birth of arcelormittal

8/8/2019 Birth of ArcelorMittal

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Birth of

ArcelorMittal& After

Sachidanand Singh

March 2008

This case has been compiled from published

sources; mainly the annual reports of the two

merging companies, the merger documents, their

press releases, the minutes of their AGMs/EGMs,

SEC filings, The Financial Times, London; The

Economic Times, Mumbai; The Economist, London;

The McKinsey Quarterly, Rediffmail.com, and The

Indian Express, Mumbai.

It is intended to be used as a basis for classroom

discussion rather than to illustrate an effective orineffective way of handling a management

situation. Though the information has been

collected from sources considered reliable, it is

strongly suggested that this document should not

be used as a primary source of information on the

companies or on the steel industry.


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BIRTH OF ARCELORMITTAL

Mittal Steel Company, worlds largest steel producer, launched its bid for acquiring Arcelor, thesecond largest steel producer of the world, on January 27, 2006. After months of tortuousnegotiations Mittal Steel succeeded in getting the shareholders approval in June 2006 and themerged entity ARCELORMITTAL came into existence in November 2007

Acquirer: Mittal Steel Company NV (MSC), was aHolland based company of India born industrialistL N Mittal. A very young company, MSC wasformed in 2004 after a $4.5bn takeover ofInternational Steel Group of the US, and a mergerof Mittals existing assets LNM and IspatInternational. The result, Mittal Steel, became thefirst truly global steel company. Before thetakeover of International Steel Group, describedby many as bold, Mittal had been acquiring steelassets all over the world, mostly in the developingcountries including Eastern Europe. None of hisother acquisitions were in the same league asInternational Steel Group, which itself was aminnow compared to Arcelor. The opening bidplaced a deal value for Arcelor at $22.7bn, i.e.about four times as much as Mittal paid forInternational Steel Group.

Target: Arcelor was headquartered inLuxembourg, with works in France, Spain, Braziland other countries. A young company, Arcelorcame into existence in 2001 with merger of threesteel companies- Aceralia, Arbed and Usinor.(Usinor was Frances biggest steel maker.) In2005, Arcelor had revenues of 32 billion Euros and

produced over 48 MMT of steel. Arcelor hadgreater concentration on downstream facilities andwas more in value added steel market.

Offer: The original offer of MSN valued the targetat $22.7bn. The offer was part cash part stock -Mittal Shares (75 percent) and cash (25 percent).Under the offer, Arcelor shareholders would havereceived 4 Mittal Steel shares and 35 euros forevery 5 Arcelor shares they held. The offer wasvalued at about 27% premium over Arcelorsclosing price on the previous day.

Reactions: Stock markets reacted positively tothe offer, both shares recording gains, target by as much as 28.44%; acquirer by 6.09%. EUcompetition commissioner said the bid will be scrutinised for any potential dominant marketposition. French finance minister, said he had "concerns", as Arcelor was among the largestemployers in France. Arcelor announced a day after the bid was made that its board hadunanimously rejected the offer and recommended its shareholders not to tender their shares toMittal Steel. Prices of both, target and acquirer made further, though smaller gains on Europeanstock exchanges.

The Man: Lakshmi Mittal-one of the richestmen in the world- was born in India in 1950. Hestarted his career with Ispat, his family businessin India and in 1976 bought an Indonesian steelmaker - his first acquisition. Over the followingdecades, he built up an empire buying upunderperforming steel plants, many in easternEuropean countries, and then turning themaround. He was at times called an assetstripper, (which he denied). He ran into troublewith his 1996 takeover of an Irish steelmakerthat subsequently closed with the loss of 400

jobs.

His companies LNM and Ispat International alsoreceived some flak for lack of transparency.This however, changed, with the creation ofMittal Steel in 2004. New York and Amsterdamstock exchanges, where MSC is listed, haveensured more disclosure about Mittalsoperations than had previously been available.Mittal once said that he wanted to be thelowest-cost steel producer in every singlemarket. Mittal Steel in 2005 had steelmakingfacilities in 14 countries, and it had highlightedits strategy of sharing know-how and generatingproduct synergies between different operations.It said all of its operations benefited from theincreased purchasing power created by scale,and global sales and marketing network.

Though publicity-shy, Mittal has often been innews and not always for acquisitions. In 2002he had donated 125,000 to Tony BlairsLabour Party which coincided with Blairsexpression of support for his attempt to takeover Sidex, a state-owned Romanian steelcompany. Later in 2004 he captured popularimagination when he hired Versailles, outsideParis and the singer Kylie Minogue - to entertain1,500 guests at his daughters wedding. For anearlier wedding, Mittal had hired VictoriaMemorial of Kolkata for holding reception.


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Government of Luxembourg, the largest shareholder in Arcelor (holding 5.6% of total stocks)disclosed political opposition when the prime minister said in the parliament that we do not wantit because we do not understand it and went on to add that he was determined to defend MrMittals bid. Unlike Government of Luxembourg, French Government did not have any stake inArcelor.

The bid sparked objections from the government of Spain too and from labour unions, worriedabout job losses although Mittal had assured that no worker would lose job and had cited that hisoperations in other countries had not caused retrenchments. (See the box: The Man; closure ofan Irish steel maker taken over by Mittal in the past)

Competition Issues: In Europe, the Competition Commission ultimately decides on fate ofmerger bids of this kind that may hurt competition by creating or strengthening a dominantcompany. The commissioner, Ms Kroes made clear she would examine the takeover only in thelight of competition rules, not to see what effect it would have on employment. She said: "We willlook at this issue, as always, very carefully, on competition grounds - and on competition groundsonly. The regulation gives us no power to question mergers for other reasons. You can be surethat when the bid is notified, we will do our job properly, taking into account the complete set ofcompetition regulations." Although the Commission has the power to block takeovers outright, ithas rarely used that. Its concerns (emergence of an over dominant player) are more often

addressed through disposals of certain assets.

