Birth of ArcelorMittal & After

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 or ineffective 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.

Sachidanand Singh
March 2008

Electronic copy available at: http://ssrn.com/abstract=1692910

BIRTH OF ARCELORMITTAL
Mittal Steel Company, worlds largest steel producer, launched its bid for acquiring Arcelor, the second largest steel producer of the world, on January 27, 2006. After months of tortuous negotiations Mittal Steel succeeded in getting the shareholders approval in June 2006 and the merged entity ARCELORMITTAL came into existence in November 2007 Acquirer: Mittal Steel Company NV (MSC), was a Holland based company of India born industrialist L N Mittal. A very young company, MSC was formed in 2004 after a $4.5bn takeover of International Steel Group of the US, and a merger of Mittals existing assets LNM and Ispat International. The result, Mittal Steel, became the first truly global steel company. Before the takeover of International Steel Group, described by many as bold, Mittal had been acquiring steel assets all over the world, mostly in the developing countries including Eastern Europe. None of his other acquisitions were in the same league as International Steel Group, which itself was a minnow compared to Arcelor. The opening bid placed a deal value for Arcelor at $22.7bn, i.e. about four times as much as Mittal paid for International Steel Group. Target: Arcelor was headquartered in Luxembourg, with works in France, Spain, Brazil and other countries. A young company, Arcelor came into existence in 2001 with merger of three steel companies- Aceralia, Arbed and Usinor. (Usinor was Frances biggest steel maker.) In 2005, Arcelor had revenues of 32 billion Euros and produced over 48 MMT of steel. Arcelor had greater concentration on downstream facilities and was more in value added steel market. Offer: The original offer of MSN valued the target at $22.7bn. The offer was part cash part stock Mittal Shares (75 percent) and cash (25 percent). Under the offer, Arcelor shareholders would have received 4 Mittal Steel shares and 35 euros for every 5 Arcelor shares they held. The offer was valued at about 27% premium over Arcelors closing price on the previous day.

The Man: Lakshmi Mittal-one of the richest

men in the world- was born in India in 1950. He started his career with Ispat, his family business in India and in 1976 bought an Indonesian steel maker - his first acquisition. Over the following decades, he built up an empire buying up underperforming steel plants, many in eastern European countries, and then turning them around. He was at times called an asset stripper, (which he denied). He ran into trouble with his 1996 takeover of an Irish steelmaker that subsequently closed with the loss of 400 jobs. His companies LNM and Ispat International also received some flak for lack of transparency. This however, changed, with the creation of Mittal Steel in 2004. New York and Amsterdam stock exchanges, where MSC is listed, have ensured more disclosure about Mittals operations than had previously been available. Mittal once said that he wanted to be the lowest-cost steel producer in every single market. Mittal Steel in 2005 had steelmaking facilities in 14 countries, and it had highlighted its strategy of sharing know-how and generating product synergies between different operations. It said all of its operations benefited from the increased purchasing power created by scale, and global sales and marketing network. Though publicity-shy, Mittal has often been in news and not always for acquisitions. In 2002 he had donated 125,000 to Tony Blairs Labour Party which coincided with Blairs expression of support for his attempt to take over Sidex, a state-owned Romanian steel company. Later in 2004 he captured popular imagination when he hired Versailles, outside Paris and the singer Kylie Minogue - to entertain 1,500 guests at his daughters wedding. For an earlier wedding, Mittal had hired Victoria Memorial of Kolkata for holding reception.

