Mergers are strategic decisions

A European Company Had To Finally Give In and Merge With “A Company Of Indians IntroductionMergers are strategic decisions leading to the maximization of a company's growth by enhancing its resources . According to Sec 2(1A) of INCOME TAX ACT 1961 defines Amalgamation as the merger of one or more companies with another company or the merger of two or more companies (called amalgamating company or companies ) to form a new company ( called amalgamated company ) in such a way that all assets and liabilities of the amalgamating company or companies becomes assets and liabilities of Amalgamated company

The Arcelor-Mittal merger is a HORIZONTAL merger as both the companies were steel manufacturers . This case study is about Mr. Laxmi Niwas Mittal, the global steel czar and has focussed the bottlenecks involved in acquisition of a Luxembourg based Arcelor steel company.

BackgroundMittal Steel (Acquirer)Mittal Steel is the world's largest and most global steel company, with shipments of 49.2 million tons and revenues of over $28.1 billion in 2005. They own steel-making facilities in 16 countries, spanning four continents. They employ 224,000 people spanning 49 different nationalities. Their shares are listed on the New York and Amsterdam stock exchanges.Mittal Steel Company N.V. was formed by the merger of:• LNM holdings & ISPAT International

• International Steel Group IncCEO Lakshmi Mittal's family owned 88% of the company and its headquarter was in Rotterdam, Netherlands The company was the world's largest steel producer by volume and also the largest in turnover and is now a part of Arcelor - Mittal It was the major player in Steel, Flat Steel products, Coated Steel, Tubes and Pipes

The Target Company- ArcelorArcelor was created through the merger of:• Arbed (Luxembourg)

• Aceralia (Spain)

• Usinor (France)Merger was launched on 19 February 2001. Choice of Arcelor name was announced on 12 December 2001 It was a major player in all its main markets: automotive, construction, metal processing, etc. Guy Dolle was the CEO of Arcelor and its headquarter was in Luxembourg city.

Executive Summary(2)The Case…Ø Mittal makes surprise $22 billion bid for Arcelor in January 2006Ø Arcelor management announce large dividend per shareØ Arcelor makes positive profit report, which was later found to be inflatedØ Arcelor makes healthy- looking forecast for future performance.Ø Arcelor management and European politicians criticize Mittal 'as a company of Indian'Ø Arcelor management refuses to meet with Mittal until their demands were metØ Arcelor pursuaded Luxembourg government to write a takeover law shutting out MittalØ Arcelor unions fear for job cuts, reduction in social cultureØ Arcelor management fear Mittal will shift its priority from long- to short-term goalsØ Arcelor tries to buy a North American steel company that will restrict Mittal by anti-trust problems, Agreement contains clause making it costly to not go through with saleØ Arcelor made €13 billion deal with Severstal ( White Knight) , including break-up fee of €140 millionØ Arcelor, Severstal and Mittal engage in heavy negotiations.Ø Arcelor tries to pursuade shareholder meeting where Severstal deal would be approved unless 50% plus one of shareholders were present and voted it down, an unusually high percent. The meeting isn't scheduled until after Severstal deal has been nearly finalized.Ø Mittal raises offer to €26.5 billion, and agreed to cede some management control and family voting rightsØ Arcelor's shareholders voice disapproval in Severstal deal & support Mittal deal. Arcelor management fears shareholders will vote down share buyback necessary for Severstal deal to go through Shareholders threatens but management and sue Arcelor boardØ Six percent of Arcelor shareholders sued Arcelor's board for selling for too low a priceUnlikely to succeed, given very high premium on Arcelor shares relative to pre-takeover-battle price

The Merger Process2006 was a very significant and memorable year for Arcelor-Mittal. The new company namely arcelor -mittal was at the forefront of the merging process.This journey started when the steel czar Mr Laxmi Niwas mittal offer to the shareholders of Arcelor to create the emerging leader with 100 million tonne plus steel producer. The new entity will be three times larger than the rivals individuallyMittal Steel announces US antitrust clearance for Arcelor-Mittal bid and the approval of the offer documents in accordance to European regulators. The acceptance period starts in Luxembourg, Belgium and France on 18 May 2006 (some days later for Spain and the United States) and lasts until 29 June 2006.Creating the globe largest steel company, Mittal Steel and Arcelor reach an agreement to combine the two companies in a merger ofA contemporaries. The terms of the agreement were reviewed by the Boards of Arcelor and Mittal Steel which each recommended the transaction to their shareholders. The combined group, domiciled and headquartered in Luxembourg, is named Arcelor Mittal.Arcelor Mittal announces new dividend policy, under which i will pay out 30% of net income annually.93.7% of Arcelor shareholders tender their shares to Mittal Steel.Arcelor Mittal confirmed Value Plan in 2008.

