Mittal is saying “Don’t worry, i will buy you guys later”
Corus employees, investors & CSN chief Benjamin are smiling all the way to the bank.
Tata is feeling the pinch. Ouch, it hurts. I thought it will be simple tooth decay, but turned out to be root canal.
I really wanted the title of the post to be “Tata won the battle of nerves”.
On the surface Tata did win the battle, but looking at the books, it is a big loss. The general perception was that Tata was going to make the Corus acquisition little harder and force CSN to pay a huge premium. At the end it turns out to be that CSN strategically withdrew from race forcing Tata to bite the nail. Ouch it hurts.
So the news is Tata buys steel giant Corus at $11.3 Billion. If one has to go by Indian media, this is a major international victory for India Inc and is the first expensive overseas acquisition by the Indian company. Only time can prove, if this was a victory or just an irrational exhuberance.
Corus was on the verge of bankruptcy just 4 years ago and was trading around 10 pence. The CEO steered it clear of Bankruptcy and sold money loosing operations and saved the company from shutting down. It has 40,000 employees and is expected to help Tata in serving the Western market.
Critics argue that Corus makes lot of sense to CSN rather than to Tata. However, Tata entered the scene first and was reluctant to withdraw after seeing CSN counter bid its offer. There were also rumours that Tata and Corus combined were going to make a bid on CSN once Tata completed its acquisition/merger of Corus. However, CSN surprised Tata and Corus by entering the fray and started counter bidding.
Tata now becomes Fifth largest Steel producer in the world with Corus acquisition. However, with surge in steel supply from China, global steel prices are going to come down in coming years. Overpaying Corus when global prices of steel are expected to come down would hurt Tata steel investors. It is my guess that Tata steel investors would run away awashing the recent gains made in the Tata steel stock.
Mittal is laughing, Benjamin is smiling and Tata is worried.
Will CSN bid for Tata and Corus few years from now? Or
Will Mittal eat all of them together? It will be interesting to watch.
It will be surprising if Tata went into takeover panel to win Corus. If yes, the Tata’s must definitely have something up their sleeves. If not, then it is anybody’s guess about Tata Steel’s future. Hope it remains a steel.
January 31, 2007 at 11:01 am
I have a lot of respect for Tatas. Even if they have overpaid, I think they could come out the winners…call it blind faith in the Tatas if you will. I have Tata steel shares and I hope they do win in the end!
Talking of Mittal, now if this guy is Tata’s adversary I think the Tatas have a hard fight ahead of them.
January 31, 2007 at 11:17 am
Nita,
I wish you good luck with Tata Shares.
If i were you, i would look into the overal commodity sector a bit and concerns of steel over supply coming from China (i know, China steel is cheap quality, but who cares these days). Tata was smartly trying to wither cyclical nature of steel and making forays into branded steel market, but whatever gains they have made or are expected to make in coming years is all wiped out by this one expensive steel market.
Tata could have let CSN walk away with Corus for now and then few years down the lane bought back whole of CSN and Corus for lot less.
I will closely watch the reaction on the street though.
I would bet my money on Tata Tea, Tata Motors at this time.
–sri
January 31, 2007 at 12:27 pm
Tata’s acquisition of Corus is all about getting shortcut to the value addition game.
Thanks to the liberalsiation Tata Steel’s prime position in the domestic market is heavil challenged by new entites in India like Posco, LNM, Essar, and Jindal, besides SAIL and Vizag. All these people can now provide flats in quality and also quantity
Tata have to improve its competetive strength, if it has to retain its prime position, so it is buying out the Corus Steel for its technology and a readymade market, in a developed country.
The justification for 34.00% premium over the original price could only be that the purchase is an established enterprise, with good technological ability.
While you guys are right that things may look tough in the short term, the fact that TATA’s have been able to create a beach head in the Developed World.
-lavender
Buy Tata Steel
January 31, 2007 at 1:02 pm
I don’t think it was mere exuberance that accounts for the higher bid. It should be treated as a strategic move rather than a sound economic move. Ultimately when the steel industry consolidates, Tata will benefit in the long run.
Even though Tata has paid a higher premium, Steel analysts had estimated that they would have paid upto $13 Billion looking at the long term benefits.
January 31, 2007 at 3:17 pm
It is ok if Tata can handle it. The Valuation is subjective. What is the cost of the Technology and opportunities? CSN can still export iron ore to Cores.
