Was Mittal too eager to get Arcelor? Wouldn't he have been better off building new plants in emerging markets like India while looking for smaller acquisition opportunities?
If Mittal Steel had succeeded in acquiring Arcelor as per the terms of its original bid announced in January, it would have been the end of Arcelor and its management. It would have created one giant Mittal Steel, double its original size, and LN Mittal would have remained the lord and master of a global steel empire. The deal as it is finally negotiated and recommended by the Arcelor board is vastly different. The price being offered by Mittal now is nearly 90 per cent higher than his original price, which means the Mittal family's stake in the merged entity would be just 43 per cent. Besides, Mittal Steel seems to be doing almost everything possible to meet Arcelor's demands.
The Arcelor chairman becomes the chairman of the merged entity and its CEO remains on the management board despite his known hostility to Mittal. Arcelor would nominate a majority of the directors and even the CEO is likely to be an Arcelor nominee. The Mittal family would also have to go by the board decisions and vote accordingly for a period of three years, unless LN Mittal uses his veto powers. The family cannot increase its stake beyond 45 per cent for a period of five years. Worse still, the merged company would be registered and based in Luxembourg and would be called, not Mittal Steel and not even Mittal-Arcelor, but Arcelor-Mittal. So, who is acquiring who?
Why did Mittal bend over backwards and give in to all of Arcelor's demands? Wouldn't he have been better off building new plants in emerging markets like India while looking for smaller acquisition opportunities? Why was he so eager to acquire Arcelor?
Merger Rationale industry perspective
Despite all the consolidation, steel companies remain vulnerable to price cycles. Revival in steel prices over the last few years was driven mostly by Chinese import demand. But China has become a net exporter now as domestic capacity has gone up substantially. There are fears that China would flood the markets with cheap steel in the near future. But China does not have enough iron ore reserves and relies on imports, which would continue to rise as long as Chinese domestic steel demand remains firm. Besides, large iron ore suppliers like Rio Tinto, CVRD and BHP Billiton control around 60-70 per cent of global supplies and hence have better pricing power.
Large consumers of steel like automobiles and white goods have also seen considerable consolidation over the last many years. This has given large companies in these consuming industries much higher bargaining power with steel producers. Steel manufacturers would face cost pressures from rising iron ore prices in future while at the same time see their own pricing power eroding. This would squeeze their margins and many steel manufacturers would struggle if demand growth slows down.
To manage the growing pressure on margins, the steel industry needs to consolidate further and have a few very large manufacturers who can bargain better with iron ore suppliers and steel consumers. Interestingly, both L N Mittal and Arcelor CEO Guy Dolle subscribe to this view. It is speculated that some of the Japanese and Korean manufacturers are also exploring mergers between themselves.
Large consumers of steel like automobiles and white goods have also seen considerable consolidation over the last many years. This has given large companies in these consuming industries much higher bargaining power with steel producers. Steel manufacturers would face cost pressures from rising iron ore prices in future while at the same time see their own pricing power eroding. This would squeeze their margins and many steel manufacturers would struggle if demand growth slows down.
To manage the growing pressure on margins, the steel industry needs to consolidate further and have a few very large manufacturers who can bargain better with iron ore suppliers and steel consumers. Interestingly, both L N Mittal and Arcelor CEO Guy Dolle subscribe to this view. It is speculated that some of the Japanese and Korean manufacturers are also exploring mergers between themselves.
Merger rationale Mittal Steel pespective
L N Mittal has expanded his steel empire and enlarged his manufacturing capacity more than 10 times to 70 million tonnes over the last 10 years mostly by acquiring state-run steel mills in privatization programmes across the globe. These assets were acquired at throwaway prices as the steel price cycle had hit rock bottom during those years. He revived the plants through heavy cost cutting including massive layoffs. He did not face much opposition to such heavy restructuring as the companies were in pathetic shape and would have been anyway shut down if such measures had not been adopted.
To bridge the final gap with the top steel companies and emerge as the single-largest steel producer, Mittal courted an American, Wilbur Ross, who employed the same strategy as Mittal to build a steel empire in the US. The merger between Mittal Steel and Ross's International Steel Group created the top steel producer in the world. But the gap between Mittal Steel and large competitors like Arcelor and Nippon Steel was not substantial. Arcelor was bigger in terms of total revenues and many others were more profitable as they produced more value added products.
Privatization opportunities have dried up and even if one does arise in the future, the up trend in steel prices has pushed up the cost of acquiring manufacturing assets. Hence further inorganic growth acquisition of state owned companies has become less feasible. Building new plants takes time. Mittal Steel has made not much progress after announcing a 10-million tonnes per annum steel plant in India last year. Even if the company finalizes the agreement for mining lease this year, the plant would not be able to commence commercial production before 2010.
