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Dr. C.T.Sunil Kumar
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TATA-CORUS DEAL
Corus
The Corus was created by the merger of British Steel and Dutch steel company, Hoogovens. Corus was Europe’s second largest steel producer with a production of 18.2 million tonnes and revenue of GBP 9.2 billion (in 2005). The product mix consisted of Strip steel products, Long products, Distribution and building system and Aluminum. With the merger of British Steel and Hoogovens there were two assets the British plant asset which was older and less productive and the Dutch plant asset which was regarded as the crown jewel by every one in the industry.
They have union issues and are burdened with more than $ 13 billion of pension liabilities. The Corus was making only a profit of $ 1.9 billion from its 18.2 million tonnes production per year (compared to $ 1.5 billion form 8.7 million tone capacity by Tata).
The Corus was having leading market position in construction and packaging in Europe with leading R&D
The Corus was the 9th largest steel producer in the world. It opened its bid for 100 % stake late in the 2006. Tata (India) & CSN (Companhia Siderurgica Nacional) emerged as most powerful bidders.
CSN ( Companhia Siderurgica Nacional)
CSN (Companhia Siderurgica Nacional) was incorporated in the year 1941. The company initially focused on the production of coke, pig iron castings and long products. The company was having three main expansions at the Presidente Vargas Steel works during the 1970’s and 1980’s. The first completed in the year 1974, increased installed capacity to 1.6 million tons of crude steel. The second completed in 1977, raised capacity to 2.4 million tons of crude steel. The third completed in the year 1989, increased capacity to 4.5 million tons of crude steel. The company was privatized by the Brazilian government by selling 91 % of its share.
The Mission of CNS is to increase value for the shareholders. Maintain position as one of the world’s lowest-cost steel producer. Maintain a high EBITDA and strengthen position as a global player.
CNS is having fully integrated manufacturing facilities. The crude steel capacity was 5.6 million tons. The product mix consisted of Slabs, Hot and Cold rolled Galvanized and Tin mill products. In 2004 CSN sold steel products to customers in Brazil and 61 other countries. In 2002, 65 % of the steel sales was in domestic market and operating revenues were 70 %. In 2003, the same figures were 59 % and 61 % and in 2004 the same figures were 71% and 73 %.
The principal export markets for CSN were North America (44%),Europe (32%) and Asia (11%)
Tata Steel
Tata steel, India’s largest private sector steel company was established in the 1907.The Tata steel which falls under the umbrella of Tata sons has strong pockets and strong financials to support acquisitions. Tata steel is the 55th in production of steel in world. The company has committed itself to attain global scale operations.
Production capacity of Tata steel is given in the table below
The product mix of Tata steel consist of flat products and long products which are in the lower value chain. The Tata steel is having a low cost of production when compared to Corus. The Tata steel was already having its capacity expansion with its indigenous projects to the tune of 28 million tones.
Indian Scenario
After liberalization, there have been no shortages of iron and steel materials in the country. Apparent consumption of finished (carbon) steel increased from 14.84 Million tonnes in 1991-92 to 39.185 million tonnes (Provisional) in 2005-06. The steel industry which was facing a recession for some time has staged a turn around since the beginning of 2002. Demand has started showing an uptrend on account of infrastructure boom. The steel industry is buoyant due to strong growth in demand particularly by the demand for steel in China. The Steel industry was de-licensed and de-controlled in 1991 & 1992 respectively. Today, India is the 7th largest crude steel producer of steel in the world. In 2005-06, production of Finished (Carbon) Steel was 44.544 million tonnes. Production of Pig Iron in 2005-06 was 4.695 Million Tonnes. The share of Main Producers (i.e SAIL, RINL and TSL) and secondary producers in the total production of Finished (Carbon) steel was 36% and 64% respectively during the period of April-November, 2006.