Initial Bid And The RejectionJan 14: LN Mittal talked to Arcelor CEO Guy Dolle about the possibility of Mittal Steel acquiring Arcelor. Guy Dolle categorically turns Mittal down.Jan 27: Mittal Steel launches a formal takeover bid for $22 billion dollars. (4)January 29: Arcelor rejected the offer and the French government said it has "great concerns" about the merger. Arcelor has plants in France.The market sent Arcelor's Paris-listed shares soaring 29%, to EURO 28.6. Mittal shares listed in Amsterdam closed up 6.2%, at EURO 27.63. Steel shares around the world also rose.Mittal said that Arcelor Chief Executive Guy Dolle wasn't positive about the approach, but he was confident Arcelor's shareholders will back the bid.A tie-up between the two companies would create a company with $70 billion a year in revenue and the most global production capacity in the industry. Arcelor is primarily a European producer while Mittal is scattered around the globe.The next largest producers after Mittal and Arcelor are Nippon Steel Corp and Posco.Mittal would become the leader in providing steel to the automotive industry in Europe and the U.S., and would lead in the North American Free Trade Area in appliances and packaging.

Hostility And RacismThere was a lot of hostility by Arcelor's Management Board as they felt that Mittal Steel was resorting to underhanded techniques to merge with them. They dismissed the idea of a merger with a "company of Indians".The European Union said it was against racial discrimination and the issue would be treated only on commercial considerations.There was a lot of controversy where racist remarks were made against LN Mittal.The bid stirred up passions amongst politicians, other leaders, and common man. With the European Commission being accused of protectionism and racism, Arcelor's CEO, Guy Dolle, offered a laundry list of ills in Mittal Steel because of which the merger should not take place.In London, a columnist for The Guardian spoke of how the bid unleashed a new wave of 'economic patriotism,' adding that Mittal and his family were often portrayed as aliens -- 'the Indians' -- rather than as global entrepreneurs.

Increasing Offers And PressureApril 19: Mittal Chairman and Chief Executive Lakshmi Mittal calls Arcelor Chairman Joseph Kinsch to ask for "friendly discussions'' about revising his proposal in return for support from management.April 28: Mittal tells Kinsch he is ready to make "significant corporate governance changes'' and revise the offer.May 4: Kinsch says the offer is "wholly inadequate'' and Arcelor has significant concerns about the real value of Mittal shares.May 9: Mittal Steel says it is ready to revise the offer and make corporate governance changes "in the event of a recommended deal.''May 10: Arcelor Chief Executive Guy Dolle describes as "insufficient'', Mittal's offer to revise its bid.May 11: Arcelor says it has filed a lawsuit in the United States against Mittal for copying a type of steel for the auto industry.May 12: Both companies announce better-than-expected results, although profits suffer due to higher costs of raw materials. Arcelor toughens its stance, announcing plan to spend up to $9.5 billion to buy back almost a quarter of its shares.May 18: Mittal formally launches its offer.May 19: Mittal raises its offer by 34 percent, bringing it up to $32.90 billion and says it would reduce the Mittal family's stake in the company.

Severstal - Entry Of White KnightSeverstal is a Russian company mainly operating in the steel industry, centered in the northern city of Cherepovets. As such it is the second largest

steel company in Russia, behind Evraz Group. The company is owned by Alexei Mordashov.May 26: Arcelor announces a deal with Severstal that will give it a controlling stake in Russia's steelmaker and $16.4 billion for 32 percent of Arcelor.June 2: European Union antitrust regulators approve Mittal bid on condition the new combined steel giant sell off some of its facilities if the bid succeeds.June 6: The European Commission approved the Mittal-Arcelor merger.June 9: Arcelor confirms it has held talks with Mittal on the term of its bid.June 12: Arcelor rejects Mittal revised bid and recommends shareholders accept deal with Severstal. Arcelor says the revised offer still undervalues the company and urges shareholders to support the Severstal merger instead, but mandates its board to explore possible improvements to the Mittal offer at a later date. Mittal says it won't budge on price, but is prepared to make changes related to corporate governance.June 20: In a bid to woo Arcelor, Severstal revised the terms of its merger proposal, saying that majority owner Mr Alexei Mordashov would settle for 25 per cent of the new group rather than the initially proposed 32.3 per cent and raised its offer by about 2 billion.