Mittal Steel had acquired a minority stake in a Chinese steel company. But a majority acquisition needs the blessings of the Chinese government, which may be difficult to come by. China has built up a huge domestic steel capacity, in excess of 350-million tonnes per annum, and hence setting up a new plant may not be attractive. Mergers between any of the other top 5 steel producers would have toppled Mittal Steel from its perch as the top producer. Therefore in order to protect and secure its turf as the single most influential steel producer in the world, Mittal was forced to acquire a large competitor. Arcelor was the best fit in terms of geographical presence and product mix. Besides, Arcelor had a widely distributed shareholding structure which made an acquisition easier.
To bridge the final gap with the top steel companies and emerge as the single-largest steel producer, Mittal courted an American, Wilbur Ross, who employed the same strategy as Mittal to build a steel empire in the US. The merger between Mittal Steel and Ross's International Steel Group created the top steel producer in the world. But the gap between Mittal Steel and large competitors like Arcelor and Nippon Steel was not substantial. Arcelor was bigger in terms of total revenues and many others were more profitable as they produced more value added products.
Privatization opportunities have dried up and even if one does arise in the future, the up trend in steel prices has pushed up the cost of acquiring manufacturing assets. Hence further inorganic growth acquisition of state owned companies has become less feasible. Building new plants takes time. Mittal Steel has made not much progress after announcing a 10-million tonnes per annum steel plant in India last year. Even if the company finalizes the agreement for mining lease this year, the plant would not be able to commence commercial production before 2010.
Mittal Steel had acquired a minority stake in a Chinese steel company. But a majority acquisition needs the blessings of the Chinese government, which may be difficult to come by. China has built up a huge domestic steel capacity, in excess of 350-million tonnes per annum, and hence setting up a new plant may not be attractive. Mergers between any of the other top 5 steel producers would have toppled Mittal Steel from its perch as the top producer. Therefore in order to protect and secure its turf as the single most influential steel producer in the world, Mittal was forced to acquire a large competitor. Arcelor was the best fit in terms of geographical presence and product mix. Besides, Arcelor had a widely distributed shareholding structure which made an acquisition easier.
The Future
Even though Mittal was forced to concede a lot of ground to Arcelor, he still emerged as the single-largest shareholder in the merged entity. Arcelor-Mittal cannot be toppled from its position as the top producer in the foreseeable future, unless China decides to consolidate its steel industry under a couple of companies. The Arcelor-Mittal merger may trigger more consolidations in the steel industry much to the benefit of all steel producers. Cost savings would hopefully improve the cash flows of the merged entity and this would make Arcelor-Mittal financially stronger as well. The big task before Arcelor-Mittal is the process of integrating the two companies with diverse strategies and culture. Many high profile mergers have failed to deliver the anticipated results because of the inability to achieve smooth integration between the merging companies. L N Mittal has already stated that he would be spending the next few years to ensure that the merger goes ahead smoothly. L N Mittal would become chairman of Arcelor-Mittal after Joseph Kinsch retires. The Mittal family can increase its stake beyond 45 per cent after five years and it will not take much of an effort to take the stake above 50 per cent. His son Aditya has reportedly refused to take up a senior management position in the merged entity at this juncture, though it is only a matter of time before he takes over from the professional managers from Arcelor. When the next downturn in steel price cycle arrives, some of the steel producers are sure to face financial difficulties. Arcelor-Mittal, with stronger finances, can be expected to go out prowling for more acquisitions and, it is possible, that this time Aditya Mittal would be spearheading those buyouts.
Mumbai:
Arcelor Mittal, the world’s largest steel maker, has received clearance from US anti-trust authorities to sell its Sparrows Point steel mill for $1.35 billion. The transaction is expected to close in October, subject to oversight and approval by the recently appointed court trustee, the
company said in a statement.
Why Arcelor Mittal had to sell the Sparrows Point facility
Prior to Mittal''s acquisition of Arcelor, Mittal was one of the two large integrated steel producers who accounted for more than 74 per cent of all tin mill product sales in the eastern United States. Prior to the merger, Canadian steel maker Dofasco Inc, which Arcelor acquired in a hostile takeover (the same week that Mittal announced its bid for the second largest steel maker, operated a large integrated mill in Ontario. Between them the two provided competition, which the US Department of Justice felt could be threatened and lead to a rise in prices once Mittal Steel had acquired Arcelor.
On 20 February, 2007, the department announced that it would require Mittal Steel to divest its Sparrows Point facility located near Baltimore, "to remedy the competitive harm arising from Metal’s recent $33 billion acquisition of Arcelor S A." To preempt such concerns in the US, Mittal had agreed to sell to Dofasco to German steel maker ThyssenKrupp, the company, which had proposed a merger with Dofasco before Aercelor grabbed it. On 1 August, 2006, the department''s antitrust division filed a civil lawsuit in the US District Court in Washington, DC, to block Mittal''s proposed acquisition of Arcelor.
