Steel czar Lakshmi Mittal was underlining a virtue of owning mills in more than one geography when he once said the knowledge bank thus getting automatically created allows the group to quickly put a team together, drawing resources from different centres to set things right if anything goes wrong anywhere. Not very well known is the fact that for Mittal, the inspiration to grow the steel business through takeovers was what Rama Prasad Goenka was doing earlier within the country.
While Goenka travelled the inorganic route to build a group, since split into two for his sons to run independent of each other, Mittal has shown mastery over cross-border deals. The difference between the two goes beyond their theatres of operation. Goenka fancied and bought businesses from tyres, electricity, transmission lines and retail to soft commodities like tea and rubber. On the contrary, Mittal, for the major part of his career, stayed put in steel. Only in recent years, has he branched out in the energy sector.
Mittal’s success in owning steel capacity of 100 million tonnes (mt) in 20 countries has encouraged Indian groups to use their native intelligence, risk taking ability and capacity to raise funds to attempt takeovers, and, on occasions a few times bigger in size than themselves. At this point, it is easy to say that Tata Steel paid an ‘insane’ price for Corus (since renamed Tata Steel Europe) owning plants in several European countries and Hindalco for Novelis, the world leader in aluminium rolled products and a storehouse of technologies.
But who could have thought in early 2007, when the two defining takeovers happened, that the world would suffer a crippling recession not long thereafter and the recovery would be painfully slow. The Economist article on ‘Indian takeovers abroad’ has missed the point that multi-billion dollar acquisitions by Tata Steel and Hindalco are driven by strategic considerations and entrepreneurial call of a special kind. Movers of such deals are not put down by fears that “takeovers routinely destroy value for the purchaser”.
No doubt the two takeovers came at a fancy price. At least in one case as other aspirants for the prize rolled the dice, the hugely enhanced price tag of $6 billion looked daunting for Indian company executives. At that point, Kumar Mangalam Birla exercised his entrepreneurial judgement to wrap up Novelis , so much bigger than acquirer Hindalco. Birla later said the Novelis takeover was no doubt an “intimidating proposition. But after a lot of thinking, I found it too compelling an opportunity to let go of”. Corus became pricey because Tata Steel got locked in a nine-round auction bidding with CSN of Brazil under a British takeover panel ruling. Ratan Tata, an admirer of Mittal for initiating consolidation of global steel capacity, described the successful Corus bid as a “moment of fulfilment for India”. Every steel producing country has seen the benefits to be derived from bringing more and more capacity under one roof. For example, China, which last year at 695.5 mt had a 45.5 per cent share of global steel production, wants consolidation to lead to 10 groups owning 70 per cent of the capacity. They now own less than 50 per cent capacity.
The Economist argument is valid that a country’s cross-border deal depend largely on the state of its economy and how well its leading business groups fare. In the three years preceding 2007, when Corus figured as India’s biggest foreign takeover yet and Hindalco forged a never-before upstream and downstream link in aluminium space, the country’s gross domestic product grew at a clip of over eight per cent yearly. A good number of companies were earning profits of 30 per cent or more of their turnover. Naturally, some of them at that point thought they were ready to bid for giant offshore companies.
Acquiring a company is a challenge. No less daunting is to ensure sustainable return on investment. In about a year-and-a-half of the takeover of Corus and Novelis, commodities in general suffered major setbacks. This necessitated major restructuring of both enterprises, including plant closure, disposal and relocation, reduction in workforce and cost cutting through productivity improvement. Both, Tata Steel and Hindalco, found their acquired companies beset with high cost operations while demand in their principal markets was tepid leading to product price falls. Tata Steel had to sell its unprofitable steel slab business and Novelis disposed three aluminium foil units in Europe not found in alignment with its growth strategies and value creation in the long run.
One will not buy the argument that benefits like transfer of technology and skills from acquired to acquiring units are “fuzzy” just because these are not quantifiable. The benefits could be in the form of transfer of a high-margin can sheet manufacturing Novelis unit from the UK to Orissa or Corus supplying rail and other very high value steel to India. SAIL chairman Chandra Sekhar Verma says, “I have seen enormous value accretion at IISCO that we took over. Come to Burnpur; you will see a new steel mill has come up like a Phoenix rising from its ashes.” Or as all acquired companies by Goenka are reborn.
