A Case Study of Tata and Corus Merger

CASIRJ Volume 7 Issue 1 [Year - 2016] ISSN 2319 9202
A CASE STUDY OF TATA AND CORUS MERGER
KOMAL SHARMA
Dev Samaj College for Women Sector 45B, Chandigarh.
Prof. Vijay kaushal

ICDEOL
Department of Commerce
H.P University,Shimla
Abstract
Mergers are not a new phenomenon. After becoming popular in the 1970s and then waning,
mergers and acquisition have been on the increase since 1995, when poor stock markets
discouraged international investors but created a favorable environment for companies looking to
expand through acquisition. In India, the concept of mergers and acquisitions was initiated by the
government bodies. Some well known financial organizations also took the necessary initiatives
to restructure the corporate sector of India by adopting the mergers and acquisitions policies. The
Indian economic reform since 1991 has opened up a whole lot of challenges both in the domestic
and international spheres. The increased completion in the global market has prompted the
Indian companies to go for mergers and acquisitions as an important strategic choice.
In the present study, Tata and Corus merger, the Indias largest merger has been
studied. The objective is to study the impact of the merger on the Tata steel company. The
results shows that there is no significant change in the short run but the merger has a long
term effect on the company.
Key words: Mergers, Acquisitions, Synergies, Ratios
INTRODUCTION
Any business, which regards itself as a closed community will never develop its full potential.
The ability of the public company and private individuals alike to expand their business activities
by acquisitions and when appropriate to take advantage of the opportunity to sell to others is
fundamental to the dynamism of the capitalist system. Mergers are not a new phenomenon. After
becoming popular in the 1970s and then waning, mergers and acquisition have been on the
increase since 1995, when poor stock markets discouraged international investors but created a
favorable environment for companies looking to expand through acquisition.
The process of mergers and acquisitions has gained substantial importance in todays corporate
world. This process is extensively used for restructuring the business organizations. In India, the
concept of mergers and acquisitions was initiated by the government bodies. Some well known
financial organizations also took the necessary initiatives to restructure the corporate sector of
International Research Journal of Commerce Arts and Science

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India by adopting the mergers and acquisitions policies. The Indian economic reform since 1991
has opened up a whole lot of challenges both in the domestic and international spheres. The
increased completion in the global market has prompted the Indian companies to go for mergers
and acquisitions as an important strategic choice. The trends of mergers and acquisitions in India
have changed over the years. The immediate effects of the mergers and acquisitions have also
been diverse across the various sectors of the Indian economy.
Merger and Acquisition defined

The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate
strategy, corporate finance and management dealing with the buying, selling and combining of
different companies that can aid, finance, or help a growing company in a given industry grow
rapidly without having to create another business entity.
Acquisition
An acquisition, also known as takeover or a buyout is the buying of one company (the target)
by another. An acquisition may be friendly or hostile. In the former case, the companies
cooperate in negations, in the latter case, the takeover target is unwilling to be bought or the
targets board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a
smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management
control of a larger or longer established company and keep its name for the combined entity.
This is known as reverse takeover.
Merger
In business or in economics a merger is a combination of two companies into one larger
company. Such actions are commonly voluntary and involve stock swap or cash payment to the
target. Stock swap is often used as it allows the shareholders of the two companies to share the
risk involved in the deal. A merger can resemble a takeover but result in a new company name
(often combining the names of the original companies) and in new branding.
Review of literature
Joy et al. (1977) examined the adjustment of stock prices to announcements of presumed
unanticipated changes in quarterly earnings and found that the market adjusts slowly to the
information contained in quarterly earning reports. In India, Mallikarjunappa (2004) tested the
semi strong form of efficiency of Indian capital market taking a sample of 30 BSE listed
companies that made earnings announcement during Jan 2000 to May 2003. He used event study
methodology to measure abnormal returns for 30 day window around the earnings announcement
and reported that there was no statistical evidence to show that Indian capital market was
efficient in its semi strong form.
Rau and Vermaelen (1998) examine long term performance of biding firms in mergers and
tenders between Jan 1980 and December 1991. The sample consists of 3169 mergers and 348
tender offers. The abnormal returns of bidding firms adjusted on the basis of book to market ratio
and size are computed for 36 months (3 years) after the merger completion. The procedure
employed by Barber and Lyon (1997) and Kothari and Warner (1997) are used to calculate the

