McKinsey Quarterly

An Indian approach to global M&A: An interview with the CFO of Tata Steel

Koushik Chatterjee discusses the Indian multinational’s approach to outbound M&A—and its response to the global financial crisis.

Long a major force in India, the Tata Group is quickly establishing a global presence. With a combined market capitalization of more than $32 billion and operations in every major international market, Tata owns companies in businesses as diverse as consumer products, energy, engineering, information systems, communications, services, and materials.

The group’s largest business, Tata Steel, was established in India in 1907 and retains its headquarters in Mumbai. In recent years, the company has expanded both within Asia (by acquiring Thailand’s Millennium Steel, now called Tata Steel Thailand, and Singapore’s NatSteel Asia) and outside it (through the 2007 acquisition of the UK company Corus, as well as a host of smaller acquisitions, joint ventures, and associations). These now place Tata among the world’s top ten steel manufacturers, and one with a unique perspective on integrating new acquisitions. According to the group CFO of Tata Steel, Koushik Chatterjee, it sends only a few people, not planeloads of employees, to do the job—an aspect of what he describes as a sincere effort to create a partnership that jointly develops a vision for the combined company.

Recently, Chatterjee discussed this approach with McKinsey directors Richard Dobbs and Rajat Gupta. During the conversation, he explained the impetus behind the group’s acquisitions abroad, the effects of the global financial crisis on the steel industry and Tata Steel, and the company’s efforts to improve the efficiency of its operations. The crisis, Chatterjee notes, makes opportunities more apparent—and restructuring more critical for the company’s long-term health.


The Quarterly: Last year was the first in which Asian and Indian companies acquired more businesses outside of Asia than European or US multinationals acquired within it. What’s behind the Tata Group’s move to go global?

Koushik Chatterjee: India is clearly a very large country with a significant population and a big market, and the Tata Group’s companies in a number of sectors have a pretty significant market share. India remains the main base for future growth for Tata Steel Group, and we have substantial investment plans in India, which are currently being pursued. But meeting our growth goals through organic means in India, unfortunately, is not the fastest approach, especially for large capital projects, due to significant delays on various fronts. Nor are there many opportunities for growth through acquisitions in India, particularly in sectors like steel, where the value to be captured is limited—for example, in terms of technology, product profiles, the product mix, and good management. India actually needs a faster pace of increased organic capacity in steel in the near future to meet its growing demand.

So to pursue our overall growth strategy, we needed to go beyond India. And as the first step, we looked at the ASEAN1 rim for our initial acquisitions, due to the nearness of the markets. When we acquired NatSteel Asia, headquartered out of Singapore, in 2004, it gave us immediate access to six markets in the region, including Vietnam, the Philippines, and Malaysia. They may not be very big now, but these countries have meaningful populations and are on a trajectory for growth over the longer term, making them very attractive for the future. And by the way, these first regional acquisitions also let us test the waters of M&A and taught us how to run a transnational business, to understand the cultural issues, and to integrate larger organizations.

The Quarterly: How do you think about the synergies of those smaller acquisitions compared with larger ones, such as the recent Corus deal?

Koushik Chatterjee: Obviously, the synergies are larger for larger acquisitions and smaller for smaller acquisitions. At Corus, for example, one part of the company had very efficient operations, and the other part had lots of potential for improvement. Tata Steel itself went through a phase, in the 1990s, when it transformed itself into the most globally competitive company in its sector from a not-so-competitive one. We feel that there is a similar transformational journey ahead for Corus. That’s the work we’ve been doing since the acquisition.

The size of the overall improvement is obviously pretty significant in Europe. The aggregate performance-improvement gains have been nearly £400 million since the acquisition, up to September 2008, on a base EBITDA2 of around £700 million for 2006, the year before the acquisition. The present slowdown or reversal in the economic environment obviously affects that journey, due to the severe contraction of demand in Europe, but we have reworked our short-term strategy at the same time as we continue to work on longer-term structural issues for our European operations.

The Quarterly: In your approach to acquisitions, what kinds of things do you do differently from other companies?

Koushik Chatterjee: If you look at the literature about how to acquire and integrate a company, it typically says that you put in your own people, who understand your objectives, and have them drive the new company, aligning the acquired company’s people, processes, and systems with those of the acquirer. We haven’t been doing that with the conventional rigidity of an acquirer. From a mind-set perspective, we quite genuinely tend to look at an acquisition as a partnership rather than an acquisition. If a company is listed in the public markets, in form it will obviously be an acquisition, but in substance it could be a very good partnership if we align the objectives across the organizations. We don’t send planeloads of people into a new company. Instead, we only send in a few integrators. That’s been the key interface.

