The Hindu Business Line : Another look at takeover

The grit shown by the Tata group at the recent battle at the hammer has been hailed by the media as India's victory, and a leap by the developing nation into the league of nations that nurture multinationals. The ball of acquisition, set rolling by the Lakshmi Mittal group after it grabbed Arcelor last year, was given a sharp shove by Ratan Tata who outbid Brazil's CSN (a tongue-twisting Companhia Siderurgica Nacional) by five pence a share to pocket Corus. Soon after, the Birla group's Hindalco bought the Canadian aluminium maker, Novelis, for $5.95 billions. Three balls pocketed in quick succession by firms of Indian origin.

(At a business management institute in India.)

Professor: I need your views on the acquisition. Do you think it was wise?

Student A: Do you think it was not?

Professor: That's clever! (smiles) I don't intend to close the discussion prematurely with my views.

Student B: Didn't Lakshmi Mittal of Arcelor Mittal say that "India stands on the verge of becoming a great economic and industrial power?"

Student C: It was a business strategy by the Tatas, present in several countries.

Professor: Please be more specific. This seminar's aim is to shed some light using hard facts. That is what separates you, the budding managers, from others who harp on premises rather than facts.

Student D: Yes madam. To be specific, the Tata group has operations in more than 54 countries across six continents, and exports services and products to 120 nations.

Professor: So?

Student D: I am afraid the material available on the company web site is inadequate. What does "more than 54 countries" mean? Is the exact number missing in action?

(Laughter all round)

Professor: What has the web site content got to do with the analysis of acquisition?

Student C: Why is the acquisition being hailed by a section of the media as India's victory? It was a business strategy, having no impact on the decisions of national interest by our policymakers. Even though the 96 companies in seven business sectors of the Tata group earned a revenue of over Rs 96,000 crore in 2005-06.

Professor: Facts please. No "over this" or "under that" ...

Student C: Sorry! (refers to his notes) Yeh, Rs 96,722.9 crore as revenue, that accounted for 2.8 per cent of the nation's gross domestic product. The group's employee strength is 2,46,000, and it has a shareholder base of 20 lakhs. But the Tata group is a private sector entity with its business interest outweighing its national commitment. Which implies, my friends, that it would not jeopardise its business — and its own survival — for the sake of the nation. And it does not make national decisions on behalf of the Prime Minister and his Cabinet, even though it could influence certain decisions, however remotely or insignificantly.

Student A: Hark, the mathematician speaks! It is as if every approach to a real world problem were a left hand side and the right hand side limits converging to the same result. If not, it would be defined as discontinuous, right?

Professor: The point here is no matter what the approach and how the observations are presented, the point has been made. Clearly. No flaws. Thanks (turns to the class). But how does one shed some light on what could have motivated the acquisition by the Tatas? We are focusing on Tata's acquisition only. We will not discuss Mittal or Birla. (pauses) Insights please!

Student E: There are five basic issues. First, the productive capacity. By how much has the Tata's steel rolling capacity increased after the acquisition? Second, how did Corus use the output it produced? If it were wholly used domestically, how was value added to steel? Third, given the ownership transfer, it is obvious that Corus would have suffered some operational hurdles? What were they? And how does the Tata Group intend to remove these kinks? Fourth, what fraction of the world steel trade does Tata Steel expect to corner? Finally, what options do the Tatas have to exploit the economies of scale, given that the productive capacity is distributed across continents?

Professor: Thanks.

Student A: My friend E seems to have missed out one point inadvertently. The impact of the acquisition was felt immediately on the stock market where Tata shares recorded a slide in value — around 10 points. I think the group hopes to benefit 10 years from now. The expected aggregate benefits have to be weighed against the opportunity cost of setting aside a huge sum for the acquisition.

Student B: Do you mean the imputed interest cost of the funds used?

Student E: You could say that. How else do you propose to measure the marginal efficiency of capital that is so elegant mathematically but a nightmare to measure statistically?

Professor: We are still nowhere and the focus, I am afraid, is slipping away.

Student C: But madam, for deeper insight we would need to wait and watch and keep a close tab on the operational details of the Tata-Corus group. Fresh data could then be analysed. We do not know enough now to draw sensible inferences based on very limited information.

Student D: But the decision to acquire was taken by seasoned professionals. Unless there were tangible benefits, the Tata group wouldn't have agreed to pay five pence more per share. They saw what we fail to see.

Professor: You're right that Tata's decision was based on facts and expected trends in world steel trade and world steel use. We will consider each of these at the next week's seminar. Meanwhile, hunt for facts on the two steel firms to convince us all why the group took the right decision; and if not, why not. You have to analyse the implications of the decision. With hard facts, of course. Good day!

Racy@TheHindu.co.in

http://RacyCases.blogspot.com

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