THE GAME
Player 1 : Corus decides to Sell : Reasons for decision:
1. Total debt of Corus is 1.6bn GBP
2. Corus needs supply of raw material at lower cost
3. Though Corus has revenues of $18.06bn, its profit was just $626mn (Tata’s revenue was $4.84 bn & profit $ 824mn)
4. Corus facilities were relatively old with high cost of production
5. Employee cost is 15%( Tata steel- 9%)
Player 2: Tata Decides to bid : Reasons for decision:
1. Tata is looking to manufacture finished products in mature markets of Europe
2. At present manufactures low value long and flat steel products while Corus produces high value stripped products
3. A diversified product mix will reduce risks while higher end products will add to bottom line.
4. Corus holds a number of patents and R & D facility.
5. Cost of acquisition is lower than setting up a green field plant and marketing and distribution channels
6. Tata is known for efficient handling of labour and it aims at reducing employee cost and improving productivity at Corus
7. It had already expanded its capacities in India.
8. It will move from 55th in world to 5th in production of steel globally.
Player 3: CSN decides to bid : Reasons for decision:
1. There was an abortive merger with Corus 3 years ago. It had offered $3.5bn.
2. CSN has a 3.8% stake in Corus since 2002
3. Every 10pence increase in bid gets CSN an extra 3mn GBP( Pound)
4. CSN also looking for producing finished steel products in Europe
5. CSN is paid 1% of the offer price as an “incentive remuneration” from Corus
Tata CNS Game
The UK take over panel set up the rules for the bidding. Of the maximum 9 rounds 8 will be for the suitors to table a fixed price bid in cash. In the event of competitive situation continuing a final round would be held to give chance to the bidders to outbid the other within a ceiling that has already been informed to the panel. There has to be a difference of 5 pence for each round of the bid between the two suitors. Before arriving at this stage the strategies are.
Player 1 Tata having two stragies two bid or not to bid and the player 2 CSN is also having two option to bid or not. The pay offs relating to the same is given in the game table.
CNS is already having a 4 % stake on Corus. For every increase of pence the share price of Corus will increase by $ 4 million and CNS will have its share. In the game cited. Tata is having a dominant strategy to play up i.e to bid and the CSN is also having a dominant strategy to play left or bid. There for the Nash equilibrium will be (Bid,Bid) i.e. (4,3) and the same is aslo pareto efficient. But it is likely to (4,3) outcome and both of the player will be bidding.
In both bidding , Pay of (4, 3): Here Tata will have 4 and CNS will have three. Both will be better off as Tata will have the advantages of developed markets, new patients, advance R& D of Corus. If Tata is willing under competition then the share price will be high and the CNS will also benefit as it is having 4 % share in Corus. In the pay off (5,2) where Tata is bidding and CNS is not bidding the Tata will be better off as they can have Corus in a low price. If Tata is not bidding and CNS bidding they can have Corus at a lower price. But Tata will also be loosing by loosing the opportunity to have developed market, patient rights, increase product mix, and chance to be a major player. If both are not bidding both of them are loosing.
Tata Corus Game
Strategy 1: Tata Bidding and Corus Accepting (Bid: A:A)
Strategy 2: Tata Bidding and Corus Not Accepting (Bid :NA :A)
Strategy 3: Tata Not Bidding and Corus Accepting ( NB : A:A)
Strategy 4: Tata Not Bidding and Corus Not Accepting ( NB NA:NA)
(Other four options not explained as they are not relevant)
Strategy 1: Tata Bidding and Corus Accepting (Bid: A: A)
This is also the roll back and Nash equilibrium of the game. In this case both will be benefiting. The pay off is given by ( 2,3). Which mean 2 for Tata and 3 for Corus. The Tata will have access to developed markets by this acquisition. It can also have its product mix enhanced with the high value product from Corus and more over it can also have the excellent R& D facilities of Corus. They can break the supply chain and produce parts of it where it makes sense, for Tata steel. It means producing the semi finished goods at locations where it has raw materials support and cost efficiencies and then making the finished products in the market where it gets the value i.e. China, South East Asia and European countries. As Tata is taking over the company the Corus will have better management skills high Value for its shares.
Strategy 2: Tata Bidding and Corus Not Accepting (Bid: NA: A)
If Tata is bidding and Corus is not accepting. The pay off is given by (- 4, 1).Tata will be the looser more than Corus because it will be forced to find market in future for the new expansion projects in India (enhanced capacity of 28 million tonnes in India) as their domestic expansion. More over its dream to be global player will cease in the present condition. Whilst denying the Tata the Corus can explore possibilities to get a better price for it share from some other player in the market. But is no one turn up it will have to go back to the old condition where no one was there to take it. With problem of pension payments, labour union and lower profit margin the pay off associated with it is 1.
