April 2007 | Christabelle Noronha
A Corus of acclaim
Over a year in preparation and a sleepless night of bidding for Corus: That’s what took Tata Steel from the fifty-sixth to the sixth-largest steelmaker in the world. What’s in store for the new steel giant?
As the sun rose on the last day of January, India woke up to the news that Tata Steel had acquired British steelmaker Corus at 608 pence a share, in one of the most remarkable takeovers of the times, to move from the world’s 56th largest steelmaker to the sixth-largest. A breathless and ecstatic Indian media hailed the takeover as a historic and momentous event not just for the Tata group but for a resurgent India Inc. The £6.7 billion Corus takeover is almost 10 times larger than any previous acquisition made by the group or by any Indian company. Says Philippe Varin, chief executive officer, Corus: “You don’t do this kind of thing twice in a lifetime.”
How does he feel about Tata being the winner? “I am very pleased to be in a situation where our shareholders are satisfied and the employees have a strategic future.” He should be. Prior to Varin joining Corus in 2003, the company was close to disaster: Corus shares were trading at a dismal 20 pence, and the former British Steel urgently needed restructuring. Radical measures followed, which revived the company’s fortunes considerably.
In a 2005 strategic review, the board had already agreed that the next stage would have to be a strategic alliance or takeover. Tata Steel had just the right mix — being the world’s most profitable steel company and located in Asia’s fast growing markets with access to raw material.
What does he feel about the other contender for Corus, Brazil’s CSN? “Our first contact with Tata was in 2005, so we had been discussing for one year,” he says, adding, “but, in all fairness, CSN was also a good business case for the company and we had to recognise that as well, though our contact with them was much shorter. ”What about the talk of the price being too high? “Of course the deal is very pricey, but I can tell you we will make it work and I am completely dedicated to this,” Varin states confidently.
He is clear about the way ahead. “If in the UK, you can supply a commodity product at 100 per cent delivery on-time, then it is difficult for the others to compete. So either in terms of the value-added to the products or the service, we must add some barriers. The only other way to do it is to have access to low cost slabs, in this case from India.” But since it will probably take a while before Tata Steel can supply raw steel to the Corus plants, Corus already has a short-to medium-term strategy in place.
The company has already kicked off a capex programme of £150 million to develop higher value-added products, like stronger steel for thinner car bodies, and rails that are 120m long instead of 40m — where its lower-cost competitors cannot compete. Other programmes include improving on-time delivery to customers, upgrading the quality of the mix and improving the efficiency of blast furnaces. With 900 people in R&D, Corus is a technological powerhouse, and the R&D people are looking forward to transfer some of their skills to the growing markets of Asia.
Corus has just over 41,000 employees, Tata Steel has another 42,000; and between Natsteel in Singapore and Millenium Steel in Thailand, there are another 5,000. What kind of business and growth opportunities are in store for such a gigantic employee base? Says Varin, “I think we are going to have a global company with an international management, and this is a very positive characteristic for a strong future. There will be a lot of potential synergies in terms of sharing of best practices across the companies. For the employees, there will be new experiences, new markets that they will be exposed to and opportunities for development.”
Still, some amount of apprehension remains about their future, especially in British plants. Varin feels it has little to do with the merger. “The company’s strategic future is very good, but obviously there are some concerns, especially in some UK plants. I don’t think it is linked to Tata, because at the end of the day the future of any plant depends on its competitiveness.” Corus has very strong assets too; it has more than a 50 per cent market share in the UK and is well positioned in Europe, especially in the high value automotive, packaging and construction markets.
One big concern analysts feel is that the economics of the deal are based on a projection that the world steel market will continue its present secular uptrend for the next four to five years. Could we be exposed in the short term (2 to 3 years) to a big dip in the market? Varin is unfazed: “I don’t have a crystal ball,” he says candidly, “but I think the structural trends in demand in China and India are no bubble. The question is on the supply side. China has been worrying because it has uncontrolled production. But the government of China has understood this, and the only question is its ability to make things happen.” If at all there is a cycle, he says, it would probably be of lower amplitude and more manageable, even assuming that China is not fully controlling its exports.
Now that the excitement of the acquisition is over, it’s time for the hard work to start — integration. “There are people who will tell you that you must have a detailed list of synergies, hundreds of teams working to integrate processes, spreadsheets, etc. This is great for consultants but, at the end of the day, two-thirds of the mergers which begin this way fail,” says Varin firmly. He favours a team at the top that drives the merger and shows the way. “The first task that B Muthuraman (MD, Tata Steel) and I have is to ensure that the top management on both sides fits the requirements. The second is that the corporate strategy should be very clear,” he says. “Third is that there are obvious synergies and we need to identify areas where we can do things together quickly.”
But this requires careful choices — nobody can do everything at the same time. “So, say we choose 10 areas. We first get results on these 10 areas then go to the following 10, rather than doing too many things in parallel and not going anywhere,” he points out. Tata’s concept is clear — to develop the Indian manufacturing hub and satellite finishing facilities in South East Asia. Corus has been implementing a turnaround strategy and focusing on the automotive, packaging and construction markets in Europe. “Very quickly, we have to see what are the good things on both sides and what is the genetic code of the new company,” says Varin.
And the future? “We would not forever stay at Number 5,” laughs Varin, pointing out that while there are some questions of debt and proper firepower, the characteristic of the new company will be defined on its very strong internal cohesiveness, its values and its technical excellence. “We have started at Number 5, but we will go up,” he says confidently.
Speaking about the future is not easy for a man who could have resigned if CSN won the bid for the steel giant. The dice seem to be rolling his way…