post merger long term abnormal returns of the firm. The sample was divided into three categories
- glamour, neutral and value firm based on book to market ratio and size. The results show that
glamour bidders significantly earn negative abnormal returns of - 17 % in mergers and positive
abnormal returns 4 % in case of tender offers. Among the value acquirers, the bidder firms earn
statistically significant positive abnormal returns of 15.5 % while bidders in mergers earn
abnormal returns of 7.64 %.
Pawaskar (2001) examined the post merger operating performance of acquiring firms in India.
The sample consisted of 36 firms engaged in merger over the period from 1992-1996. For
comparing the performance of the firms involved in merger with that of non merger forms a
sample of non acquiring firms has been matched on the basis of size and industry. Multiple
regression analysis has been done to identify the factors which have led to changes in
profitability of the firms. The results show that mergers do not lead to improved performance and
there is persistence profitability of firms indicating it is not affected by mergers.
Sudarsanam, P.S. (1997) studied that mergers and acquisitions are undertaken by
companies to achieve certain strategic and financial objectives. They involve the bringing
together of the two organizations with often disparate corporate personalities, cultures and
value systems. This book provides a unified view of the organizational, legal, regulatory
and financial aspects of mergers and acquisitions. It provides a framework for the
evaluation. The regulatory and stock market environment in which mergers take place is
described. The book examines the evidence for the failure of the acquisitions and the likely
causes of the failure in addition with cross border mergers, the rationale behind them, the
recent trend in and the barriers mergers. It ends with an introduction to strategic alliances.
OBJECTIVES OF THE STUDY
To study the effect of mergers and acquisitions on the profitability of the companies
RESEARCH METHODOLOGY
Research means search for knowledge through scientific and systematic methods for gaining
useful information. It includes enunciating the problem, formulating the hypothesis, collection
data, analyzing the facts and reaching to conclusions. The study of the existing experiments will
be based on the case study method of research, for which both the primary and secondary
information will be used. Case study is a research methodology based on an in-depth study of a
single individual, group or event. Case studies may be descriptive or explanatory.
It involves an in-depth examination of a single instance or event: a case. It investigates a
phenomenon within its real-life context. Case studies research means single and multiple case
studies, can include quantitative evidence, relies on multiple sources of evidence and benefits
from the prior development of theoretical propositions.
The financial information from annual reports, various other reports and documents will be used.
Apart from this, to generate primary information, questionnaire and interview schedule may be
used.
The analysis will be done on the basis of primary and secondary data available and with the help
ratio analysis and paired t-test for comparison. 5 ratios have been used for this purpose. The
ratios used are Earning per Share, Profit after Tax, Current Ratio, Debtors Turnover ratio, Return
on Net Worth.
Tata and Corus merger

Tata acquired Corus, which is four times larger than its size and the largest steel producer in the
U.K. The deal, which creates the world's fifth-largest steelmaker, is India's largest ever foreign
takeover. Over the past five years, Indian companies had made global acquisitions for over $10
billion. The Tata bid ($12 b) almost equals this amount. Most of them have averaged $100 to 200
million.
Tata acquired Corus on the 2nd of April 2007 for a price of $12 billion making the Indian
company the worlds fifth largest steel producer. This acquisition process has started long back
in the year 2005. In 2005, when the deal was started the price per share was 455 pence. But
during the time of acquisition held in 2007, the price per share was 608 pence, which is 33.6%
higher than the first offer. For this deal Tata has financed only $4 billion, although the total price
of this deal was $12billion.
The Merger Deal

