalco Industries Limited, India’s largest non-ferrous metals company, acquired the Canada based firm Novalis in an all-cash transaction for $6 billion.

• Hindalco, along with Novelis, was the world’s largest aluminium rolling company, one of the biggest producers of primary aluminium in Asia, and India’s leading copper producer.

OBJECTIVE

1. To study the main rationale behind the merger and acquisition in Indian steel industry.

2. To study the synergies of major companies in Indian steel industry.

3. To find out the value creation of major merger and acquisition in Indian steel industry.

NEED ANALYSIS

• This case study has three main objective which gives emphasis on finding out main reason which enforces these firms to acquire.

• Along with that, need to assess the financial performance of Company after three year of merger and acquisition is felt.

• There has been several M&A has been witnessed by Indian Corporate but Tata Corus deal is the biggest deal in Indian history of Merger & Acquisition.

Cont………..

• After three year of the deal there is need to assess the extent of success of this biggest ever deal in steel industry.

• Though it has been too early to assess percentage of success and failure, but for in sighting the researcher and managers.

• This study have been conducted to find out the post merger and pre merger scenario of these companies along with the whole steel industry.

SCOPE OF THE STUDY

• The study is meant to find out the history, background and current status of the company who undergone the process of merger and acquisition. so that it can enlighten the reader as well as the researcher.

RESEARCH METHODOLOGY

• Exploratory Research is going to be held in this project as we are going to study the synergy model based on the balance sheets, cash flow and annual reports, to find out the value creation of the company.

• Secondary data would be taken for the study of the models as taking primary data is not possible.

• Recent secondary data has been taken for accomplishing the project.

Data Sources

• Secondary Data

– Internet sources

– Business Journals (ICFAI JOURNAL ON M & A)

– News papers

– Company websites

– Annual reports of companies

RATIONALE BEHIND THE TATA-CORUS DEAL

• The initial motive behind the completion of the deal was not Corus’ revenue size, but rather its market value.

• As the management has stated that the basic reason for supporting this deal were the expected synergies between the two entities.

Cont……..

• This deal is a 100% acquisition and the new entity will be run by one of Tata’s steel subsidiaries.

• Corus is larger in size compared to Tata.

RATIONALE BEHIND THE HINDALCO-NOVELIS DEAL

• Hindalco’s rationale for the acquisition is increasing scale of operation, entry into high—end downstream market and enhancing global presence.

•  By acquiring Novelis, Hindalco aimed to achieve its long-held ambition of becoming the world's leading producer of aluminum flat rolled products.

Cont…..

•  Novelis was the leader in producing rolled products in the Asia-Pacific, Europe, and South America and was the second largest company in North America in aluminum recycling, metal solidification and in rolling technologies worldwide.

• Novelis had the most modern technology in the industry and efficiently produced high-quality products in several countries across the world.

Rationale behind Arcelor Mittal

• The steel industry is highly fragmented, the top 5 manufacturers in the steel industry account for less than 25 percent of the market (to put that in perspective, the corresponding figure for the automotive industry is 73 percent).

• LN Mittal believes that the consolidation will end with three of four major companies dominating the industry around 2010.

Cont…….

• Bigger steel manufacturers have better bargaining powers against customers (such as as auto manufacturers) and against suppliers (iron ore).

• Consolidation helps in comapanies improving their sourcing of raw materials; access to more markets, better utilization, more flexibility in production scheduling and better efficiency.

synergy

WHAT IS IT?

Popular definition: 1 + 1 = 3

Roundabout definition: If am I willing to pay 6 for the business market-valued at 5 there has to be the Synergy justifying that

More technical definition: Synergy is ability of merged company to generate higher shareholders wealth than the standalone entities

Cont……

Synergy is the additional value that is generated by combining two firms, creating opportunities that would not been available to these firms operating independently. synergy can be categorize into two groups.