January 31, 2007 at 4:10 pm
Your argument is based on the presumption that global steel prices are going down but the recent steel market trends show otherwise. I dont deny the steel market has seen some volatile wobble but last two quarters have seen a great resurgence. As for the “China effect” that worries you – China is a major importer of steel by themselves & despite increasing their internal production capacity. Lets just hope the Tata’s are better able to leverage the advantages of Corus.
January 31, 2007 at 7:56 pm
I am summing up all responses here.
China was a net importer but started exporting to. It is importing heavily the Iron ore raw material and exporting/consuming the finished goods. Good thing is, India has one of the largest Iron Ore deposits.
In the short term as already mentioned by several readers, it will be an overkill and this can magnify with falling global steel prices.
Atleast investors gave their verdict. The stock is down 10% on heavy volume.
Let us hope that Tata emerges a winner in the long run. Unfortunately this long run looks like another 4-6 years and i can safely re-enter the stock anytime later.
Woke: It made a strategic sense, if it was at the original price tag. However, they could have gotten it at a later time too. Tata could have simply let CSN walk away and made a combined bid on Corus/CSN few years down the lane. In this steel consolidation era, you always have counter bidders. If not CSN, you have mittals, Posco,Nippo (i guess) etc.
Let us wait and see how this unfolds.
Thanks for all your responses.
February 1, 2007 at 3:32 am
Swetha,
The prices have definitely gone up in the steel market over the last few years, but that trend is not going to continue forever as you know.
When it starts going down, it will go lot down creating oppurtunities for us investors to jump in and eat the pie.
Look at the sugar market. The global prices and the domestic prices have dramatically gone down after a huge surge in the last 3 years.
I will definitely watch Tata steel over the next few quarters and then take a position in it.
If anybody has faith in Tata steel, then look into options.
–sri
February 1, 2007 at 3:25 pm
If Tata steel paid a premium for Corus, they must have done thier home work. They know what makes business sense to them. Tata’s are not foolish enough to buy something for the heck of it. Remember, they paid a huge premium to take over Tetley. Tata’s have faith in themselves.
As management view, they’ve taken long term view. They cannot look at it like a stock trader who is interested in making a few bucks in the short term. Even if the Tata Steel stock fall further, company will not fall, they will do thier business as usual. That is what Tata’s will do. They have a sound business in hand.
Let’s not worry over how Tatas will manage all these. They are competent enough to take over & run large enterprises. They have a good management. Banks are there to back them up. Those who have nerves of steel will win this, Tata certainly has that. And they have proved it many times.
Raja Krsnan
February 1, 2007 at 7:31 pm
To Raja Krsnan,
I am certainly a trader. I will look into both short term, mid term and long term. This is the advatage a small trader has over an institutional trader. I can get out and get in easily any time.
Faith is one thing and blind faith is another thing. I certainly believe myself when it comes to money. Whether it is Tatas, Birlas or for that matter Reliance. I need to look at books and their strategy to hold Corus and go with it into future.
For the next few years, they will either have zero cash flow or worse a negative cash flow. This is mainly due to huge debt serving they have to do. Now, when cash flow is 0 or -ve , how do you want me to have faith?
Let us wait few more weeks, to see Tata spill their strategy on running this business.
good luck with your holdings.
February 1, 2007 at 8:49 pm
Interesting writeup. You could be right. This could be like the fancy window dressed balance sheet whcih proves deceptive when seen from the perspectiv of management accounting. The coming years shall show whethr or not the TATAs should have done TATA to it instead of acquiring it.
February 1, 2007 at 10:08 pm
As an Indian I have belief in Tatasons wisdom. Ratan Tata must have given good thought before bidding so high. I will not call it irrational move.
And question of taking over of Tata Steel bcause of this move is out of question. Tata group is too big to be engulfed.
February 2, 2007 at 1:06 am
To JV: Your statement “As an Indian…” doesnot go well. Tata steel bought corus which is bigger than Tata itself. This is a risky venture and time can only tell, if they have done their due dilligence.
Again blind faith in Tatas is dangerous. Tata Steel is just a part of Tata Sons empire. Don’t be under the impression that Tata will not be up for sale.
To all: As Hiren pointed out, we should be blind by the brand name Tata and its past success.
Also, no one is stupid or smart forever. If the Corus buyout looks stupid today, it will look like an exellent decision after 5 or 10 years.
