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 India’s 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 today‟s 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 http://www.casirj.com
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CASIRJ
Volume 7 Issue 1 [Year - 2016]
ISSN 2319 – 9202
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 target‟s 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 International Research Journal of Commerce Arts and Science http://www.casirj.com
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CASIRJ
Volume 7 Issue 1 [Year - 2016]
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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 International Research Journal of Commerce Arts and Science http://www.casirj.com
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CASIRJ
Volume 7 Issue 1 [Year - 2016]
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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 world‟s 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 Tata‟s 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. International Research Journal of Commerce Arts and Science http://www.casirj.com
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CASIRJ
Volume 7 Issue 1 [Year - 2016]
ISSN 2319 – 9202
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 COMPANY’S 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.) International Research Journal of Commerce Arts and Science http://www.casirj.com
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CASIRJ
Volume 7 Issue 1 [Year - 2016]
ISSN 2319 – 9202
Chart:1(a)
Calculation of T – Test:Table 1(b) Analysis of T - Test n
Mean(d)
4
3.79
Standard deviation 10.14
d.f
tc
tt
Result
=n-1 =4-1 =3
0.74
3.182
Ho
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
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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 (Source: Annual reports of the selected units and EMIS database website.) Chart: 1(c)
Calculation of T – Test:Table 1(d) Analysis of T - Test n
Mean(d)
4
2213.012
Standard deviation 683.97
d.f
tc
tt
Result
=n-1 =4-1 =3
6.47
3.182
H1
H0 = There would be no significant difference in the Profit after Tax ratio, before and after merger and acquisition. H1 =There would be significant difference in the Profit after Tax ratio, before and after merger and acquisition. H0 = u1 = u2 International Research Journal of Commerce Arts and Science http://www.casirj.com
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CASIRJ
Volume 7 Issue 1 [Year - 2016]
ISSN 2319 – 9202
H1 = u1 ≠ u2 5% level of significance table value = 3.182 The calculated value of T is 6.47 and table value of T is 3.182(at 5% level of significance). 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) YEAR
PRE-MERGER
POST-MERGER
1
0.66
3.81
2
0.69
0.91
3
0.71
1.12
4
1.69
1.53
(Source: Annual reports of the selected units and EMIS database website.) Chart: 1(e)
Calculation of T – Test:Table 1(f) Analysis of T - Test
International Research Journal of Commerce Arts and Science http://www.casirj.com
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n
Mean(d)
4
0.905
Standard deviation 3.75
ISSN 2319 – 9202
d.f
tc
tt
Result
=n-1 =4-1 =3
0.48
3.182
H0
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 5% level of significance table value = 3.182 The calculated value of T is 0.48 and table value of T is 3.182(at 5% level of significance). Hence, tc
PRE-MERGER
POST-MERGER
1
13.29
33.45
2
23.5
41.29
3
26.99
46.58
4
29.81
68.46
Chart: 1(g)
International Research Journal of Commerce Arts and Science http://www.casirj.com
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CASIRJ
Volume 7 Issue 1 [Year - 2016]
ISSN 2319 – 9202
Calculation of T – Test:Table 1(h) Analysis of T - Test n
Mean(d)
4
24.04
Standard deviation 9.78
d.f
tc
tt
Result
=n-1 =4-1 =3
4.91
3.182
H1
H0 = There would be no significant difference in the Debtor’s turnover ratio, before and after merger and acquisition. H1 =There would be significant difference in the Debtor’s turnover 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 4.91 and table value of T is 3.182(at 5% level of significance). 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
International Research Journal of Commerce Arts and Science http://www.casirj.com
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CASIRJ
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TABLE 1(i) YEAR
PRE-MERGER
POST-MERGER
1
38.67
21.52
2
49.21
21.1
3
35.94
13.45
4
29.95
14.68
Chart:1(i)
Calculation of T – Test:Table 1(j) Analysis of T - Test n
Mean(d)
4
-20.75
Standard deviation 5.80
d.f
tc
tt
Result
=n-1 =4-1 =3
7.15
3.182
H1
H0 = There would be no significant difference in the Return on Net Worth ratio, before and after merger and acquisition. H1 =There would be significant difference in the Return on Net Worth ratio, before and after merger and acquisition. H0 = u1 = u2 International Research Journal of Commerce Arts and Science http://www.casirj.com
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CASIRJ
Volume 7 Issue 1 [Year - 2016]
ISSN 2319 – 9202
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 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 paired„t‟ statistics at 5% level of significance (d.o.f =3).The tabulated value of„t‟ is 3.182. The calculated value of of„t‟ in case of EPS is 0.74, the calculated value of„t‟ 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, debtor‟s 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. International Research Journal of Commerce Arts and Science http://www.casirj.com
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Volume 7 Issue 1 [Year - 2016]
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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 International Research Journal of Commerce Arts and Science http://www.casirj.com
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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 postmerger 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 firm‟s profitability, a case study of Canadian firms”. Journal of Finance, volume 4, 1605-1621,(2000). Agarwal, Anup: Jeftery F jaffe and G N Mandelkar, “The post Merger Performance of acquiring Firms: A re-examination of an Anatomy”, The Journal of Finance, 47(4), 1605-1621, (1992). 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 European Journal of Finance, Aug., 9(4), 379-390, (2003). 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. Dann, L Y., “Common Stock Repurchases- An Analysis of Returns to Bondholders and Shareholders”, Journal of Financial Economics, 9(1), 113-138, (1981). Financial Management by Khan M.Y. & Jain P.K. Firth, Michael, “Synergism in Mergers: Some British Results”, The Journal of Finance, available at http://www.jstor.org downloaded on 16.03.2006, (1978). Ghosh, A, “Does operating performance really improve following corporate acquisitions?” Journal of Corporate Finance, 7(2), June-2001, 151-178. Healy, Paul M, Krishnan G Palepu and R S Ruback, “Does Corporate Performance Improve after Merger?”, Journal of Financial Economics, 31, 135-175, (1992).
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