The Big Merger: Thyssenkrupp AG and Tata Steel Ltd.

By Shweta Arya

Mega mergers aren't very common, but when they happen, the numbers involved are truly massive, as seen from a very recent development in business. 

Leading German Steel maker Thyssenkrupp AG and India's Tata Steel Ltd. signed a memorandum of understanding to form a 50-50 joint venture in a non-cash deal on Wednesday. The newly formed entity will be called — Thyssenkrupp Tata Steel, to be headquartered in Amsterdam region of the Netherlands and will supply premium and differentiated products to customers.

The move to create Europe's second-largest steel company is an effort to affiliate the industry, which has long struggled with excess capacity and competition, particularly from China.

Speculations regarding this proposed merger started one year ago, the company is estimated to have a revenue of about €15 billion (?1.16 lakh crore) per year, shipments worth 21 million tons a year and, at present, some 48,000 employees. The companies expect to save between €400 million and €600 million (?40 crore to ?60 crore) in costs per year by integrating activities including research and development.

The effect of this merger is supposed to help both the companies as the steel assets and identified liabilities will be transferred from their books to the Joint Venture, leading to a leaner balance sheet for both the firms. The combined business profitability will be higher than the Tata Steel Europe's current magnitude.

The critical point arises that up to 2,000 administrative jobs and around 2,000 jobs in production sector will likely be cut, the impact estimated to be shared between both sides. Another major contrast is that Tata Steel is a focused steel company whereas Thyssenkrupp has a more profitable 'capital goods business' it would like to focus on and producing steel is not it's prime initiative. More details are to be concluded in time for a formal signing of the transaction at the beginning of 2018.

The trend of regional consolidation is quite extensive, pointing to other four large combinations in China and ArcelorMittal acquiring ILVA, Italy's largest producer. Hence, how the two firms work to make the European steel business more rewarding and the eventual outcome are the aspects to watch out for in the years ahead.