1. Financial synergy

2. Operating synergy

Synergy of Arcelor-Mittal

• Gains from synergy =   $6,959.74 • Most that bidder firm can bid for target = $20,424.11• % Premium over the market price = 51.69%

After the merger of Arcelor-Mittal the gains which is shown from the synergy are $6959.74.The bidding firm can bid for the target which is quite high amount and the premium received by the company is 51.69% over its market price

Synergy of Tata-Corus

• Gains from synergy =   $7,481.79 • Most that bidder firm can bid for target = $3,856.18• % Premium over the market price = -206.36%

The company has gained $7481.79 from the synergy. The bidder firm has to bit $3856.18 for achieving its target and the premium that is received by the firm is 206.36% over its market price

Synergy of hindalco-novalis

• Gains from synergy =$23,321.92• Most that bidder firm can bid for target =$34,381.35• % Premium over the market price =210.88%

The company has gained $23321.92 from the synergy which was formed by merging the firms. The bidding firm has to bid $34381.35 for the target firm and the premium received over the market price is 210.88%

Hindalco Novalis

Analysis ,Findings & Recommendation

Current & Quick Ratio

year Current ratio

2006 1.12

2007 1.22

2008 1.08

2009 1.17

2010 1.28

year Quick ratio

2006 0.73

2007 .0.66

2008 0.53

2009 0.88

2010 0.39

Current & Quick Ratio

• Current ratio of Hindalco’s consolidated balance sheet after merger its decreases and then slowly increasing because of cost management & operational excellence. As the current assets of companies increasing more rapidly than the current liabilities.

• Quick ratio is also decreasing but in consolidated balance sheet it’s less than the 1:1 ratio of thumb rule. As the proportion of inventories is increasing in current assets while the current liabilities more than current assets. That’s why the quick ratio is decreasing.

Operating profit & net profit ratio

year Operating profit

2006 23.47 %

2007 22.94%

2008 11.06 %

2009 4.50%

2010 16.05 %

year NPR

2006 13.03%

2007 13.90%

2008 3.65%2009 0.73%

2010 6.46%

Operating profit & Net profit ratio

• There is decline in the operating profit ratio because of the increase in operating profit as well the net sales of the company. In 2009 the sales of the company declined and operating profit also declined and in 2010 it again achieved a high ratio with market.

• Net profit has continuously decreased from 2007 to 2009 and it’s regained a height in 2010. While the sales is appreciated from 07 to 09 but declined in 2010.

Debt Equity Ratio & EPS

year DE RATIO

2006 0.67

2007 0.66

2008 1.87

2009 1.80

2010 1.11

year EPS

2006 16.02

2007 26.73

2008 17.04

2009 3.21

2010 22.17

Debt Equity Ratio & EPS

• Debt to equity ratio is increasing its because of Novelis acquisition and increasing debt conditions. Due to the loan repayment its decreases in 2009-2010.

• EPS is increasing except 2009 when the net profit is extremely lower than previous and last year. Share no. is also increases after merger and acquisition. Market capitalisation has immensely increases as the Hindalco acquires the Novelis. In recession the market capital was decreases due to the lower share price of company.

ROE & ROCEyear ROE

2006 16.85%

2007 20.96%

2008 12.69%

2009 3.07%

2010 18.22%

year ROCE

2006 13.69 %

2007 17.07%

2008 8.67%

2009 1.29%

2010 14.22%

ROE & ROCE

• The net profit is increasing in trend except in 2009 when recession came its on lowest slot. So the return on equity has changed as per the net profit and equity capital which is increases after merge.net profit of company was minimum in 2009.

• Capital employed was maximum in 2008 and then decreases in 2009 again increases in 2010, so does is with net profit of the company, it was minimum in 2009 and maximum in 2010 and as the ROCE is the ratio of net profit to capital employed, so it has similar impact on the ROCE ratio of company’s consolidated balance sheet.

Asset & Debtor turnover Ratio

year DTR

2006 11.16

2007 13.30

2008 12.46

2009 13.13

2010 15.48

year TAR

2006 0.79

2007 0.93

2008 0.74

2009 0.57

2010 0.57

Asset & Debtor turnover Ratio

• Hindalco has continuously increased its DTR to increase its operational efficiency and its profit. As its shows the company’s ability to recover the amount that is market due or in other words the company has sold on credit.

