Goodwill Hunting

Brand Tata takes a $18 bn hit

"The Company has satisfied itself that the acquisition of Corus in no way jeopardises long-term shareholder value." Ratan Tata, 31.05.2007

"Although there was a rise in market price of the Corus shares and while there was a competitive bid which further raised the acquisition price of Corus, I believe that when one looks back at this acquisition – even at this price, it will be seen as a bold visionary move."

 
A decade later, Tata Steel's shareholders are paying heavily for the acquisition.

B. Muthuraman, Tata Steel's MD had stated in the 2007-08 annual letter, "Currently the steel industry is going through unprecedented times. The steel demand is .. unseen in the past several decades."

The top management at Tata Steel was aware that the period was certainly not a normal one and clearly out of the ordinary. So with steel at several decades high and in highly irrational times, Mr. Tata embarked on his ambitious plan to acquire Corus with the highest possible leverage. The results were there to see when in the very next year Tata Steel had to incur restructuring costs amounting to Rs. 4,094 crores and further Rs. 1,684 crores in 2009-10.

Any businessman with a reasonable sense can say that the commodity business has its ups and downs and buying a business at the very height of the commodity boom can prove disastrous for the company and its shareholders. Not only did Mr. Tata buy Corus at the height of the commodity boom, but by his own admission at a very high price.

No Mr. Tata, your move was not a bold, visionary one but an ill-timed and ill-conceived one. In none of the past years has Tata Steel even managed to perform on par with BSE Sensex having cumulatively underperformed the Sensex by 126% over the past 8 years. 

In 2014-15, the company under Cyrus Mistry took a goodwill writeoff of Rs. 4,951 crores and wrote off the Long Products UK business from its books. In a sudden, unexpected move on 24th Oct, 2016 Cyrus Mistry was removed as the chairman and replaced by Mr. Tata himself. The company under Cyrus Mistry was trying to emerge from the weight of the acquisition. With one swift move, Mr. Tata has put the company at a standstill. Cyrus Mistry has stated that there is a $18 bn goodwill impairment at Tata group companies primarily related to Ratan Tata's expensive acquisitions. SEBI and NSE are looking into the allegations.

The current going-ons are a fit case for class action lawsuits against the Tatas given that the interests of the minority shareholders were severely impacted by the secrecy around the surroundings and the long-term loss in shareholder value.

Tough love: Ratan Tata’s message to Cyrus Mistry and Tata Steel workers and shareholders.

Four years after riding into the sunset, Ratan Tata is back with a message for the incumbent Chairman, Cyrus Mistry and Tata Steel shareholders: “Tough Love”. 

In Happier times

He has succeeded in getting the board of directors to fire Cyrus Mistry barely four years into his job. Cyrus Mistry was at the forefront of efforts to enter into JV with Thyssenkrupp and negotiate pension plans with the UK Government which would have saved thousands of jobs and pensions.

The Chinese onslaught of dumping steel has bled Tata Steel and they have been forced to write off almost $3bn of the $13bn purchase price.  

Ever since Ratan Tata acquired Corus for $13bn at the height of the commodity boom, the business was doomed to fail. Having a write off of nearly $600mn in the very next year of acquisition is certainly an ominous sign. Instead of hiving off the business, Mr. Tata continued with his priced acquisition. Subsequent years saw steel prices crash and alongwith it the high pedestal upon which Mr. Tata placed himself upon. A person of the calibre of Mr. Tata should have been aware that he was riding the very peak of the commodity wave when he bought Corus in a bidding war.

Last 10 years has seen Tata Steel underperforming the BSE Sensex by 140% and giving an absolute return of -18.94%.

Known for his fights against the old guard at the House of Tatas, Mr. Ratan Tata himself has turned old guard. It is anyone’s guess who the new chairman would be accountable to. Most certainly not to the shareholders.

Meanwhile the fate of thousands of workers and investors in Tata Steel hang in balance. Tough love.