Strategy 3: Tata Not Bidding and Corus Accepting ( NB : A:A)
If Tata is not bidding it will be definitely loosing and when Tata is not bidding the loss of Corus will be much higher. It will loose the bargaining power and the options. The pay off will be lesser than when Tata bids and accept i.e 3.
Here the payoff for Corus is -5 because it will lose its bargaining power and be at the situation were several player looked seriously at Corus and kicked the tires. The ultimate price offered at that time was $ 5 million.
In this strategy also going for option “Not bidding” for Tata will deny it from entraning the developed markets and other benefits like patent rights, advance R& D facilities etc... So the pay off is less compared to the (Bid :A:A) option and more over it will have to find new markets, R&D, product patents etc.
Strategy 4: Tata Not Bidding and Corus Not Accepting ( NB NA:NA)
If Tata not bids and Corus also not selling the both will be losers. The more loser will Corus as it is having more problems than Tata. The pay off given to this is ( -3,-6). The pay off for Tata is ” -3” because in the case of Tata bidding and Corus not accepting it was “-4” . It is always better as far as reputation of the organization is concerned that bidding and rejecting is worse than not bidding and rejecting.
Conclusion
In the case the roll back equilibrium and the Nash equilibrium is the ( Bid :A:A). In this game the Tata will be valuing Corus more as their galaxy of benefits are more and the Corus will be selling itself to Tata as the pay off it receives is high. The payoff is the Nash and pareto efficient.
As we all know that Tata won the bidding for price of 608 pence per share, which translates to a purchase price of $ 12 billion which was 9 times the EBITDA. Tata valued Corus very high as it has a dream to be a major player in steel industry. On the first bid in October Ratan Tata said “ This proposed acquisition represents a defining moment for Tata Steel and is entirely consistent with our strategy of growth through International expansion”.
References.
Game Theory and Economic Modeling by David M.Kerps – Clarendon Press OxfordDecision Making using Game Theory- An introduction for managers – Anthony Kelly
Corus
The Corus was created by the merger of British Steel and Dutch steel company, Hoogovens. Corus was Europe’s second largest steel producer with a production of 18.2 million tonnes and revenue of GBP 9.2 billion (in 2005). The product mix consisted of Strip steel products, Long products, Distribution and building system and Aluminum. With the merger of British Steel and Hoogovens there were two assets the British plant asset which was older and less productive and the Dutch plant asset which was regarded as the crown jewel by every one in the industry.
They have union issues and are burdened with more than $ 13 billion of pension liabilities. The Corus was making only a profit of $ 1.9 billion from its 18.2 million tonnes production per year (compared to $ 1.5 billion form 8.7 million tone capacity by Tata).
The Corus was having leading market position in construction and packaging in Europe with leading R&D
The Corus was the 9th largest steel producer in the world. It opened its bid for 100 % stake late in the 2006. Tata (India) & CSN (Companhia Siderurgica Nacional) emerged as most powerful bidders.
CSN ( Companhia Siderurgica Nacional)
CSN (Companhia Siderurgica Nacional) was incorporated in the year 1941. The company initially focused on the production of coke, pig iron castings and long products. The company was having three main expansions at the Presidente Vargas Steel works during the 1970’s and 1980’s. The first completed in the year 1974, increased installed capacity to 1.6 million tons of crude steel. The second completed in 1977, raised capacity to 2.4 million tons of crude steel. The third completed in the year 1989, increased capacity to 4.5 million tons of crude steel. The company was privatized by the Brazilian government by selling 91 % of its share.
The Mission of CNS is to increase value for the shareholders. Maintain position as one of the world’s lowest-cost steel producer. Maintain a high EBITDA and strengthen position as a global player.
CNS is having fully integrated manufacturing facilities. The crude steel capacity was 5.6 million tons. The product mix consisted of Slabs, Hot and Cold rolled Galvanized and Tin mill products. In 2004 CSN sold steel products to customers in Brazil and 61 other countries. In 2002, 65 % of the steel sales was in domestic market and operating revenues were 70 %. In 2003, the same figures were 59 % and 61 % and in 2004 the same figures were 71% and 73 %.
