IN THE early 1900s, when Britain ruled India, the chairman of the colony's Railway Board, Sir Frederick Upcott, was so sceptical about Tata, then a young steel company, that he declared he would “eat every pound of steel rail” that it could produce to Britain's exacting specifications. His subsequent indigestion is not recorded, even though Tata was producing hundreds of tonnes a year by 1916. Similar scepticism would have been justified if anyone had suggested two or three years ago that Corus, the Anglo-Dutch steelmaker which includes the once-mighty British Steel, would receive a takeover bid from Tata Steel, a much smaller Indian firm. Yet that is what happened on October 20th when Corus accepted an $8.1 billion takeover bid from Tata to form the world's fifth-largest steel producer.

AFP

Tata and Leng's Corus of approval

When Jim Leng, Corus's chairman, began making foreign forays a year or so ago to find low-cost sources of steel slabs for his European steel-finishing plants, Tata was one of his first ports of call. He also talked to O.P. Jindal, a smaller Indian steel group, and to firms in other countries. But as steel prices hardened this year, Corus switched from being a steel buyer to a takeover target, and the cash-rich Tata group saw the opportunity to achieve global scale a few months after Mittal Steel, run by Lakshmi Mittal, an Indian-born businessman based in London, had swallowed Arcelor, a European steel company. The aim, says Ratan Tata, who heads the group, was not just to increase Tata Steel's size, but also to achieve a “strategic fit”.

The Arcelor-Mittal deal, plus plans by Mr Mittal, POSCO of Korea, and others to set up integrated iron-and-steel plants in India, had made Tata Steel feel vulnerable. In the past decade, Tata has updated its technology and slimmed down its workforce to become one of the world's lowest-cost producers. But it is still small, with only 5.3m tonnes per annum (mtpa) steel output, compared with Corus's 18.2mtpa and Arcelor-Mittal's 109.7mtpa. It plans to spend some $15 billion to build three integrated iron-ore mining and steelworks in the Indian states of Orissa, Jharkhand and Chattisgarh. That will add 23mtpa in capacity, but will take 10-15 years.

In the meantime, Tata has been expanding abroad. It acquired Singapore's NatSteel in 2004 and Thailand's Millennium Steel last year, which together added about 4mtpa. It also bid for South Africa's Highveld Steel, and will bid again if Evraz of Russia does not complete its agreed takeover of the firm. And it has plans for big iron-ore and steel projects in Iran and Bangladesh, though both are currently on hold for political reasons.

All of these moves are the result of a strategy introduced three years ago by B. Muthuraman, Tata Steel's managing director. Tata, which mines all the iron ore and coal it needs, now aims to carry out primary steel production close to its iron-ore deposits, and then ship semi-finished steel for finishing close to foreign consumer markets. This meets demands from Indian states that they should have the benefit of adding some value after their iron-ore deposits have been mined, while also allowing down-stream processes to be tailored to meet local requirements.

It also means Corus is a good fit. The industrial logic converged with a cultural affinity between the two groups' top executives early this year, reflecting the easy relations that usually exist between Indian and British firms. Tata Tea successfully took over Britain's Tetley Tea in 2000, linking Indian tea output to drinkers overseas, and this year Tata Consultancy Services (TCS), the group's software and services arm, set up a business-process outsourcing operation in Britain with Pearl, a life-assurance group. Both Corus and Tata executives talk about their desire for a friendly takeover and their common line on governance practices and business ethics. Tata also says that, in line with its record at NatSteel and Millennium Steel, it has no plans to close Corus plants or lay workers off—a bonus for Corus that might make it difficult for any rival bidder to succeed. (CSN, a Brazilian firm, is thought to be considering making its own bid for Corus.)

Mr Tata would become the chairman of the combined group with Jim Leng as deputy chairman, but he intends to leave the running of Corus to its existing executives, in conjunction with an integration committee that he will head. The deal would also restore the Tata Group to its traditional place as India's biggest conglomerate by revenues, ousting the more abrasive Reliance Industries from the top spot—a side-effect that Mr Tata and his colleagues are no doubt quietly relishing.