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Group 12 A rcelor-Mittal : A takeover story Alina MUSTAFINA Mihir PATWARDHAN Alexis KUMUCHIAN Alexis POUGNANT 8 December 2010 Group 12 1. Company Background Mittal Steel Company was one of the world’s largest steel producers by volume, and also one of the largest in turnover. CEO Lakshmi Mittal’s family owned 88% of the company. Mittal Steel was based in Rotterdam but, managed from London. It was formed when Ispat International N. V. acquired LNM Holdings N. V. (both were already controlled by Lakshmi Mittal) and merged with International Steel Group Inc. n 2004. On 25 June 2006, Mittal Steel merged with Arcelor. The merger has been successfully approved by shareholders and directors of Arcelor making Mittal the largest steel maker in the world. Mittal Steel Company was founded by an Indian steel tycoon, Lakshmi Nivas Mittal. L. N. Mittal played an immense role in Mittal Steel Company’s strategy. L. N. Mittal’s quote goes as follows: “Always think outside the box and increase the opportunities that appear wherever they might be”.

He did, in fact, utilize all opportunities presented in the steel market and in less that a decade, he has expanded the company from a wire rod manufacturer in Indonesia to the largest steel producer in the world. His success stemmed from his strategy of buying up loss making steel mills and quickly turning them around. 2. International Strategy The economic boom in China and India has caused a massive increase in the demand for steel in recent years. Between 2000 and 2005, world steel demand increased by 6%.

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Since 2000, several other Indian and Chinese steel firms have risen to prominence such as Tata Steel (which bought Corus Group in 2007), Shanghai Baosteel Group Corporation and Shagang Group. These groups are direct competitors and potential threat to Mittal. In order to remain the first steel producer on the international market, Mittal has been multiplying mergers and acquisitions since the 1980s. Mittal’s motto is growth through acquisition. This successful horizontal integration is summarized in the following paragraphs.

In 1989, Mittal acquired Iron ; Steel Company of Trinidad ; Tobago; in 1992, Sibalsa (Mexico); in 1994, Sidbec-Dosco (Canada); in 1995, Hamburger Stahlwerke (Germany); in 1997, Walzdraht Hochfeld GmbH and Stahlwerk Ruhrort (Germany); in 1998, Inland Steel Company (US); in 1999, Unimetal (France); in 2003, the company acquired Nowa Huta (Poland); in 2004, Polskie Huty Stali, BH Steel, Macedonian facilities from Balkan Steel. In October 2005 Mittal Steel acquired a Ukrainian steel manufacturer Kryvorizhstal for $4. 8 billion at an auction.

This occurred right after an earlier controversial sale of the Enterprise to a consortium including the son-in-law of ex-President Leonid Kuchma. In 2005 Lakshmi Mittal flew into Jharkhand, India to announce a $9 billion investment to build a Greenfield steel plant with 12 million tons per annum production capacity. As we can see, Mittal’s strategy has been to acquire many established western steel manufacturing plants. The reasoning behind it lies in the fact that these plants have been in crisis since the 1970s; therefore, they could have been purchased at bargain prices and then turned around in efficient facilities.

The generated profits could be reinvested in the fast growing markets in India. As a result, this formidable growth created economies of scale and synergies. The geographical expansion also allowed Mittal to adapt to various standards and to sell its products directly in both saturated and non-saturated markets. The steel industry is a capital intensive industry. Thus, there are many advantages related to diversification: transfer of expertise, capabilities and technology from an acquired firm; grouping of related activities into a single operation and reduction of costs; Arcelor-Mittal : A Takeover Story 1| 6 Group 12 se of an established firm’s brand name reputation. Mittal performed related value chain activities in a collaborative fashion in order to create competitive capabilities which finally translated into value for shareholders. Arcelor’s core areas were flat carbon steel, long carbon steel, stainless steel and steel solutions and services. For Mittal Steel, the acquisition of Arcelor would result in product diversity and greater emphasis of its size and scale. The vertical integration element was not yet present; however, Lakshmi Mittal’s plan did not end with the acquisition of Arcelor: it was merely one of the key cogs of the bigger wheel. . The strategy underlying the merger The reasons for a merger and its implementation are always intertwined. For example, a horizontal integration will most likely result in redundancy and, thus, in lay-offs; whereas a firm acquired to diversify a company’s activities is more likely to remain unscathed if it was performing well before the merger. In the following paragraphs, we will try to understand why Mittal Steel launched a takeover bid on Arcelor, and that analysis should help us to explain the measures taken by Mittal Steel in regards to its human resource management. The first thing we should be aware of is the economic context.

