A book review on

Submitted By• Kameshwari Kvl 75• Kavita Patil 77• Vaishnavi Kulkarni

82

The Multi Billion Dollar Battle For A Global

Empire

“Cold Steel” is the story of the biggest and most hard-fought industry takeover in

recent years, bringing to life the cut and thrust of big businesses at war with each

other.

Book Description• A compelling account of the biggest corporate

takeovers of recent years, and an insight into the life of Lakshmi Mittal, the UK's richest man

• Tim Bouquet and Byron Ousey have written an account of the takeover in the style of a thriller.

• Cold Steel describes the often brutal and chaotic five-month battle between Mittal and Arcelor.

• This book shows, money and business logic prevailed in the end over politics and protection.

• Mittal’s vision, which he kept on repeating throughout the battle for Arcelor was that, the state run steel companies had no place in the modern world.

• Steel would have to go global.

• Mittal Steel Company N.V. – CEO Lakshmi Mittal

• Formed by the merger of

• - LNM holdings & ISPAT International- International Steel Group Inc.

• Headquartered in Rotterdam, Netherlands. 2005 Revenues was $28.10 billion

• World’s largest steel producer by volume and also the largest in turnover

• Major player in following products : Steel, Flat Steel products, Coated Steel, Tubes and Pipes

Mittal Steel

Arcelor• Arcelor was the world's largest steel producer in terms of

turnover before takeover.• Second largest in terms of steel output.

• Guy Dolle was the CEO of Arcelor and its headquarter was in Luxembourg city.

• In 2005, Arcelor had revenues of $38.84 billion.• Arcelor was created through the merger of three

companies:Arbed, Aceralia and Usinor

The Deal

Why Arcelor?

• An Attractive Target: Arcelor had 71% pre merger revenue share from

Europe while Mittal had only 34% While in North America The revenue share for Arcelor

was only 9% but Mittal had 42% So they had complementary industrial and market

footprint

• 27 January 2006 : Mittal Steel offers the shareholders of Arcelor to create the world's first 100 million tonne plus steel producer.

• The deal valued at $27.05 billion offer to Arcelor’s shareholders

• The deal was split between Mittal Shares (75 percent) and cash (25 percent)

• But soon the deal landed into controversy

Indian Government Stance• Deal was not getting pushed due to MITTAL’s Indian

Nationality• But LN Mittal himself felt that there was no case of

“racism”• He emphasized that Mittal Steel was a European

company and NOT an Indian one.

THE FINAL DEAL Deal finally clinched when the shareholders of Arcelor agreed to Mittal Steel’s offer – In June 2006 Mittal raised its valuation of Arcelor to $32.9 billion. The Mittal family holds 43 % of the combined group. The combined company holds 10 percent of the global market for steel.

The flow of fierce fight• At the age of 39, Mittal knew that he did not have enough time in

front of him to build many more plants from scratch. So he started acquiring loss making steel manufacturing entities and turning them around completely.

• The state-owned Iron & Steel Co. of Trinidad and Tobago (ISCOTT) was facing bankruptcy which was his first opportunity for acquisition in1989.

• The next year he baught “Graveyard” and made the plant private firm. Later he bought Sidbec-Dosco in Quebec in 1994 and the next year Hamburger Stahlwerke which formed Ispat International.

• Next ISG was sold to Mittal Steel for $ 4.5 billion.

• In october 2005, mittal wanted to win the bid for ukrain’s kryvorizstal, he won the deal by strategically bidding in tough auction against guy Dolle.

• They have predefined the range for their bidding as well as they have forecasted the range for their competitors as well, which helped them to win it.

• Arcelor was planning to acquire Dofasco, as it was a big potential prize for both the Arcelor and ThyssenKrupp because it would give them entry to the North American market.

Controversy Arcelor Management – The management was extremely hostile to Mittal Steel’s bid which he called “150% hostile”The CEO of Arcelor dismissed Mittal Steel as a “company of Indians” European governments –

• The French, Spanish and the government of Luxembourg was against the deal,

• The French opposition was initially very fierce,• But It was criticized in the British, American and Indian media

as double standards and economic nationalism in Europe

• Arcelor tried to create a “poison pill” using Dofasco, a Canadian steel firm that it had recently bought.

• Later the firm proposed a share buyback, but denied the ruse was intended to hamper Mittal's bid.

• Mr Dollé's attempt to paint Mittal as a firm that did not share European “cultural values”. Saying Mittal suffered from “mono-cultural management” describing the offer as “monkey money”

• Arcelor rubbished the quality of Mittal's steel and criticised its corporate governance.

Other related facts of tussle

• Luxemberg government was not in favour of the hostile takeover bid for Arcelor.