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

Electronic copy available at: http://ssrn.com/abstract=1692910

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 want it because we do not understand it and went on to add that he was determined to defend Mr Mittals bid. Unlike Government of Luxembourg, French Government did not have any stake in Arcelor. The bid sparked objections from the government of Spain too and from labour unions, worried about job losses although Mittal had assured that no worker would lose job and had cited that his operations in other countries had not caused retrenchments. (See the box: The Man; closure of an Irish steel maker taken over by Mittal in the past) Competition Issues: In Europe, the Competition Commission ultimately decides on fate of merger bids of this kind that may hurt competition by creating or strengthening a dominant company. The commissioner, Ms Kroes made clear she would examine the takeover only in the light of competition rules, not to see what effect it would have on employment. She said: "We will look at this issue, as always, very carefully, on competition grounds - and on competition grounds only. The regulation gives us no power to question mergers for other reasons. You can be sure that when the bid is notified, we will do our job properly, taking into account the complete set of competition regulations." Although the Commission has the power to block takeovers outright, it has 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 terms of a $4.7bn hostile acquisition of Canadian steel maker Dofasco. The other bidder for Dofasco was Thyssen Krupp Group of Germany. Mittal had announced that it would sell back this unit to Thyssen Krupp if he succeeded in acquiring Arcelor; rightly surmising that competition regulators may insist on such a divestiture. His calculations proved spot on, American antitrust authorities did 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, its combined global market share will be only about 10 per cent - far below any thresholds that might raise concern among regulators. However, in previous merger decisions affecting the steel industry 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 merged entity 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 the competition laws only meant a lot for acquirers as European governments were famous for preserving 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, why so few BPO deals are originating from Europe?) Experts view: Professor Robert F Bruner, dean of the Darden School of Business, University of Virginia and a leading M&A analyst from American academia: "This deal is driven by excess capacity 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 - mainly through the transfer of technology and know-how. So far, Mittal's acquisitions have helped this industry adjust to the need for change. Customers and ultimately individual consumers are the beneficiaries of Mittal's actions." He however cautioned that "the scale of the proposed takeover dwarfs Mittal's previous deals. Big acquisitions are significantly harder to integrate successfully than smaller deals and went on to add that "we should hope and expect that Lakshmi Mittal very carefully plans the post-merger

integration. So far the stock market has given this deal an enormous vote of confidence - but this too, 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 steel industry account for less than 25 percent of the market (to put that in perspective, the corresponding figure for the automotive industry is 73 percent). LN Mittal believes that the consolidation will end with three or four major companies dominating the industry around 2010. World Steel Producers Output (2005 total 1.3bn tonnes)

70
Million Metric Tonnes (MMT)

60 50 40 30 20 10 0
Mittal Steel Arcelor Nippon Steel JFE Japan Posco US Steel Corus

Bigger steel manufacturers have better bargaining powers against customers (such as auto manufacturers) and against suppliers (iron ore). Consolidation helps in companies improving their sourcing of raw materials; access to more markets, better utilization, and more flexibility in production scheduling and better efficiency. (See the box: The Man) Controversy: Mittal Steel bid was perceived as hostile by Arcelor. This perception, in all probabilities, was because of the Arcelor managements strong belief that Arcelor itself would have been doing the acquisitions and not the other way around. In its Annual Report for 2002 it had declared its medium-term objective to earn an average pretax return of 15 percent on capital employed over the business cycle, coupled with a significant improvement of the debt-to-equity ratio by the end of 2004. One of the initiatives it had identified for achieving this objective was to play a pivotal role in the development of the global steel industry, driving the growth of the Group through targeted acquisitions that create value and anchor Arcelors presence in key regions. In its annual report for 2003 Arcelor reiterated this strategy of inorganic growth when it professed to ensure our growth through targeted acquisitions that create value and strengthen the geographic presence of Arcelor. Acquisition of Dofasco demonstrated how serious Arcelor was about acquisitions. In 2004 Arcelor had also acquired a majority shareholding in CST (a company producing carbon steel slabs in Brazil) and took 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 to how do you see Arcelors performance in the medium term observed that We are currently embarking on our strategic plan for 2006-2008, with the following key objectives: normalized EBITDA of 7bn; maintaining free cash flow of 4.4bn per year; and value-accretive acquisitions that guarantee a return on capital employed (ROCE) in excess of 15%. Earlier in the annual general meeting of Arcelor in April 2004, Mr Doll had made the following comments: The strengthening 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, which generates 75% of its sales in the European Union, it is clear that a shift in the geographical