Since 2003, commodities markets are soaring thanks to China’s incredible growth. Steel industry’s annual growth is close to three to four percent, rates that were forgotten since the 1973 oil crisis. This growth has allowed many players in the industry to quickly reduce their debts, including Mittal Steel, which simultaneously gained cash assets and a positive outlook on the future. The steel industry structure is also worthy of interest. Oddly enough, the industry is very fragmented: there are a lot of microproducers (about 900 in China) and the first ten producers only accounted for 27% of the market in 2005.

These figures contrast with both the suppliers’ and clients’ sides. In the iron market, the Australian CVRD and BHP Billiton and the Brazilian Rio Tinto make up 80% of all production, which allow them to control the prices. When it comes to clients, we notice that many sectors are also fairly concentrated such as the car industry. In 2005, a combination of both the economic conjuncture and the market structure created favorable conditions for the consolidation of the steel industry, with many producers seeking external growth.

The leader among them, Mittal Steel, wanted to see the emergence of three to four global groups producing 80 to 100 million tons of steel per year. The creation of such groups would give them an ability to directly influence prices and production levels. However, the attack of Arcelor was not just an impulse driven by the economic context. Arcelor was a major player in the industry: a world leader in terms of sales and second in production after Mittal Steel. The crucial reason for the merge was that Arcelor and Mittal Steel complimented each other in many ways.

Together, they would form an unrivaled leader, producing more than three times the quantity of steel of their closest competitor Nippon Steel. The steel coming out of their plants would not be the same. Arcelor produced upscale steel, while Mittal Steel focused on lower end steel. Thus, acquiring Arcelor would help to widen the range of products proposed by Mittal Steel, as well as creating economies of scale. Moreover, thanks to previous massive investments, Arcelor had a technological advance which could be used to modernize the older plants held by Mittal Steel, hence improving the quality of the production.

The fusion of their research and development departments would give birth to the largest R;D potential in the industry. Vertical integration would also be improved by merging the two entities: Mittal Steel has already bought companies providing raw materials, and Arcelor has set up an efficient distribution network. Finally, the two companies were not established in the same parts of the world: Arcelor Arcelor-Mittal : A Takeover Story 2| 6 Group 12 had its plants in Western Europe and South America, while Mittal had his in Eastern Europe, Central Asia and North America for a total of 27 countries across the globe.

In 2006, Mittal Steel assessed that in three years, synergies would amount to USD 1bn. To boil it down, they looked like the perfect match. Still, the shareholders remained to be convinced. Brief summary of the bid A quick overview of the facts should be given before going on with the analysis. The conflict lasted five months, from January to June 2006. January 27th: Mittal Steel makes a first offer to buy Arcelor. This offer is deemed hostile since no dialogue had been previously engaged between the two firms. The Administration Board of Arcelor unanimously discards the project, and urges the shareholders to follow suit.

May 19th: Mittal Steel revises the offer, and Arcelor is now worth EUR 25. 8bn (a 34% increase over the first offer). 70. 6% of the Arcelor shares would be exchanged for the newly emitted Mittal Steel shares and the remaining shares would be paid in cash. Yet, Arcelor’s Management Board had other plans. May 26th: The Management Board of Arcelor proudly presents to the market the Severstal partnership project, nicknamed “Strategic Alliance Agreement”. This solution was envisioned two years ago; however, it was not carried out as it did not seem profitable for Arcelor.

This time was different: Severstal was seen as a means to avoid a takeover by foreigners and to remain independent. June 25th: Mittal Steel revises its offer again, increasing it by 7%, and Arcelor finally agrees. Now, the roles have changed: while Mittal Steel now deems the bid as a “merger of equals”, Arcelor thinks that in the end Arcelor will absorb Mittal Steel. Arcelor’s shareholders will hold 50. 6% of the new entity, against 49. 4% of Mittal’s shareholders (43. 6% for the Mittal family). 4. Key players Lakshmi Nivas Mittal was as astute a businessman as any.

