Landmark bid

The Tata bid for Corus Steel is a landmark case in Indian corporate history. It is the first multi-billion dollar bid for an overseas company, and therefore sets a benchmark even as it stands out for boldness and strategic vision. There is always a risk in such large gambits, so the bid needs to be evaluated with a cool head, and not on the basis of nationalist pride or corporate hubris. It is striking, for instance, that steel did not figure very high on the Tata group's priority list of businesses a decade ago; if accounts are to be believed, the group's view of steel's long-term profitability was not very rosy. That perspective has certainly changed, now that the rise of China and India (and other developing countries) has translated into a dramatic increase in the demand for steel, with the prospects being that such demand will keep growing for the next quarter century. Steel prices have risen sharply as a consequence, by 200 per cent and more from the trough reached early this decade, and it is only natural that this should change perceptions about the future of the business. It also helps that Tata Steel has substantially improved its operating parameters, independent of the steel price bonus.

The risk in such a context would be buying a company at the top of the business cycle. Corus Steel's share price is reported to have doubled this year, but some of that increase has been in the wake of the Tata bid. Published reports suggest that the valuation of the company ($10 billion) is on the same ballpark basis as in the Mittal-Arcelor case of a few months ago; indeed there are indications that Tata may in fact do better than that. If that is the case, the issue shifts from price to affordability, since Corus is more than three times as big as Tata Steel. However, the Tata group as a whole has a market capitalisation of $50 billion, so the group should not find the price tag a barrier. Indeed, if the financing is to be in the same manner as other recent Tata acquisitions (a special purpose vehicle, some equity injection and the balance funding through debt which will be paid off by committing future Corus receivables), then the primary risk element consists of a sharp drop in steel prices. If that is considered a remote possibility, then the deal makes financial sense.

That leaves the question of strategic fit. Tata Steel has recently been declared the lowest-cost producer of steel in the world, while Corus makes high-end steel but has high raw material costs. If the two can be dove-tailed, then Tata Steel's Indian mills could supply Corus and Tata would gain access to larger world markets and to technology for high-end steel production. In other words, the strategic fit is perhaps the easiest question to answer. On that basis, it might be argued that if Tata has to up its bid a little, the acquisition is still worthwhile.

None of this guarantees that the bid will go through. There could be others who throw their hat in the ring, and the Corus board has to recommend its preferred choice of action to shareholders. Judging from the reports so far, Tata seems to have the inside track. Three months ago, Tata was being asked why it had not been able to match Mittal's far more impressive global steel record, although it has been in the steel game for much longer. The acquisition of Corus would be an effective answer to the question.