balance is required, particularly towards regions with economies that are growing faster than Western Europe. In the future, Arcelor will be an even more global company than today. We must be ready to take part in a further phase of consolidation in the steel industry, and to seize opportunities when they arise. Clearly Arcelor had acquisition ambitions of its own. It is no wonder that Arcelor management was extremely hostile to Mittal Steels bid from the beginning. Arcelor repeatedly played the patriotic card to urge the shareholders to reject the bid. The CEO of Arcelor, Guy Doll dismissed Mittal Steel as a company of Indians and unworthy of taking over a European company. (Despite the fact that most industry analysts and investment banks were pointing out that the deal was in Arcelors best interests). Doll had once referred to Mittal Steel shares as monkey money. This is a French usage for describing an asset of low value. Unfortunately it was seen as a racist remark in India and created a lot of furore. Doll also compared the two companies as one manufacturing eau de Cologne (MSC) and other (i.e. Arcelor) parfum. Even this remark cannot be considered derogatory as MSC did have low value high volume product line and Arcelor did concentrate on value added steel markets. Unfolding drama: Arcelor meanwhile announced a better-than-expected jump in its dividend payout, 1.2 per share, an 85 per cent increase on 2004s payment. Some observed that higher dividend 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 of 3.8bn last year, up from 2.3bn in 2004, in spite of a drop in steel prices. Company said the higher payout reflects structural improvements of Arcelors profitability, and that the group was committed 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 as evidenced 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% of consideration 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 compared with trading multiples of comparable companies Meanwhile, in May 2006 Mittal had increased his offer to $25bn and had made cleared that he would not increase it any further. Around the same time Arcelor contacted Russian steel maker Severstal for a merger. (Severstal, based in the northern Russian city of Cherepovets is the second largest Russian steel maker. It is listed in Russia and London and its produce are exported to over 50 countries.) Arcelor and Severstal had been negotiating on joint initiatives for several months. Arcelor reported that it had agreed to buy most of Severstal, Russia's third-biggest steelmaker in a Euro 13 billion ($16.4 billion) transaction, which would give Russian tycoon Alexei Mordashov up to 38 per cent of the combined company. "The Severstal transaction represents a key step in implementation of Arcelor's value plan and growth strategy and it is consistent with its strategic vision, business model and corporate values." Arcelor set the price per share of the self-tender at Euro 44; that is six Euros more than offered by Mittal. Stating that Severstal transactions were more "attractive alternative from a strategic,

financial and social point of view," Arcelor took a dig at Mittal Steel, saying that "the revisions of Mittal Steel's offer announced on May 19, 2006 demonstrate that its initial offer undervalued Arcelor.Notwithstanding the increase in the consideration offered by Mittal Steel, the Arcelor Board 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 its shareholders 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 its management giant decided not to commence "such self tender offer until after the publication of Mittal Steel's offer results and mandated the group management board to meet with Mittal Steel in order to review its proposal to further improve its offer. Dwelling on the reasons leading to the rejection of Mittal Steel's offer, Arcelor said its 34 per cent increase offer was required to re-align with the bid initially offered by the company due to its under-performing share price vis--vis Arcelor's share price. Although there was no formal word from the Mittals, there were indications that they might submit a revised offer. Arcelor board finally on 25th June announced acceptance of Mittal group's takeover bid, improved to euro25.9 billion ($32.4 billion). Announcing the decision, 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 that of Severstal," he said. The details of the transaction with Severstal, which was recommended by the Board to shareholders, were as under: Mr. Alexey A. Mordashov, Chairman of Severstal was to transfer all his economic interests in the Severstal 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 which would 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 to 34bn and had agreed not to insist on majority holding in the merged entity and had also agreed to a 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 be called Arcelor Mittal. It was reported that Lakshmi Mittal will be the co-chairman and Joseph Kinsch is said to continue to be chairman. EGM and after: The shareholders met on the 30 June and 58% opposed the Severstal deal clearing the bid of Mittal Steel. The deal was enthusiastically hailed in India. Commerce Minister Kamal Nath called it a demonstration of the intellectual and entrepreneurial abilities of Indians, I had raised this issue when countries had tried to block it and said that globalisation is not a oneway street. We are going to have in this new economic order, Indian corporates, people of Indian origin investing and creating employment and creating economic activities in other countries. So this is happening and I really think that countries need to realise this that there's a new economic architecture". Finance Minister P Chidambaram also issued a comment: "We are very happy and proud 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 an alliance with controversial fell Russian billionaire Roman Abramovich, to offer a higher price for Arcelor shares. ABN AMRO Bank had reportedly offered the required money to the Russian
th