He had known from the onset that the merger was not an easy task but it was a crucial piece in his bigger picture. This was the key element of his plan which he started in 1989 by acquiring the Iron ; Steel Company of Trinidad ; Tobago. Looking at the global steel industry, the biggest demand for steel since 2000 came from China and the emerging countries. Mittal’s goal was to be the dominant player in this growing industry. The Arcelor takeover was last piece of the puzzle to get to global domination. Let us now analyze the key players in this drama and how Lakshmi Mittal dealt with them to be eventually successful in his takeover bid.

The Pitch There are two interesting observations on the timing of Lakshmi Mittal’s first pitch of the idea of the merger to Guy Dolle. Firstly, it came as a complete surprise to the CEO of Arcelor. Mittal knew Dolle as both of them were on the board of the steel industry’s International Trade Group. He had a chance to learn about Dolle and use this information during the negotiations of the merger. When Dolle started the personal attacks on him, Mittal knew it was a sign of weakness. The end was near. Secondly, the timing of the first move was perfectly planned by Mittal.

Dolle and Arcelor’s management were focused on the hostile takeover bid for Dofasco, a Canadian steel producer. Mittal Steel made the bid just one day after the announcement from Arcelor on the successful takeover of Dofasco. Arcelor’s share prices had been subject to unusual movement due to its own takeover bid, and led to limited defense against the bid from Mittal. Governments ; Politicians Arcelor-Mittal : A Takeover Story 3| 6 Group 12 As soon as the merger bid turned into a hostile takeover attempt, the governments of France, Luxembourg and Belgium became involved to defend Arcelor.

However, it should be noted that these governments did not have much leverage as Mittal Steel itself was a registered EU company. Key politicians made comments similar to those made by Dolle against the bid. In February 2006, French President Jacques Chirac said, “France has nothing against a non-European company taking over a European company”, although Mittal Steel was very much based and registered in Europe. Mittal assured all governments that there would be no lay-offs, but it failed to convince the politicians. However, there was a bonus for Mittal as the EU competition lawyers approved the merger on antitrust grounds.

In reality, the governments had no say in the merger. They could not prevent two EU companies from merging. Banks Mittal hit the nail on its head when he decided to use the services of the French investment bank Societe Generale. The participation of Societe Generale in the bid helped convince the French government to take a lighter view of the takeover bid. This was a brilliant strategical victory for Mittal, and would go a long way in making this bid successful. Shareholders and Analysts In April 2006, Arcelor announced its plans to merge with Severstal, a Russian steel company.

However, this plan backfired as the shareholders were not happy with the proposition, and started to believe that Dolle was trying to force the Severstal deal onto them. It was then that they started looking at the advantages of the deal with Mittal Steel. Arcelor’s second largest shareholder was Romain Zeleski, with a 7% controlling stake. He contacted Arcelor’s board and suggested that the top executives be replaced and also that the plan to merge with Severstal be aborted. This was akin to the shareholders going on a strike against Guy Dolle. Now governments, banks, analysts and shareholders were aligned with Mittal. The die was cast.

Lakshmi Mittal’s strategy had been successful. The merger was complete. 5. Dealing with these issues A merger and acquisition can be implemented in three ways: assimilation, novation and structural integration. Assimilation is a method where an identity of one of the merging firms is applied to the whole group. Novation is a creation of a brand new identity and culture. Structural integration is one where both identities are kept, as the two firms are combined while remaining separated. Applying this framework, we can conclude that the merger between Arcelor and Mittal Steel is halfway between novation and structural integration.

We will now examine the solutions implemented in the construction of the new entity Arcelor-Mittal. Legal differences The Indian social policy differs substantially from the French one. At first, many French unions were pointing the finger at Mittal Steel for allegedly neglecting the welfare of its employees, whereas Arcelor was making all-out efforts to alleviate the pain of the grueling tasks. What is more, Arcelor was deemed as a French group because of Usinor, the French company which participated in the creation of Arcelor, and because the CEO, Guy Dolle, was French.

At that time, many solons (foremost among them, the French Prime Minister Dominique de Villepin) advocated an “economic patriotism” to defend national industries from being bought by foreigners, that is companies outside Europe. Nevertheless, Arcelor was not that French since it was based in Luxembourg. Mittal Steel was well-prepared for the takeover: it had already received the agreement of European authorities for its bid, and had also some knowledge of European laws, since its head office was established in Arcelor-Mittal : A Takeover Story | 6 Group 12 Rotterdam (Netherlands). During the implementation of the merger, they successfully abided by the laws by leaving Arcelor’s units as they were. Cultural differences The first bid made by Mittal Steel was welcomed with contempt. Guy Dolle talked about the low quality of their products compared with Arcelor, the ‘monkey money’ of the Mittal family and emphasized the fact that the company was run by Indians. Mittal Steel never mentioned racism and sticked to communication on the industrial project and nothing else.