Incidentally Arcelor, just a week before announcement of Mittals bid had itself finalised the termsof a $4.7bn hostile acquisition of Canadian steel maker Dofasco. The other bidder for Dofascowas Thyssen Krupp Group of Germany. Mittal had announced that it would sell back this unit toThyssen Krupp if he succeeded in acquiring Arcelor; rightly surmising that competition regulatorsmay insist on such a divestiture. His calculations proved spot on, American antitrust authoritiesdid insist on this divestment and ArcelorMittal sold Dofasco to Thyssen Krupp in 2007.

Even though the combined group was set to be the biggest steel producer in the world by far, itscombined global market share will be only about 10 per cent - far below any thresholds that mightraise concern among regulators. However, in previous merger decisions affecting the steelindustry the Commission had usually defined steel markets much more narrowly, splitting up the

industry into both national markets and into different product categories. The proposed mergedentity could therefore still be found to be dominant in one or more of those sub-sectors.

The European Commissions commitment that it would examine the deal in the light of thecompetition laws only meant a lot for acquirers as European governments were famous forpreserving European control of corporations and jobs, at the expense of economic efficiency.Though the acquirer, Mittal Steel Company, was a Holland incorporated European corporation,acquisition was widely viewed as an Indians attempt to takeover of European assets. (Aside, whyso few BPO deals are originating from Europe?)

Experts view: Professor Robert F Bruner, dean of the Darden School of Business, University ofVirginia and a leading M&A analyst from American academia: "This deal is driven by excesscapacity in the global steel industry and by technological innovation. Mittal is an instrument of

change for the industry, removing excess capacity and rationalizing the availability of capacity.Also, Mittal is a proven operator that enhances the efficiency of the assets it acquires - mainlythrough the transfer of technology and know-how. So far, Mittal's acquisitions have helped thisindustry adjust to the need for change. Customers and ultimately individual consumers are thebeneficiaries of Mittal's actions."

He however cautioned that "the scale of the proposed takeover dwarfs Mittal's previous deals. Bigacquisitions are significantly harder to integrate successfully than smaller deals and went on toadd that "we should hope and expect that Lakshmi Mittal very carefully plans the post-merger


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integration. So far the stock market has given this deal an enormous vote of confidence - but thistoo, warrants caution since my study showed that overconfidence is another precursor of failure."

Steel Industry: The steel industry was / is highly fragmented, the top 5 manufacturers in the steelindustry account for less than 25 percent of the market (to put that in perspective, thecorresponding figure for the automotive industry is 73 percent). LN Mittal believes that theconsolidation will end with three or four major companies dominating the industry around 2010.

Bigger steel manufacturers have better bargaining powers against customers (such as automanufacturers) and against suppliers (iron ore). Consolidation helps in companies improving theirsourcing of raw materials; access to more markets, better utilization, and more flexibility inproduction scheduling and better efficiency. (See the box: The Man)

Controversy: Mittal Steel bid was perceived as hostile by Arcelor. This perception, in allprobabilities, was because of the Arcelor managements strong belief that Arcelor itself wouldhave been doing the acquisitions and not the other way around.

In its Annual Report for 2002 it had declared itsmedium-term objective to earn an average pre-tax return of 15 percent on capital employed over the business cycle, coupled with a significantimprovement of the debt-to-equity ratio by the end of 2004. One of the initiatives it had identifiedfor achieving this objective was to play a pivotal role in the development of the global steelindustry, driving the growth of the Group through targeted acquisitions that create value andanchor Arcelors presence in key regions. In its annual report for 2003 Arcelor reiterated thisstrategy of inorganic growth when it professed to ensure our growth through targetedacquisitions that create value and strengthen the geographic presence of Arcelor. Acquisition ofDofasco demonstrated how serious Arcelor was about acquisitions. In 2004 Arcelor had alsoacquired a majority shareholding in CST (a company producing carbon steel slabs in Brazil) andtook control of another steel maker Acindor in Argentina through one of its subsidiaries).

The CEO of Arcelor Mr. Guy Doll had set sights on becoming the global leader through

acquisitions. In an interview published in Arcelors annual report for 2005 Doll in response tohow do you see Arcelors performance in the medium term observed that We are currentlyembarking on our strategic plan for 2006-2008, with the following key objectives: normalizedEBITDA of 7bn; maintaining free cash flow of 4.4bn per year; and value-accretive acquisitionsthat guarantee a return on capital employed (ROCE) in excess of 15%. Earlier in the annualgeneral meeting of Arcelor in April 2004, Mr Doll had made the following comments: Thestrengthening of our balance sheet enables us to embark on a new phase of external growth,which will consolidate and confirm our global leadership. For a group like Arcelor, whichgenerates 75% of its sales in the European Union, it is clear that a shift in the geographical

World Steel Producers Output

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Arcelor NipponSteel

JFEJapan

Posco USSteel

Corus

MillionMetricTonnes(MMT)


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balance is required, particularly towards regions with economies that are growing faster thanWestern Europe. In the future, Arcelor will be an even more global company than today. We mustbe ready to take part in a further phase of consolidation in the steel industry, and to seizeopportunities when they arise.

Clearly Arcelor had acquisition ambitions of its own. It is no wonder that Arcelor management wasextremely hostile to Mittal Steels bid from the beginning. Arcelor repeatedly played the patrioticcard to urge the shareholders to reject the bid. The CEO of Arcelor, Guy Doll dismissed MittalSteel as a company of Indians and unworthy of taking over a European company. (Despite thefact that most industry analysts and investment banks were pointing out that the deal was inArcelors best interests). Doll had once referred to Mittal Steel shares as monkey money. Thisis a French usage for describing an asset of low value. Unfortunately it was seen as a racistremark in India and created a lot of furore. Doll also compared the two companies as onemanufacturing eau de Cologne (MSC) and other (i.e. Arcelor)parfum. Even this remark cannot beconsidered derogatory as MSC did have low value high volume product line and Arcelor didconcentrate on value added steel markets.

