Tata Steel Development

Established in 1907, Tata Steel is Asia’s first and India’s largest integrated private sector steel company. In 2005/06, the company had revenue of US$5 billion and crude steel production of 5.3 million tons across India and South-East Asia. It is a vertically integrated manufacturer and is one of the most profitable and value creating steel companies in the world. In 2005, Tata Steel acquired 100% equity interest in NatSteel Asia in Singapore and in 2006 acquired majority control of Millennium Steel in Thailand, now Tata Steel Thailand. In global steel industry, the consumption of steel decreased drastically in 2007, in comparison to 2006. Among the major steel producing countries the production of steel increased from 2005-2006 except Brazil. China was the highest steel producing country in the world with a production of 355.8 million tons in 2005 and 418.8 million tons in 2006. And for this increasing demand of steel market it was not possible for a single company to capture the market alone.

India was the world’s third-largest steel producer in 2016. The steel sector has been a major contributor to India’s manufacturing output. India’s crude steel output grew 10.7 per cent year-on-year to 25.76 million tons (MT) during January-March 2017. India’s crude steel output during April 2017 grew by 5.4 per cent year-on-year to 8.107 MT.

India’s finished steel exports rose 102.1 per cent to 8.24 MT, while imports fell by 36.6 per cent to 7.42 MT in 2016-17. India’s steel exports rose 142 per cent in April 2017 to 747,000 tons over April 2016, while imports fell by 23 per cent to 504,000 tons in April 2017 over April 2016.

Total consumption of finished steel grew by 3.4 per cent year-on-year at 6.015 MT during April 2017.

India is expected to overtake Japan to become the world’s second largest steel producer soon, and aims to achieve 300 million tons of annual steel production by 2025-30.

Timing is everything: In the early 2000s, the strategy team at Tata Steel with the intention of globalisation had identified many potential M&A deals from the US, Europe and Asia. Corus was a penny stock in the early 2000s and was available for 10 per cent of the value that Tata Steel had to eventually pay for it.

It is known that this time frame in Tata Steel was the transition period between J J Irani’s reign and before B Muthuraman took over, there was no consensus on the globalisation strategy. L N Mittal’s acquisition of Arcelor in 2006 may have galvanised the Tatas intention to go global. But by then, the commodity cycle was at its peak. And asset prices had zoomed.

Know when to withdraw: Tata Steel had signed a negotiated deal with the Corus management. A few months later, Brazilian steel maker CSN made an entry with a higher offer. And the Corus board proposed an auction. Now, participating in an auction is a very precarious situation.

Since the price moves up only marginally, the impact is often hard to gauge, and before you know it, you could end up getting scalded. In any case, insiders suggest that by then, it had become a prestige issue. Tata eventually paid 30 per cent more than the original price negotiated in the initial deal signed.

Show me the cash: In hindsight, doing an all-cash deal funded by debt may have been a big mistake. For one, a part stock deal may have softened the blow a fair bit. And by allowing the incumbent management team to sell out their stock options-the then CEO Philippe Varin made £10 million as part of that deal-eliminated their residual interest in the business.

Due diligence is key: It is true that the Tatas may have expected that the underperforming UK assets could prove to be problematic, but it isn’t clear if they knew the full extent of the situation or how to fix it.

As a former Tata Steel strategist claims, the UK assets had seldom generated a surplus over a decade. Their underperformance was masked by its well-run Dutch operations at Hoogovens.

Kid gloves won’t work: After taking over, the Tatas chose a hands-off strategy. And left it to the incumbent group CEO, Mr Varin, and his team.