They coped with the French pride by substantially increasing the offer and by accepting to be in a minority position: may it be in shares ownership or in the new Management Board. Lay-offs Mittal Steel respected its pledge and no employee reduction plans followed the merger. This way, unions, which are endowed with great power in France, were at rest about the workers’ future. They promoted employees share ownership as Arcelor wanted to. All in all, the new entity decided to uphold all the social commitments previously signed by Arcelor.

Distribution of decision making power A new corporate governance was devised for Arcelor-Mittal, and Arcelor has clearly retained most of the decision making power. Mittal Steel knew that that was one of the main conditions in order for the merger to succeed. The Mittal family could not exceed 45% of the shares ownership, and Mittal shareholders would amount to 49. 6% of the total shares. Key members of Arcelor would be maintained, such as Mr. Kinsch, who would hold the Chairman position at the Board of Directors, Mr. Mittal holding the President position.

Of course, Guy Dolle, who led the resistance against the bid, was to leave the company as soon as the deal was closed. The new Management Board would be made up of seven members. Four of them would belong to the old Arcelor’s Management Board, and the last three would be nominated by the Board of Directors of Mittal Steel. What should be underlined here is that this solution seemed to satisfy both parties. Communication Mittal Steel quickly understood that communication was the keystone to win the takeover. Convincing the shareholders amounted to changing of the public opinion.

They laid the stress on the self-made man side of Lakshmi Mittal to give him credibility in France, and they took care of the unions by often meeting them. They made great efforts to publicize each social move agreed by Mittal Steel, and in the end, everybody greeted the merger with serenity because everyone knew that they would keep their job. 6. Assessment of their strategy Assessing the quality of their strategy is not that easy since the merger is still recent and has suffered from the economic crisis. Still, we can say that at that time, Mittal Steel did all they could to ensure the success of the merger.

Both organizations seem to have melted together perfectly, or at least no public clash has yet emerged at the top levels. The merger has given birth to the world leader in the steel industry, accounting for only 10% of the market but truly outshining its competitors. Even though they were forced to lay off more than 9,000 people in 2008, the economic crisis can be held responsible for it. However, some weaknesses can be detected. First, we can have some doubts about Mittal’s strategy: was he ready to make so many concessions on the bid?

Initially, Mittal Steel was supposed to buy Arcelor, and in the end they got absorbed by Arcelor. Hence, Mittal Steel may have not been able to implement the merger as they wanted, especially regarding human resource. Arcelor-Mittal : A Takeover Story 5| 6 Group 12 This observation leads us to the second point: the merger seems twofold. There has been a novation at top levels, with the new entity trying to gather the best practices and to appoint the best senior managers of the two firms. On the other hand, lower levels are more based on structural integration.

They did not really merge, and production units keep strong emotional links with their former company. To boil it down, this merger could provide even better results if synergies were pushed to its limits, but that would imply firing some employees: this dilemma is now in the hands of the top management team. 7. References [1] Schweiger, D. M. , Csiszar, N. K. ; Napier, N. K. (1993). Implementing international mergers and acquisitions. Human Resource Planning, 16(1), 53-70. [2] Wikipedia, Mittal Steel Company. Retrieved December 5th, 2010 from http://en. wikipedia. org/ wiki/Mittal_Steel_Company 3] Piramal, Gita ; Ghoshal, Sumantra (2005). The extraordinary story of Mittal Steel. Retrieved December 5th, 2010 from http://www. rediff. com/money/2005/mar/17mittal. htm [4] Gupta, A. K. The extraordinary story of Mittal Steel (Powerpoint). Retrieved December 5th, 2010 from http://www. scribd. com/doc/20317804/The-Extraordinary-Story-of-Mittal-Steel [5] Margaret A. Goralski, The Takeover Strategy of Lakshmi Mittal: Mittal Steels, International Academy of Business Disciplines, Business ResearchYearbook : Global Business Perspectives, Volume XVI, 2009 (Number 2) Arcelor-Mittal : A Takeover Story 6| 6

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