 "Is one reading more into it than called for?")
For many in the media and industry research houses, a common failing is to make a mountain out of a molehill when companies like Rio Tinto, ArcelorMittal and Tata Steel make goodwill write-offs. Headline grabbing takeovers that these three companies were involved in, ahead of the unforeseen but a crippling global recession of 2008-09, demanded of suitors to pay heavy premiums on goodwill account over the book value of acquired assets. Goodwill impairment is a non-cash loss, which many believe should ideally be recognised annually as part of accounting adjustment. Will it be betraying a lack of understanding of impairment exercise, if more is sought to be read into it than brand value erosion, which happened in all the above three instances, hugely in the case of Rio Tinto and a lot more modestly for ArcelorMittal and Tata Steel? The Economist in a trenchant piece says goodwill impairments are not "meaningless. In fact, they can reveal a lot about internal politics of firms and their battles over strategy".
The pains of Tata Steel, evidenced in goodwill impairment, are all on account of the takeover of the Anglo-Dutch steelmaker Corus, since renamed Tata Steel Europe (TSE). The European debacle was not on anybody's radar at the time of the 2007 Tata Steel takeover of Corus at top dollar. Otherwise, Ratan Tata, then group chairman, would not have given his lieutenants the mandate to engage in a head-to-head bidding against Brazil's CSN and take Corus paying $12.2 billion. Whatever premium price it paid for Corus, the management was circumspect to ring fence Tata Steel's Indian business from Corus debts. In less than two years of the deal, which catapulted Tata Steel to the world's fifth largest steelmaker slot, the global economy started sinking, hitting Europe, TSE's action area, the most. The Economist raises the point that for at least four years it is known that the acquisition is proving a "financial disaster. Why recognise that now? The cynical view is that managers are vain and hate to admit mistakes... The typical lag between error and admission seems to be about five years." Citing estimates by unidentified analysts, the magazine says TSE will be worth a third or even less of the money paid for its acquisition.
Reacting to this, Tata Steel Chief Financial Officer Koushik Chatterjee in an interview with Bloomberg TV, said, "I don't know where the valuation numbers come from." But even otherwise, the world mining and metals sector was constrained to write down assets worth nearly $50 billion, according to Chatterjee. All this erosion came from acquisitions in the past five or six years. That managements and auditors are eternally engaged in quibbling over any number of issues, including goodwill impairment, is known. We have it from Bloomberg data that impairments rocketed to $150 billion last year bringing back memories of massive goodwill write-offs in 2003 when much hyped dotcom ventures collapsed in a row. It will be patently unfair to question at this stage the judgments of industry leaders that led to very big ticket acquisitions in the years preceding the 2008-09 crisis. Let's start with the Rio Tinto acquisition of Alcan for $38 billion in 2007, when aluminium was fetching multi-year high prices.
Similarly, many think Lakshmi Mittal, a great proponent of capacity consolidation, is finally facing insurmountable challenges for his $32.2-billion Arcelor takeover. Mittal, in 2006, thought the combination of its own low-cost production and Arcelor's high margin markets plus the combined entity's power to influence steel prices and negotiate for cheaper raw materials would make him a winner. In the same vein, Ratan Tata saw in Corus a strategic fit that would give it scale, global footprint and access to closely-held technologies. If such hopes are coming unstuck, it is because, as Tata Steel Managing Director Hemant Nerurkar says, the European steel market has shrunk and steel prices are down while raw materials, on historical averages, are up. Both the groups are engaged in restructuring their European operations. But switching off blast furnaces is not an easy proposition. Nerurkar, however, raises hopes that new investments, further restructuring and attempts to improve market positions could still make sense of Tata Steel's European odyssey.
The pains of Tata Steel, evidenced in goodwill impairment, are all on account of the takeover of the Anglo-Dutch steelmaker Corus, since renamed Tata Steel Europe (TSE). The European debacle was not on anybody's radar at the time of the 2007 Tata Steel takeover of Corus at top dollar. Otherwise, Ratan Tata, then group chairman, would not have given his lieutenants the mandate to engage in a head-to-head bidding against Brazil's CSN and take Corus paying $12.2 billion. Whatever premium price it paid for Corus, the management was circumspect to ring fence Tata Steel's Indian business from Corus debts. In less than two years of the deal, which catapulted Tata Steel to the world's fifth largest steelmaker slot, the global economy started sinking, hitting Europe, TSE's action area, the most. The Economist raises the point that for at least four years it is known that the acquisition is proving a "financial disaster. Why recognise that now? The cynical view is that managers are vain and hate to admit mistakes... The typical lag between error and admission seems to be about five years." Citing estimates by unidentified analysts, the magazine says TSE will be worth a third or even less of the money paid for its acquisition.
Reacting to this, Tata Steel Chief Financial Officer Koushik Chatterjee in an interview with Bloomberg TV, said, "I don't know where the valuation numbers come from." But even otherwise, the world mining and metals sector was constrained to write down assets worth nearly $50 billion, according to Chatterjee. All this erosion came from acquisitions in the past five or six years. That managements and auditors are eternally engaged in quibbling over any number of issues, including goodwill impairment, is known. We have it from Bloomberg data that impairments rocketed to $150 billion last year bringing back memories of massive goodwill write-offs in 2003 when much hyped dotcom ventures collapsed in a row. It will be patently unfair to question at this stage the judgments of industry leaders that led to very big ticket acquisitions in the years preceding the 2008-09 crisis. Let's start with the Rio Tinto acquisition of Alcan for $38 billion in 2007, when aluminium was fetching multi-year high prices.
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Then chief executive officer of Rio Tinto, Tom Albanese, found justification in buying the Canadian aluminium business as he believed that sprinting Chinese demand would take the metal prices still higher. He also thought that as China would need more and more aluminium, it would, after a point, on cost ground, stop growing smelting capacity and resort to imports. Alcan caught his fancy because Canadian smelters have the advantage of using low-cost hydro power. All Albanese calculations, however, went awry as China went on building smelting capacity of 28 million tonnes and further new capacity is in the pipeline. World surplus capacity and production, high inventory, Euro zone issues and growth in metal demand in China and India settling at lower levels hit aluminium prices hard. In what certainly are the deepest wounds suffered by a constituent of the world mining industry, Rio Tinto had to provide for impairments totalling $20 billion over the past two years. Earlier this year, Albanese had to step down for the now soured takeover that looked good six years ago.
Similarly, many think Lakshmi Mittal, a great proponent of capacity consolidation, is finally facing insurmountable challenges for his $32.2-billion Arcelor takeover. Mittal, in 2006, thought the combination of its own low-cost production and Arcelor's high margin markets plus the combined entity's power to influence steel prices and negotiate for cheaper raw materials would make him a winner. In the same vein, Ratan Tata saw in Corus a strategic fit that would give it scale, global footprint and access to closely-held technologies. If such hopes are coming unstuck, it is because, as Tata Steel Managing Director Hemant Nerurkar says, the European steel market has shrunk and steel prices are down while raw materials, on historical averages, are up. Both the groups are engaged in restructuring their European operations. But switching off blast furnaces is not an easy proposition. Nerurkar, however, raises hopes that new investments, further restructuring and attempts to improve market positions could still make sense of Tata Steel's European odyssey.