As an investor i don’t want to go along with Tata Steel at this time. I will buy when this goes down and makes real sense from books and then ride it up. If you believe in Tata that they are going to turn around then, you will be surprised to see no gains in next few quarters/years.
This is not bashing an Indian company, but just an investor fears.
I would advise people to read ‘Rule #1′ investing. This is a book, which can help you have a closer look at companies.
Thank you for all wonderful conversations.
February 2, 2007 at 6:16 pm
Just different prespectives. You think as investore I think as an Indian, with capital ‘I’. You say with sense of caution , I state with sense of trust and proud. It is not necessary that acquireing smaller company is always safe bet. Risk is main element of any buiness.
You were not required to give the explanation, anyway I accept that you did not want to bash Tata’s move.
February 3, 2007 at 11:12 am
I think it is a matter of long term and short term. I do not think that Tatas will go down – no not even in the long term. I may have used the word blind faith, but maybe I was too hasty. I do not think my faith is really blind. One develops faith in a company over the years…slowly as one reads about it and sees what is happening. Sees the figures. admires the professional management. just because the company suddenly makes a move which seems to have two sides to it does not ruin a faith that has been built up over many years. I have had Tata steel shares for many years and have seen it through rough patches. As an Indian I am proud of the Tatas just like JV is, and as an investor I have full faith in the Tatas which has been built up over many years. I do not have the same faith in all the companies whose shares seem to be on a high right now…one has to respect the management. That is a very personal thing. Even from the investor’s point of view I think that professional management wins in the long run.
But yes, time will tell if I am wrong. As I said, I am not a trader, I don’t buy shares for short-term gains.
February 3, 2007 at 9:22 pm
Tata Steel is not just another steel company. This is where India’s most capable management and ethical leaders are working. I think, India is on its way to be paying salaries of nearly 20% of the world by 2020.
February 4, 2007 at 12:19 am
Buying stocks as nothing to do with nationalism or patriotism.
What we need to do is see our money grow atleast 15% per anum.
I, you and many more are small investors. Our belief or attachment to Tata’s will not matter at all. We have to worry about institutional investors who have invested millions into Tata steel.
Will they hold on to Tata steel shares, if they see zero/negative cash flow for few years?
Once they figure out there is trouble, they get out and we are left with deep losses.
Let Tata steel come out with their aquisition details. Let us see, how they are going to pay and how much dilution is expected.
How much Tatas have to sell their assets to fund this aquisition. How long will it take for merging to finish and clash of work cultures etc etc.
It will be atleast 1-2 years before they get a complete hold onto this aquisition. Interesting thing will be their future strategies.
We need to see that our hard earned money is not lost.
We should wait to see the events unfold and take another look at it.
In short term, ca we expect the stock to go up?
Thanks
sri
February 4, 2007 at 2:27 pm
Surprisingly, I dont hold any of Tata Steel shares.
Another surprise, on 03-02-2006 at BSE closing price of the share was 400.75 and closing price on 02-02-2007 stood at 462.95, return of just above 15%, despite all ho-hum.
Again, mutual funds net purchase was at the month end was as under by month ends :
8,252,206 Jul’06
8,399,917 Aug’06
9,489,824 Sep’06
12,404,758 Oct’06
10,958,011 Nov’06
17,991,658 Dec’06
Looking to the figures, it appears to me that MFs have increaased/doubled their stake
(Source moneycontrol.com).
Now about which scrip one can tell exactly/certainly what will happen in short term.
I am not analyst of any kind, but I can state like any of them, with straight face “From here either it can go up, or it can go down.”
February 4, 2007 at 8:49 pm
JV: Thanks for getting those numbers. If i had time, i would definitely calculate the fare price of Tata steel using Rule #1 rules.
Mind you, the steel prices were on the rise for the last year. So it shouldn’t be surprising to see a gain of +15% in the stock. As far as the mutual funds net purchase in the Dec 06, it can also be explained.
The word on the street during December 06 was that Tata will backout of this deal. Again, you will also notice that the stock went up to about 500-520 (approx). But, when the deal fell through, there was huge volume with a loss of 10% in stock value.
So yes, in the long run, we don’t know what will happen.
In the short term, defintely it is going down. Depending on how CORUS will be paid and depending on the merging is carried forward, the stock can become attractive again for an entry/re-entry.
April 30, 2013 at 12:33 am
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April 30, 2013 at 1:54 pm
جوالات = damnatus – buphammad vem muhammad = der feind im innern: http://www.youtube.com/watch?v=dB4nnD0XZ44