The biggest takeover battle in the global steel industry came to an end in late June when Mittal Steel, the world’s biggest steelmaker, acquired Arcelor, the industry’s second-largest company. For five months before shareholders signed off on the $32.2 billion transaction, both sides were engaged in an acrimonious fight in which European politicians, investment bankers and many others got involved. At times it seemed as though the deal would collapse — especially after Arcelor turned in May to Severstal, a Russian steel manufacturer, as a potential white knight. But finally, after Mittal Steel significantly increased its offer, Arcelor’s shareholders approved, and the deal was clinched.
What was Mittal Steel’s strategy in pursuing this acquisition? When the company encountered resistance, how did it frame its negotiation strategy? What will the deal mean for the world steel industry? Aditya Mittal, president and chief financial officer of Mittal Steel — and son of founder Lakshmi Mittal — spoke recently with Knowledge at Wharton about the transaction. Knowledge at Wharton had also interviewed Aditya Mittal last November about trends in the global steel industry.
An edited transcript of the conversation follows. (You could also listen to the discussion by clicking on the Download Audio button above or by subscribing to Knowledge at Wharton podcasts on iTunes.)
Knowledge at Wharton: When we interviewed you last November, you said that the industry needed two or three players who were producing 100 million tons of steel each. Media reports have noted that you suggested the acquisition of Arcelor to your father. Is that true? What were your strategic reasons for choosing Arcelor as the target?
Mittal: Yes, the steel industry needs consolidation and it was obvious that Arcelor was the best fit. I proposed that to our Chairman and CEO and others at Mittal Steel, and we moved forward. There is no doubt that Arcelor and Mittal Steel is the best combination within the steel industry. It becomes No. 1 in all of the major markets in which it operates. It becomes, by far, the leader in terms of technology, research and development and process innovation. We’ve become three to four times larger than the next competitor. And, lastly and perhaps most importantly, we jump-start consolidation in the global steel industry. Even today, the top five steel companies represent about 25% of the global steel industry…. The steel industry needs consolidation, and this merger will accelerate that process.
Knowledge at Wharton: After Mittal Steel made the initial bid for Arcelor in January, there was considerable resistance from Arcelor’s chief executive, Guy Dollé, and also some politicians in France and Luxembourg. Did you anticipate that kind of backlash? What do you think was behind it?
Mittal: The backlash was unexpected. I think ignorance was behind the backlash. People did not understand or realize what Mittal Steel is about, what we have been doing in the countries and the communities in which we operate. We began a process of education and communication over the last four months. Today we can see the results of that process. We gave a business plan [industrial plan] to various governments, walked them through what we have done at our facilities, and demonstrated that we are truly the market leader in the steel industry.
Knowledge at Wharton: Once you recognized that the acquisition process was going to be difficult, I wonder if you could tell us a little about your negotiation strategy. Arcelor employed a couple of classic anti-takeover tactics. First, it had the so-called “poison pill” defense involving its Canadian subsidiary, Dofasco. And then in May, it turned to Severstal of Russia as a white knight to fend off the bid. How did that affect your negotiation strategy?
Mittal: We focused on the shareholders. We realized that the poison-pill defenses that Arcelor was constructing were not in the interest of the shareholders. And it became our job to mobilize the shareholder base. The shareholder base at Arcelor got mobilized, and this was unprecedented for Europe. You do not have that measure of shareholder activism in Europe, and we helped begin that process.
The first shot was a letter that we sent to the Arcelor Board of Directors, which had 30% of the shareholders signing a petition. This was done less than two days after the Severstal announcement, including a weekend, which was quite substantial and quite phenomenal. The numbers of shareholders who wrote and signed this petition were greater than the numbers which we elected to the existing management board. I think with that widespread support we continued to leverage and mobilize on it, communicate with them, and it became very obvious to everyone concerned that the shareholder base was behind us, and therefore we deserved a seat at the negotiating table.
Knowledge at Wharton: On Sunday, June 25, the Arcelor board agreed to accept your offer of 25.6 billion Euros [$32.2 billion]. This was almost as much as your revenues. Considering that this was 40% more than your initial offer, was this the right price?
Mittal: Interesting question. If you look at the price-equity (p/e) multiple, the p/e multiple for our January 27 offer was 8.5 times, and the p/e multiple for our revised offer, based on Arcelor’s consensus estimates, was 8.6 times. So what’s happened is basically two things: The steel industry’s outlook is much stronger than it was when we started the process in January, and secondly, Arcelor also increased its forecast for 2006, 2007 and 2008. So from a p/e multiple or earnings forecast basis, the difference in price is less than 10%.
Knowledge at Wharton: What happens next? How do you plan to go about integrating the operations of Arcelor and Mittal Steel? The reason we ask is that most mergers that succeed — and also those that fail — do so because of cultural and human reasons. How do you plan to address those challenges?
Mittal: The most important thing is that this is a merger of equals, and we truly and deeply believe in that. I think a merger of equals can be successful if we have an open, transparent and performance-oriented culture, and that is what we will be instilling. At the end of the day, I do not believe that the cultures of Arcelor and Mittal Steel are that disparate. We obviously come from different backgrounds, but the vision has been the same. In the global steel industry we operate within the same markets. Our market conduct has been the same. Our attitude towards operational excellence has been the same. Our attitude towards purchasing has been the same. So from an organizational structure [decision-making strategic vision] I think the fit is very strong. Clearly both of us need to ensure that we can work together better — that the whole is greater than the sum of the parts.
My personal discussions with Arcelor management over the last 10 days have provided me with a great level of comfort that this can be achieved. We were amazed, within the first half hour, with how we broke the ice and that we could communicate. We became excited about the vision that we will share and figured out the industrial plan and how we are going to achieve the synergies. It’s going to happen. So, the initial start has been very positive. I do believe because of an open, transparent and performance-oriented culture that we will achieve success in this merger.
Knowledge at Wharton: You told us when we last spoke that China was a major priority for the future. Will that change after the merger?
Mittal: Absolutely not. I think China will become a bigger priority for us because now we can focus jointly on China and its growth.
Knowledge at Wharton: One last question. Considering what you said earlier — that the combined company will be three times the size of the next largest competitor — do you think this makes you more vulnerable to anti-trust regulation?
Mittal: No, we have anti-trust clearances globally.