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ECONOMY: India’s Billion Dollar Bids Mark Southward Shift

Paranjoy Guha Thakurta

NEW DELHI, Feb 7 2007 (IPS) - The acquisition of Anglo-Dutch steel manufacturer Corus by India’s Tata group signifies a ‘coming of age’ of industrial corporations in developing countries. The fact that the two final bidders for the European steelmaker were from Brazil and India, indicates a discernible shift in the global economic power balance.

On the last day of January, after nine successive rounds of bidding in a closely-contested auction supervised by Britain’s ‘Takeover Panel’, Brazil’s Companhia Siderurgica Nacional (CSN) pulled out of the race in favour of the Tata group.

With a production capacity of nearly 24 million tonnes, the Indian corporate group is now the world’s fifth largest steelmaking conglomerate after Mittal-Arcelor – the largest steelmaker headed by Lakshmi Mittal, a person of Indian origin – followed by Japan’s Nippon Steel and South Korea’s Posco.

In December, the Tata group had initially placed a 9.2 billion US dollar bid for controlling shares in Corus against a higher bid of 9.6 billion dollars placed by CSN. During the open bidding process, the Tata group gradually increased its bids, finally settling for a figure of 11.3 billion dollars.

Investors in Tata Steel initially reacted negatively to the event and the price of the company’s shares actually fell on Feb. 1. Tata’s chief Ratan Tata described the Corus acquisition as a “defining moment” in the group’s history that began more than a century ago when family patriarch Jamshetji Tata set up a steel plant in eastern India – then under British colonial rule.

With Corus in its fold, the Tata group has emerged as India’s largest privately-owned corporate enterprise. The group currently comprises nearly 100 corporate entities with a market capitalisation of 52 billion dollars, an employee strength of around 250,000 and operations in more than 50 countries spanning six continents. The group’s revenues are equivalent to roughly 2.8 percent of India’s gross domestic product (GDP).

The Tata group is a widely diversified industrial empire with facilities for manufacturing automobiles, chemicals and computer software. It also owns a large chain of hotels and has interests in other industries. Before Corus, the group had acquired a controlling 30 percent stake in the U.S.-based Energy Foods Inc., in August 2006, for a relatively small sum of 677 million dollars.

In several media interviews, Tata, who also heads the government of India’s Investment Commission that is meant to attract foreign direct investment (FDI) to the country, dismissed suggestions that his group had overbid for Corus’ shares. Given the fact that world steel prices have doubled over the last three years, largely on account of demand from China, Tata may well be proved right if international metal prices remain as bullish as they have been in the recent past.

The Tata group’s offer places an equity value of 12.1 billion dollars for the Corus group and an enterprise value in excess of 13.6 billion dollars. Tata Steel’s contribution to the bid will be around 4.1 billion dollars while the rest of the funds would be provided by a consortium of international banks and financiers.

Analysts believe the Corus deal is more than a landmark in Indian corporate history and quite unlike the acquisition of European steel giant Arcelor by Mittal Steel, since Mittal does not have investments in the country of his origin. “The Corus acquisition shows a maturing of the managerial and professional capabilities of Indian corporate bodies,” Anjan Roy, economic adviser, Federation of Indian Chambers of Commerce and Industry, told IPS in an interview.

Roy added that the fact that the Tata group acquired Corus against stiff international competition indicated that Indian companies currently “possess the necessary expertise to successfully conclude complex mergers and acquisitions that involve intricate financial engineering”. Above all, Roy points out, “the Tata group today has tremendous financial muscle – it has money to buy reputed companies in developed countries”.

Like Tata Steel, more and more Indian companies are at present making investments outside the country in a liberalised economic environment. The Indian economy has of late been growing at an impressive clip – for the first time since the country became politically independent in 1947, India’s GDP would be growing by an average of 8 percent a year for four successive years. Moreover, for the first time in 2006, outward investments from India exceeded incoming FDI.

Indian companies on the prowl in global markets include pharmaceutical giant Ranbaxy that may buy into the U.S.-based Merck (Charts), the Aditya Birla Group that has plans to buy up aluminium interests in Canada and Hutchison-Essar that is bidding for the Hong Kong-based Hutchison Telecom.

According to Suhel Seth, managing partner, Counselage (a corporate strategy consultancy firm), the Tata-Corus deal “has definitively and perceptively changed the paradigm that India is merely the back office of the world” given the country’s success in computer software development and business process outsourcing. “A new layer of sheen has been added to Brand India with the Tata group demonstrating its prowess as a manufacturer of steel which is a core industry,” Seth told IPS.

“The Tata group’s acquisition of Corus does not merely indicate that India Inc. is on a roll – the deal was crucial for the strategic, long-term survival of the group,” says Alam Srinivas, business editor, ‘Outlook’ weekly. He pointed out to IPS that Mittal-Arcelor as well as Posco of Korea intend setting up major steel making facilities in India as these corporate groups are attracted to India’s abundant reserves of high-grade iron ore. “The Tata group has to become a global player to compete effectively against its rivals.”