The deal (between Tata and Corus) was officially announced on April 2nd, 2007 at a price of 608
pence per ordinary share in cash. This deal is a 100% acquisition and the new entity will be run
by one of Tatas steel subsidiaries. As stated by Tata, the initial motive behind the completion of
the deal was not Corus revenue size, but rather its market value. Even though Corus is larger in
size compared to Tata, the company was valued less than Tata (at approximately $6 billion) at
the time when the deal negotiations started. But from Corus point of view, as the management
has stated that the basic reason for supporting this deal were the expected synergies between the
two entities. Corus has supported the Tata acquisition due to different motives. However, with
the Tata acquisition Corus has gained a great and profitable opportunity to make an exit as the
company has been looking out for a potential buyer for quite some time.
The total value of this acquisition amounted to 6.2 billion (US$12 billion). Tata Steel the
winner of the auction for Corus declares a bid of 608 pence per share surpassed the final bid
from Brazilian Steel maker Companhia Siderurgica Nacional (CSN) of 603 pence per share. The
official declaration of the completed transaction between the two companies was announced to
be effective by Court of Justice in England and Wales and consistent with the Scheme of
Arrangement of the Tata Steel Scheme on April 2, 2007. According to the Scheme regulations,
Tata Steel is required to deliver a consideration not after than 2 weeks following the official date
of the completion of the transaction. The process has started on September 20, 2006 and
completed on July 2, 2007. In the process both the companies have faced many ups and downs.
Synergies of the Deal

Most experts were of the opinion that the acquisition did make strategic sense for Tata Steel.
After successfully acquiring Corus, Tata Steel became fifth largest producer of steel in the world,
up from fifty sixth positions. There were many likely synergies between Tata Steel, the lowest
cost producer of steel in the world, and Corus, a large player with a significant presence in value
added steel segment and a strong distribution network in Europe.

Among the benefit to Tata Steel was a fact that it would be able to supply semi-finished steel to
Corus for finishing at its plants, which were located closer to the high value markets. Another
area - an obvious come out of large scale consolidation - would be the synergies of joint
procurement. Economies of scale would give more strength during raw material purchase
negotiation and also while implementing product price changes. All these synergies, was
expected to increase the merged entities profitability further.
Tata Steel optimism regarding the synergies that could be generated after merger with Corus was
strong.
According to industry experts, Tata steel would have two options with regard to Steel production
after the acquisition. The option would be to continue with its primary steel production close to
its iron ore deposits, and the ship semi-finished steel for finishing at Corus's plant that were close
to foreign consumer markets. The second option would be to shift a part of Corus steelmaking
capacity to India, where Tata Steel was already planning a massive expansion to cater to the
rapidly growing demand of steel in the country. Corus expertise in making better grades of steel
used in automobiles and in aerospace could be used to boost Tata Steel's supplies to the growing
Indian automobiles market.
Corus consultancy services based in new Port, South Wales, provided iron, steel, and metal
related consultancy, right from the stage from core mining to that of marketing the finished
products. It was planned that this would be synergized with an automation unit that Tata had in
India.
IMPACT OF MERGER ON COMPANYS PROFITABILITY

Ratio analysis is one of the most powerful tools of financial analysis. It is most important
techniques of financial analysis where ratios are used as yardstick for evaluating the financial
condition and performance of the firm. Analysis and interpretation of various accounting ratios
gives a skilled and experienced analyst a better understanding of the financial condition and
performance of the firm than what it could have obtained only through a perusal of financial
statements. It has been described here under:
1. Earnings per share ratio

TABLE 1(a)
YEAR PRE-MERGER EPS POST-MERGER

EPS
1 47.48 63.85
2 62.77 69.7
3 63.35 56.37
4 72.74 71.58
(Source: Annual reports of the selected units and EMIS database website.)

