The Hindu Business Line : Tata steals a march

Indian enterprises are not altogether unexposed to cross-border acquisitions having snared quite a few of them across pharma, software and auto-component industries. But for sheer size, the winning bid by the Tatas for Corus, the Anglo-Dutch steel major, is in a class of its own. By this one single deal India will make a foreign direct investment nearly thrice as large as the sum it receives annually. This is not just a tribute to the entrepreneurial capacities of an Indian industrial combine but is, in a sense, symbolic of the unleashing of latent `animal spirits' of India Inc. The lead set by the Tatas is sure to be followed by others. Indeed, the international investment banking industry would be pencilling in an Indian corporate whenever the issue of ownership restructuring of a business comes up.

That Tata Steel emerged a suitor to Corus was no surprise at all. It is, after all, the least cost producer of steel in the world, an attribute that fitted in neatly with the Corus management's strategic plans for the company. Corus had only recently emerged from a near bankruptcy and needed something more than high global prices to put its operations on a viable footing. The company saw in Tata Steel's position as a source of semi-processed low-cost metal the answer to its problem of long-term survival. The logic of acquisition was no less compelling for Tata Steel. The Indian steel industry, minuscule by global standards, is threatening to get more crowded with the Mittals, Poscos and many others planning greenfield capacities. But the demand for steel is unlikely to grow so dramatically as to absorb all the incremental capacities that might come up. Exports are thus an option for Tata Steel, and Corus fits in nicely with that game plan.

Of course, there is always going to be some question mark over the price paid for the acquisition. But against this must be set the fact that such assets are not put up for sale every day. The premium over the intrinsic worth paid for the target company is a price that an acquirer pays to mitigate the peculiarities of its own strategic situation. In the instant case, the choice before the Tata Steel was either to pay a premium for a readymade marketing infrastructure in a region noted for pricing power implicit in the takeover of Corus, or settle for cut-throat prices in a domestic market that might soon see a glut. Only time will tell whether the high stakes gamble of the Tatas will work for the Tata Steel shareholders. But managers, unfortunately, do not have the advantage of gazing into some crystal ball to read the future. They have to make a call here and now.

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