The principal export markets for CSN were North America (44%),Europe (32%) and Asia (11%)
Tata Steel
Tata steel, India’s largest private sector steel company was established in the 1907.The Tata steel which falls under the umbrella of Tata sons has strong pockets and strong financials to support acquisitions. Tata steel is the 55th in production of steel in world. The company has committed itself to attain global scale operations.
Production capacity of Tata steel is given in the table below
The product mix of Tata steel consist of flat products and long products which are in the lower value chain. The Tata steel is having a low cost of production when compared to Corus. The Tata steel was already having its capacity expansion with its indigenous projects to the tune of 28 million tones.
Indian Scenario
After liberalization, there have been no shortages of iron and steel materials in the country. Apparent consumption of finished (carbon) steel increased from 14.84 Million tonnes in 1991-92 to 39.185 million tonnes (Provisional) in 2005-06. The steel industry which was facing a recession for some time has staged a turn around since the beginning of 2002. Demand has started showing an uptrend on account of infrastructure boom. The steel industry is buoyant due to strong growth in demand particularly by the demand for steel in China. The Steel industry was de-licensed and de-controlled in 1991 & 1992 respectively. Today, India is the 7th largest crude steel producer of steel in the world. In 2005-06, production of Finished (Carbon) Steel was 44.544 million tonnes. Production of Pig Iron in 2005-06 was 4.695 Million Tonnes. The share of Main Producers (i.e SAIL, RINL and TSL) and secondary producers in the total production of Finished (Carbon) steel was 36% and 64% respectively during the period of April-November, 2006.
THE GAME
Player 1 : Corus decides to Sell : Reasons for decision:
1. Total debt of Corus is 1.6bn GBP
2. Corus needs supply of raw material at lower cost
3. Though Corus has revenues of $18.06bn, its profit was just $626mn (Tata’s revenue was $4.84 bn & profit $ 824mn)
4. Corus facilities were relatively old with high cost of production
5. Employee cost is 15%( Tata steel- 9%)
Player 2: Tata Decides to bid : Reasons for decision:
1. Tata is looking to manufacture finished products in mature markets of Europe
2. At present manufactures low value long and flat steel products while Corus produces high value stripped products
3. A diversified product mix will reduce risks while higher end products will add to bottom line.
4. Corus holds a number of patents and R & D facility.
5. Cost of acquisition is lower than setting up a green field plant and marketing and distribution channels
6. Tata is known for efficient handling of labour and it aims at reducing employee cost and improving productivity at Corus
7. It had already expanded its capacities in India.
8. It will move from 55th in world to 5th in production of steel globally.
Player 3: CSN decides to bid : Reasons for decision:
1. There was an abortive merger with Corus 3 years ago. It had offered $3.5bn.
2. CSN has a 3.8% stake in Corus since 2002
3. Every 10pence increase in bid gets CSN an extra 3mn GBP( Pound)
4. CSN also looking for producing finished steel products in Europe
5. CSN is paid 1% of the offer price as an “incentive remuneration” from Corus
Tata CNS Game
The UK take over panel set up the rules for the bidding. Of the maximum 9 rounds 8 will be for the suitors to table a fixed price bid in cash. In the event of competitive situation continuing a final round would be held to give chance to the bidders to outbid the other within a ceiling that has already been informed to the panel. There has to be a difference of 5 pence for each round of the bid between the two suitors. Before arriving at this stage the strategies are.
Player 1 Tata having two stragies two bid or not to bid and the player 2 CSN is also having two option to bid or not. The pay offs relating to the same is given in the game table.
CNS is already having a 4 % stake on Corus. For every increase of pence the share price of Corus will increase by $ 4 million and CNS will have its share. In the game cited. Tata is having a dominant strategy to play up i.e to bid and the CSN is also having a dominant strategy to play left or bid. There for the Nash equilibrium will be (Bid,Bid) i.e. (4,3) and the same is aslo pareto efficient. But it is likely to (4,3) outcome and both of the player will be bidding.