Chart:1(a)
Calculation of T Test:-
Table 1(b)
Analysis of T - Test
n Mean(d) Standard d.f tc tt Result
deviation
4 3.79 10.14 =n-1 0.74 3.182 Ho
=4-1
=3
H0 = There would be no significant difference in the Earning per share ratio, before and after
mergerand acquisition.
H1 =There would be significant difference in the Earning per share ratio, before and after
merger and acquisition.
H0 = u1 = u2
H1 = u1 u2
5% level of significance table value = 3.182
The calculated value of T is 0.74 and table value of T is 3.182(at 5% level of significance).
Hence,
tc<tt
The calculated value of t is less than the table value. The Null Hypothesis is accepted.

2. Profit after Tax

TABLE 1(c)
YEAR PRE-MERGER POST-MERGER

PAT PAT
1 1746.22 63.85
2 62.77 69.7
3 63.35 56.37
4 72.74 71.58
Chart: 1(c)
Table 1(d)

deviation
4 2213.012 683.97 =n-1 6.47 3.182 H1
=4-1
=3
H0 = There would be no significant difference in the Profit after Tax ratio, before and after
H1 =There would be significant difference in the Profit after Tax ratio, before and after merger
and acquisition.
H0 = u1 = u2

H1 = u1 u2
Hence,
tc>tt
The calculated value of t is more than the table value. The Null Hypothesis is rejected.
3. Current ratio
TABLE 1(e)

1 0.66 3.81
2 0.69 0.91
3 0.71 1.12
4 1.69 1.53
Chart: 1(e)
Table 1(f)


deviation
4 0.905 3.75 =n-1 0.48 3.182 H0
=4-1
=3
H0 = There would be no significant difference in the Current ratio, before and after merger and
acquisition.
H1 =There would be significant difference in the Current ratio, before and after merger and
acquisition.
H0 = u1 = u2
H1 = u1 u2
Hence,
tc<tt
The calculated value of t is less than the table value. The Null Hypothesis is accepted.
4. Debtors turnover ratio

TABLE 1(g)

1 13.29 33.45
2 23.5 41.29
3 26.99 46.58
4 29.81 68.46
Chart: 1(g)

Table 1(h)

deviation
4 24.04 9.78 =n-1 4.91 3.182 H1
=4-1
=3
H0 = There would be no significant difference in the Debtors turnover ratio, before and after
H1 =There would be significant difference in the Debtors turnover ratio, before and after
H0 = u1 = u2
H1 = u1 u2
Hence,
tc>tt
The calculated value of t is more than the table value. The Null Hypothesis is rejected.
5. Return on net worth ratio

TABLE 1(i)

1 38.67 21.52
2 49.21 21.1
3 35.94 13.45
4 29.95 14.68
Chart:1(i)
Table 1(j)
deviation
4 -20.75 5.80 =n-1 7.15 3.182 H1
=4-1
=3
H0 = There would be no significant difference in the Return on Net Worth ratio, before and after
H1 =There would be significant difference in the Return on Net Worth ratio, before and after
H0 = u1 = u2

H1 = u1 u2
Hence,
tc>tt
The calculated value of t is less than the table value. The Null Hypothesis is rejected.
ANALYSIS OF THE RATIO