Unfolding drama: Arcelor meanwhile announced a better-than-expected jump in its dividendpayout, 1.2 per share, an 85 per cent increase on 2004s payment. Some observed that higherdividend was a defence against the bid but Arcelor chief executive claimed it to be normal

considering our fantastic results and our stock price performance. Arcelor posted net profits of3.8bn last year, up from 2.3bn in 2004, in spite of a drop in steel prices. Company said thehigher payout reflects structural improvements of Arcelors profitability, and that the group wascommitted to keep increasing shareholder remuneration year on year.

Guy Doll, CEO of Arcelor, said he would only consider an offer from Mittal if it was improved,and all in cash. His reasons were:

1. Though in cyclical industry, Arcelors performance is less cyclical than others asevidenced by its strong 2005 performance when Mittal had announced decreased profits,citing lower steel prices and the rising cost of raw materials.

2. Mittal steels share prices have much higher volatility (MSC had offered to pay 75% ofconsideration by stocks)

3. Arcelors strong performance in 2005 was sustainable as steel prices in Europe were

improving and China was not a threat.4. Mittal Steel's offer does not take into account Arcelor's operating and financial results for

2005, which exceeded market expectations.5. The multiples indicated by the Mittal Steel's valuation of Arcelor are significantly lower

than multiples in the steel sector and do not show a control premium when comparedwith trading multiples of comparable companies

Meanwhile, in May 2006 Mittal had increased his offer to $25bn and had made cleared that hewould not increase it any further. Around the same time Arcelor contacted Russian steel makerSeverstal for a merger. (Severstal, based in the northern Russian city of Cherepovets is thesecond largest Russian steel maker. It is listed in Russia and London and its produce areexported to over 50 countries.) Arcelor and Severstal had been negotiating on joint initiatives forseveral months.

Arcelor reported that it had agreed to buy most of Severstal, Russia's third-biggest steelmaker ina Euro 13 billion ($16.4 billion) transaction, which would give Russian tycoon Alexei Mordashovup to 38 per cent of the combined company. "The Severstal transaction represents a key step inimplementation of Arcelor's value plan and growth strategy and it is consistent with its strategicvision, business model and corporate values."

Arcelorset the price per share of the self-tender at Euro 44; that is six Euros more than offered byMittal. Stating that Severstal transactions were more "attractive alternative from a strategic,


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financial and social point of view," Arcelor took a dig at Mittal Steel, saying that "the revisions ofMittal Steel's offer announced on May 19, 2006 demonstrate that its initial offer undervaluedArcelor.Notwithstanding the increase in the consideration offered by Mittal Steel, the ArcelorBoard of Directors believes that this offer is still inadequate as it continues to undervalue Arcelor,"the statement added.

Pitching for this deal with the Russian Steel group, the Arcelor management board, asked itsshareholders to support the Severstal transactions at the general body meeting on June 30.

Breakthrough: Around the same time, May June 2006 Arcelor's supervisory board instructed itsmanagement giant decided not to commence "such self tender offer until after the publication ofMittal Steel's offer results and mandated the group management board to meet with Mittal Steelin order to review its proposal to further improve its offer. Dwelling on the reasons leading to therejection of Mittal Steel's offer, Arcelor said its 34 per cent increase offer was required to re-alignwith the bid initially offered by the company due to its under-performing share price vis--visArcelor's share price. Although there was no formal word from the Mittals, there were indicationsthat they might submit a revised offer. Arcelor board finally on 25th June announced acceptanceof Mittal group's takeover bid, improved to euro25.9 billion ($32.4 billion). Announcing thedecision, Arcelor Chairman Joseph Kinsch told reporters that his Board unanimously backed a

new takeover offer from Mittal Steel. "We concluded that Mittal Steel's was a better offer than thatof Severstal," he said.

The details of the transaction with Severstal, which was recommended by the Board toshareholders, were as under:

Mr. Alexey A. Mordashov, Chairman of Severstal was to transfer all his economic interests in theSeverstal steel business to Arcelor, which included:

a. Severstal North America,b. Severstal Resources (iron ore and coal)c. His stake in Lucchini

In addition he was to pay EUR 1.25 billion in cash to Arcelor pursuant to the agreement whichwould have given him about 38% of the merged entity.

There was widespread opposition from the shareholders of Arcelor to this Severstal transaction.Mittal by the final round of negotiation had substantially increased his bid from opening $22bn to34bn and had agreed not to insist on majority holding in the merged entity and had also agreed toa Board of the merged entity which would have majority from Arcelor. Under the agreement,reportedly, the stake of the Mittal Group will reduce to 45 percent and the merged firm will becalled Arcelor Mittal. It was reported that Lakshmi Mittal will be the co-chairman and JosephKinsch is said to continue to be chairman.

EGM and after: The shareholders met on the 30th June and 58% opposed the Severstal deal

clearing the bid of Mittal Steel. The deal was enthusiastically hailed in India. Commerce MinisterKamal Nath called it a demonstration of the intellectual and entrepreneurial abilities of Indians, Ihad raised this issue when countries had tried to block it and said that globalisation is not a one-

way street. We are going to have in this new economic order, Indian corporates, people of Indianorigin investing and creating employment and creating economic activities in other countries. Sothis is happening and I really think that countries need to realise this that there's a new economicarchitecture". Finance Minister P Chidambaram also issued a comment: "We are very happy andproud that a company with Indian links is the world's largest steel maker in the world".

According to a Russian daily Izvestia, Alexei Mordashov, chairman of Severstal, forged analliance with controversial fell Russian billionaire Roman Abramovich, to offer a higher price forArcelor shares. ABN AMRO Bank had reportedly offered the required money to the Russian


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steel-maker. Arcelor chairman Joseph Kinsch observed that the long fight with Mittal was worth it,L N Mittal and the markets had finally recognised Arcelor's "true value." "We have created in fivemonths more than $10 billion in value," Kinsch said

Experts view: Jason Hunter of Steel Business Briefing said, "This may be attractive to someother financial investors, but certainly for the individuals who are looking to gain additional long

term values to their investments, this may not be quite as attractive as they were hoping." Thecombined entity will have 61 plants in 27 countries and some 320,000 employees all over theworld. Industry observers say that shedding excess staff and integrating the two managementteams might pose a problem.

