So, the great battle is over and Tata Steel, around hundred years after it was founded, has become one of the largest steel companies in the world. Of course, the deal is not really done yet and there's some news that some workers union has vowed to prevent it from going through, but one assumes that it will eventually happen.
Looking at the newspapers and TV one sees broadly two types of reactions to Ratan Tata's audacious play. One is the cheerleader reaction, which sees Tata Steel as a symbol of a resurgent India that has arrived on the world stage. The cheerleader reaction is generally an emotional one and is all the more sharp because this is a (partly) British company. The irony of Tata Steel taking over British Steel (which is the British part of Corus) is all the more delicious to those who know the history of British scorn at the Tatas being able to make steel. In 1907, Sir Frederick Upcott, the chief commissioner of the Great Indian Peninsular Railway, promised to “eat every pound of steel rail the Tatas succeed in making”. That was Upcott's way of saying that an Indian company could never make steel. And now the Tatas look likely to own a good part of the British steel-making capacity.
Historical comeuppances aside, what does the Corus deal hold for investors? That question brings me to the other kind of reaction, that of the stock markets. Tata Steel's stock price fell dramatically by 10 per cent on the day the news came out. This wasn't really a surprise. Large mergers and acquisitions are generally treated with alarm by the stock markets, at least in the beginning. The main reason for this is that the stock markets are dominated by players who take a short-term view of things. Tata Steel's acquisition of Corus is something that will start to bear fruit perhaps five years from now. Unfortunately, the stock market does not like to think of good things that can happen five years from now. For the moment, the negative story is much easier to sell to punters.
Tata Steel has paid an enormous sum of money to buy Corus. Corus is far less profitable than Tata Steel itself and when times turn tough-and in this cyclical industry, they inevitably do-then Tata Steel's ex-Corus parts could become a serious drag on its profitability. Anyway, no matter how that pans out, the most interesting thing for investors is that Tata Steel-till now the most quintessentially Indian of companies-is suddenly the most foreign among large Indian companies. There are many large Indian companies which are global in the sense 70 or 80 per cent of their sales are outside India, the IT giants being the major examples. However, Tata Steel is global in a far deeper sense-about 82 per cent of its manufacturing will now be outside India. Jamshedpur, the hallowed birthplace of Indian heavy industry, is now a fairly small part of Tata Steel's manufacturing base. This really is a transnational company in the truest sense of the word.
While this is interesting from the nationalist cheerleading angle, it brings a new challenge from the investment analyst's point of view. Tata Steel's sales and profits are now going to be decided more by events in Europe than in India.
The rewards as well the challenges of understanding global businesses have now come home to Indian investors too.
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