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 five months more than $10 billion in value," Kinsch said Experts view: Jason Hunter of Steel Business Briefing said, "This may be attractive to some other 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." The combined entity will have 61 plants in 27 countries and some 320,000 employees all over the world. Industry observers say that shedding excess staff and integrating the two management teams might pose a problem. Jason Hunter adds, "The difficult thing between the two companies is going to be the integration of the management team, both in Europe and in North America and other regions, due to the hostilities that had been going on over the last five to six months. Some of them have been fairly aggressive on the comments from both sides. He observed that the deal will give Mittal a presence in South America. "From Mittal Steel's point of 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 to make a very quick buck, they will be very pleased with the deal, I am sure. The longer term investor who is looking to add value to his money and to his investment in the company, I suspect, 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. Arcelor acquired a company in Canada, which is very big in North American automotive industry. We understand that will be retained in the new format of the company and his other North American facilities 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 150.60 Euros 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 Mittal family 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 public offer and by 18th July 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.e acquisition 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 from shareholders who had tendered 594.5 million shares and 19.9 million Arcelor convertible bonds had so far, representing 91.88 per cent of the group's fully - diluted share capital. Mittal Steel announced to reopen the offer giving remaining shareholders time till August 17 to tender their shares. 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, the combined 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. Mittal was appointed the non-executive chairman of the merged entity and expected to play a part in setting strategy, giving a vision for the company, looking at growth opportunities, talking to employees, strategic investors and overseeing and helping the integration.

Role of Guy Doll: Ever since the first offer of Mittal Steel Doll, the French CEO of Arcelor had resisted the offer with all his powers. It is widely believed that he was instrumental in putting together the proposed transaction with Severstal to ward off Mittal. His stand that Mittal Steel is a company of Indians (and hence) unworthy of taking over a European company and his many references to Mittal is an Indian in a derogatory sense has made him a much hated figure in India. As expected, he had no role to play after the takeover. If we were to set aside his odious persona and examine the specific statements made against Mittal Steels products, share price movements or transparency we will admit he had some points. Let us recall his reasons for asking an improved, and all in cash, offer. He was right about MSC shares having higher volatility, about Arcelors performance somewhat less cyclical (though some felt that the 2005 results were product of rather creative accounting) and absolutely right about the below average multiple indicated by MSCs first offer. We must also remember that he got his shareholders a very 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 before the bid was announced, Laksmi Mittal had informally discussed it with him, over a private dinner in London. It is however certain that the shareholders of Arcelor will not forget his contributions to the increased bid amount. Perhaps, they will also not forget that the insensitivity he displayed towards 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 two companies had not really merged yet. Legal and regulatory provisions of different countries The Netherlands (where Mittal Steel was registered), Luxembourg where Arcelor was registered and USA as both companies were listed at New York Stock Exchange, among other. The mechanics of the acquisition and merger, as agreed between the parties is graphically represented here:

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

Acquisition completed

Mittal Steel gets absorbed into a new company (We call it vehicle for transition), share holders of MSC get shares in the transition vehicle

First step

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

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

Second step

Name of Arcelor is changed to signify the changes

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 insignificant amount of cash. In April 2007 its name was changed to ArcelorMittal S.A. Shareholders of ArcelorMittal and Mittal Steel agreed to a merger and the terms of the merger proposal and the

