According to a report by the online edition of Britain’s Daily Mail, Tata Steel Ltd may merge its recently acquired British steel company Corus with itself in an attempt to cut costs. The report goes on to say that such a merger could put at risk thousands of jobs at Corus.
An analyst at an institutional broker dismisses the report, saying nothing of the sort is on the anvil. After all, Tata Steel carefully put in place the subsidiary structure to ring-fence the parent company from any adverse impact of the acquisition. A merger would undo that completely. Having said that, the need to cut staff costs at Corus is imperative. The company has been negotiating with Corus’s labour unions and has been pushing for a 10% cut in pay due to the recession and drop in steel demand. But the unions gave out a statement earlier this month that they haven’t agreed to pay cut.
Corus has already cut production by 30% and is likely to run into losses in the second half of the current fiscal. If the company is not able to cut a large portion of its costs commensurately, losses would mount further.
Also See Shares Jump (Graphic)
One of the concerns the markets have had about overseas acquisitions by the Tata group is its agreements with labour unions.
According to an analyst with a foreign broker, the company has an agreement with Corus’s unions that it won’t engage in massive lay-offs for a few years after the acquisition.
In fact, this agreement is what is said to have caused the unions of Ford Motor Co.’s Jaguar-Land Rover to be comfortable with the Tata group. While such employee-friendly measures may not hurt Tata Steel in its Indian operations, which has a competitive edge thanks to its captive resources, they would backfire in case of a commodity business like that of Corus.
With both capacity utilization and steel prices dropping, stagnant staff costs would hurt badly.
While Corus has gotten rid of a few people, the layoffs are far from sufficient.
According to an analyst, its decision to divest one of its units recently was motivated by getting a few employees off its rolls.
The company got some succour from the Netherlands government, which finances wages of firms that have seen a drop in profit, but has so far been unable to get any such incentive from the UK government, which houses a large chunk of Corus’s workforce.
As a result, few expect any meaningful reduction in the company’s wage bill in the near future, despite the plunge the steel industry has taken. Given the negatives the future holds, it’s interesting that Tata Steel’s shares have jumped by at leat 50% this month.
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Graphics by Ahmad Raza Khan / Mint