Valuation And RatiosOn June 20, the claim by economists was confirmed when Severstal increased its valuation of Arcelor in order to crack the deal . Management of Arcelor had in fact undervalued the company itself. The credibility of management which had openly supported the previous valuation of Arcelor came into question. Further the combined markets of France, Belgium, Luxembourg and Spain criticized Arcelor management and suspended trading of its stock.On June 26, the BOD recommended the approval of the improved Mittal offer (49% improvement compared to the initial offer with 108% improvement of the cash component), proposal was the creation of Arcelor-Mittal with industrial and corporate governance model based on Arcelor and scheduled a corporate meeting for June 30 to vote on this.The share swap ratio for the exercise was fixed at 1:1.(4)

Agreement To Merger And Final Merger(2)June 19: Arcelor cancels shareholder meeting on share buyback amid growing shareholder opposition.(6)June 21: Market regulators in France, Spain, Luxembourg and Belgium suspend Arcelor shares, saying they want more clarity on the state of talks with Mittal and Severstal.June 24: Talks on between Mittal Steel and Arcelor

June 25: Arcelor's board agrees to sweetened bid from Mittal worth about $32.3 billion.(3)June 30: Paving the way for a merger between Arcelor and Mittal Steel, an overwhelming majority of shareholders of the Luxembourg-based firm vote down a merger proposal from Russia's Severstal.57.95% per cent of Arcelor shareholders voted against the Severstal offer.In the process, they accept Mittal Steel's $32.3 billion offer, which was approved by the Board of Arcelor on June 25 after a five-month long battle.Arcelor had recommended acceptance of share and cash from Mittal Steel valuing at about $32.3 billion, which creates a group with 3,20,000 employees producing about 116 million tonnes of steel annually, accounting for about 10% of the world market.Arcelor chairman Joseph Kinsch told shareholders that the long fight with Mittal was worth it, saying the India-born steel tycoon L N Mittal and the markets had finally recognised Arcelor's "true value.""We have created in five months more than EURO 12 billion in value," Kinsch said.

Snapshot View Of The MergerTransaction Highlights• Arcelor Mittal: A merger of equals with shared management for successful integration- Ownership of 50.5% for Arcelor investors and 49.5% for Mittal Steel investors• The undisputed industry leader• Creation of company with unprecedented scale and diversification to manage cyclicality, stabilize earnings and increase shareholder returns• Annual synergies increased by 60% to €1.3bn (US$1.6bn)

The Combined Vision* Combination driven by simple and compelling industrial logic, spurring consolidation in a fragmented industry* Creation of European-based global champion best positioned to capture new market opportunities* New entity will capitalise on strong European heritage and presence, as well as leading position in North America* Enjoy unparalleled access to new high-growth markets: Central and Eastern Europe, Africa, China and Latin America* Company will be able to service global customers with broad and deep product offering* High level of direct access to raw materials making group more profitable and less cyclical than most of its peersThe Combined Strategy

* Consolidate regional high-end leadership into global customer platform* Achieve industrial excellence through state of the art assets sustained by sound capital expenditure and best in class R&D* Realise commercial leadership through strong distribution channels* Capture growth in BRICET countries, utilising existing leadership in high-end products in mature economies* Accelerate growth in key emerging markets such as India and China* Achieve cost leadership and operational excellence across product range* Maintain high level of vertical integration to hedge against raw materials price fluctuations* Focus on people management and social responsibility

A Win-Win Transaction For All StakeholdersFrom Mittal Point Of View* Merger would take consolidation to a new horizon.* Successful distribution business in Europe.* Mittal Co. to have leadership position in high end segments in Western Europe with strong R&D capabilities.* Low Cost slab manufacturing in Brazil that can be expanded for export to Europe and North America.* Increased free float and liquidity

From Arcelor Point Of View* Mittal Company will accomplish Arcelor's stated plan in the most efficient way.* Arcelor becomes a global player.* Operations in high-growth economies with low-cost, profitable assets and local operating expertise in numerous emerging markets.* Leadership position in high-end segments in North America, with strong R&D capabilities.* Access to very low cost slab potential in Ukraine to serve West Europe.* Access to raw materials and upstream integration.

