Focus on M&A remains intact for steel makers: Deloitte

Despite the current slowdown in consolidations within the global steel industry, mergers and acquisitions (M&A) remain a critically important business strategy for companies, according to a new report , Getting back in the water: Consolidation in the global steel industry, by Deloitte Touche Tohmatsu's (DTT) Global manufacturing industry group. While the economic downturn is a significant factor in short-term decisions regarding M&A activity, steel companies are expecting that they will be making acquisitions over the next three years.

''Some of the major steel players are not just standing on the shoreline looking to see if it is safe to get back in the water-they are diving in and exploring deal opportunities today,'' says Nicholas Sowar, global steel leader, with DTT's Global Manufacturing Industry Group. ''In fact, 69 per cent of the executives surveyed are currently considering an acquisition.''

The downturn, however, is having an impact. In response to the credit crisis, 73 per cent of executives surveyed by DTT's Global manufacturing industry group said their companies were likely to assess the implications of decreased liquidity and the higher cost of capital. Sixty-seven per cent expected to manage capital to free up cash, and 60 per cent said they were setting new priorities for capital investment.

''There is generally a more cautious approach to acquisitions right now,'' says Dan Schweller, global metals M&A leader with DTT's Global manufacturing industry group. ''This is largely due to the economic downturn's impact on financial results and the credit markets, making it more difficult to price and finance deals.''

But companies may not want to wait too long to move: while only one-quarter of executives surveyed described the current climate for acquisitions as being very competitive today, almost two-thirds expect competition to increase over the next three years. To help companies position themselves for when the economy recovers, the report outlines M&A challenges and leading practices for the steel industry and highlights the need for companies to improve their capabilities to make the most of their acquisitions.

Commenting on the India scenario Kumar Kandaswami said, ''Like the global steel industry, the Indian steel sector is also fragmented and is a candidate for consolidation. However, consolidation in India looks difficult since the industry is still not as mature like it is in the rest of the world, companies have announced green field investments or have gone through big acquisitions in the recent past.''

According to the report, managing corporate cultures, integrating management processes, and managing change were cited as the top three challenges in conducting acquisitions. But less than half of the executives surveyed said their companies conducted a detailed analysis of corporate or cross-border cultural issues when considering an acquisition or that these issues were very important when deciding whether or not to proceed. This was despite the fact that 64 per cent termed cultural issues as extremely or very challenging when managing an acquisition, making it the highest-rated challenge.

''Most companies tend to focus heavily on financial issues during the due diligence phase and overlook the cultural issues and potential human capital integration challenges while deciding whether to proceed with a deal,'' explains Schweller. ''But with continued interest expected in cross-border transactions, cultural considerations will be critical to making a successful acquisition.''

Other highlights of the report:

• Scale, negotiating power, and new markets top objectives for acquisitions. 75 per cent of executives surveyed said that achieving economies of scale, increasing negotiating power with customers and vendors, and entering new geographies were important objectives when making an acquisition.
• Financial factors often decide whether a deal proceeds. More than 90 per cent of executives surveyed indicated growth prospects, financial performance, and financial strength as important factors determining if a potential acquisition proceeds.
• Integrating acquisitions remains problematic. Although almost 60 per cent of executives surveyed said the goal of their companies was to fully integrate acquisitions, roughly 40 per cent said they only somewhat integrated them or left them largely independent.