''The CFO is the conscience-keeper of the organisation'', said Tata Steel group CFO Kaushik Chatterjee as he spoke at the 2nd CFO Strategies India 2008 on Monday, 15 September in Mumbai, as he delivered insights on the remarkable rise of Tata Steel and its much-publicised acquisition of Corus last year. Sourya Biswas reports from the venue.
When companies announce their annual reports or bask in the glow of successful deals, it is often the CEOs who take centre stage. However, a lot of the groundwork for a successful venture is done by another important functionary in the corporate machinery, the chief financial officer who goes by the humbler acronym of CFO.
With rapid economic growth and increased globalisation over the last decade, the importance of the finance professional has grown manifold. And for the top finance professional in an organisation, the CFO, the changing dynamics of international business have caused him to adopt and adapt at a frenetic pace.
All these and many other details were discussed at the closed-door two-day CFO Strategies India 2008 summit, organised by Dubai-based Naseba, at the Hotel Le Meridien in Mumbai on 15 and 16 September 2008. On the first day, Kaushik Chatterjee, group CFO, Tata Steel, treated the delegates to an enlightening session.
In his 30-minute presentation ''M&A - growth strategy for value creation'', Chatterjee spoke in detail on the growth of the Tata Group in general and Tata Steel in particular, all on the strength of mergers and acquisitions. Of particular interest were his views on the Corus acquisition of 2007 that had occupied the pages of pink sheets worldwide.
Chatterjee candidly admitted that the earlier growth of the Tata Group had been largely organic as previous political regimes had not been very conducive to growth by acquisition, either domestic or international. He called the 10 years from 1992 onwards as the ''decade of transformation''.
Elaborating on the Arthur D Little recommendations for the group in the early 90s, Chatterjee said that the consultancy had been quite vocal on the group's needs to be internationally competitive, something quite alien to the house of Tata then.
However, the steep growth curve that had started in 2000 with Tata Tea's acquisition of Tetley grew even steeper and faster with one acquisition after another by different group companies, topping off with the $12.11-billion takeover of Corus last year.
The meteoric growth of Tata Steel
Chatterjee now spoke on the growth strategy for Tata Steel in particular and how it grew to become the sixth-largest steel producer in the world. Of course, he didn't forget to mention that his company continues to be the ''lowest-cost steel producer in the world'' as well.
As of 2003, Tata Steel was essentially a one-site company, centred in the pristine locales of Jamshedpur - aptly named after the great man who envisioned the place, Shri Jamshedji Nusserwanji Tata. Although an ideal township where nature is in perfect harmony with steel manufacturing, it was, admittedly, a small operation with only 4 million tonnes annual capacity.
Also, even though Tata Steel had a leadership position in finished goods like automobiles and white goods, in many other aspects it lagged behind its competitors. More importantly, as regards a foreign presence, there was none. (See: A hundred years of Tata steel)
Chatterjee spoke of how the senior management got together at this point of time to envision an aspirational target for the company, as well as brainstorm on how to achieve it. From these high-level discussions emerged a target - 15 million tonnes annual capacity by 2015, subsequently revised to 50 million tonnes - a ten-fold-plus increase in just ten-plus years. (See: Tata Steel plans to raise capacity to 30mn-tonnes in 10 years)
Of course, the company's jewel in the crown Jamshedpur was to be very much a part of the action. Target capacity was set at 10 million tonnes by 2010, with gradual increments over the years: 4 to 5 million tonnes in 2005 (already achieved), 5 to 6.8 million tonnes in 2008 (on schedule) and 6.8 to 10 million tonnes in 2010 (expected). (See: Tata Steel to raise capacity to 10 million tonnes at Jamshedpur)
Reason behind these ambitious numbers
Chatterjee explained that such an ambitious target was born out of the management's confidence in a vibrant world economy, with special emphasis on engines of growth like India, China, Russia, South-East Asia and Brazil. Indeed, many of the company's recent investments bear ample testimony to its belief in the strength of emerging economies. (See: Tata Group seeks more business in Vietnam / Tata Steel offers to acquire Brazilian ore miner AVG / Tata Steel seals $5-billion steel complex deal in Vietnam)
Chatterjee made an interesting observation - whenever a country's per-capita GDP had exceeded $3,000, a metal boom had been witnessed. This was because, according to Chatterjee, there is a strong co-relation between GDP and consumption of metals. With India's GDP almost at that threshold, there was no better time for Tata Steel to spread its wings and fly.
In an aside, Chatterjee spoke of the increasing importance of branded steel in the company's scheme of operations - it now accounts for $1.5 billion in annual sales. Chatterjee's assertion that steel items can be branded like FMCG items because they last longer certainly has merit.
Coming back to Tata Steel's growth plans, the management had identified that acquisition would definitely play an important part in the company's future plans. This was especially true of developed markets where the costs of establishing Greenfield projects were prohibitive.
Determinants for acquisition
Of course, the question now arises as to which companies to target for acquisition. Chatterjee revealed that Tata Steel had devised a set of determinants based on size, markets, technology and R&D and management compatibility for different steel producers around the world.
Additionally, associated risks such as operations and pension liabilities (a big concern in Western companies) as well as engagement with the target (''no shopping'' or exclusivity clause) were also considered. Finally, seven or eight likely candidates emerged.
