Heavy metal

Making the Corus acquisition work will not be easy.

It may be a done deal, but the work's just begun. The Tatas have pulled off the $12.1 billion acquisition of Anglo-Dutch steelmaker Corus, but that's the easy part.

What's difficult is getting the maximum bang for buck, in other words, growing both Corus and Tata Steel into more profitable entities.

To be sure the synergies look great on paper. Corus is a high-cost, non-integrated player with top end products especially in the automobile and construction space and strong customer relationships in Europe. Tata Steel on the other hand, is a low-cost, efficient producer operating in a high-growth market.

The agenda: to bring down costs at Corus which would push up operating margin from the current 9.2 per cent. Also, transfer Corus technology to Tata Steel so that it can manufacture its current range of products more efficiently and turn out new products. In the process, buy raw materials together, so that procurement costs are pruned.

For all of this to happen though, the synergies need to kick in fast. Says Joy Jain, Executive Director, PricewaterhouseCoopers, "If the synergies aren't seen to be coming through in six months time, it could mean trouble." Adds Nitin Bhatt, associate director, Ernst &Young, "Often both sides are tired after a big deal and tend to relax. That just cannot happen."

According to Jain, the Tata team needs to begin the integration process by communicating transparently with all employees in order to gain their confidence.

"It's understandable that employees will feel insecure so the integration task force needs to immediately reassure them," he points out. It's also important that all decisions taken are perceived to be impartial.

What Bhatt believes is crucial is that both companies immediately start looking at operational policies and organisation structure through one lens instead of each viewing things in its own way.

"Successful integration is about openness to new operating models and the ability to drive and manage change. " If either side is rigid, the synergies envisaged may not come through in the manner or timeframe that was originally anticipated," he says.

Tata Steel chairman is aware of the need to integrate. "Nothing could be more disrupting than to have conflicting cultures," Tata said at a press conference post the announcement of the buyout.

Given the high price that the Tatas have paid for Corus ""at 608 pence per share, the enterprise value per tonne works out to around $710 "" the margin of error doesn't exist.

As Yezdi Nagporewalla, national industry director, KPMG, points out, "Integration and crystalisation of synergies gain significance for any merger of this size, given the market dynamics."

While the Tata management has estimated the available synergies at $350 million, the biggest element of cost reduction for Corus will come from the lower cost of slabs. The sooner Tata Steel ships out slabs from its plant that's coming up in Orissa, the better.

Assuming a synergy of $70 per tone of slab exported from Tata Steel's Indian locations and around five million tonne of slabs shipped out in CY2010, the present value of cost synergies, works out to around $2 billion, say analysts.

However, even a year's delay in the supply of slabs could upset all calculations, especially if steel prices come off, unless slabs can be sourced from elsewhere.

That should be possible now with the higher scale of operations of the combined entity "" 24 million tonne per annum. Says Nagporewalla, "Given the market dynamics, the combined entity will be in a strong position to negotiate and that should translate into benefits."

Tata Steel managing director, B Muthuraman has been talking about the changes in the way that the steel industry functions today, with intermediate products not necessarily being made by the same manufacturer that also makes the end product. Ostensibly, there is a plan to source cheap slabs and billets to feed Corus, but that needs to be implemented.

The statistics are stacked against mergers "" 50 per cent of them do not yield the expected results and actually destroy shareholder value. However, with a bit of luck and strong steel prices, Tata Steel should be able to prove its mettle.