Post Merger DetailsShareholder Voting RightsAll shares with identical voting and economic rights: One share - one vote regardless of holding period

Composition Of Initial Board Of Directorso Mr Kinsch to be Chairman, Mr Mittal to be Presidento Upon Mr Kinsch's retirement, Mr Mittal becomes Chairman

o The Board of Directors will be composed of 18 members, all non executive (majority independent)• 6 members from Arcelor• 6 members from Mittal Steel• 3 current representatives of existing Arcelor major shareholders• 3 employee representativeso After expiry of three year period, shareholders to elect Board of Directors* Board Committeeso an Audit Committee composed solely of independent directorso an Appointments and Remuneration Committee composed of 4 members, including the Chairman, President and 2 independent directors

·Composition Of Management Boardo The Management Board will be comprised of 7 executive memberso 4 current Arcelor executives, CEO to be proposed by the Chairmano 3 Mittal Steel executives

Key Contract TermsOther OffersArcelor has agreed they will accept no other offer for Arcelor shares unless it is asuperior offer for the entire share capital of Arceloro No break-up fee required in contracto If shares are issued under the Strategic Alliance Agreement, corporategovernance rules and certain other conditions terminateStand stillMittal family has agreed to a standstill at 45% of share capital. Exceptions incertain circumstances - consent of a majority of the independent directors or incase of passive crossing of such thresholdsLock UpMittal family has agreed to a 5-year lock-up, subject to certain exceptions,including the right to dispose of up to 5% of the share capital after the 2nd yearIncreased Identified SynergiesMarketing And Trading (US$570m)• Accelerated growth of distribution in developing regions e.g., CEE, CIS, Africa• Cross selling through enlarged and enhanced product portfolio• Optimisation of order book for cross product flows and logistical savings

Manufacturing And Process Optimization (US$470m)• Benchmarking and best practice alignment across all operating assets• Optimisation of utilisation of assets through selected mill product specialisation(e.g., productivity gains with better sequencing rates, fewer changeovers)• Logistical and mill optimisation through transfers of semi finished products

Purchasing (US$500m)• Scale effects on standardisation of procurement contracts• Optimisation and efficiencies from maintenance services, subcontracting, spareparts And Consumables• Logistics savings on optimisation of raw material flows

SGA (US$60m)• IT synergies• Reduction in external contracts e.g., consulting services• Duplication in commercial network avoided

FindingsType Of Merger -Horizontal merger take place where two merging companies produce similar products in same industry like arcelor and mittal both are steel maufactures , henceArcelor mittal merger is a horizontal merger as both the companies were in steel manufacturing .

Objective/Advantages Of Arcelor-Mittal MergerØ Economies of scale : The main objective of Mittal regarding the merger is to have economies of scale in the foreign market so that they will be leader in the steel Industry .As Arcelor was one of the major producer of steel in Europe , thus by the merger mittal will enjoy economies of scale and increase order sizeA tie-up between the two companies would create a company with $70 billion a year in revenue and the most global production capacity in the industryØ Synergy : The objective Low Cost slab manufacturing in Brazil that can be expanded for export to Europe and North America. Annual synergies increased by 60% to €1.3bn (US$1.6bn)Ø Increased revenue and market share : The motive of the mittal behind the merger was to increase the market share and become a leader in steel production .

Issues In Process Of Merger§ Arcelor Management was extremely hostile to Arcelor-Mittal merger. The CEO of Arcelor dismissed Mittal Steel as a “company of Indians”.§ The French & Luxembourg Government was against the deal§ The European Union approved of the deal

Anti Takeover Defense Strategy -There was a lot of hostility by Arcelor's Management Board as they felt that Mittal Steel was resorting to underhanded techniques to merge with them. They dismissed the idea of a merger with a "company of Indians".Initially arcelor rejected mittal's proposal many times and have taken active anti takeover measures1 .Green mail: - In this merger Arcelor goes for buy back of shares to avoid merger or takeover. Arcelor toughens its stance, announcing plan to spend up to $9.5 billion to buy back almost a quarter of its shares.2. White Knights:- In this Arcelor Mittal merger Severstal plays white knight for Arcelors. As Severstal offers to give it a controlling stake in Russia's steelmaker and $16.4 billion for 32 percent of Arcelor. To avoid the merger offer with Mittal Steel, Arcelor released a 13 billion Euro merger plan with Severstal.3. Declaration of dividend - On February 16, Arcelor declared a dividend of 1.2 euros to convince the shareholders of a positive situation under current managementBidders TacticsBear Hug:- In this merger Mittal's revise its initial bid from $22 billion to $32.3 billion inorder to merge with ArcelorModifying the form of consideration for the Offer :- Kinsch says the offer is "wholly inadequate'' and Arcelor has significant concerns about the real value of Mittal shares. : Mittal Steel says it is ready to revise the offer and make corporate governance changes "in the event of a recommended deal.'' No break-up fee required in contract.

