Tata Steel’s journey in the United Kingdom, as it draws to an end, reminds us of the Winner’s Curse, the financial theory that the winning participant in a frenzied auction will typically pay an overvalued price.
What a win it was! Nine years ago, Tata Steel came out on top in a frenzied bidding bout for Anglo-Dutch steelmaker Corus Group, defeating Brazil’s CSN by a mere five pence a share. The bids went on for weeks, culminating in a seven-and-a-half-hour home stretch in which Tata breasted the tape first.
The warning signals were there even back then. Several analysts said acquiring Corus would stretch Tata Steel’s balance sheet and it might take a lot of time to establish synergies with the acquired company.
Tata made its initial bid for Corus at $8 billion. That was enough of a red rag to markets and rating agencies. Standard & Poor’s placed Tata on its CreditWatch list with “negative implications”. Investors dumped its shares. That Tata Steel went on to pay $12 billion, 50% more than its initial bid, left several market mouths agape.
Interestingly, CSN held 3.8% equity of Corus, that is, 33,856,936 shares. Every increase of 50 pence a share would fetch the Brazilian company an additional £17 million.
Tata execs were philosophical about the negative reaction to the Corus acquisition. “The market is taking a short-term and harsh view,” they said. “Hopefully, somebody will look back and say that we did the right thing.”
A lot of people would be saying the worst things now, probably with an I-told-you-so air.
To be fair to Tata, things looked much more optimistic in those days. The financial crisis of 2008 was still some way away. Both Tata and CSN were looking to ride the rising curve of the commodity cycle. Demand and prices seemed to be going incessantly up as far as the eye could see.
India was being touted as one of the biggest consuming countries for steel. Tata was king here, with access to mines of iron ore and coal. Those were heady days of economic growth during the first term of the United Progressive Alliance. The country was expected to build large swathes of shining infrastructure: roads, highways, bridges, railway bridges, houses, offices. There was talk of economic growth hitting 10% to catch up with China.
Sentiment may have played a role, too. Ratan Tata was leading his eponymous group on a global march, starting with the acquisition of the Tetley brand of tea in 2000. Corus was the high point of this March, so much so that when the group went on to acquire Jaguar Land Rover, the news created much less wonder than the acquisition of a British brand of luxury vehicles by an Indian company not renowned for the quality of its vehicles should have. Ratan Tata called the Corus acquisition a visionary move.
To enhance the flavour, reporters dug out that Jamsetji Nusserwanji Tata had set up Tata Steel in 1918 to fight British dominance in steel making. Corus Group was part British Steel, created as it merged with Koninklijke Hoogovens of the Netherlands in 1999.
The merger was intended to revive British Steel, but it got embroiled in labour problems and cultural mismatch, two of the issues that plagued Tata as it looked to make a good fist of its acquisition. Others got added as the European economy slowed to a crawl and China paused to catch its breath. The global commodities cycled, rising when Tata acquired Corus, turned in the opposite direction. The cost of electricity in the UK and swings in the currency also played their role.
Tata Steel’s European operations lost an estimated $5 billion since 2010. The company admitted to asset impairments of more than £2 billion in that period. Its net debt stood at $11.3 billion at the end of December, more than 10 times the estimated earnings before tax, interest, depreciation, and amortisation for 2016.
Still, it’s hard to shake off the feeling that the change of guard at the top of the Tata Group may have played a role in the decision to sell. Ratan Tata may have wanted to try some more and see if things could turn around. Look at how he refused to give up on his baby, the car project of Tata Motors, and how he made sure he delivered the Nano in spite of reservations all around. Nano may not be a marketing success yet, but it is an engineering marvel.
Footnote: On Tuesday, CSN posted better-than-estimated quarterly results. That same day, Tata Steel’s board was in a marathon meeting in Mumbai, which ended with a decision to sell the UK operations, the one for which it had outbid CSN.