• As we have seen in the data the total assets turnover ratio after the merger has shows a decline trend in past years. This is because the total assets were reduced and the sales were also decreasing. Sales of company have declined as the shipment of novelis has decreased.

Findings

• Hindalco’s acquisition of Novelis is forward kind of integration. So benefit was obvious. As Novelis was initially a problem child so company is growing with a slow pace.

• Due to the decrease prices of LME and the 2% decrease in the shipment of Novelis the sales of Hindalco decreases.

• Cost synergy has achieved as the cost of sales has decreases by significant amount.net profit and operating profit has shown a growth except the year 2009 when the recession came, it shows a decline, otherwise its increases.

• In 2009-10 the net profit decreases by 8% in comparison to last year, and the operating profit increases by 2.28%.

• Due to the effect of external demand and supply the company has fluctuating ratios. But as the synergy is expected the company is about to increase at the great pace

Value Addition

• Size

• Scale

• Cutting edge technology

• Explosive combination

• Market expansion with increasing customer base

Recommendation

• Company need to focus more on the cost management process to increase the profit and decrease the cost of company.

• Company should keep focussing on cost optimization, operational excellences and its integrated business approach to ensure its long term success.

• With the initiatives, strategic measures, realignment of product line to the revised demand scenario, closure of some capacity, pruning of overhead costs and prudent inventory management altogether the expected synergy can be achieved soon with this merger.

• With the expecting benefit of synergy company should focus more on capacity expansion of hindalco in fastest growing market of asia and south America.

Tata-Corus

Analysis, Recommendations

and Findings

Current and Quick Ratioyear Current ratio

2006 0.71

2007 1.69

2008 3.81

2009 0.91

2010 1.12

year Quick ratio

2006 0.30

2007 1.37

2008 3.52

2009 0.57

2010 0.76

Analysis Current & Quick Ratio Tata-Corus

Current Ratio:The standard current ratio value is 2:1 However it does not mean so that higher current ratio means good company profile. It may signify higher unused cash inventory which again may result in inventory carrying cost . As we have seen in the financial years that current ratio of the Tata steels is fluctuating in the period of five years first increases then decreases, It doesn't means that any increase or decrease in current ratio reflects the financial performance of the company. The current ratio decreases in the year 2009 as we have seen that current assets of the company decreases this year which leads to decline in current ratio.

Quick Ratio: The standard Quick ratio is 1:1. There is a huge difference between the quick ratio of the company .It also shows the decreasing trend .In the year 2008 there was high unutilized cash, but for the financial year 2009-10 the cash was balanced .

Operating and Net Profit Ratioyear Operating profit

2006 38.88 %

2007 39.61%

2008 41.94 %

2009 37.68%

2010 35.70 %

year NPR

2006 22.78%

2007 23.53%

2008 23.43%2009 21.09%

2010 19.96%

Analysis Operating Profit & Net Profit Tata-Corus

Operating Profit:There is an increase in operating profit of Tata Steels up to 2008 this is because after the merger there sales figure, the EBIT value of the company increased as we can see the trend above. Whereas, in the year 2009-10, the value of the operating profit starts declining, as we know that lower operating profit ratio indicates higher efficiency of the firm. So, on the basis of the calculated data we can say that the operating efficiency of Tata Steels has actually increased for the current year with a comparison of 2008 and 2009-10.

Net Profit:We can see that there is a fluctuation in the Net Profit Ratio. Actually, it indicates the firm’s ability to transfer its sales into the net profit. So, here analyzing the consecutive the five years data we can see that the profitability of Tata Steels has actually decrease in 2009-10 as compared to the initial years of merger. 