The Role Of Indian GovernmentThe Indian government raised the issue through commerce minister Kamal Nath of Racism by Arcelor management as dismissing Mittals as ‘Company of Indians'Role Of ShareholdersPaving the way for a merger between Arcelor and Mittal Steel, an overwhelming majority of shareholders of the Luxembourg-based firm vote down a merger proposal from Russia's Severstal.57.95% per cent of Arcelor shareholders voted against the Severstal offer.

Finally Merger Between Two Steel Giants25th June, 2006 was the remarkable day when deal finally cracked when the shareholders of Arcelor agreed to Mittal Steel's offer Mittal had to considerably sweeten the initial offer-by raising its valuation of Arcelor to $32.9 billion .The Mittal family holds 43 percent of the combined groupThe combined company holds 10 percent of the global market for steelPost Merger AnalysisIn January 2006, Mittal Steel launched a $22.7 billion offer to Arcelor's shareholders The deal was split between Mittal Shares (75 percent) and cash (25 percent) Under the offer, Arcelor shareholders would have received 4 Mittal Steel shares and 35 euros for every 5 Arcelor shares they held . No break-up fee required in contractConclusionThe largest steel company in the world is created, a company larger than the next 3 largest steel companies combined. According to the press releases issued by the companies, “Consolidation creates value in the steel industry”.Arcelor is the number 1 steel producer in the world by revenue.Mittal is the number 1 steel producer in the world by shipments.• Both companies have been leaders in steel industry consolidation• Consolidation is contributing to increased discipline by producers• Combination of top two players takes consolidation to a new levelArcelor is primarily a European player, while Mittal has interests all around the world. Together, they form• World's number 1 steel company• Leading positions in 5 major markets• 61 plants• 27 countries• Numerous international partnerships and Joint Ventures• Opportunity to grow in China and IndiaThe new company is number 1 in North America, South America, Africa, Western Europe, Eastern Europe and CIS countries.A very vital omission from this list is Asia and more importantly, LN Mittal's home country, India.Why has LN Mittal not concentrated on India so far? One can speculate that he was going at it step by step, conquering the world markets one by one and now, only India is left.Till now, he has shown virtually no interest in the Indian market.Recently, he has shown interest in investing large amounts of money in Jharkhand and Orissa, amounting to about Rs. 40,000 crore.Logically his next stop would be Asia, as China and India are the fastest growing steel consumption markets. In 2005, the US witnessed a 15.4% fall in consumption, and the fall in EU was 11.7%. Total global consumption still

managed to rise 5.3%, thanks to a massive 25.9% rise in demand in China and an impressive 7-8% demand in India.Some analysts say that Mittal had to pay a much higher price than was actually required to merge with Arcelor. He also did not get the best deal that he could have, as his controlling stake in the newly formed Arcelor-Mittal is lower than what was originally aimed for.Mittal Steel is the world's largest steel producer at 70 million tonnes a year, almost double the world's second largest producer - Arcelor. October 2005 saw the first battle between the big two- Mittal and Arcelor, both bid for Ukraine's largest steel mill - Kryvorizhstal in an open televised bid. Mittal beat Arcelor to the $4.8 billion deal,much more than the $3 billion at what analysts had valued Kryvorizhstal.Reports suggest that it was this bidding war with Arcelor that gave L N Mittal's son Aditya, the CFO of Mittal Steel, the idea of taking over Arcelor. His reason was that it would eliminate any future messy battles.Why was the deal so important for LN Mittal? In a snapshot, the Mittal-Arcelor combine would have an even larger share of the global steel market and would be able to get a better grip over steel pricing.Severstal had to be paid legal fees as they had been completely cut out of the deal. Now Severstal has threatened a legal battle and a fresh bid. If that happens, the immediate future, at least, will not be glinting enough to Mittal's advantage.It Has Been A Win-Win Transaction For Both Parties.• Creating the undisputed leading global steel company• Growth and value creation opportunities maximised through unique global platform• Step change in steel industry consolidation• Significant synergy potential• Financial strength and strategic flexibility reinforced• Leadership in R&D/product development• Significant free float and liquidity• Re-rating potential• Positive for all stakeholdersIn the end, a European company had to finally give in and merge with “a company of Indians”.