Jason Hunter adds, "The difficult thing between the two companies is going to be the integrationof the management team, both in Europe and in North America and other regions, due to thehostilities that had been going on over the last five to six months. Some of them have been fairlyaggressive on the comments from both sides.

He observed that the deal will give Mittal a presence in South America. "From Mittal Steel's pointof view, it is a terrific acquisition for them. It gives them a very big presence in South America,which they've been looking for a long time; it's a very low cost region to produce in. For Arcelor

shareholders, there are two very distinct camps. There are the financial investors that are out tomake a very quick buck, they will be very pleased with the deal, I am sure. The longer terminvestor who is looking to add value to his money and to his investment in the company, Isuspect, will lose out in the short-term," said Jason Hunter, Steel Business Briefing.

Jason also said that the biggest barriers for Arcelor-Mittal will be the North American markets."Certainly the biggest barrier to Arcelor-Mittal will be the North American markets. Arceloracquired a company in Canada, which is very big in North American automotive industry. Weunderstand that will be retained in the new format of the company and his other North Americanfacilities in order to comply with regulations in there," Hunter added.

Takeover: Mittal Steel, in terms of the revised offer was to give 13 Mittal Steel shares and 150.60Euros for every 12 Arcelor shares. If the takeover was accepted by 100 per cent of current

Arcelor shareholders, they will end up owning 50.5 per cent of the combined group, with the Mittalfamily owning 43.6 per cent of the capital and voting rights.

The minimum condition for takeover was acquiring 50% of Arcelor shares. MSC made a publicoffer and by 18

thJuly claimed "Mittal Steel announces that on a preliminary basis and based on

statements made by financial intermediaries, the minimum tender condition of the offer (i.eacquisition of 50 per cent of Arcelor's outstanding shares on a fully diluted basis) has been met".

Mittal Steel, on the 26th July announced that it had acquired 92 per cent control over Arcelor fromshareholders who had tendered 594.5 million shares and 19.9 million Arcelor convertible bondshad so far, representing 91.88 per cent of the group's fully - diluted share capital. Mittal Steelannounced to reopen the offer giving remaining shareholders time till August 17 to tender theirshares. It was reported that between end of January 2006 and the end of July 2006 i.e. between

the first offer made by Mittal to Arcelor and closure of the offer to the targets shareholders, thecombined market capitalisation of the two companies had gone up by $8 billion.

By September 2006 L N Mittal was reportedly 'pleasantly surprised' at how complementary the$34.3 billion merger of his company Mittal Steel with its nearest rival Arcelor proved to be. Mittalwas appointed the non-executive chairman of the merged entity and expected to play a part insetting strategy, giving a vision for the company, looking at growth opportunities, talking toemployees, strategic investors and overseeing and helping the integration.


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Role of Guy Doll: Ever since the first offer of Mittal Steel Doll, the French CEO of Arcelor hadresisted the offer with all his powers. It is widely believed that he was instrumental in puttingtogether the proposed transaction with Severstal to ward off Mittal. His stand that Mittal Steel is acompany of Indians (and hence) unworthy of taking over a European company and his manyreferences to Mittal is an Indian in a derogatory sense has made him a much hated figure inIndia. As expected, he had no role to play after the takeover. If we were to set aside his odiouspersona and examine the specific statements made against Mittal Steels products, share pricemovements or transparency we will admit he had some points. Let us recall his reasons forasking an improved, and all in cash, offer. He was right about MSC shares having highervolatility, about Arcelors performance somewhat less cyclical (though some felt that the 2005results were product of rather creative accounting) and absolutely right about the below averagemultiple indicated by MSCs first offer. We must also remember that he got his shareholders avery substantial deal, compared to what was initially offered by Mittal Steel.

He had complained about the abruptness of the bid. Though, reportedly about two weeks beforethe bid was announced, Laksmi Mittal had informally discussed it with him, over a private dinnerin London. It is however certain that the shareholders of Arcelor will not forget his contributions tothe increased bid amount. Perhaps, they will also not forget that the insensitivity he displayedtowards the long term prospects of Arcelor while giving a thumbs up to the Severstal transaction,giving its owner over 35% in Arcelor.

Merger: By August 2006, MSC had become the majority shareholder of Arcelor, but the twocompanies had not really merged yet. Legal and regulatory provisions of different countries TheNetherlands (where Mittal Steel was registered), Luxembourg where Arcelor was registered andUSA as both companies were listed at New York Stock Exchange, among other. The mechanicsof the acquisition and merger, as agreed between the parties is graphically represented here:

The transition vehicle was Verger Investments S.A., a wholly owned subsidiary of Mittal Steel,registered in Luxembourg in 2004. It had no activities and no assets except an insignificantamount of cash. In April 2007 its name was changed to ArcelorMittal S.A. Shareholders ofArcelorMittal and Mittal Steel agreed to a merger and the terms of the merger proposal and the

Mittal Steel makes open offer to shareholders of Arcelor;issues shares in exchange in addition to cash

The transition vehicle will automatically get listed on allexchanges where MSC was listed (Reverse Merger)

First step

Acquisitioncompleted

Mittal Steel gets absorbed into a new company (We callit vehicle for transition), share holders of MSC get sharesin the transition vehicle

Name of Arcelor is changed to signify the changes

Transition vehicle gets absorbed into Arcelor.Shareholders of transition vehicle get shares in Arcelor

Second step


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explanatory memorandum, Mittal Steel will merged into ArcelorMittal, by way of absorption byArcelorMittal of Mittal Steel and without liquidation of Mittal Steel. The combined company wascontinued to called ArcelorMittal. After this merger became effective (3rd September 2007) allthe assets and liabilities of Mittal Steel (as such assets and liabilities that exist on the effectivedate), stood transferred to ArcelorMittal, Mittal Steel ceased to exist and ArcelorMittal issue newshares to the (then former) holders of Mittal Steel Shares.

