n 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. Richard Dobbs and Rajat Gupta .0/msohtmlclip1/01/clip_image002.jpg”> 2 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 acquiredmore 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 populationand 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. 3 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 acquisitionscompared with larger ones, such as the recent Corus deal? Koushik Chatterjee:Obviously, the synergies are larger for larger acquisitions andsmaller 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 dodifferently from other companies? Koushik Chatterjee:If you look at the literature about how to acquire and integrate acompany, 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 1The Association of South East Asian Nations: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. 2Earnings before interest, taxes, depreciation, and amortization. 4 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 aconcrete 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.” 5 The Quarterly:What cultural barriers do Indian companies face when acquiring aEuropean company?