explanatory memorandum, Mittal Steel will merged into ArcelorMittal, by way of absorption by ArcelorMittal of Mittal Steel and without liquidation of Mittal Steel. The combined company was rd continued to called ArcelorMittal. After this merger became effective (3 September 2007) all the assets and liabilities of Mittal Steel (as such assets and liabilities that exist on the effective date), stood transferred to ArcelorMittal, Mittal Steel ceased to exist and ArcelorMittal issue new shares to the (then former) holders of Mittal Steel Shares. Mittal Steel had two types of equity shares Class A Common shares and Class B Common shares. In this merger shareholders of Mittal Steel received one share each of ArcelorMittal for each share (whether Type A or Type B) they held of Mittal Steel Company. Dutch and Luxembourg law permit treasury shares shares of a company, held by the company itself to be sold later in the market or for other treasury operations. These shares are acquired by the companies in buyback programmes. This merger agreement clearly stated that all treasury shares of Mittal Steel held by the company or by ArcelorMittal would cease to exist from effective date. Thus on effective date 100% of the shares of ArcelorMittal was held by former shareholders of Mittal Steel. (These also included the former shareholders of Arcelor who had sold their Arcelor shares 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 623,598,333 of Mittal Steels outstanding shares on May 31, 2007, representing 44.79% of Mittal Steels outstanding voting equity. After the merger, they owned the same percentage of the outstanding ArcelorMittal shares. On 26th September ArcelorMittal and Arcelor announced details of the merger of ArcelorMittal into Arcelor. On the 3rd September the merger of Mittal Steel Company N.V. (Mittal Steel) into ArcelorMittal had become effective, which was the first step towards merger of Mittal Steel and Arcelor. The merger announced on the 26th September between Arcelor and ArcelorMittal constituted 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 propose to the shareholders of ArcelorMittal and Arcelor to implement the second-step merger based on a ratio of 7 Arcelor shares for every 8 ArcelorMittal shares. On September 25, 2007, the Boards of Directors of ArcelorMittal and Arcelor decided to restructure the share capital of Arcelor prior to the giving effect to the second-step merger so as to have a one-to-one exchange ratio in the merger. This was supposedly done to limit the effect of the merger on the ArcelorMittal share price and hence its comparability pre- and post-merger. This was done by an exchange of every 7 pre-restructuring Arcelor shares for 8 post-restructuring Arcelor shares. This of course had no economic 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 were treated 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 existing shares of Arcelor were held by Mittal Steel, acquired in 2006, which had been transferred to ArcelorMittal in the first step merger. All those shares now ceased to exist. All assets and liabilities of ArcelorMittal became assets and liabilities of Arcelor and Arcelor issued one share of Arcelor for each share of ArcelorMittal held by the shareholders of the latter.

And finally Arcelor changed its name by changing the articles of association on 5 November 2007 to ArcelorMittal. The company Verger Investments S.A. which had changed its name to ArcelorMittal 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 the annual general meeting the chairman of the Dutch shareholders association of Mittal Steel raised this question in a rather pointed manner. Neither Laksmi Mittal nor his son were present during this 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 of their content and the risks involved, on the long term intentions concerning the voting rights, on the vision with respect to the possibilities of an opening in the Arcelor discussion, and on the selling 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 up to 1.25% of the total business of the two companies. He added that this was actually less than achieved 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 not quantified yet.

th

ARCELOR: Revenue & EBIDTA

mn

Mittal Steel: Revenue & EBIDTA

bn
35 30 25 20 15 10 5
2001 1 2002 2 2003 3 2004 4 2005 5

35000 30000 25000 20000 15000 10000 5000 0

2002

2003

2004

2005

More than immediate synergies, Mittal perhaps wanted to merge because he, as had others in the steel business, had sensed the underlying consolidation phase of the industry and did not want to lose the position of control he enjoyed as the biggest steel manufacturer. By merging with the second biggest he was ensuring that the new second biggest will be less than a third of the size 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 and rationalizing the availability of capacity. While increasing the bid, Mittal Steel must have taken in account 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, the combined entity would not need Dofasco. Dofasco was also very expensive: in absolute terms, its acquisition cost as much as the whole acquisition of ISG, which was four times bigger. Mittals naturally felt that that money was better spent somewhere else. Disposing Dofasco was not a simple task. Arcelor management had bought it and felt that it was a very important acquisition.

They had also created a special arrangement for preserving Dofasco and in the process perhaps safeguarding them from a possible takeover. (See the box) Did the merger gain any new geographic areas for Mittal Steel? Merger made the new entity by far the biggest player in Americas. But Mittal were already bigger in Americas as the table would show:
$ bn

ArcelorMittal chokes on its own poison pill To deter Mittal Steel from takeover, Arcelor had set up a Dutch foundation (akin to a trust in India), Strategic Steel Stichting in April 2006 to hold shares of Dofasco. Its creation had evoked outcries of foul play from Mittal camp during those politically charged early days of the takeover battle. The foundations directors, mandates included taking an independent view on sale of shares of Dofasco entrusted to them for and on behalf of Arcelor. In November 2006 when the two fighting companies had already made truce and ink had dried on their well publicized merger agreement, Sichting foundation refused to wind itself up, despite requests for it to do so from the boards of both Arcelor and Mittal. Insisting on carrying out their original responsibility of taking an independent view of any sale of Dofasco, Stichting directors were objecting on the grounds that Dofasco owns technology important to Arcelor and that the price offered by ThyssenKrupp was too low. By this time, the United States Department of Justice had made the sale of Dofasco a precondition for the approval of the merger. Mittals had already started talks with the department to see if sale of any other North American asset would satisfy them. In the end however, the Foundation did agree to dissolve itself and Dofasco was sold to ThyssenKrupp at $68 a share, i.e. $3 less than what was paid by Arcelor at the time of purchase.