Mittal Steel had two types of equity shares Class A Common shares and Class B Commonshares. In this merger shareholders of Mittal Steel received one share each of ArcelorMittal foreach share (whether Type A or Type B) they held of Mittal Steel Company. Dutch andLuxembourg law permit treasury shares shares of a company, held by the company itself to besold later in the market or for other treasury operations. These shares are acquired by thecompanies in buyback programmes. This merger agreement clearly stated that all treasuryshares of Mittal Steel held by the company or by ArcelorMittal would cease to exist from effectivedate. Thus on effective date 100% of the shares of ArcelorMittal was held by former shareholdersof Mittal Steel. (These also included the former shareholders of Arcelor who had sold their Arcelorshares to Mittal Steel for shares exchange and cash considerations in 2006.)

Mittal Steels shares were listed on stock exchanges at Madrid, Bilbao, Amsterdam, Brussels,Paris, Luxembourg, Barcelona, Valencia, and New York Stock. From effective date ArcelorMittal

shares would be listed on all these exchanges and admitted for trading.

Lakshmi Mittal, together with his wife, Mrs. Usha Mittal, directly and indirectly owned 623,598,333of Mittal Steels outstanding shares on May 31, 2007, representing 44.79% of Mittal Steelsoutstanding voting equity. After the merger, they owned the same percentage of the outstandingArcelorMittal shares.

On 26th September ArcelorMittal and Arcelor announced details of the merger of ArcelorMittal intoArcelor. On the 3rd September the merger of Mittal Steel Company N.V. (Mittal Steel) intoArcelorMittal had become effective, which was the first step towards merger of Mittal Steel andArcelor. The merger announced on the 26th September between Arcelor and ArcelorMittalconstituted the second step of the two-step merger process between Mittal Steel and Arcelor.

On May 16, 2007, Mittal Steel, ArcelorMittal and Arcelor had announced that they would proposeto the shareholders of ArcelorMittal and Arcelor to implement the second-step merger based on aratio of 7 Arcelor shares for every 8 ArcelorMittal shares. On September 25, 2007, the Boards ofDirectors of ArcelorMittal and Arcelor decided to restructure the share capital of Arcelor prior tothe giving effect to the second-step merger so as to have a one-to-one exchange ratio in themerger. This was supposedly done to limit the effect of the merger on the ArcelorMittal shareprice and hence its comparability pre- and post-merger. This was done by an exchange of every7 pre-restructuring Arcelor shares for 8 post-restructuring Arcelor shares. This of course had noeconomic effect on Arcelor or ArcelorMittal shareholders.

In terms of the agreement entered into between Arcelor and ArcelorMittal, the latter i.e.ArcelorMittal got merged into Arcelor by absorption. Thus all assets and liabilities of ArcelorMittal(which were what earlier were the assets and liabilities of Mittal Steel) become assets and

liabilities of Arcelor from the effective date of merger. (For accounting purposes the entities weretreated under common control with effect from January 2007.)

In terms of this merger all shares of Arcelor held by ArcelorMittal ceased to exist (or evaporated,as the Luxembourg laws read) on the effective date. We may recall that over 92% of the existingshares of Arcelor were held by Mittal Steel, acquired in 2006, which had been transferred toArcelorMittal in the first step merger. All those shares now ceased to exist. All assets andliabilities of ArcelorMittal became assets and liabilities of Arcelor and Arcelor issued one share ofArcelor for each share of ArcelorMittal held by the shareholders of the latter.


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And finally Arcelor changed its name by changing the articles of association on 5 th November2007 to ArcelorMittal. The company Verger Investments S.A. which had changed its name toArcelorMittal finally got merged into Arcelor and Arcelor changed its name into ArcelorMittal!

Why did Mittal want to merge his operations with Arcelor?

While the negotiations were still going on (though Arcelor board had approved the merger), in theannual general meeting the chairman of the Dutch shareholders association of Mittal Steel raisedthis question in a rather pointed manner. Neither Laksmi Mittal nor his son were present duringthis meeting, busy with meeting Arcelor top brass. A top functionary of Mittal Steel was in chair.The question was about the identified synergy effects between Mittal Steel and Arcelor in terms oftheir content and the risks involved, on the long term intentions concerning the voting rights, onthe vision with respect to the possibilities of an opening in the Arcelor discussion, and on theselling of Dofasco to Thyssen Krupp.

The Chairman advised that cost synergies were identified in three major areas: purchasing,distribution and service center & operations. He quantified that the identified synergies added upto 1.25% of the total business of the two companies. He added that this was actually less thanachieved synergies in other acquisitions of Mittal Steel. (As the two charts would indicate, 1.25%would amount to 0.65bn per year. This by itself, perhaps, may not justify acquisition at $ 32bn.)He however added that there were more synergies expected on the sales side, that were notquantified yet.

More than immediate synergies, Mittal perhaps wanted to merge because he, as had others inthe steel business, had sensed the underlying consolidation phase of the industry and did notwant to lose the position of control he enjoyed as the biggest steel manufacturer. By merging withthe second biggest he was ensuring that the new second biggest will be less than a third of thesize of the new biggest (Arcelor, Mittal combine). To paraphrase Prof. Bruner of University of

Virginia Mittal was an instrument of change for the industry, removing excess capacity andrationalizing the availability of capacity. While increasing the bid, Mittal Steel must have taken inaccount the funds that would be released by selling Dofasco to Thyssen Krupp.

Mittal Steels view was very clear. With the absolute leading position in North America, thecombined entity would not need Dofasco. Dofasco was also very expensive: in absolute terms, itsacquisition cost as much as the whole acquisition of ISG, which was four times bigger. Mittalsnaturally felt that that money was better spent somewhere else. Disposing Dofasco was not asimple task. Arcelor management had bought it and felt that it was a very important acquisition.

