What is the issue?
Tata Steel’s recent merger is a proof of hard commercial considerations in overseas acquisitions.
What is the merger about?
- Tata Steel had announced its tentative plans to merge their European steel operations in a 50:50 joint venture.
- Tata Steel and Germany’s ThyssenKrupp AG have planned for this merger.
- This merger will emerge as the second largest steel producer in the high value-added European market.
- These companies clarified that this merger is driven more by “industrial and strategic logic” than the need for financial engineering or job cuts.
What is the need for the merger?
- This merger is more about reducing exposure to the barely-growing and over-supplied European market.
- Tata Steel is keen to free up the capital from its overseas plants in order to double its Indian capacity.
- Global operations have become a millstone around Tata Steel’s neck.
- ThyssenKrupp has been progressively shedding its commodity businesses to focus on high-margin capital goods.
- This merger seems to be an intermediary step to a complete exit.
What are the challenges in this merger?
- The merger may have a rough passage with external stakeholders.
- The labour unions and the governments of UK and Germany are already looking to ring-fence their interests.
- Financial considerations are at play in this merger, with both partners looking to de-leverage their balance sheets.
- Chinese export threat is continuing to loom large.
- It is unclear that how this joint venture would pay off without pricing sacrifices, cost and job cuts.
Source: Business Line