Debt Equity Ratio & EPS

year DE RATIO

2006 0.25

2007 0.68

2008 1.07

2009 1.31

2010 0.68

year EPS

2006 63.35

2007 72.74

2008 63.85

2009 69.70

2010 56.37

Analysis Debt Equity Ratio & EPS Tata-Corus

Debt Equity Ratio: Here we can see that in both debt equity ratio and in long term debt equity ratio has increased from 2006-09 which is not favorable for the company as it indicates poor performance of the company whereas in 2010 the ratio decreases which indicates good sign.

EPS:The earning per share of the company increased which is a good for the company. Whereas in 2010 the EPS has reduced which does not indicates the good sign for the company, this decline may be because the earnings were reduced in 2010.

ROE & ROCEyear ROE

2006 36.44%

2007 31.19%

2008 20.42%

2009 19.87%

2010 11.00%

year ROCE

2006 43.72 %

2007 27.71%

2008 17.11%

2009 15.01%

2010 13.06%

Analysis ROE & ROCE Tata-Corus

ROE: ROE is defined as the amount of the net income retained as a present age of shareholder equity .Return on equity measures a corporation profitability by reviling how much profit a company generates with the money shareholders have invested. Over the years Tata Steels has been witnessing a downfall in its ROE, a fact which is also witnessed in the S/E ratio. It is a tool used to compare the profitability among its competitors. 

ROCE:ROCE is the ratio that indicates the efficiency and profitability of the company’s capital investments. Over the years it has reduced because of slowdown as well as huge inventory of stocks and new plants.

Total Asset & Turnover Ratioyear TAR

2006 1.24

2007 0.74

2008 0.43

2009 0.43

2010 0.40

year DTR

2006 26.99

2007 29.81

2008 33.45

2009 41.29

2010 46.58

Analysis Total Asset & Turnover Ratio Tata-Corus

Total Asset Ratio:As we have seen in the data the total assets turnover ratio after the merger has shows a decline trend in past years. This is because the total assets were reduced and the sales were also decreasing.

Turnover Ratio :As its shows the company’s ability to recover the amount that is market due or in other words the company has sold on credit. It is very important for any company to calculate this ratio as depending on that the company can decide about its current position to recover the receivables.

Findings

Tata-Corus:• There is a decline in the gross profit ratio after 2008, as demand of steels starts reducing at a

faster pace.• The debtors turnover ratio of the company is increasing in the last 5 years, which indicates

the effectiveness of the collection Policy adopted by the company.• The Debt-Equity ratio of the company is high in the financial year 2008-09 it means that a

company has been aggressive in financing its growth with debt. If a lot of debt is set to finance increased operations ,the company generates more earnings that it would have without this outside financing. If this were to increase the earnings by a greater amount than the debt cost, then the shareholders benefit as more earnings are being separate among the same amount of shareholders. The cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle.

• The fluctuations in the EPS shows the volatility of the market.

 

 

Recommendation

Tata-Corus:• The company should lay emphasis on the proper utilization of cash, so that the cash

is managed and utilized in a proper manner.

• The company should lay emphasis on the reduction of the cost while following economies of scale which enhances the productivity and increases the demand.

ARCELOR-MITTAL

Analysis Finding and Recommendation

Current & Quick Ratio

Year Current Ratio

2008 1.44

2009 1.39

2010 1.38

Year Quick Ratio

2008 0.60

2009 0.68

2010 0.75

Analysis Current and Quick Ratio Arcelor-Mittal

Current Ratio:The standard current ratio is 2:1 However it does not mean so that higher current ratio means good company profile. It may signify higher unused cash inventory which again may result in inventory carrying cost . As we have seen in the financial years that current ratio of the company is fluctuating in the period of three years first increase then decreases, It does not means that any increase or decrease in current ratio reflects the financial performance of the company. The current ratio decreases in the year 2009-10 as we have seen that current assets of the company decreases this year which leads to decline in current ratio.

Quick Ratio:As per the investor norms the Quick ratio is 1:1. There is a huge difference between the quick ratio of the company .It also shows the increasing trend.

