Tata Steel and Corus
On 20 October 2006, Anglo-Dutch steelmaker Corus agreed to be bought by Tata Steel at 455 pence a share. Brazil's CSN then made a rival bid, and the offers rose. Tata Steel raised its offer to 500 pence in December.
To settle the contest, the UK Takeover Panel ran an auction on the night of 30–31 January 2007. Bidding went the full nine rounds over about eight hours. Tata Steel won at 608 pence a share, 5 pence above CSN's 603 pence and 34% above its own first offer.
Tata Steel completed the £6.2 billion (US$12 billion) acquisition on 2 April 2007. The combined group became the world's fifth-largest steel producer. Corus was much larger than its buyer: its 2005 revenue was £9.2 billion, against Tata Steel's US$5 billion in 2005-06.
Steel demand in Europe fell sharply after the 2008 financial crisis and stayed weak for years. In the quarter ended March 2013, Tata Steel took a one-time impairment of ₹8,355.91 crore on non-current assets, mainly in Europe, relating partly to goodwill from the Corus acquisition. The company described it as a non-cash charge.
What the Corus deal teaches
- Auctions raise prices. In a contest, the winner is often the bidder with the most optimistic view of the target. Setting a walk-away price before bidding starts is the only protection.
- Watch the cycle. A price based on strong profits near a cycle peak leaves little room if demand falls. Test the deal at mid-cycle earnings.
- Size and funding magnify outcomes. Buying a target several times your size leaves less room for surprises in the years after.
- Impairments come later. When expected cash flows fall below what was paid, accounting rules require a write-down, sometimes years after the deal.
Described from public sources as an example of deal pricing and timing; no view on the companies, their shares or any decision-maker is implied.
Chapter 3: Value the target and synergies
Value the target on its own first, then add only the synergies you can deliver, net of their costs; that sum is the most you should ever pay.
- Value a target on its own
- Estimate, risk-weight and phase synergies
- Set a walk-away price before negotiating
This article is adapted from the book. Examples marked “Example” use invented names and numbers; company stories are based on public sources listed in the book. Education only: not investment, tax or legal advice.