Authors

DePamphilis DonaldAbstract

The focus in the case study is on the formation of the integration team, the importance of

communication, and the realization of anticipated synergies during the post-merger period. The

discussion centers on the events that followed the merger of steel giants Arcelor and Mittal into

ArcelorMittal in mid-2006.

Taken from Mergers, Acquisitions, and Other Restructuring Activities, 5th edition, 2009, by Donald M. DePamphilis. For more information, click here.

 

Background

 

The merger of Arcelor and Mittal into ArcelorMittal in June 2006 resulted in the creation of the world’s largest steel company. With 2007 revenue of $105 billion and its steel production accounting for about 10 percent of global output, the behemoth has 320,000 employees in 60 contries, and it is a global leader in all of its target markets.

Arcelor was a product of three European steel companies (Arbed, Aceralia, and Usinor). In contrast, Mittal resulted from a series of international acquisitions. Despite being competitors, the two firms exhibited little overlap in terms of their operations. However, their attributes proved to be highly complementary with Mittal owning much of its raw materials such as iron ore and coal and Arcelor having extensive distribution and service center operations. Like most mergers, ArcelorMittal faced the challenge of integrating management teams; sales, marketing, and product functions; production facilities; and purchasing operations. Unlike many mergers involving direct competitors, a relatively small portion of cost savings would come from eliminating duplicate functions and operations.

 

Top Management Sets Expectations

     ArcelorMittal top management set three driving objectives before undertaking the postmerger integration effort. These included the following: (1) achieve rapid integration; (2) manage effectively daily operations; and (3) accelerate revenue and profit growth. The third objective was viewed as the primary motivation for the merger. The goal was to combine what were viewed as entities having highly complementary assets and skills. This goal was quite different from the way Mittal had grown historically, which was a result of acquisitions of turnaround targets focused on cost and productivity improvements.

Developing the Integration Team

     The formal phase of the integration effort was to be completed in six months. Consequently, it was crucial to agree on the role of the management integration team (MIT), key aspects of the integration process such as how decisions would be made, and the roles and responsibilities of team members.

     Activities were undertaken in parallel rather than sequentially. Teams from the two firms were identified. The teams were then asked to submit a draft organization to the MIT. The profiles of the people who would occupy the senior positions were defined and selection committees established. Once the senior managers were selected, they were to build their own teams to identify the synergies and to create action plans for realizing the synergies. Teams were formed before the organization was announced and implementation of certain actions began before detailed plans had been developed fully. Progress was monitored to plan on a weekly basis, enabling the MIT to identify obstacles facing the 25 decentralized task forces and, when necessary, to resolve issues. 

     The integration team leader was selected based on their demonstrated ability to be collaborative and process-oriented, enabling them to manage the weekly reviews and to resolve issues as they arose. The leader would also have to be sensitive to cultural differences in order to be able to get people to work together. Finally, the team leader would have to be someone who had the confidence of the CEO and other top managers.

Developing Communication Plans

     Considerable effort was spent in getting line managers involved in the planning process and to sell the merger to their respective operating teams. Initial communication efforts included the launch of a top-mangement “road-show.” The new company also established a Web site and introduced Web TV. Senior executives provided two-to-three minute interviews on various topics giving everyone with access to a personal computer the ability to watch the interviews onscreen.

Owing to the employee duress resulting from the merger, uncertainty was high as employees with both firms wondered how the merger would impact them. To address employee concerns, managers were given a well-structured message about the significance of the merger and the direction of the new company. Furthermore, the new brand, ArcelorMittal, was launched at a meeting attended by 500 of the firm’s top managers during the spring of 2007. This meeting marked the end of the formal integration process. Finally, all communication of information disseminated throughout the organization was focused rather than of a general nature.

 

External communication was conducted in several ways. Immediately following closing, senior managers traveled to all the major cities and sites of operations (i.e., the road show) talking to local management and employees at these locations. Typicallly, media interviews also were conducted around these visits, providing an opportunity to convey the ArcelorMittal message to the communities

through the press. In March 2007, the new firm held a media day in Brussels, which involved presentations on the status of the merger. Journalists were invited to go to the different businesses and review the progress themselves.

 

Within the first three months folowing closing, customers were informed about the advantages of the merger for them, such as enhanced R&D capabilities and wider global coverage. The sales forces of the two organizations were charged with the task of creating a single “face” to the market.

