Steel in the melting pot of mergers
Jayanta Mallick
D. Murali
Waves were battering the jagged coastline, as if they were ever trying to consolidate in strength. And Binoy, watched from one of the ancient stone chariots of the Pallavas in Mahabalipuram. He had pushed away the endless and mind-numbing number-crunching from his table, and told his partner in the CA firm: "Stealing off for the afternoon."
But `steel’ he did seem to hear from a chorus of voices wafting by, below. Presently, someone called, "Excuse me," and Binoy turned. "Can you take a snap of us, against that big elephant… in the golden evening light?" asked a foreigner. "Sure!" said Binoy, jumping off from the ledge he had perched himself on.
Shots over, they got introduced.
"I’m Jack, a reporter," said one. "Of all trades!" exclaimed Binoy, to the glee of the group. "Me, John, a hedge fund portfolio manager," said another. Binoy feigned looking around John, teasing, "Checking if millions are spilling off your pockets!" The last was a lady. "Susanne," she said, smiling. "An economist?" asked Binoy, and supplied the basis of his studied hypothesis: "Guessed from the way you dress!"
As it happens with professionals, the three tourists bonded fast with the desi CA, identifying quite a few common topics to talk about. When they sat around a table in a thatched tea stall, the theme that sprung up was hotter than the coal in the shop’s copper boiler: steel and Corus.
"When I first heard the name, I remembered Kores and the carbon paper we once used in office," said Binoy, with a giggle. "Then I turned the pages of my M&A notes to read about the first phase of consolidation in the steel industry beginning in 1997."
Jack nodded, "After the Southeast Asian crisis. Global slump in steel industry that came in the wake of the crisis affected the UK significantly." John tapped a biscuit on the teacup and said, "Those days, we analysts used to point out that the high valuation of the British pound and stagnation in demand for steel were gradually undermining the competitiveness of British Steel in the European market."
Birth of Corus
Susanne remembered ruefully, "Corus was a child born to ailing mother British Steel, which had incurred a net loss of £81 million in 1999." Jack continued the parental analogy: "The Dutch father, Hoogovens, sought to gain critical mass in the global metals market through synergies with its UK partner." And Susanne resumed, "But Corus’ childhood was fraught with failures. Just three years after the merger, in 2003, Corus’ stock market valuation had dropped to $230 million from $6 billion in 1999."
There was a pause, even as the group absorbed the magnitude of the loss. Binoy broke the silence, saying, with a shrug: "How ironical that the larger merged company was expected to meet the challenges of the increasing bargaining power of customers and the downward movement of steel prices."
John supplemented with what he always said of most M&A (mergers and acquisition) opinions: "The aim of the merger was to attain operating economies by combining the facilities of the two companies to eliminate duplication and remove overlaps in marketing, accounting, procurement, logistics, R&D and other functions." John Bryant, the CEO of Corus in 1999, had said something likewise, then: "I am confident that this strategic merger of two strong companies will create a unique group which will be to the long-term benefit of shareholders, customers and employees."
Thankfully, John, the hedge fund manager added some numbers, "The new group planned to save £194 million a year through `terrific cost savings in overhead costs, purchase, logistics and adjusted best practices’." His emphasis on terrific was as obvious as satirical. But Susanne was kinder to the failure. "A case study by the ICFAI (Institute of Chartered Financial Analysts of India) suggests that cultural mismatch between the merged entities and the lack of HR (human resource) involvement when integrating the two entities, large-scale labour unrest due to downsizing and rationalisation of various operations seriously impacted the normal functioning of the fledgling organisation."
That reminded Jack of one of his reports. "In one of my stories, I had quoted Duncan Angwin, M&A expert at the Warwick Business School. That `without creating a workable model for decision-making during the merger, Corus was papering over the cracks’. And that the Corus management was much too narrow in its mandate of what constitutes cultural differences." Binoy only wished that something similar didn’t happen this time around, with a partner marching in from India, in the form of Tata Steel. John had a solid head for names in the consolidation game. "In 1997, Krupp and Thyssen, Germany’s two largest steel companies merged to form ThyssenKrupp. Arcelor, which came into existence in early 2001, was a result of a three-way merger of Arbed, Usinor and Aceralia, the three biggest steel producers in Luxembourg, France and Spain respectively… " he reeled off.
"Each of these companies was in turn created by numerous smaller mergers which had come about over the previous 15 years," interrupted Jack. "France’s Usinor joined forces with Sacilor way back in 1987 and acquired Cockerill Sambre in 1998. Similarly, the other two companies had also entered into several small mergers during the period."
The result was a behemoth, said Susanne gesticulating. "Now, of course, dwarfed by Arcelor-Mittal combination, which marked the beginning of the second phase," quipped Binoy. "A staggering 45 million tonnes of steel a year!"
Consolidation chronology
John had more facts to add. "In 1991 Avesta AB merged with the British Steel Stainless Group (today part of the Corus Group) and formed Avesta Sheffield AB. In 2001 Avesta Sheffield merged with the Finnish stainless steel producer Outokumpu Steel and created Avesta-Polarit." Jack asked, "Now the third largest stainless steel producer in the world?" John nodded, and said, "In certain market sectors, such as hot and cold rolled wide strip and plate products, it ranks as number one in the world." Meanwhile, Susanne was noting down a T. Nagar address that Binoy was helping her with, to buy stainless steel water glasses from.
"Hey, do you know why Mittal didn’t buy Corus?" asked John, of the group. "I heard they spoke, but Mittal was not interested because of… " began Binoy, in response. And Jack filled in with the logic: "The potentially high production costs and pension liabilities involved in a takeover."
Susanne was sympathetic towards Corus, making Binoy wonder if she was a `substantial’ shareholder. She recounted that the company had progressed in stripping out costs. "It has implemented a three-year `Restoring Success’ programme designed to deliver some £680 million of savings by the end of 2006. So far, it has achieved over £600 million of these benefits. Recently, the group sold off its aluminium assets for 826 million euro."
There was more: "A new pensions deal with the UK unions has also been agreed which should reduce the underlying cost of the scheme by around 20 per cent. Its attempts at bringing debt under control has achieved some success," Jack recounted.
"It has been trying to look out of the West European box, especially in the low-cost BRIC economies (Brazil, Russia, India and China)," alerted John, because he always carried a big red book in which he noted down all likely deals, anywhere under the sun. "In July 2002, Corus Group planned to acquire Companhia Siderurgica Nacional of Brazil for $2.1 billion in stock; will also assume $2.1 billion in debt."
Three rounds of tea were already over, but the group was thirsting for more discussion, about the second phase of consolidation in the industry. Ambling from the restaurant, the four had come to the periphery of a crowd that had gathered around a roadside `snake charmer’. Jack was telling Binoy their mission: "We three are here to study your steel industry!" Binoy laughed and remarked, "Perhaps, you’ll also find out that we can be unpredictably charming in tricky situations!"
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