The comparison of pre-merger and post- merger performance ratios shows that in case of EPS,
there is no significant difference between the pre- merger and post-merger performance ratios.
This has been validated by the pairedt statistics at 5% level of significance (d.o.f =3).The
tabulated value oft is 3.182. The calculated value of oft in case of EPS is 0.74, the calculated
value oft is less than the tabulated value; hence we accept the Ho hypothesis and conclude that
there is no significant difference between the pre-merger and the post-merger ratio. However, in
case of Profit after tax, current ratio, debtors turnover ratio, return on net worth, there is
significant difference between the pre-merger and the post-merger ratios. The calculated value of
t at 5% level of significance (d.o.f=3) in case of PAT is 6.47, in case of current ratio it is 3.75,
debtors turnover ratio is 4.91, return on net worth is 7.15, In all these cases, the calculated value
is more than the tabulated value, so we reject Ho hypothesis and conclude that there is significant
difference between the pre-merger and the post-merger ratios.
CONCLUSION
India has a promising future in acquisitions in all the sectors whether it is the IT industry,
pharmaceutical or the steel. Indian companies are becoming important characteristics in the
global business world. There has been a rapid expansion of outward foreign investment from
India and a boom of acquisitions is the more significant development. India also faces certain
challenges while going for acquisitions in the global markets. It has been observed that since
liberalization came into effect, closed business environment of Indian companies has been
changed in the competitive environment companies started undertaking acquisition to achieve
growth and enhance competitive position in the market. It is predicted that this trend will
continue in the future, due to the country's economic and political environment. Also the
innovative packages for financing the overseas acquisitions increased the pace of Indian
organization entering the global markets. The future prospects of Indian organization are to build
higher value markets and develop the capability to deliver world class services and products so
as to have a competitive advantage in the market. However, overseas acquisitions should be done
with a strategic viewpoint and with an aim of having a new market presence, acquiring new
technology, creating shareholder value to have a successful association throughout the business
life.
Tata acquired Corus for a price of $12b. For this purpose Tata steel limited had a debt of $6.14
billion and a bridge loan of $2.66 million. Tata steel offered a price of 455 pence per Corus share
valuing Corus at $7.6bn. This price represented a multiple of 7.6 times the EBITDA of Corus.

Various ratios of the Tata steel Ltd. has been analyzed to check the impact of mergers and
acquisitions on the profitability of the company. Ratio analysis and t-test has been done on the
four years pre merger and four years post merger ratios. We have accepted Null hypothesis i.e.
there is no significant difference in the pre-merger and the post merger ratios of the company in
case of EPS ratio and in all the other remaining ratios we rejected Ho hypothesis. The reason for
the same has been that the initial motive behind the deal between the Tata and Corus was not the
revenue size of the Corus rather its market value. After the acquisition Tata steel became 5 th
largest producer of steel in the world, resulting in increased profitability. The deal resulted in
synergies between the two entities. Economies of scale during raw-material purchase
negotiations and also while implementing product price changes increased the entities
profitability further. The reason behind this was the insecurity amongst the shareholders because
the merger was rated as an expensive merger. But with time Tata succeeded to gain back the
interest of the investors and the shareholders by showcasing the synergies gained by the merger
and the stock market reacted positively to the deal. So it can be concluded that because of the
high debt deal the shareholders and the investors were reluctant to the deal but the synergies of
the deal resulted positively for the Tata thus increasing the share prices and the ratios for the
company.
Need of the Study

