A

SYNOPSIS
OF
Merger and acquisition valuation
methods: case of Tata-Corus deal using
DCF.
A study of

Submitted in the partial fulfilment of the requirement

For the award of degree of

MASTER OF BUSINESS ADMINISTRATION (MBA)

To
AMITY UNIVERSITY HARYANA

Submitted to:-

Submitted by:-

Prof. Rajnikant

MOHIT BATRA
MBA (B&F)

AMITY BUSINESS SCHOOL

(2013-15)
PERFORMA FOR APPROVAL OF PROJECT PROPOSAL

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Institutes Name

A50050213025
:

Title of the project

Corus deal)
Subject Area

Name and Designation of

Mohit Batra

Amity Business School

:

Merger and acquisition valuation (Tata-

FINANCE

Prof. Rajnikant

Supervisor

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Date:-

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SYNOPSIS

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TABLE OF CONTENTS

TOPICS

Introduction
Significance of the study
Focus of the problem
Objectives of the study
Review of existing literature
Research Methodology
Organization of the study
Limitations of the study
Bibliography

Introduction
Mergers and Acquisitions are an important element in corporate strategy for several
decades. By studying mergers and acquisitions we are able to determine whether
they enhance a company or destroy its wealth. There are ongoing debates on effects
of mergers and acquisitions on companies.
The principal behind buying a company is based on the theory that it would create
shareholder value over and above the total value of the two companies.

The

rationale behind mergers and acquisitions is that two companies together are more in
value that two companies separate. This rationale is attractive to companies when
times are tough. The strong company which will be the bidder will act to buy
another company in order to create a more competitive and cost efficient company.
Two companies will merge hoping to gain greater market share and to achieve more
efficiency.

This attractive offer will make target companies often agree to be

purchased as they realize they cannot survive alone.

On 20 October 2006 the board of directors of Anglo-Dutch steelmaker Corus
accepted a $7.6 billion takeover bid from Tata Steel, the Indian steel company, at
455 pence per share of Corus. The following months saw a lot of negotiations from
both sides of the deal. Tata Steel's bid to acquire Corus Group was challenged by
CSN, the Brazilian steel maker. Finally, on 30 January 2007, Tata Steel purchased a
100% stake in the Corus Group at 608 pence per share in an all cash deal,
cumulatively valued at USD 12.04 Billion. The deal is the largest Indian takeover of
a foreign company and made Tata Steel the world's fifth-largest steel group.

Significance of the study

Focus of the problem

 To use an appropriate valuation method.

To see whether the purchase of the company is undervalued or overvalued.
Which company is getting benefit from this M&A deal.

Objectives of the study

The major objectives of my project are as follows To find out whether the M&A deal of tata-corus is meaningful or not.
To find out whether the impact of M&A activity on the value of the firm i.e
whether the activity leads to value enhancement or value erosion.
To see whether the deal price is undervalued or overvalued.
The current research was done to find out whether the M&A activity leads to
value enhancement or result in synergies in the merged entities.
Since the Tata Corus deal was given effect in the year2007, so further research in
the area could be done to analyze the pre and post operating performance of the
company through ratio analysis, trend analysis and other statistical models.

Review of existing literature

Methodology:
The valuation is conducted of the Tata Corus Deal.
Discounted cash flow (or DCF) approach describes a method of valuing a project,
Company or asset using the concepts of the time value of money. All future cash
flows are estimated and discounted to find present value. The discount rate used is
generally the appropriate cost of capital, and may incorporate judgments of the
uncertainty (riskiness) of the future cash flows.
Firm value = PV (Free cash flow over the life)
Sales Revenue -Operating Cost-Taxes- Net Investment- Change is Working
Capital = Free Cash Flow.

Taxes are calculated as a percentage of net operating profit as prescribed. Net

Investment is calculated from the difference of the total assets from the
present to previous year. Change in working capital is considered same as the
changes in sales revenue.
Life of a firm = Forecast period + Terminal year, Forecast period = Interval
over which firm enjoys competitive advantage.
WACC (weighted average cost of capital) is used as the discount rate for the
cash flow of the company.
Cost of Equity (Ke) is calculated from the Capital asset pricing model, as
follows
Ke= Rf + (Rm-Rf) Where, Rf =Risk Free rate, Rm = Market return, _=beta
value.
Cost of debt (Kd) is calculated as follows.
Cost of Debt Kd = Where, LTB= Long term borrowings STB= Short term
borrowings.
Terminal value is calculated using Gordon Growth Model as follows
Terminal Value = Final Projected Year Cash Flow X (1+Long-Term Cash
Flow Growth Rate) (Discount Rate Long-Term Cash Flow Growth Rate)
Valuation of the deal
The deal under consideration is valued using the Discount Cash Flow Method (DCF)
Under the following steps
1. Pre merger valuation of the two entities undergoing the deal
2. Post merger valuation of the combined entity and also synergy valuation
Concept of WACC for the discount rate, CAPM model for the cost of equity and
Gordon growth Model for the calculation of the terminal value is used for the
valuation of the deal. SPSS (Data mining tool) was also being used to get a suitable
and true projected value for the sales and operating cost. Input data like past sales
data, past price of steel & aluminium, past trend of input cost for the manufacturing
of Steel & Aluminium were used for setting up the required trends.
Justification of the deal: Justification of the deal is being carried out based upon the
Valuation of the company under consideration and also the synergy or due diligence

that is to be attached in the due course of the deal.

Maximum value the bidder company can pay = Value of the target company +
Synergy value
The mega deal in India: TATA & CORUS DEAL
Enterprise deal amount = $12 million.

Limitations of the Research

1. Data collection for the project is done from secondary sources. The source of
data is assumed to be authentic and will be disclosed properly in the report.
2. Valuation done in this research is based on financials up to year 2006 and various
assumptions are taken as per the macroeconomic factors prevailing at the time of the
entering of the deal. Since economic factors are dynamic and keep changing, so
valuation different times can also vary.
3. Valuation depends on the various estimates taken by different analyst. Hence,
subjectivity creeps in the valuation and comes up with different figures.

Organization of the study

Chapter 1: Introduction to topic M&A
Chapter 2: Overview of both companies
Chapter 3: Literature review
Chapter 4: Analysis (DCF valuation)
Chapter 5: Conclusion

Bibliography/References
1. www.corusgroup.com
2. www.tatasteel.com
3. www.wikipedia.org
4. www.sebi.gov.in
5. Investment banking book
6. rcssindia.org