Tata Steel has informed the stock exchanges about the decision taken in their board meeting. In the meeting, the issue discussed was related to the European operations of Tata Steel. The company is struggling due to various global factors, including falling commodity prices.
At this stage, it is important to take a look at when the acquisition was made.
In the period prior to the crisis of 2008-09, the global economy was booming and rising stock prices exhibited the confidence of global investors in the risk assets.
It was around this time, when India was one of the fastest growing economies, there was a lot happening. Indian companies also went on an acquisition spree. One of those multi-billion dollar acquisition was that of Corus by Tata Steel.
Well, I am not going to analyse whether the decision was right or wrong. I am also not going to analyse if the current decision of getting out of the business is right or wrong.
What I want to highlight is something we keep witnessing in the market cycles. It is in the boom times that large-ticket acquisitions become commonplace. We see many announcements of big acquisitions – the amounts are large not just because the companies acquired are large, but also due to the valuations they fetch.
As I have written in my book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget” in the chapter on Valuation: “If one happens to buy at the top of the respective market, the time to recovery was quite long.”
In case of the Tatas, they waited for almost a decade before they decided in the board meeting to consider the exit option.
Some things do not change.
#RidingTheRollerCoaster – 113