Many companies have grown as big empires through mergers and acquisitions programs.
Hindustan Lever is one pertinent example whose growth is significantly contributed by mergers
and acquisitions. Other companies that have made successful merger deals to grow are Ranbaxy,
Glaxo India, Sun Pharmaceuticals Ltd. Apart from these successes there are some unsuccessful
merger deals too. These include AOL-Time Warner merger, merger of Chrysler with Daimler
Benz, Compaq with HP and Jet Airways and Air Sahara.
In spite of such failures, mergers and acquisitions have been increasing worldwide. India has also
seen periods of four merger wave since 1980s. With growing size of M&A activity in India there
is need to study whether growth achieved through merger and acquisition route is profitable or
not. In most of the studies the evidence show that target companies experience positive gains
around merger announcement (Andrade et al. 2001, Asquith et al.1983 Bradley, Desai and Kim
et al. 1988) and there is negative impact of mergers on acquiring companies. In UK also, Franks,
Julian and Robert et al. (1991) report positive returns to targets. In another study by Firth et al.
(1979) it is reported that no gains are associated with takeovers as gains to targets are more than
offsets by the losses to bidders.
The studies during recent times have more focus on long run performance of acquiring firms.
Most of the long run event studies show negative returns to acquirers in case of mergers
(Loughran and Vijh et al. 1997; Aggarwal, Jaffe and Mandelkar et al. 1992). Studies that focused
on operating performance showed improvement in cash flow: returns after merger (Healy et al,
1992; parrino and Harris et al. 1999) whereas some studies reported no improvement after
mergers (Sharma et al, 2002; pawaskar, et al 2001). In the long run event studies, relationship
between pre-event and post-event returns throw some light on post-mergers long run returns
which has been ignored in most of the studies (Lyon, Barber and Tsai et al. 1999). Very few
studies attempted to find the relationship between pre-merger returns and post-merger
performance. In US Aggarwal, Jaffe and Mandelkar et al. (1992) have examined the relationship
between pre-merger announcement returns and post-merger returns. In India, Ashutosh Dash et
al. (2004) have examined the long run impact of mergers and acquisition and relationship
between pre and post-merger returns.
Mergers and acquisitions has been an emerging area for research in the field of finance. In India,
the subject has not been well explored. Very few studies relating to impact of mergers and
acquisitions have been done in India. The present study attempts to examine the short run as well
as long run impact of mergers in India. The relationship between pre-merger returns and post-
merger returns has also been examined.
Earlier studies show that the incidence of the Indian entrepreneurs acquiring the foreign
company was not so common. But now the situation has changed and the acquisition of foreign
companies by the Indian companies has been the latest trend. This is because of various
facilitating factors. One reason is the maximization of the shareholders return (Berkovitz and
Narayan et al. 1993). This study will analyze that the mergers and the acquisitions results in
positive returns for the shareholders or not.
BIBLIOGRAPHY
Abhijit, R. Business today.Vol.3, No.6, pp 68(1994).
Acharya, Ram. C, the impacts of merger and acquisition on firms profitability, a case study of
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Bagrial K Ashok, Co. Law Vikas Publication House, pp 508-518.
Balachandran, B, UK interim and Final Dividend reductions: A note on Price reaction, The
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Banerjee, Gargi, Year of Deals Business World, 17 October, 34-37, (2005).
Bansal C.L., Business and Corporate Law, Excel Books, pp 621-629.
Cost and Mgt. Accounting by Ravi M. Kishore.
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Shareholders, Journal of Financial Economics, 9(1), 113-138, (1981).
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CASIRJ Volume 7 Issue 1 [Year - 2016] ISSN 2319 9202

A CASE STUDY OF TATA AND CORUS MERGER

Prof. Vijay kaushal

International Research Journal of Commerce Arts and Science

Merger and Acquisition defined

International Research Journal of Commerce Arts and Science

Tata and Corus merger

The Merger Deal

Synergies of the Deal

International Research Journal of Commerce Arts and Science

IMPACT OF MERGER ON COMPANYS PROFITABILITY

1. Earnings per share ratio

YEAR PRE-MERGER EPS POST-MERGER

International Research Journal of Commerce Arts and Science

International Research Journal of Commerce Arts and Science

2. Profit after Tax

YEAR PRE-MERGER POST-MERGER

n Mean(d) Standard d.f tc tt Result

International Research Journal of Commerce Arts and Science

YEAR PRE-MERGER POST-MERGER

International Research Journal of Commerce Arts and Science

n Mean(d) Standard d.f tc tt Result

4. Debtors turnover ratio

YEAR PRE-MERGER POST-MERGER

International Research Journal of Commerce Arts and Science

n Mean(d) Standard d.f tc tt Result

5. Return on net worth ratio

International Research Journal of Commerce Arts and Science

YEAR PRE-MERGER POST-MERGER

International Research Journal of Commerce Arts and Science

ANALYSIS OF THE RATIO

International Research Journal of Commerce Arts and Science

Need of the Study

International Research Journal of Commerce Arts and Science

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