In both bidding , Pay of (4, 3): Here Tata will have 4 and CNS will have three. Both will be better off as Tata will have the advantages of developed markets, new patients, advance R& D of Corus. If Tata is willing under competition then the share price will be high and the CNS will also benefit as it is having 4 % share in Corus. In the pay off (5,2) where Tata is bidding and CNS is not bidding the Tata will be better off as they can have Corus in a low price. If Tata is not bidding and CNS bidding they can have Corus at a lower price. But Tata will also be loosing by loosing the opportunity to have developed market, patient rights, increase product mix, and chance to be a major player. If both are not bidding both of them are loosing.
Tata Corus Game
Strategy 1: Tata Bidding and Corus Accepting (Bid: A:A)
Strategy 2: Tata Bidding and Corus Not Accepting (Bid :NA :A)
Strategy 3: Tata Not Bidding and Corus Accepting ( NB : A:A)
Strategy 4: Tata Not Bidding and Corus Not Accepting ( NB NA:NA)
(Other four options not explained as they are not relevant)
Strategy 1: Tata Bidding and Corus Accepting (Bid: A: A)
This is also the roll back and Nash equilibrium of the game. In this case both will be benefiting. The pay off is given by ( 2,3). Which mean 2 for Tata and 3 for Corus. The Tata will have access to developed markets by this acquisition. It can also have its product mix enhanced with the high value product from Corus and more over it can also have the excellent R& D facilities of Corus. They can break the supply chain and produce parts of it where it makes sense, for Tata steel. It means producing the semi finished goods at locations where it has raw materials support and cost efficiencies and then making the finished products in the market where it gets the value i.e. China, South East Asia and European countries. As Tata is taking over the company the Corus will have better management skills high Value for its shares.
Strategy 2: Tata Bidding and Corus Not Accepting (Bid: NA: A)
If Tata is bidding and Corus is not accepting. The pay off is given by (- 4, 1).Tata will be the looser more than Corus because it will be forced to find market in future for the new expansion projects in India (enhanced capacity of 28 million tonnes in India) as their domestic expansion. More over its dream to be global player will cease in the present condition. Whilst denying the Tata the Corus can explore possibilities to get a better price for it share from some other player in the market. But is no one turn up it will have to go back to the old condition where no one was there to take it. With problem of pension payments, labour union and lower profit margin the pay off associated with it is 1.
Strategy 3: Tata Not Bidding and Corus Accepting ( NB : A:A)
If Tata is not bidding it will be definitely loosing and when Tata is not bidding the loss of Corus will be much higher. It will loose the bargaining power and the options. The pay off will be lesser than when Tata bids and accept i.e 3.
Here the payoff for Corus is -5 because it will lose its bargaining power and be at the situation were several player looked seriously at Corus and kicked the tires. The ultimate price offered at that time was $ 5 million.
In this strategy also going for option “Not bidding” for Tata will deny it from entraning the developed markets and other benefits like patent rights, advance R& D facilities etc... So the pay off is less compared to the (Bid :A:A) option and more over it will have to find new markets, R&D, product patents etc.
Strategy 4: Tata Not Bidding and Corus Not Accepting ( NB NA:NA)
If Tata not bids and Corus also not selling the both will be losers. The more loser will Corus as it is having more problems than Tata. The pay off given to this is ( -3,-6). The pay off for Tata is ” -3” because in the case of Tata bidding and Corus not accepting it was “-4” . It is always better as far as reputation of the organization is concerned that bidding and rejecting is worse than not bidding and rejecting.
Conclusion
In the case the roll back equilibrium and the Nash equilibrium is the ( Bid :A:A). In this game the Tata will be valuing Corus more as their galaxy of benefits are more and the Corus will be selling itself to Tata as the pay off it receives is high. The payoff is the Nash and pareto efficient.
As we all know that Tata won the bidding for price of 608 pence per share, which translates to a purchase price of $ 12 billion which was 9 times the EBITDA. Tata valued Corus very high as it has a dream to be a major player in steel industry. On the first bid in October Ratan Tata said “ This proposed acquisition represents a defining moment for Tata Steel and is entirely consistent with our strategy of growth through International expansion”.
References.
Game Theory and Economic Modeling by David M.Kerps – Clarendon Press OxfordDecision Making using Game Theory- An introduction for managers – Anthony Kelly
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