We also tend to cocreate a vision for the enlarged organization rather than just imposing our own. For example, after we closed the transaction for Corus, on April 2, 2007, we worked together for the next six months on cocreating a vision for the enlarged enterprise. And in that vision we asked questions. What are our objectives? What are our strengths and our weaknesses? How do we leverage those strengths—such as people, R&D, access to new markets, and our organic-growth pipeline—to achieve the vision? If the vision exercise isn’t shared or if the process isn’t participative, then the acquired organization’s willingness to be part of the future action plans and the consequent accountability will be much lower.

The Quarterly: Do you see any risks in this approach?

Koushik Chatterjee: The risk is that if the approach is more for show rather than a concrete action plan, then it will just fall by the wayside. So we need to ensure that the building blocks are in place, that we are all aligned in creating a shared vision, and that we follow the action plan. This approach requires a lot of maturity from the senior leadership on all sides, as it depends on a great deal of adaptability to new situations, cultures, and sensitivities. It’s not easy to do.

We don’t have a prescriptive integration manual, but we attempt to engage at various levels. The risk is that it takes time to positively influence a large organization or even to establish trust in the sincerity of the shared vision. But I believe that when we eventually establish that trust, things move faster; you don’t have to go around reassuring people. This was demonstrated by our European colleagues, who reacted very fast to the global economic crisis last year, when we realized Europe would be significantly affected. A short-term program, “weathering the storm,” was launched, which gave us very significant value—over £700 million—in the six months between October 2008 and March 2009. The program continues even today, with significant savings forecast for this year too, and we think some of the savings will remain, due to better practices adopted in the past ten months. This program demonstrates the organization’s keenness and motivation to react to this unprecedented crisis.

We also share and adopt good practices across the organization through performance-improvement teams, lending credibility to the concept of shared change. This gives employees in the acquired organization a sense of confidence that they too have good things that the parent company is absorbing. This approach builds trust in the partnership and in the whole target-setting process. But it is much, much harder than the structured route, which would typically say, “We do these five things, and therefore these five things must be done by everyone.”

The Quarterly: What cultural barriers do Indian companies face when acquiring a European company?

Koushik Chatterjee: First, we have to accept that there will be differences in cultures; one cannot make a single-culture organization. But it is critical to build a uniform performance culture. By that, I mean how we think as one enterprise and set targets for the larger organization, how we go about realizing the group vision—including how we benchmark performance and identify sources of value—and how we measure less tangible actions and behavior. These things are especially relevant now because there are no standard operating procedures for overcoming a global financial crisis.

So how can you build a culture that does not fear failure and tends to break barriers—and that goes right down into the organization? And as an Indian company, how do you welcome new family members and make them comfortable? The Indian mind-set is generally not rigid and has significant empathy. We are generally enthusiastic about welcoming people from different geographies, with different languages, and are proud to be a truly global organization. The inclusiveness of the Indian mind-set helps in building a global business, especially when that mind-set is reinforced by a structured emphasis on profit and value creation for the stakeholders. At the same time, an inclusive-partnership approach doesn’t mean that we are shy about making the tough decisions if they are in the long-term interest of the organization.

The Quarterly: What has the financial crisis meant for Tata Steel?

Koushik Chatterjee: It’s actually been different across our three hubs—Southeast Asia, India, and Europe. Europe has been affected the worst, as the size and impact of the contraction has been severe. Southeast Asia is kind of a mixed bag. Thailand, for example, had been affected by the crisis much earlier than elsewhere in the region because of the political and general economic situation there.

Singapore is a different story because when we acquired NatSteel, in 2004, it had around 60 to 65 percent of the Singapore construction market, which at that time was around 15 billion to 17 billion Singapore dollars. By 2007, that market had increased to around 30 billion Singapore dollars. With the help of government-supported construction during this crisis, it could still be 22 billion to 24 billion going forward. And while that’s worse than 2007 or 2008, it’s still much higher than 2004. For the entire Southeast Asian business, we are focusing more on cost competitiveness through improved operating practices and tight working-capital management and also ensuring that we improve our market share in the region.

In India, we are actually increasing our production base for steel, even as the rest of the world is contracting. We’ve commissioned a 1.8 million-ton-capacity expansion, for a total of 6.8 million tons, and we are going to produce and sell 20 percent more in the financial year ending in March 2010. And we continue to work on the continuous improvement of our operating practices and to raise the bar on cost competitiveness. We are also enhancing our capacity further, by around 30 percent, over the next two years.