Singapore-based NatSteel Ltd was the first of these to be successfully acquired for $486.4 million in 2004. Chatterjee said that this buyout gave Tata Steel access to seven different markets, countries in which the company was interested to consolidate further. This again led to the acquisition of Millennium Steel of Thailand for $167 million. (See: Tata's NatSteel to buy two rolling mills in Vietnam / Tata Steel acquires Thailand's Millennium Steel)
Of course, this brings us to the most keenly awaited Indian corporate deal of recent times - the Corus takeover. Although recently trumped in the news headlines by group company Tata Motors' buyout of Jaguar and Land Rover (JLR) a few months ago, the $12.11-billion Corus deal remains by far the largest foreign acquisition by an Indian firm. In contrast, JLR involved only $2.3 billion. (See: Tata Steel completes Corus acquisition)
Rationale behind the Corus acquisition
Chatterjee gave the following reasons as rationale behind the Corus acquisition:
- Consistent with Tata Steel's objective of growth and globalization.
- Creates the 6th largest steel producer in the world.
- Corus is an ideal combination of high-quality developed and low-cost high-growth markets.
- There were opportunities for significant synergies between Tata Steel and Corus.
- There was a considerable culture fit. He attributed this to the Anglo-Saxon background of Corus and India's colonial past.
Chatterjee then went on to speak on the manner in which a target acquisition is valued in monetary terms. The following factors played a key role in the valuation of Corus by Tata Steel:
- Market cap and premium in ''that market''. Chatterjee was very particular that premium varied from market to market, often within the same broader region.
- Comparable transactions in the recent past.
- Discounted Cash Flow approach -
- ''As is'' valuation
- Potential value with synergies
- Competitive situation and ''walk-away'' price
The last point assumes special significance in light of the bidding war that Tata Steel was dragged into by CSN of Brazil, a conflict that considerably increased the former's shopping bill. Fortunately, the JLR acquisition was spared such an ordeal. (See: CSN blinks at 603p, Tata Steel bags Corus for $12.11 billion)
Financing the Corus deal
Chatterjee next spoke on the financing of the deal and the various limitations faced by the company. Not only did Tata Steel have to deal with the sheer size of financing, it was also beset by certain limitations like:
- Unknown (for itself) nature of the European market.
- Confidentiality restrictions to test market, since both Tata Steel and Corus were listed entities.
- Indian corporate regulations that limited foreign investment by an Indian firm to 200 per cent of its net worth..
- The restrictive nature of the financing.
Chatterjee was quite candid about his displeasure with the $6 billion leveraged buyout first negotiated. In his opinion, the 3.7-per cent rate being paid out was quite costly, additionally burdened by restrictions on limited pre-payment clauses. In fact, to a question from the audience on the fall in Tata Steel's share price post-acquisition, he attributed the costly financing as a major reason. (See: Tata Steel to raise $2.5-billion to fund Corus acquisition)
Being the CFO, Chatterjee was quite unhappy with this but with the pressures of CSN's maneuverings and volatile market movements, he had to go along with the deal. But he wasted no time in renegotiating terms once the acquisition was complete. The result: a new financing arrangement which will end up saving Tata Steel a couple of billion dollars in interest costs. (See: Tata Steel preference issue to fund Corus merger raised to Rs6,000 crore)
In this context, Chatterjee made a very interesting observation - ''A CFO is the conscience-keeper of an organisation and trustee of the shareholders.'' When the entire world is celebrating a successful deal, on him may fall the onerous task of informing the real costs of the transaction.
Integration philosophy of Tata Steel
The integration philosophy of Tata Steel formed the concluding part of Chatterjee's talk. He spoke of the company's Oriental approach to acquisitions vis-à-vis the Western approach adopted abroad. While most acquirers require the target to bring everything on the table for an immediate assessment, Tata Steel prefers cross-fertilization and adoption of a shared vision and business plan. In that sense, Tata Steel prefers to act more like a partner in growth than a conqueror.
Chatterjee described the current Tata Steel-Corus conglomerate as two separate entities bridged together by the support functions like finance and HR. He was quite emphatic that nothing much changed for the man in the Jamshedpur plant in India or his counterpart in England, except for certain performance indicators. They will continue to perform their roles as before, only now contributing to a larger goal. In his words, they are required ''to be on the same bus''.
Chatterjee mentioned certain similarities between the two companies regarding their continuous improvement plans - Tata Steel's Aspire and Corus' The Corus Way - that are being further improved going forward. With promotion and sharing of best practices between the two, Tata Steel expects $450 million in shared synergies over the fist three years. Chatterjee revealed they were right on target. (See: Post-Corus acquisition Tata Steel reports six-fold hike in quarterly earnings)
What Tata does differently
Concluding his presentation, Chatterjee mentioned what Tata Steel did differently in the often-volatile world of mergers and acquisitions:
1. Don't conquer but build partnerships.
2. Don't send planeloads of people but only the key integrators.
3. Pay attention to cultural sensitivities.
4. Create shareholder value by aligning objectives.
5. Continue to maintain existing identities.
6. Co-create the value of enterprise by developing aspirational targets
At the end, as expected, Kaushik Chatterjee signed off with the group's motto - ''Leadership with trust.''