ARCELOR: Revenue & EBIDTA

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They had also created a special arrangement for preserving Dofasco and in the process perhapssafeguarding them from a possible takeover. (See the box)

Did the merger gain any new geographic areasfor Mittal Steel? Merger made the new entity byfar the biggest player in Americas. But Mittal

were already bigger in Americas as the tablewould show:$ bn

Americas Europe RoW Total

Arcelor

2004 6.6 9.9 7.6 24.1

2005 12.5 7.7 9.8 30.0

Mittal Steel

2004 4.4 23.4 2.4 30.2

2005 6.5 23.2 2.9 32.6

ArcelorMittal

2005 19.0 30.9 12.7 62.6

Arcelor had a big lead over Mittal Steel inEurope. And despite being Dutch incorporated itseems Mittal Steel was viewed by many as anIndian company and it must have been thatmuch more difficult for Mittals to enter thefortress. The differences become still starker ifwe bifurcate the data in EU and Rest of Europe.It may be right to say that the merger hadallowed Mittal to grow in home turf.

The other difference that can be seen in theoperations of the giants is the realization ofvalue per tonne. Mittal Steel produced anddispatched much more than Arcelor in 2005 andrealized less! (Though Arcelor was charged ofcreative accounting when it came out with its2005 results in the thick of the takeover battle,we must understand that it is far more difficult tofudge revenue figure than net results.) Wasthere some merit in Guy Dolls ranting abouteau d Cologne andparfum? One thing is clear;the merger did not bring Mittals any closer to thefastest growing Chinese markets. However, thetwo merging partners had some obviously complementary strength. As noted earlier, Mittal Steelhad vertically integrated business model (with iron ore mines around the globe) and Arcelor wasmore concentrated on downstream facilities. (This explains Arcelors better realization per MT of

dispatch.) And as we would see, in spite of its spectacular size, the merger did not give rise to thedifficult problems when capacities need to be rationalized because of overlaps.

Laxmi Mittal, about nine months after the merger went on record saying that One of the mostexciting things about this merger was that the two businesses were entirely complementary withvirtually no overlap. In a consolidating steel industry, Arcelor and Mittal Steel were naturalbusiness partners and the past nine months have only served to further convince us of thecompatibility between the two companies. Arcelor Mittal is the first truly global, diversified andintegrated steel producer and there are a wide range of benefits associated with such a model.

ArcelorMittal chokes on its own poison pill

To deter Mittal Steel from takeover, Arcelor hadset up a Dutch foundation (akin to a trust in India),

Strategic Steel Stichting in April 2006 to holdshares of Dofasco. Its creation had evokedoutcries of foul play from Mittal camp during thosepolitically charged early days of the takeoverbattle. The foundations directors, mandatesincluded taking an independent view on sale ofshares of Dofasco entrusted to them for and onbehalf of Arcelor.

In November 2006 when the two fightingcompanies had already made truce and ink haddried on their well publicized merger agreement,Sichting foundation refused to wind itself up,despite requests for it to do so from the boards ofboth Arcelor and Mittal. Insisting on carrying outtheir original responsibility of taking anindependent view of any sale of Dofasco, Stichtingdirectors were objecting on the grounds thatDofasco owns technology important to Arcelor andthat the price offered by ThyssenKrupp was toolow.

By this time, the United States Department ofJustice had made the sale of Dofasco aprecondition for the approval of the merger. Mittalshad already started talks with the department tosee if sale of any other North American assetwould satisfy them. In the end however, theFoundation did agree to dissolve itself andDofasco was sold to ThyssenKrupp at $68 ashare, i.e. $3 less than what was paid by Arcelorat the time of purchase.

How did Sichting directors change their hearts?We do not have any account of that. It can be safeto surmise that they finally buckled to the full forceof famous Mittal charm. You do not create anempire of the size of ArcelorMittal in 17 years ifyou cant win over support of some dissentingdirectors.


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I have always believed that a business model based on size, scale and diversification would benecessary to unlock the value potential of the steel industry. Steel has historically suffered fromsevere volatility and cyclicality due largely to its fragmented nature which has resulted in the verylow multiples still afforded to the sector today. Whilst the sector will always have some degree ofcyclicality, the severity of the cycles can be reduced through consolidation of the industry and theemergence of a number of key players with a more diversified and global operating base. ArcelorMittal is the first such company to be created and we are already seeing the benefits in terms ofcreating a more sustainable operating environment, which will have considerable benefits for allstakeholders. (We can hear Prof Bruner humming.)

Mergers will always create challenges and issues, but the integration between Arcelor and MittalSteel Mittal explained, had been remarkably straight forward, largely due to the fact that the twobusinesses did not overlap at all in terms of operations. He believed the two businesses the twobusinesses to be very complementary which was highly motivational and encouraged people towork together to share their skills and expertise. He elaborated with the European business howby harnessing the experience and quality of the Western European plants, the merged entitywere able to transfer this to the Eastern European plants to help them improve product qualityand mix. He considered the automotive business to be another example of this. The mergerentity, he claimed, had created a global automotive segment which was in a position to offer a

global solution to most important global customers.

In the final analysis it seems Prof Bruner was spot on. Both merging partners shared committedto a more significant role in the global steel scenario. This perhaps acted as a strong unifyingforce and forming the basis for the successful merger. Gains from merger are perhaps necessaryfor a successful integration, but by no means sufficient. In spite of numerous benefits that amerge can bring forth it will still fail miserably in delivering those values unless the two teamslearn to give up rivalry and truly become one. This is the essence of integration. McKinsey hasdone a very useful study of this process by talking to the two senior most executives who were incharge of speedy post merger integration. The next section draws heavily from an interviewpublished in The McKinsey Quarterly.


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AND AFTER

Mittal conceded a lot of ground to clinch the deal. His biggest bargain, other than the merger, wasperhaps, removal of then Arcelor CEO Guy Dolle. Mittal conceded to the Arcelor boards demandof greater professionalism and better corporate governance by agreeing to a majorityrepresentation by Arcelor on the board of the merged entity, even though he owned 45% equity.

