Alarm bells sounded in the global steel market on Friday, January 27, 2006, when Mittal Steel, the world’s largest manufacturer of steel, launched a whopper of an offer in that highly fragmented sector. Mittal made a hostile bid worth €18.6 billion for Arcelor, its main competitor.


The offer by Mittal – which is run by Lakshmi Mittal, the third-richest man in the world – is the highest in the history of the steel industry. It calls for exchanging four Mittal shares plus €35.25 in cash for every five shares of Arcelor. The offer values shares of Arcelor at €28.21 each, which means that it involves a premium of 27% over the closing price on the stock market the day before.


Arcelor’s senior executives saw the offer as hostile from the very first moment. Its board of directors called an urgent meeting on the afternoon of Sunday, January 29, where it unanimously rejected the offer. In addition, Arcelor – which is itself the product of a merger in 2002 between Luxembourg’s Arbed, France’s Usinor and Spain’s Aceralia – recommended that its shareholders reject the Mittal offer. One of the arguments given by Arcelor’s board to justify a rejection is that Arcelor and Mittal do not share the same strategic vision, the same model for development or the same values. “Arcelor is not going to share its future with Mittal,” Guy Dollé, president of Arcelor, told a press conference.


Coordination of the Sector


The deal left experts in shock because although Mittal is quite accustomed to expanding its base through acquisitions, it is now daring to confront a company that ranks second in the steel sector in terms of production, and first in terms of revenues. In addition, notes Esteban García Canal, professor of business administration at the University of Oviedo (Spain), “What makes this deal unique is that this is the steel sector. Until very recently, this business was protected by the governments and no one thought that companies could make hostile takeover offers on this scale, despite the fact that the sector was in the process of consolidation.”


According to Wharton professor Mauro Guillén, “Mittal wants to grow, to strengthen itself and to eliminate competitors in a mature sector where costs are a fundamental factor.” For his part, José Mario Álvarez de Novales, a professor of strategy at the Instituto de Empresa in Madrid, explains that Mittal’s interest in Arcelor is based on the type of production each company is involved in. “Mittal produces low-cost steel, so it has factories in countries where labor costs are low, and its mills are located near mines and close to markets where there is a lot of demand. In contrast, Arcelor produces steel for industries that demand higher quality products, such as the auto sector.” As a result, “Mittal’s offer is an attempt to enter the higher range of the steel industry as well as new markets where the company does not have any production facilities,” he adds.


What would happen if the deal succeeded? It would create an enterprise with total revenues of some $69 billion, a market capitalization of some $40 billion and a global market share of about 10%. The new Mittal would become the first steel company to produce more than one hundred million tons of production a year, three times the production volume of its closest rival, Japan’s Nippon Steel.


According to Victor Pou, a professor of management at IESE, the Spanish business school, “The deal is an attempt to make the two companies complementary.” If it were approved, he adds, “Arcelor would bring innovation and technology, and Mittal would achieve greater geographic reach and have access to more raw materials. From the strategic point of view, there are many synergies between the two companies.”


Beyond the fact that Arcelor is an obvious opportunity for Mittal to gain size and acquire access to new markets, “The European steelmaker [Arcelor] is Mittal’s main rival, not only in the market but when it comes to making other deals for acquiring other competitors,” adds García Canal.


European Politicians to the Rescue


In principle, there is no reason to believe that the deal could fail because of any problems involving its impact on competitiveness. “This deal does not mean any limitations in terms of competitiveness for other companies in the sector,” notes Pou. “We are talking about the steel market, which has a very low level of integration and where there is a lot of room for this type of deal. If you add up the market shares of the two companies, you barely exceed 30%, so this would not have any impact on competitiveness in the market or on the activities of other companies.” The president of Arcelor himself has also acknowledged that there are no problems regarding competition, especially if Mittal were to sell Canada’s Dofasco, which Arcelor recently purchased, to Germany’s ThyssenKrupp.