• Special secret team was created by Guy Dolle to envision circumstances where they might be under attack from Mittal and plan out defences in advance. One of the plans was to acquire a steel company in USA, which was infact acquired by Arcelor

Various Strategies by Arcelor• Various meetings with all banks like Deutsche bank for

issues related to investments for winning the bid.• Took advise from Michael Zaoui, a successful banker,• Consulted Romain Zaleski of Milan (involved in many

world’s industrial strategic decisions), his experience was very important for the Arcelor

Various Strategies by Mittal• Initially Mittal invited Guy Dolle at his home and tried to

convince him for takeover, and after that also he consistently tried to convince Guy Dolle for the same.

• Later, Mittal had Roland Verstappen, appointed him as director of government affairs, and Goldman’s as his lead advisor,

• Goldman’scrafted the bid and built the assault team of bankers, lawyers, political advisers and PR spinners,

• A cabal of banks was created with credit suiss, HSBC, Citigroup to help finance the biggest steel deal in history.

• They made offers direct to Arcelor’s board members and shareholders,

• He was trying hard so that every regulating authority clears Mittal's offer before he could open it formally to Arcelor's shareholders.

• Spanish billionaire Jose Maria Aristrain, second biggest share holder in Arcelor with 3.6% stake, showed interest in Mittal.

Proposal by Mittal to Arcelor Management• ‘They suggested enlarging the Mittal Steel board to

fourteen members, with Mittal Steel and Arcelor equally represented with six members each, plus two further independent directors.

• They proposed a management board of six people, with Mittal Steel and Arcelor equally represented.

• They proposed moving to a one-share one-vote principle. And they also said that in the context of a recommended transaction, Mittal Steel would be prepared to revise the value of its offer.'

• Various poison pills were used by Arcelor, a special protectionist takeover law put on table by Luxembourg govt. but which was never passed, the political charm offensive of Lakshmi Mittal and how in the end every single defence strategy that was put in place by Arcelor failed and the only option they were left with was the While Knight in SeverStal.

Defence strategies used by Arcelor • It increased the dividend from euro 1.25 per

share to euro1.85 per share • To really woo the shareholders Arcelor declared

buy back of shares and returned the shareholders money.

• For the first time in its history the company offered to buy shares and at a decent price, from its shareholders, especially those who might be wavering towards Mittal.

• Arcelor planned to takeover Severstal Russian steel making company.

• In return, SeverStal would get 32 Percent of the combined group, equating to 295 million new shares valued at €44 each, totalling around €13 billion.

• SeverStal would be allowed six directors on a newly confuted board of eighteen, and Mordashov(owned SeverStal) would become president of the strategy committee, with Kinsch seeing out the rest of his two-year tenure as chairman and Dolle retaining his CEO role.

• This new deal would enable Arcelor now to distribute a Mittal-matching €7.6 billion to shareholders who sold back their shares at €44 a share, an attractive proposition for hedge funds

Mittal’s situation after announcement of SeverStal Takeover by Arcelor

• Mittal have to secure 50 per cent of the fully diluted shares to win and to have the SeverStal deal come undone.

• It means that they have to win in the tender offer 50 percent of the sum of 614 + 295 - i.e. 455 million shares.

• Arcelor was rigging it so Mittal could never win Cold Steel 281 outright. And there was another problem was identified. 'Mittal could "win" the tender, say, by getting 50 per cent of the 614 million outstanding shares, but with Arcelor on automatic pilot to issue 295 million shares to Mordashov, Mittal's shareholding would be diluted down to 34 per cent, giving Mordashov 32 per cent with the remaining 34 made up of other shareholders.' 'A three-way standoff,'

• Mittal would like to have the proposed SeverStal combination proposed to and approved by shareholders in a manner consistent with widely followed procedures across Europe and in accordance with best corporate governance practices ... allowing shareholders a meaningful opportunity to choose between the SeverStal and Mittal Steel transactions.

Mittal’s Move• The Arcelor by-laws say that if the shareholders,

who hold in aggregate more than 20 per cent of the issued share capital, call f0r a meeting, then the company has no option but to hold it

• In accordance with Article 70 of Luxembourg law dated August 10, 1915, on companies, the convening of a shareholders' meeting to be held within 30 days from the date of the letter.

• Mittal also revised it share price to Arcelor’s shareholder and shared Mittal business plan with Arcelor’s Chairman.

• This made the Chairman Kinsch to have a meeting with Mittal.

• In the meeting Kinsch and Mittal discussed various aspects of the Arcelor-Mittal merger and agreed to wait till the shareholders made right decision.

• Finally Arcelor had the longest general meeting with its shareholders and in which Mittal offer was accepted and Mittal won the bid for Arcelor.

• The final share price Mittal Paid was 40 euro per share to Arcelor’s shareholders.

Few Facts• Times named Lakshmi Mittal its 'Person of the

Year'. • The thirteen banks that advised both sides on

the deal banked, between them, $200 million in fees.