He agreed to shift the headquarters to Luxembourg and also agreed to be co-chairman ofArcelorMittal with Arcelors then chairman Joseph Kinsch. Finally, despite his majority ownership,he agreed to ArcelorMittal as the new name and not Mittal or MittalArcelor. After conceding somuch, it would have been tragic if the merger had not worked out well. Laksmi Mittal devoted thesame energetic attention to post merger integration that he had unleashed for overcomingcorporate and political objections when he had launched the takeover bid. However nothing of thekind happened.

It is important to note that before the merger, both companies had grown strongly and haddemonstrated successful integration. Arcelor itself was the outcome of the merger of Aceralia,Arbed and Usinor in 2002. Mittal Steel (and its predecessors) had been growing at a breakneckpace through acquisitions. These past experiences ensured that the merged entity had plenty ofintegration experience to call on. In the merged companys Activity Report for 2006, Mittal

observed that the success of the merger had surpassed even his own expectations. One of theclear priorities for 2007 is ensuring a successful integration he said, and It was clear from thebeginning that the two businesses benefited from complementary business models, which formedthe basis for a positive integration.

Two very senior professionals, Bill Scotting and Jrme Granboulan were in charge of speedyintegration. The top management had set three clear objectives to them: first, to achieve anefficient and rapid integrationaligning people, delivering synergies, creating the appropriateorganization; second, to secure and manage the day-to-day business; and third, to drivecontinued growth. The first two are fairly common objectives in any merger, though generally withmore emphasis on integration than on managing the business. The third one was unusual. Themerger process also suffered from the fact that it was highly visible. The scale of the mergeroperation and the tumultuous courtship of the partners gave it a much greater visibility than in

most mergers. Many more people inside and outside the company were following the integrationactivities to see how things would progress. A particularly significant factor was that the mergerwas strategically driven by growth rather than by restructuring objectives. Its aim was to combinetwo complementary businesses with a wide range of capabilities in order to create a morecomplete entity. In contrast, many of earlier acquisitions at Mittal Steel were turnarounds focusedon cost and productivity improvements.

Bill and Jrme conducted interviews and surveys with employees to gain a better understandingof their views about the two companies, a process that culminated in an entire rebrandingexercise. They questioned people about the companys strengths and weaknesses and what theythought ArcelorMittal should stand for. This clearly indicated what people are thinking and bothfound it extremely useful.

As could have been expected one of the greatest challenges was to get line managers involvedand to sell the merger to the operating teams. The top management top-management conductedroad show which was very successful and so was the communication programme launched tokeep the people informed of what was happening. The integration team established a Web siteand introduced Web TV, which is perhaps the first large-scale application of this tool. Topexecutives recorded two- to three-minute interviews on various topics, and everyone with accessto a PC was able to watch them onscreen.

The new ArcelorMittal brand was launched with an employee convention at which the companystop 500 executives had gathered. This provided a great boost and marked the end of the formal


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integration process, in spring 2007. In the early days of the merger, as would be inevitable,everyone was wondering what impact this process would have on them, and the uncertainty levelwas quite high. Managers need to have a well-structured message about the significance of themerger and the direction the company is going in, and this should be done very clearly and as amatter of urgency. With relatively few operational overlaps, initially the merger only directlyaffected employees working in procurement, sales and marketing, and the corporate centerbesides those operating managers involved in benchmarking and the integration task forces, ofcourse. So a lot of time may have elapsed before it had a direct impact on the activities of manyother employees. That time lag may have contributed to the uncertainty.

A key impetus to quick integration was agreeing on the medium-term value plan for the newgroup. The budgeting cycle, started in August 2006, and budgets for 2007 had to be finalized inNovember. This worked in favour of the integration team and added impetus to the process.

The integration teams goal at the beginning was to complete the formal phase of integrationwithin the first six months. It was therefore critical to agree quickly the role of the integrationoffice; the essential characteristics of the integration process, including how decisions would bemade; and what problem-solving mechanisms might be needed. In large mergers progress isoften reviewed on a monthly basis, but Mittal, a man in a hurry, made the review cycle weekly.The group-management board met every Monday, and the integration office, met every

Wednesday. There were many decentralized taskforces. Weekly review ensured that theprogress of the 20 to 25 decentralized task forces was reviewed in the middle of every week.These reviews identified the roadblocks early the management board could take a decision onthem a few days later. This cycle continued throughout the integration effort. This was anextremely efficient way to maintain tension and momentum within the organization and this paceis a major component of the success of the integration process anywhere.

In many mergers, teams from the two merging entities are nominated. These teams then proposea draft organization to the management board. The profiles of the people who will occupy thesenior positions are defined and committees established to select them. Once these seniormanagers are nominated, they build their own teams to identify the synergies and build actionplans. In ArcelorMittal case, all these different tasks were conducted in parallel. Teams wereformed even before the organization had been fully announced; and the implementation of certain

actions was started even before the detailed plans had been developed.

As is common in merger of equals, everything was initially divided 5050 between the twocompanies. There were 6 members on the new group-management board, for example3 fromeach side. The integration office comprised 10 to 12 people, again evenly split. In many mergersthis team is much larger, but many believe that 10 to 12 is an optimal size and makes themovement speedier. Typically, the larger the team, the more complicated the process becomes.

The role of the integration office is not to lead the company, nor is it a body located in a remotecorporate office to manage processes. Although its an instrument of the management board, itmust establish its credibility with the managers of the large units separately. The managers mustfeel that they can receive assistance and facilitation from the integration office. Integrationprocess and integration office (team) becomes effective if it is clear from the first day that the top

management are virtually the integration board. In ArcelorMittal case the CEO i.e. Laxmi Mittalhimself and the management board were the ones who laid out the expectations. They decidedwhat actions should be taken, and at what speed. They also outlined the core principles andguidelines and the weekly cycle.

