How Mittal Steel Proved Its Mettle in a Tough MarketplacePublished: November 30, 2005 in Knowledge@Wharton
Each day, recalls Aditya Mittal, he and a colleague, along with two advisers, would be locked in a conference room with "24 chain-smoking representatives of the Romanian government." The negotiations, which the Romanians insisted on tape-recording, often stretched on for 15 hours.
Mittal, then head of mergers and acquisitions for his family's company, Rotterdam-based Mittal Steel, wanted to acquire a steel mill owned by the Romanian government, even though the plant was losing $1 million a day. Mittal Steel was the only bidder, but the Romanians kept pushing hard for concessions. Eventually, both sides agreed to the deal. "They realized that we weren't budging on our conditions and, more than that, they realized that the restructuring was necessary," Mittal says.
The incident, which occurred five years ago, illustrates the business strategy that has made Mittal Steel the world's largest steel maker -- a commitment to consolidation and globalization and a willingness to take risks that scare off competitors. As the steel industry overall struggled in the early part of this decade, Mittal Steel, grappling with financial problems of its own, continued to expand. And as competitors insisted that steel should remain a regional business, Mittal Steel pursued its vision of becoming a global giant.
Today, the company has plants in 14 countries and a market capitalization of $20.3 billion. Fortune magazine in January named Lakshmi Mittal, the company's chairman and chief executive and Aditya's father, its Europe Businessman of the Year (2004) for his "deal making and steel making." In April, the company capped a 15-year string of acquisitions with the completion of its $4.5 billion purchase of U.S.-based International Steel Group. In early October, Mittal Steel announced that it would construct a new plant in the Jharkhand state in India which, at its peak, will produce 12 million metric tons of steel a year. And in late October, Mittal announced the purchase of Ukraine steel manufacturer Kryvorizhstal for $4.8 billion. According to a report in the Wall Street Journal, the transaction, "conducted "in a tense televised auction that set a new benchmark for acquisitions" in the steel industry "underscores the increasing premiums being paid for former state-owned steel plants."
Just as important as these recent acquisitions is the fact that Mittal Steel has begun to change the way that its industry does business. Earlier this year, when steel prices dipped, the company announced that it was cutting production substantially. Because of Mittal's position in the industry, competitors followed. In years past, their course of action had been to continue producing, driving prices down further and compounding the industry's misery.
Aditya Mittal, who earned his undergraduate degree at Wharton in 1996, joined the company in 1997 after a stint as an investment banker. Today, based in London, he is president and chief financial officer. During a recent trip to campus, he spoke with Knowledge@Wharton about the company's strategy and future plans.
"An Opportunity Basket"
Lakshmi Mittal built Mittal Steel from a single mill. His father, too, had been a steel man -- in Calcutta. Lakshmi Mittal ran a factory for him in Indonesia before striking out on his own with a plant in Trinidad. Soon, he seized on a strategy of serial acquisition, often scooping up underperforming former government outfits in such far-flung places as Kazakhstan. Although the locales have changed over the years, he has stuck to a common formula: Import modern management practices, wring out costs and, where possible, create new efficiencies by taking steps like acquiring nearby coal and iron ore mines. In some locations, like the Czech Republic, he has left the local management team intact. In others, like Romania, he has replaced every member.
Aditya Mittal says his father understood sooner than most steel executives that their companies should operate worldwide, not just near home. "We were the only steel company pursuing a strategy of globalization when we started. Most participants at industry conferences said, 'Steel can never be global. Steel is regional.' Today, those same organizations are scrambling for assets in Central Europe because of their proximity to raw materials and a growing market. Our global vision allowed us to look at the world as an opportunity basket."
When Mittal Steel considers an acquisition, it seeks not only low-cost inputs and an expanding market, but also inexpensive labor, Mittal says. But it will bend its criteria if an opportunity looks promising enough. Its Algerian plant, for example, had no obvious source of iron ore. When Mittal staffers discovered that the country had ore deposits, the company secured a license to open a mine.
Similarly, its purchase of International Steel Group did not seem to fit its requirement for low-cost labor; U.S. wages are among the highest in the world. But ISG had been cobbled together out of such storied American steel names as Bethlehem and LTV by U.S. turnaround specialist Wilbur Ross, and Ross had streamlined the companies while reorganizing them. He laid off employees and jettisoned pension plans, giving ISG a cost edge over U.S. competitors. "We believe that, with the integration of ISG into Inland, [another Mittal division in America], we will have the lowest cost manufacturing base in the U.S," Aditya Mittal says.
Although the company has a blueprint for acquisitions, each of its deals presents unusual challenges, Mittal adds. In the former Eastern Bloc, for example, financial statements have proven unreliable because plants often did business via barter. "Traders would come in and say, 'I'll give you a ton of ore or coal, and I want you to pay me in steel.' In Romania, they had a central computer which would track all of the barter transactions.
