This is how TATA wants to buy Corus – a leveraged buyout. It entails creating a SPV and raising debt on the strength of the to be acquired company i.e Corus and then transferring the shareholding of the acquired company to SPV. Though this is a less risky strategy as the debt so raised are not the acquirer’s books, it does have many pitfalls especially in case of Indian companies like TATA who are fond of acquiring much bigger companies then themselves.
Stock markets worldwide are on highest ever and so are commodity prices. This may not sustain for long especially in a commodity like Steel which has a highly cyclical demand.Once price of steel and profitability drops so will market valuation and the trouble starts.
Nevertheless if there are substantial benefits that can be accrued from the acquisition like economics of scale, cheap raw materials ( TATA have access to captive mines) and opening up of new markets , new technology etc then it is worth it.
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