 

Achieving Operational and Functional Integration

ArcelorMittal management set a target for annual cost savings of $1.6 billion annually, based on their experience with earlier acquisitions. The role of the task forces was first to validate this number from the bottom up and then to tell the MIT how the synergies would be achieved. As the merger progressed, it was necessary to get the business units to assume ownership of the process to formulate the initiatives, timetables, and key performance indicators that could be used to track performance against objectives. In some cases, synergy potential was larger than anticipated, while smaller in other situations. The expectation was that the synergy could be realized by mid-2009. The integration objectives were included in the 2007 annual budget plan. As of the end of 2007, the combined firms were on track to realize their goal with annualized cost savings running $1.4 billion.

 

Concluding Formal Integration Activities

The integration was deemed complete when the new organization, the brand, the “one face to the customer” requirement, and the synergies were finalized. This occurred within eight months of the closing. However, integration would continue for some time to achieve cultural integration. Cultrural differences within the two firms are significant. In effect, neither company was homogeneious from a cultural perspective. ArcelorMittal management viewed this diverity as an advantage, since it provided an opportunity to learn new ideas.

 

This case study relies upon information provided in an interview with Jerome Ganboulan (formerly of

Arcelor) and William A. Scotting (formerly of Mittal), the two executives charged with directing the

postmerger integration effort. See Jan De Mdedt and Michel Van Hoey, “Integrating Steel Giants: An

Interview with the Arcelor Mittal Post-Merger Managers,” Mckinsey Quarterly, Februrary, 2008.

The biggest deal in the Global Steel Industry: Arcelor Mittal (1/2)By ASHUTOSH  | Published: JULY 28, 2009

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In this and the next post, I would try to give an account as to how the “impossible” Arcelor-Mittal merger became possible.

With a large number of parties involved, with different cultures in play, and a lot at stake, this deal promises to give many insights into thenegotiation techniques used.BackgroundMr. Lakshmi Mittal founded Mittal Steel in 1976 in India. After a few years, Mr. Mittal found that it would take him long to grow to a significant size and wanted a way to grow fast. He found that there were various steel companies around the world, which had been performing badly, due to cyclical nature of the industry and poor management of the companies. He started acquiring these companies and turning them around through better management and economies of scale.

In 2005, when Mittal Steel acquired the American steel company, ISG, it overtook Arcelor as the world’s largest steel maker, in terms of output. Towards the end of 2005, it made up its mind to acquire Arcelor, the second

largest steel producer by output and the largest by turnover. Mittal Steel was headquartered in Netherlands.

Arcelor was created in 2002 through merger of three major European steel companies, Arbed (Luxembourg), Aceralia (Spain) and Usinor (France). The idea was to leverage their technical, industrial, and commercial resources in order to create a global leader in the steel industry. It was headquartered in Luxembourg and Mr. Guy Dollé was the CEO. Arcelor employed thousands of people across 60 countries. Most of the employees were from Western Europe and in countries with a traditionally strong labor union. Arcelor were still in the process of integrating the business and were neither expecting nor ready for any deal, let alone a takeover offer.

It is important to understand where the main people stood when the deal was proposed. This is because, finally it is after all these individuals who would consider and negotiate the deal. The personal interests would play a critical role in the entire process.

Mr. Mittal, aged 55 and Mr. Dollé, aged 63 shared the same vision. They believed that the steel industry was too fragmented (top 5 companies controlled just 20% business) and was being exploited by the raw material / commodity producers (top 3 iron ore companies controlled 70% business) as well as consumer companies (top 5 automobile companies control 70% business). Consolidation was required and both wanted to emerge as the leader once it gets achieved. Both had contributed their fair share to this process of consolidation in the industry. Their aim was to do things in a way that, before they retire, the companies reach a dominating position in the industry. And that they are considered responsible for that leading position of their companies.

The OfferOn January 27, 2006, Mittal Steel unveiled an unsolicited $22.7 billion bid for Luxembourg-based Arcelor.As we have already seen, that both companies had been acquiring others in the industry. Both thought that it was a competition against each other. They had been part of various bidding fights for acquisitions of steel companies. But at least one side was not thinking of both going hand in hand against all others.

In one such typical bidding, the steel company, Kryvorizhstal of Ukraine was on the block. Many companies entered the fray and the price kept on increasing. Mittal Steel and Arcelor were the last two remaining in the tussle, and the price increased from $3.5bn (when the last company left leaving these two) to $4.8bn where Mittal Steel won the bid.

