AFTERMATH

TEAM: HIGHLAND
 History and Background

ABC Ltd
Formed in 1999 by merger of KANAKAVA URAY and
STPHEN JOE’S.
Listed in London Stock Exchange, Euronext
Amsterdam and New York Stock Exchange.
Annual output of 18.2 million tons.
1.15 Billion pounds in 2006 loss due to restructuring
and consolidation of accounts.
 History and Background
XYZ Ltd
Formed in 1907 Asia’s first and India’s largest private
sector steel company.
EVA positive (Economic Value Add) with margins of
30%.
Goodwill and Capitalization of brand advertising.
State of the art 5 million per annum plant at Rourkela.
Plans to extend Rourkela plant capacity from 5 to 7
million.
Wire manufacturing in Sri Lanka known as Colombian
Steel.
Joint Venture in Thailand for Limestone mining annual
turnover of $3.8billion.
Started Globalization initiative by acquiring Singapore
based NatSteel followed by Millennium Steel from Thailand.
Strong presence in South East Asia.
Plans of producing 30 million tons by 2015.
Globalizing plans include Greenfield plants in Iran and
Bangladesh.
 The Merger
Interest towards acquiring ABC Ltd shown in October 2006.
Initial bid of $7.6 billion @455 pence per share.
Further raised its bid to $9.2 billion @ 500 pence per share.
The deal closed at $12.1 billion making it number 4 among
the deals of Steel Industry.
Fall in profits before taxes in the quarter after the merger
from Rs 1600.74 crore to Rs 1548.52 crore.
Post deal annual profits also declined to Rs 959.51 crore.
EPS declined from Rs 18.19 to Rs 16.63.
 After-Effect
The deal justified by the management explaining how
producing the quantity and quality of steel that ABC Ltd
produced would have cost 70-85% more.
Setting up 3-5 year plants could also pose execution
risks.
Deal also enabled bringing together cost effective raw-
materials and advanced production techniques together.
EPS and Market Capitalization of XYZ Ltd got diluted
immediately after takeover due to high Debt-Equity
ratio.
Tax payers being Indian Company has incurred
expenses for amalgamation which can be amortized
over 5 successive years.
The final deal costed 34% higher than the initial price.
The total value being 13.6 billion including the debt
that’s taken over.
 Synergies
Access to new and developed European Markets.
Sharing of Research and Development information
between the two companies.
Similar management and work culture helps in easy
integration.
XYZ Ltd produces low value long and flat steel
whereas ABC Ltd produces high value stripped
products.
Post Merger SWOT Analysis
STRENGTHS
The merger makes XYZ-ABC Ltd the 5th largest steel
manufacturer helping attainment of Economies of
Scale.
Cost advantage of operating in India can be leveraged
in western markets and differentiation based on better
technology from ABC Ltd can work in Asian markets.
 Helps in fending off any takeovers and helps in
buying its own shares at reduced prices.
WEAKNESS
ABC Ltd EBITDA at 8% was much lower than that of
XYZ Ltd which was at 30%in financial year 2006-2007.
The merger requires high level of integration for
technology transfer and coordinating supply chains.
The fact that XYZ Ltd being a smaller company
compared to ABC Ltd posed a threat in integration
OPPURTUNITIES
Chinese steel plants dependence on imported raw
materials, limit their pricing power.
ABC Ltd’s strong research and technology
development would add to the competitive strength
for XYZ Ltd.
The acquisition would open new markets and product
segments for XYZ Ltd, it would have access to some of
the largest steel buyer.
THREATS
Capacity additions by China, Russia may outrun the
demand growth and lead to subdued steel prices.
If the business performance of ABC Ltd declines, the
company’s cash flows would reduce leading to a
default on the loan taken.
Thank You