When Tata Steel paid out a hefty $13.1 billion to acquire Corus in 2007, Chairman Ratan Tata described it as a defining moment for the company. It is not hard to see why he thought this may be so. It made Tata Steel’s capacity grow three times, put the company on the global map, and spread the risks of the business of making steel. The investment was made in a climate when there was a tremendous buzz about outward foreign direct investment (FDI), a time when a clutch of Indian industrialists were persuaded to see value in making foreign investments at extremely heady prices, which were sought to be justified on the basis of over-optimistic profit projections and growth forecasts for the world economy. In hindsight, it is apparent that the acquisition was a bad strategic decision, but it would have been difficult, if not well nigh impossible, to predict such things as the Eurozone’s slide into recession and the abrupt and unexpected slowdown in China. The damage was compounded by cheap Chinese steel flooding western markets.
The move by Ratan Tata’s successor Cyrus Mistry to explore a sale of Tata Steel’s U.K. steelmaking business is not going to change the fortunes of the company in a hurry. It remains to be seen whether buyers can be found and if so what prices they are willing to fork out for plants operating in an industry that seems set for a protracted and severe winter. But given the circumstances, in which the Indian company’s profitability is eroded by its operations in Europe, the decision to bolster a still-lucrative core by paring the company’s debt from the Corus acquisition is probably the best course of action. It remains to be seen how the U.K. government will react to this decision. There could be an attempt to nudge the company into accepting a restructuring proposal. But given that the company’s European operations have lost almost $5 billion since 2010 and the net debt surpassed the cost of the Corus acquisition by the end of last December, it may take a lot of doing to get the company to change its mind. While the decision to divest itself of the U.K. business is a bold one, it could be said that the company took a tad longer than it should have in arriving at that decision. Arguably, foreign investments made by some Indian companies during the extended period of the commodity boom were influenced too much by the ambition or desire to scale up for the sake of doing so. For instance, the billions of dollars invested by some of the country’s industrialists in sectors such as coal at the peak of the commodity supercycle have come to no good. But it may be worth pointing out that some of the acquisitions have indeed paid off. When Ratan Tata acquired Jaguar Land Rover, there were those who wondered about the wisdom of the purchase. Still the gamble has worked, and the losses notched up at the domestic businesses of Tata Motors have been more than offset by the profits earned by one of Britain’s most iconic carmakers.