Along with a proposed consent decree for Mittal to divest a steel mill that supplied tin mill products to the eastern United States anticipating that it might be unable to sell Dofasco, which Mittal had agreed to sell to German steel maker ThyssenKrupp because Arcelor had, in an attempt to defeat Mittal''s hostile takeover bid, placed legal title to Dofasco into a Dutch foundation, the Strategic Steel Stichting. Therefore, in the event the sale of Dofasco could not be carried out as required the proposed consent decree gave the Department the right to select for divestiture either Mittal Steel''s Sparrows Point mill or its Weirton mill, located in Weirton, W.Va
The Sparrows Point is a profitable and diversified facility that has the capacity to produce more than 500,000 tons of tin mill products annually. Sparrows Point currently operates as an integrated facility that produces the steel slabs used in the manufacture of tin mill products and, unlike the Weirton mill, would not have to develop new sources of supply for this critical input upon its separation from Mittal Steel. "With the divestiture of Sparrows Point, competition in the market for tin mill products in the eastern United States will be preserved," said Thomas O. Barnett, assistant attorney general in charge of the department’s antitrust division.
The world's largest steel maker, the Rotterdam-based Mittal Steel Co officially launched its €21-billion ($27 billion) offer on Thursday for Luxembourg-based rival Arcelor S A, the second-largest steel maker, seeking an acquisition that would leave Nippon Steel, the next largest player a mere third the size of the combined entity. The formal cash and stock offer, launched in Luxembourg, France and Belgium, is open until June 29. Mittal Steel has said that it would extend the launch bids in Spain and the US, once regulators clear the offer. At their end, Arcelor's shareholders are meeting today to discuss the buyback proposal. Merging the world's top steel makers would create a firm with a 10 per cent share of global steel production and a market capitalisation close to $40 billion
Arcelor has so far rejected the offer as hostile, saying the Arcelor's current management was in the best interest of the company's shareholders. Arcelor's largest shareholder is the Grand Duchy of Luxembourg with a 5.6-per cent stake and the Walloon province of Belgium. Small and institutional investors hold most of the company's equity. On January 27, 2006, Mittal Steel had announced its plans to acquire Arcelor close on the heels of Arcelor's acquisition of Dofasco, Canada's biggest flat steel producer barely three days earlier.
Though Mittal Steel was nowhere in the picture here, the Dofasco deal strengthened the French company's position in the all-important North American automotive market for steel, where Mittal had acquired Wilbur Ross's Ohio-based ISG for a record $17.8 billion deal to become the world's largest steel-maker, dethroning the European combine, Arcelor. Mittal Steel has eight major plants in Indiana, Ohio, West Virginia, Maryland, Pennsylvania, South Carolina and Illinois, is the fourth largest steel producer in Canada. In a move to fend-off the takeover, Arcelor says it plans to spend up to €7.5 billion ($9.5 billion) to buy back almost a quarter of its own shares.
Lakshmi Mittal, chairman and CEO, Mittal Steel, said in a statement, "We continue to believe that our offer is a very attractive one, structured to enable Arcelor shareholders to participate in the exciting growth potential of the combined company, whilst also receiving a generous cash element."
Though Mittal Steel was nowhere in the picture here, the Dofasco deal strengthened the French company's position in the all-important North American automotive market for steel, where Mittal had acquired Wilbur Ross's Ohio-based ISG for a record $17.8 billion deal to become the world's largest steel-maker, dethroning the European combine, Arcelor. Mittal Steel has eight major plants in Indiana, Ohio, West Virginia, Maryland, Pennsylvania, South Carolina and Illinois, is the fourth largest steel producer in Canada. In a move to fend-off the takeover, Arcelor says it plans to spend up to €7.5 billion ($9.5 billion) to buy back almost a quarter of its own shares.
Lakshmi Mittal, chairman and CEO, Mittal Steel, said in a statement, "We continue to believe that our offer is a very attractive one, structured to enable Arcelor shareholders to participate in the exciting growth potential of the combined company, whilst also receiving a generous cash element."
Questions for review:-
1) Do you think these Business mergers & bids affect the marketing strategies or the existing markets? If so how?
2) What do you think should be the approach of the marketing department towards their promotional strategies considering the fact that there are doubts over ownership of the company?
3) Can Mittal Steel afford to have its corporate branding in a new manner so that it helps in entering newer markets?
1) Do you think these Business mergers & bids affect the marketing strategies or the existing markets? If so how?
2) What do you think should be the approach of the marketing department towards their promotional strategies considering the fact that there are doubts over ownership of the company?
3) Can Mittal Steel afford to have its corporate branding in a new manner so that it helps in entering newer markets?
PS: last date of submission 10/2/2009 to verve2009@staloysius.ac.in
send in the hard copies to Miss Shipla Kamath (lecturer AIBA)
Aloysius Institute of Business Administration (AIBA)
St Aloysius college
Mangalore - 575003