"In Kazakhstan, we opened a warehouse and found 50,000 bottles of Romanian red wine. They had traded steel for wine. And they had created their own currency -- IOU notes. All the employees came and said, 'I have an IOU note from the company.' You would go to the hospital or the grocery store, and there were these IOU notes."
The Game Had Changed
Aditya Mittal was named head of mergers and acquisitions as the steel industry teetered on the precipice of its latest slump. His first project was a $1 billion deal -- which was never completed after another company lured the target firm away. Then came the 1999 steel market crash. A third of U.S. steel makers filed for bankruptcy, and Mittal Steel, which was losing money along with everyone else, considered that same path.
"That was the worst period my life," Mittal recalls. "Here I was the head of M&A with one direct report and one failure to my credit. I analyzed my mistakes and realized that the game had changed. Historically, acquisitions in the steel industry were contingent on financial measures, but those [measures] were no longer as important. Employee commitment, capital-expenditure commitment and media perception were more important now."
Historically, steel makers, saddled with high fixed costs, have been whipsawed by commodity pricing and overcapacity in their industry. When prices dropped, companies kept pumping out steel, even as losses piled up. Cutting production would have risked failing to cover their fixed costs and collapsing into bankruptcy. Some companies even cut prices in hopes of protecting their market share. The industry was so fragmented that no one company or group of companies could stabilize it by reducing production. If one small player cut his output, everyone else would increase theirs and drive him out of business.
The slump put Aditya Mittal in a tricky spot. He was trying to buy companies but had no cash to do it. "A very rational person would have decided to focus internally, and that's what the rest of the steel industry did," he says. "But I wasn't ready to do that. I had just gotten the job. I kept looking at opportunities."
In the next year, 2000, he found three -- the plant in Romania as well as ones in Algeria and South Africa, both of which were also losing money. Mittal managed to acquire all three, adding $5 billion to the company's sales. Soon came a deal in the Czech Republic and then, last year, the announcement of the ISG acquisition.
Buying ISG was a coming-out party for Mittal Steel. After two decades of largely operating in out-of-the-way places, the Mittals charged into the business mainstream, creating the world's biggest steel company. It has pro forma revenues of $31.5 billion and profits of $6.8 billion.
Aditya Mittal says the company's acquisitions are far from done. "It's critical for consolidation to continue," he says. "We need two or three players in our industry who are producing 100 million tons each. Today, we are a 60-million-ton steel company." Mittal Steel's biggest competitor, Arcelor in Luxembourg, produced about 50 million tons in 2003. Fewer, bigger producers will give the industry better economies of scale and greater pricing power, which should translate to less volatile steel prices. "That's critical for our industry to survive in the long run," Mittal says.
International scope brings benefits to the company besides sheer market muscle. It also enables it to transfer knowledge among its far-flung subsidiaries. "We have thousands of managers who participate in our knowledge management program, and they meet on a bi-annual basis," Mittal says. "That allows the cross-fertilization of ideas. Our counterparts in Kazakhstan were able to teach our American smelters some better melting practices."
Dealing with China
The future of Mittal, as for many companies, can be boiled down to one word: China. The company has long done business in that part of the world. Its Kazakhstan plant, acquired in 1995, exports much of its steel to China. In September, Mittal Steel completed its $338 million acquisition of a minority stake in Hunan Valin Steel Tube & Wire Co. Aditya Mittal envisions more deals there. "We want to be a consolidator in China," he says.
The lure, of course, is supplying China's red-hot economy, especially as the Chinese construct the sort of infrastructure -- highway bridges and big industrial structures -- that requires a significant amount of steel. The risk is that China will decide to ramp up its own production and undercut foreign producers. China's steel production is already growing each year by the total amount of steel that India produces, according to Mittal. But he thinks that fears about China's designs on a larger piece of the steel business are overblown. "I don't believe China is a low-cost steel producer, because it doesn't have iron ore," he says. "They import ore, bring it primarily inland, make steel, then ship it, and that involves a lot of cost. Their labor-cost advantage is less than that."
In addition, Chinese government policy has lately seemed to discourage additional domestic production, Mittal notes. The government has repealed export incentives for the industry and announced its intention to consolidate its domestic firms. "I think they recognize that, if they become a significant exporter of steel, there will be trade issues."
Mittal Steel has found the Chinese government to be an accommodating partner for foreign firms, especially when compared with the Mittal family's home country, India. "With India being a democracy, setting up operations can be difficult," Mittal says. "I don't mean to denigrate democracy. But it takes time. You negotiate with all different levels of government. You negotiate with tribal people. It can take two or three years. It's a more difficult process than in the United States.
"But I remember going to China. I flew into the airport, and there was literally red-carpet treatment. Then I'm in a car on a highway, and there is no one else on the road. So I ask, 'What's going on here?' And they say, 'The party secretary wanted to give you a nice welcome. This highway isn't actually open yet.' Then I get to the plant site, but I don't see any land. I see houses, lots of houses -- a village. And I say, 'Where's the land?' And the party secretary says, 'Right here. In 90 days, everyone will be gone.'