There was clear scope for “saving” money in such context. Mr. Aditya Mittal, son of Lakshmi Mittal, was of the view that there were a large number of synergies between the two companies – not to mention getting better valuations while buying different companies. There were complementary strengths that could be leveraged. After intense internal discussions, they decided to take the leap, and find ways to make this acquisition possible.

The Process of the Initial OfferGenerally, in such acquisitions, the acquirer company would like to have a co-operative discussion and settlement. After acquiring, the acquirer is dependent on the target firm for collaboration – from executives, employees etc. In addition, the acquirer would like to be seen not as a predator but someone who would make the company achieve greater heights and also help the employees improve their standard of living – something which makes it preferable to go for a co-operative process.

As we know that, they finally had to resort to go towards a competitive process but they did that when it became a necessity. I believe one has to be ready for this as well for the other side’s rationale might be very different and sometimes there might be seemingly irrational behavior as well that would necessitate such a process.

Whom to approach – The best foot forwardOne important issue is how the discussion with the target should get started. Research suggests that extroversion, agreeableness and cognitive ability of the negotiators play a major role in the negotiation. So, a person on the other side with these attributes should be preferred, especially when it comes to the initial stages. This particular person is the potential harbinger of the proposed deal in the target.

The Mittals found such a person at Arcelor – Mr. Alain Davezac, Senior Vice-President, International Business Development, Arcelor (Cognitive Ability). He had been dealing with the extended Mittal family before (Agreeableness) and

was an outgoing person (Extroversion). He was enchanted with Buddhism and had dealt with Indians & Indian Companies extensively before in his career.

Mr. Aditya thought that it was important to make Mr. Alain up to terms with what has been going on at the Mittals side, and show him the benefits of the collaboration between the two companies. In addition, if everything goes on well, it is Aditya and Alain that would have to do bulk of the work during integration, and so it was best that they became acquainted with each other at the earliest.

Where to discuss and the occasion?Issues such as where do the meetings take place; who all are part of the meeting; how are they treated etc, though they might seem trivial, play a very important role.

After discussions with Alain for some time and a couple of meets, the Mittals thought that it was now time to involve the CEO of Arcelor, Mr. Dollé. Instead of having a formal meeting at some office or hotel, Mr. Dollé and Mr. Alain were invited to a dinner meeting on 13th January, 2006 at the grand Mittal’s home in London (the world’s most expensive house at that time). We believe that it was a way to show the other party that they would be dealing with someone who is not less equal in any possible way. It was also to settle any apprehensions regarding the Mittal’s ability to handle the large company, that might arise once they come to know about their proposal. The Mittals might also be looking to gain an upper hand (through the venue and the fact that they are the hosts) before the start of the formal negotiations.

The negotiations before the negotiation – The notorious dinnerWhen the dinner was planned, little did anyone know that it would become such a quoted event in the future. The Mittals did not want to indicate on an outright basis that there would be a deal coming. They wanted to explore the possibility and see the reaction of the other side. As per Mittal Steel’s prospectus for the Arcelor offer, the issue of the merger was brought up at the dinner meeting but Mr. Dollé’s reaction was “non-committal” and that he pointed out the issues that would arise and the risks involved.

The part of the conversation related to the merger was only for 4-5 minutes. Mr Dollé later said that the conversation was friendly but did not give any details. A week after the dinner, both sides decided to meet again to discuss about the

merger specifically, but the meeting could not take place as Mr Dollé had to follow-up on their proposed acquisition of the Canadian company, Dofasco.

Now or NeverThis was an inflection point in the whole deal. The Mittals knew that if Arcelor went ahead with the Dofasco deal, it would get tougher to merge, possibly due to anti-trust conditions and due to Arcelor becoming a larger company. So that Dofasco can be done away with, they needed to find an alternate for Dofasco in case they are successful in going ahead with merging with Arcelor. They signed a binding agreement with ThyssenKrupp AG (that was also involved previously in bidding for Dofasco) about selling Dofasco to them, after the merger.

Without wasting any more time, the Mittals informed Mr. Dollé (who reportedly hung up on hearing about the Offer announcement) and Mr. Alain on 26th January, 2006 (after markets closed) about their plans to announce an Offer on 27th January. The Mittals had gotten the sense that management at Arcelor, specifically Mr. Dollé would not be too keen on such a proposal. However, they wanted to do as much as possible that would make them look as if the were on the “right” side; and it was their counterparts that did not co-operate.

The offer was announced the next day