• Mittal's total adviser bill for the banking, legal, lobbying and communications work required to acquire Arcelor amounted to $188 million - a million dollars a day, according to the first annual report of the new company.

Analysis – Financial ViewThe first, and probably the dominant one, is financial. From the perspective of financial markets, their view triumphed. The Arcelor board was forced to give full voice to the shareholders rather than impose their own view of what was good for the company. It was an object lesson in the force of international capital markets, even if at times the tactics were murky. Particularly noteworthy was the role of hedge funds, which claimed to speak for far more of the shareholding than in the end proved to be the case.

Analysis – Industrial View• The second point of view is industrial. Did this combination make

sense? On paper, with no integration or consolidation of significance, the arguments were decidedly mixed. In essence the Arcelor defence was industry-based: ‘We have a plan and a vision; we don’t need Mittal.’ ‘The Mittal bid is a financial construct, not an industrial plan.’ This point of view was defensible, but it ultimately stands up only if the financial point of view supports it. This of course is the logic of the market for corporate control, i.e., takeovers. From an industrial point of view the result is inconclusive. LNM never publicly changed his plan, which involved little reshuffling or rationalisation of assets. Even in an expanding market, many regard this as a vital component of a good steel company merger.

Analysis – Strategic view

• Running a low–value-added–product steel mill (hence emphasising productivity) is not the same job as running a high–value-added–product steel mill (hence emphasising quality).

Analysis – Strategic view• The merits of consolidation were clearly one important

issue. How far consolidation should go was still a debatable issue. Big equals good pleased the bankers and analysts who had been persuaded that because there were only three or four large iron ore suppliers worldwide (and not many more coke suppliers), the steel industry should be similarly structured. This was debatable for several reasons.

• The first reason concerns price-fixing and cartel concerns. Quite apart from issues of where the market is and how is it defined, the question was ‘when is price discipline not price fixing?’4 How many companies per market do you need to stop this happening (although it is of course exactly what steel companies want to happen)?

• Second, it is all very well concentrating in front of suppliers; what about in front of customers? Only two groups were cohesive (automotive and white goods), plus one that was vocal (construction). The first two groups (with their own problems) generally want at least four or five potential suppliers. And to be potential they have to be actual, i.e., get orders.

• Third, at what point does big equal inefficient? Is this the correct direction for the steel industry to go? Both companies nominally have the same strategy of size and globalisation, so there should be no disagreement. The bid process has shown that this is too simplistic a view. One could characterise the growth of Mittal as the fruit of long period of privatisations, now largely (India and China excepted) complete. And the growth of Arcelor was a response to a need to consolidate (largely in Europe) and to find new growth (largely in Latin America) built round a tight product focus. For both strategies size is a driver, but this does not make them the same strategy, and the bid process showed this.

Market Analysis• There was no pressure for this merger from the steel

markets. However, both companies had proposed strategies of consolidation as the means to raise returns. There was resistance from the markets for some specific products where the combination would have created a dominant supplier — of structural beams in Europe, and of tin plate in the US. In the latter case this was one reason to dispose of Dofasco, but other Mittal North American facilities could also have been sold.

Analysis Technological Factor• Technology was not a major factor. Both companies had

both major melting technologies (furnaces based on either iron ore or scrap). Arguably Mittal wanted Arcelor for its better technology. Mittal argued that a bigger company would have a bigger (undeniable) or better (debatable) R&D effort. A bigger company would have more power vis-à-vis the steel equipment suppliers, who are very concentrated and who lead innovation, but as both companies were only renewing existing capital this was not important.

Analysis – Economic Factors• The degree of backward integration into raw materials,

greater for Mittal, was certainly a factor. European mills, having abandoned local national sources over the years, were at the mercy of the highly oligopolistic sea-borne suppliers of iron ore and coke. This was one of the arguments for larger scale. Competitiveness of local labour was not an issue, although the governments clearly were worried it might be. Steel companies consume a great deal of cash, and it was suggested that Mittal wanted Arcelor for its stronger cash flow (because it was better invested, hence over the cycle would at some stage be throwing off a lot).

Key learnings• Prove your critics wrong, accept the challenges and you should

dedication, commitment and passion in what you are doing will differentiate you from others.

• Knowledge is the key: To win you should have prior knowledge and tactics to handle, about the possible scenarios. you should know your areas of strength, there is so much knowledge available today which you should grasp and use to make strategies.

• If you want to grow you have to do things differently than what everyone else is doing.

Key learnings

• Being responsible is vital to a firm’s long-term success.

• Goals should keep on changing as we move forward in the life, don’t set high goals, always make “a small step forward” to become stronger to gain confidence then you change your pose.

• Take Bold decisions: Bold decisions are not free of risks as we should analyse the risks very carefully, however it could be very transformative in the business you are. Analyse the situation and take bold decision.