The integration team size was deliberately kept small. This is a second key design element of themergerin addition to speed. Some people have termed it integrating integration. In taskforces, the people leading them came from the business units. Thus, commercial integrationissues are handled by the commercial business units; technical-benchmarking issues are handledby the operations experts. The role of the integration team is to coordinate all these efforts.


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Usually an integration coordinator is made responsible for three or four task forces and maintainscontact with them on a daily basis.

The high-level, top-down target of synergies to be realized was $1.6bn. (Please contrast with theexpected synergy figure given by at the general meeting in June 2006 it worked out to $0.65bn.) There were other task forces aimed at knowledge sharing, and the use of benchmarks.The role of the task forces was first to validate this number from the bottom up and then to tell theintegration team how the synergies could be achieved. As the merger progressed, it wasnecessary to get the business units to assume ownership of the process and to formulate theaction plans for delivering the synergies. The taskforce just pushes hard to obtain the plans,details of the initiatives, timetables, and, where possible, key performance indicators that can beused to track the delivery of objectives. The duo in charge of integration was able to obtain thisinformation for some areas, but not all. In some cases they discovered the scope for savings waslarger than what was thought, in others smaller. Overall, they managed to validate the target of$1.6 billion to be achieved by mid-2009. (The realization of these synergies, incidentally, is wellahead of schedule, with more than $1.4 billion of annualized savings captured by the end of thefourth quarter 2007.)

Within a month the duo had refined the $1.6 billion savings target, which is an annualized figure,divided it into four main partspurchasing, sales, operations, and miscellaneousand assigned

parts of it to the business units and task forces. Each task force had about five weeks to confirmthat the figures seemed correct and to present their action plan. As mentioned earlier, because ofthe budget cycle, the timing worked in o favour, as the integration objectives could beincorporated into 2007 budget plans. Without this, people might have tried to suggest that theenvironment had changed.

Some of the task forces were named after large business entities, such as Flat Carbon Europe(FCE) operations and Long Carbon Europe operations. Others, such as purchasing or sales,were functional. However, all were staffed by people from the business and deeply rooted in thebusiness. The key point is that the task forces did not operate independently of the businessoperations.

The external communication was conducted in several ways. In the early days, members of the

group-management board travelled to all the major cities and sites of operationsthe road showreferred to earliertalking to local management and employees in these environments. Typically,media interviews were also conducted around these visits, providing an opportunity to conveymessage to local communities through the press. Because of the size of the merger, it hadgenerated sustained interest from the financial and business press. The integration teamorganized a media day in Brussels in March 2007, offering presentations on the status of themerger and the results and inviting journalists to go to the different businesses and review theprogress themselves.

Investors and other stakeholders were reassured to a great degree from the fact that group-management board members came from both companies. A key objective of the commercial taskforce during the integration phase was to quickly create a single face to the market, rather thantwo separate propositions. Besides the synergies this task force was asked to deliver, it was

instructed to set up the appropriate organization for communicating with customers in this waysomething that was achieved by the end of the first three months. Customers were informedabout the advantages of the merger for them, such as enhanced R&D capabilities and widerglobal coverage.

ArcelorMittal merger throws some light of the traits of the people leading integration effort. Suchleaders must be collaborative. In the ArcelorMittal case, the office played a facilitating role and atthe same time possessed a degree of process orientation: for instance, to manage the weeklycycle and obtain all the mandates. In addition, the role requires a thorough understanding of thebusiness. For example, there could be some intense debates on the changes to be made in the


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value plans. The leader must possess an understanding of such matters. Key qualities, manywould affirm, are cultural openness, the capacity to understand people, and the ability to see howthey can fit together. However, its also important not to accept any diversions and to adhere tothe schedule and the key objectives of the organization. The integration leader should also beable to form a close, trusting relationship with the senior management of the group. Theintegration offices credibility and authority, which are essential for the tougher aspects of amerger, rely on the support of the CEO and senior management.

Role of the CEO in a mergerCEO sets the tone, the speed, the direction, the key principles, and the requirements. InArcelorMittal, Laxmi Mittal insisted that the business units should be fully involved and take thereins as soon as possible. The CEO also plays a critical role with respect to communication anddeveloping the personality of the new company. A merger is like a river flowing into the sea.When the tide is changing, the boats do not know exactly how to align. Then, progressively, theymanage to do so. The role of the CEO is quickly to set everybody on the same axis and toreassure people. At the same time, though, he must be demanding.

There is also the accountability aspect. CEOs should not merely announce that the merger isimportant; they should demonstrate its importance by ensuring that it is placed on the agendaevery week. The CEO plays an extremely important role in communication, both internal and

external, but in ArcelorMittal model it is vital that the whole top-executive team should be visible,cohesive, and that it should provide leadership. Top team cannot afford its members to be pullingin different directions. It is the CEOs role to ensure that the top team is aligned and speaking witha single voice.

On merging culturesThe formal integration may be over soon. In ArcelorMittal it was completed when the neworganization, the brand, the one face to the customer requirement, and the synergies werefinalized, two and a half quarters after the start. But it will take more time to fully integrateincluding all the cultural aspectstwo entities such as Arcelor and Mittal Steel.

Then the passion of a professional does remarkable things. It always provides an immediatecommon ground. The first time the senior management from the two sides (Arcelor & Mittal) got

together some may have had apprehensions, but they were discussing steel and exchangingideas after a few minutes.

ArcelorMittal is progressively building a common culture combining the best of both entities. It iscombining the speed and vision that characterized the Mittal Steel with the steady, long-term,step-by-step approach that characterized the some of the ex-Arcelor entities. In areas like healthand safety, quality, and performance, it has set for itself high standards and that if some parts ofthe group do not meet these standards it is possible for them to obtain help from other parts.

If we look at the merged entitys operations from Laxmi

Mittals past operations, the most striking thing, it seemed,

was his willingness to concede more than 50% ownership to

others. Mittal had all through ensured that he retained avery clear majority as much as could be had while still

keeping the company publicly listed. How do you thinkMittal will go about increasing his stake and how long

would you give him to control 50% of ArcelorMittal?

birth of arcelormittal

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