Tata Steel’s decision to sell its entire British business which may impact 15,000 jobs, is the result of an individual ego, organisational over-confidence, and uncertain industry environment. It doesn’t imply the death of former Tata group head Ratan Tata’s dream of creating a truly global multi-national corporation, nor does it indicate current head Cyrus Mistry’s new strategic mindset. However, what the predicament does underline once again is that operating in a globalised village is fraught with risks.
Individual ego
In 2006 and 2007, when Ratan Tata bid for Corus Steel, then the ninth largest steel producer in the world, he was on a high. With successful global acquisitions like Tetley Tea, he was confident that his group could emerge as India’s first MNC. He wished to crash into the list of top 10 global steelmakers. What JRD Tata had done to the group within India, he wanted to replicate globally. This was why he trained his takeover gun on a company that was four times bigger in terms of annual revenues – it is another matter that its yearly profit was lower than that of Tata Steel.
Organisational overconfidence
Ratan Tata's vision translated into organisational bullishness and brashness. So, Tata Steel threw caution to the winds during the intense, aggressive and manipulative bidding war for Corus Steel. Initially, in October 2006, the Corus management, along with market analysts, tried to goad Tata Steel to increase its initial offer. Ratan Tata rightly refused to budge and stood his ground. Finally, Corus accepted Tata Steel’s price.
Before that, British industrialists criticised Corus for accepting Tata’s price, which they believed was too low. As early as October 2006, the battle for Corus had acquired a colonial and racist tinge. It was pitched as former colony versus imperialist power, and white versus black. Therefore, it wasn’t surprising when a new bidder appeared on the horizon, with Brazil’s CSN making a higher counter-offer in November 2006. Tata Steel made a counter counter-offer; CSN hiked its price. Finally, an auction was held. And the winner was Tata Steel.
In April 2007, when the deal was sealed and delivered, almost everyone, except Ratan Tata, agreed that Tata Steel paid too high a price to fulfil the global ambitions of its chairman. After all, with a cash payout of over $12 billion, the Indian MNC-in-the-making had ended up hiking its original offer by 34%. However, the critics piped down as those were the heady days for the global economy and international steel sector. Not too many had any clue about the coming financial crisis of 2008. The Beijing Olympics to be held in 2008 was around the corner and China, one of the largest consumers of steel would need more steel, especially quality steel that Corus manufactured. And then there was the London Olympics in 2012, which would mean more construction and more demand for steel.
Mortgaged crisis
The financial crisis of 2008 engulfed the world in its economic flames. Experts predicted the beginning of a global recession that would be akin to the Great Depression of the 1930s, and said that it would take decades for most economies to recover from it. Post-Beijing Olympics, there was overcapacity in the steel sector as China (with production capability of a billion tonnes per annum) had constructed additional steel plants to meet the construction demand. At the same time, steel prices slumped, and continued to do so. As recently as in 2015, they were down by 18%.
All the steel companies were in turmoil, saddled with losses and debts, and approached their respective governments for financial help. Steel plants were shut down in China, or gobbled up by the bigger players. Across the rest of the world, companies pruned their capacities and employees’ strength, sold off plants at rock-bottom prices, or simply shut down a few units. One of the reasons for the rising non-performing assets with Indian banks is their exposure in the steel industry. Tata Steel and Corus Steel were no exceptions to this dismal trend.
Corus in crisis
The crunch in Corus intensified because of other reasons. At the time of the buyout, Tata Steel said that it would not sack employees, although it added that it would review the situation later. In 2008, it had no choice but to pare down employees’ expenses. In addition, Corus had a huge debt burden of its own; although its steel attracted better prices, its costs were higher too, compared to Tata Steel’s India operations. Finally, Corus had high actuarial costs, related to employees’ insurance, severance and others, which was a European baggage due to the prevalent social security structure.
The combination of the above factors was, obviously, a combustible mix for any business. It logically led to a situation where Tata Steel had no choice but to sell off the assets of Corus Steel. Last year, there were rumours that the British operations would be sold; they were confirmed a few days ago. But the Tata Group has had experience in pruning their group companies, and selling off those that didn’t fit the overall strategy. As Chairman, Ratan Tata did it without remorse. He publicly claimed that he would dispose of any firm that wasn’t among the top three in its segment. And he did it too. Cyrus Mistry, if he sells Corus Steel, will continue the legacy.