Nevertheless, Dollé has pointed out a serious challenge for the merger: The contrasting business cultures of the two companies could make it hard for the deal to succeed. Dollé believes that Mittal Steel’s idea of good governance practices are not the norm in Europe. The Indian family itself controls 97% of the company’s capital, and the son of the company’s president is also its director of finance and its managing director. In addition, Lakshmi Mittal owns shares that have two votes each, which would guarantee him control of the resulting group. He would have more than 50% of the ownership rights and 64% of the voting rights. Moreover, in Luxembourg, where Arcelor has its headquarters, it is not permitted to issue shares that have double voting power.


Arcelor has also said that it is worried about the consequences this deal would have for its shareholders, employees and customers. As a result, Arcelor has mobilized European politicians in an attempt to prevent the deal from moving forward. The three countries involved in the deal – Luxembourg, France and Spain – have already rejected the acquisition offer. “It is the first time that I have seen a deal that seems to be so poorly prepared,” said Thierry Breton, France’s minister of economics. Breton also insisted that Arcelor should have a “European character.”


Luc Frieden, Luxembourg’s treasury and budget minister, and Jeannot Krecké, the country’s minister of economics and trade, declared that “the social and cultural model of Arcelor has our firm support.” Luxembourg is not only the headquarters of Arcelor but it is the chief shareholder of Arcelor, owning 5.6% of its shares. The government of Spain, the third player in the deal, said that it would study the impact of the move on employment and activity in the 18 plants Arcelor operates in Spain. “We will act in consonance with the rest of the European countries that are involved in this operation, especially with France and Luxembourg,” declared Pedro Solbes, second vice-president of the Spanish government.


The three European governments seem to have forgotten that Mittal Steel has its headquarters in Holland, and that Lakshmi Mittal owns important businesses in the United Kingdom. His main residence is in London. In addition, they have been overlooking the fact that Germany’s largest steel producer, ThyssenKrupp, would benefit from this deal, since it would be able take over Dofasco.


Although Luxembourg is the largest shareholder in Arcelor, Guillén believes that “it is a country that is very small when it comes to playing an important role.” In addition, “the Luxembourg government’s 5.6% [ownership stake] may not carry enough weight to prevent the takeover offer,” notes García Canal. For his part, Alvarez de Novales believes “France can make a lot of trouble, given its tendency to rescue French companies, as it has shown on other occasions.”


García Canal notes that “beyond the defensive maneuvers that the management of Arcelor can carry out with the backing of [European] politicians, the success of the deal depends on two other groups: Shareholders [of Arcelor] and officials at the agency that enforces [European] competition laws. From the viewpoint of shareholders, Arcelor’s high free float of 80% makes it feasible that Mittal could achieve the 50% level [of shares] necessary for taking control.” Nevertheless, he adds, “The Indian steel manufacturer should convince institutional investors by making credible commitments to improve its [Mittal’s] corporate governance, since the deal would take place largely through an exchange of shares. If the deal involved cash, it would be more attractive for shareholders.”


A Company Formed by Writing Checks


Mittal Steel is the result of a long line of acquisitions based on a simple strategy: Acquire money-losing companies owned by formerly public enterprises, make investments to reduce their production costs, and expand their capacity. “This strategy has always worked well for it, and shareholders have never punished the company on the stock exchange when it announced another acquisition,” explains Álvarez de Novales.


This path to growth, notes García Canal, “is a common way to do things in sectors that are highly cyclical, since it means not adding new capacity to the industry during periods when demand contracts, and it enables a company to rapidly take advantage of growth opportunities.”


Lakshmi Mittal has spent his entire life in steel. At the age of 21, he began working in the steel plant his father owned in India. Years later, he founded his own steel company in Indonesia. Over time, he added new factories in former Soviet republics and other emerging markets, creating his own empire of steel. Now the Mittal family owns 88% of the world’s largest steel company. Its most recent purchase, last year, was International Steel, the U.S. company, at a cost of $4.5 billion. Mittal Steel is now using the same strategy to challenge the sector by presenting an offer for its closest rival. Mittal may already be the leader in the United States and Asia, but it could soon reach the top spot in the European rankings.