Operating & Net ProfitYear Operating Profit

2008 11.53%

2009 (2.50)%

2010 5.07%

Year NPR

2008 9.84%

2009 0.19%

2010 4.23%

Analysis Operating & Net profit Arecelor-Mittal

Operating Profit :There is an increase in operating profit of Arcelor-Mittal up to 2008 this is because after the merger there sales figure, the EBIT value of the company increased as we can see the trend above. Whereas, in the year 2009-10, the value of the operating profit starts declining, as we know that lower operating profit ratio indicates higher efficiency of the firm. So, on the basis of the calculated data we can say that the operating efficiency of the company actually increased for the current year with a comparison of 2008 and 2009-10.

Net Profit Ratio :We can see that there is a fluctuation in the Net Profit Ratio. Actually, it indicates the firm’s ability to transfer its sales into the net profit. So, here analyzing the consecutive the three years data we can see that the profitability of the company has actually decrease in 2009-10 as compared to the initial years of merger. 

Debt Equity & EPS Ratio

Year DE Ratio

2008 34.17

2009 6.13

2010 18.17

Year EPS

2008 18.19

2009 0.19

2010 4.81

Analysis Debt Equity & EPS Ratio Arcelor-Mittal

Debt Equity Ratio: Here we can see that in both debt equity ratio and in long term debt equity ratio in 2008 was 34.17, this is because the debts were very high and our equity shareholders were very low. Whereas in 2009 the company is in good position as our stakeholders were increased and in 2010 the debts further increased because the equity shareholders were further reduced.

EPS Ratio :The earning per share of the company increased which is a good for the company. Whereas in 2009-10 the EPS has reduced which does not indicates the good sign for the company, this decline may be because the earnings were reduced in 2009-10.

ROE & ROCEYear ROE

2008 0.189

2009 0.001

2010 0.048

Year ROCE

2008 0.174

2009 (0.052)

2010 0.023

Analysis ROE & ROCE Arcelor-Mittal

ROE: ROE is defined as the amount of the net income retained as a present age of shareholder equity. Return on equity measures a corporation profitability by reviling how much profit a company generates with the money shareholders have invested. Over the years has been when company is witnessing a downfall in its ROE, a fact which is also witnessed in the S/E ratio. It is a tool used to compare the profitability among its competitors.

ROCE:ROCE is the ratio that indicates the efficiency and profitability of the company’s capital investments. Over the years it has reduced because of slowdown as well as huge inventory of stocks and new plants.

Total Asset & Debtor Turnover Ratio

Year Total Asset Ratio

2008 0.79

2009 0.46

2010 0.54

Year Debtor Turnover Ratio

2008 23.17

2009 35.68

2010 29.40

Analysis Total turnover asset & Debtor Turnover Ratio Arcelor-Mittal

Total Asset Turnover Ratio :As we have seen in the data the total assets turnover ratio after the merger has shows a decline trend in past years. This is because the total assets were reduced and the sales were also decreasing .

Debtor Turnover Ratio : As it shows the company’s ability to recover the amount that is market due or in other words the company has sold on credit. It is very important for any company to calculate this ratio as depending on that the company can decide about its current position to recover the receivables. 

Findings

Arcelor-Mittal:• The gross profit ratio of the company reduces in the year 2009,as our sales were

reduced in this financial year and then increases in the year 2010.

• The debtors turnover ratio of the company increases in the year 2009 and then reduces in the year 2010, as the Investment of the investors reduced due to reduction in sales .

• The debt-equity ratio of the company reduces in the year 2009, which is not good for the company and then the ratio increases in the year 2010.

Recommendations:

Arcelor-Mittal:• An innovative approach combining operational and financial skills and all

encompassing view of the companies operations will help in identifying and implementing strategies that generates short term cash.

• The companies should lay emphasis on the increase in demand of steels which leads to increase in sales and profitability.

LIMITATIONS OF THE STUDY

• The collected data about the study could be biased as it is only limited to the case of three companies.

• The present data is confined to the base of secondary data only and the findings may not be applicable to the other companies of different countries.

• Culture, values and ethics vary from company to company and there is every possibility that over time and space findings of today may become invalid tomorrow.