In Europe, we have been able to maintain supply discipline to match the demand contraction. At Tata Steel Europe, the production cuts have been significant, matched by a very strict focus on the management of spending and a contraction of the cost base, as mentioned earlier, through the weathering-the-storm program. For the longer term, we’ve launched a program to reconfigure or realign some of the production facilities in Europe, especially in the United Kingdom, and to make them more competitive.

The Quarterly: Has the weak economy affected your restructuring plans?

Koushik Chatterjee: What we have planned and announced is a long-term restructuring of our European operations. The scope and extent of the restructuring depend on the opportunity to fundamentally alter the competitive position of the business. During a cyclical upturn, some of the opportunities remain hidden, as the businesses actually keep generating cash flow and earnings by riding the cycle rather than being fundamentally strong. The problem a company faces is to figure out how much of its performance is cyclical and how much is fundamental—and to find the right time to do this exercise.

The crisis makes the opportunity more apparent—questions about performance inevitably rise to the surface—and makes it imperative to make the hard decisions. I believe stakeholders understand why it’s necessary. It also costs money to restructure, and one has to balance the priorities: to retain liquidity and yet undertake fundamental restructuring to create long-term value.

Economically, the cost of restructuring marginal activities is higher in good times because they are making money—the problem is that you don’t want to restructure them when they’re making money, even though you know that you’ll have to do it eventually. So the question is when to actually do it.

The Quarterly: What has the crisis meant for how you, as a CFO, spend your time?

Koushik Chatterjee: Since the Corus acquisition, we have become a large, diverse organization in a very short time, adding significant complexity to the business, which means I spend a lot of time focusing on performance management, capital allocation, and liquidity management. But we’d been building a liquidity cushion and buffers long before the crisis. I think the best time to raise capital is when you don’t need it immediately but have a long-term deployment strategy in place. That gives you the leeway to get the best out of negotiations with the providers of capital, because you’re not under duress. These last six months have reaffirmed my view on that point, and our buffers are in long-term capital—three, five, or seven years—that won’t need refinancing in the short term. We have also raised equity recently, which will be deployed in some very attractive capital projects, especially the growth projects in India. Given the volatility and uncertainty of the global environment, it is important to keep an adequate liquidity buffer.

Furthermore, I’m extremely focused on generating cash savings in the broader organization. There has to be enough tightness to make business units go on pushing operating improvements to ensure further reductions in working capital and spending management. The best people to identify and reduce costs or spending are the people in the business. I also firmly believe improving working capital is primarily a role for operating functions, not the finance function. But the finance function can be a very effective partner in improving working capital, and my colleagues in the finance function and I find that a large part of our time goes into looking at how that can happen, both on the revenue side and the spending side. We also have a pipeline of capital projects—especially the Indian expansion projects and the mining projects, which are value creating under any economic conditions—and therefore have to prioritize their capital needs.

Finally, the global financial markets may undergo a structural change in the near future. At the very least, we have entered an era of capital scarcity. Therefore we need to look at the capital structure and ensure that the balance sheet of the company has the right mix of debt and equity and that the liquidity from these sources is deployed in the most effective manner. Also, the source of capital is fundamentally debt or equity, and each has its own risk–reward servicing implications. The structured-finance approach, which had developed very significantly through hybrid instruments in recent times, possibly went too far and did not help the investor and the issuers. Instead, it tried to hide the true risks and drove a return profile that was artificial. Therefore, a key part of my engagement is devoted to developing the blueprint of a sustainable and value-creating financial architecture for the company—covering several aspects, including capital structure, future financing, cost of capital, liquidity management, and effective capital allocation principles.

The Quarterly: How do you keep the organization aligned with such a complex agenda?

Koushik Chatterjee: Communication plays an important part in ensuring that the organization is geared up to the challenges. The key is to make finance, which is often remote, understandable to people in the business. To do this, we use the five Cs: costs, contribution, capital expenditure, capital preservation, and cash flows. While not rocket science, this simplifies finance into the five levers that the organization should focus on.

To illustrate, when knowledge of the crisis broke, last October, my CEO asked me to make a presentation to the union leadership in India to make them aware of the global financial crisis as it was unfolding. “In the language they are familiar with and the form in which they understand easily” was his brief. This presentation was intended to alert them to the forthcoming challenges, so that they could in turn communicate the same to the wider workforce. At the end of the meeting, there were many people from the union who asked what they should do to ensure Tata Steel emerges stronger from this crisis. That approach from the wider organization is our strength to counter any downturn—the element of self-belief and can-do spirit is quite extraordinary.

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