Americas Arcelor 2004 6.6 2005 12.5 Mittal Steel 2004 4.4 2005 6.5 ArcelorMittal 2005 19.0

Europe 9.9 7.7 23.4 23.2 30.9

RoW 7.6 9.8 2.4 2.9 12.7

Total 24.1 30.0 30.2 32.6 62.6

Arcelor had a big lead over Mittal Steel in Europe. And despite being Dutch incorporated it seems Mittal Steel was viewed by many as an Indian company and it must have been that much more difficult for Mittals to enter the fortress. The differences become still starker if we bifurcate the data in EU and Rest of Europe. It may be right to say that the merger had allowed Mittal to grow in home turf.

The other difference that can be seen in the operations of the giants is the realization of value per tonne. Mittal Steel produced and dispatched much more than Arcelor in 2005 and realized less! (Though Arcelor was charged of creative accounting when it came out with its How did Sichting directors change their hearts? 2005 results in the thick of the takeover battle, We do not have any account of that. It can be safe we must understand that it is far more difficult to to surmise that they finally buckled to the full force fudge revenue figure than net results.) Was of famous Mittal charm. You do not create an there some merit in Guy Dolls ranting about empire of the size of ArcelorMittal in 17 years if eau d Cologne and parfum? One thing is clear; you cant win over support of some dissenting the merger did not bring Mittals any closer to the directors. fastest growing Chinese markets. However, the two merging partners had some obviously complementary strength. As noted earlier, Mittal Steel had vertically integrated business model (with iron ore mines around the globe) and Arcelor was more 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 the difficult 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 most exciting things about this merger was that the two businesses were entirely complementary with virtually no overlap. In a consolidating steel industry, Arcelor and Mittal Steel were natural business partners and the past nine months have only served to further convince us of the compatibility between the two companies. Arcelor Mittal is the first truly global, diversified and integrated steel producer and there are a wide range of benefits associated with such a model.

I have always believed that a business model based on size, scale and diversification would be necessary to unlock the value potential of the steel industry. Steel has historically suffered from severe volatility and cyclicality due largely to its fragmented nature which has resulted in the very low multiples still afforded to the sector today. Whilst the sector will always have some degree of cyclicality, the severity of the cycles can be reduced through consolidation of the industry and the emergence of a number of key players with a more diversified and global operating base. Arcelor Mittal is the first such company to be created and we are already seeing the benefits in terms of creating a more sustainable operating environment, which will have considerable benefits for all stakeholders. (We can hear Prof Bruner humming.) Mergers will always create challenges and issues, but the integration between Arcelor and Mittal Steel Mittal explained, had been remarkably straight forward, largely due to the fact that the two businesses did not overlap at all in terms of operations. He believed the two businesses the two businesses to be very complementary which was highly motivational and encouraged people to work together to share their skills and expertise. He elaborated with the European business how by harnessing the experience and quality of the Western European plants, the merged entity were able to transfer this to the Eastern European plants to help them improve product quality and mix. He considered the automotive business to be another example of this. The merger entity, 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 committed to a more significant role in the global steel scenario. This perhaps acted as a strong unifying force and forming the basis for the successful merger. Gains from merger are perhaps necessary for a successful integration, but by no means sufficient. In spite of numerous benefits that a merge can bring forth it will still fail miserably in delivering those values unless the two teams learn to give up rivalry and truly become one. This is the essence of integration. McKinsey has done a very useful study of this process by talking to the two senior most executives who were in charge of speedy post merger integration. The next section draws heavily from an interview published in The McKinsey Quarterly.

AND AFTER
Mittal conceded a lot of ground to clinch the deal. His biggest bargain, other than the merger, was perhaps, removal of then Arcelor CEO Guy Dolle. Mittal conceded to the Arcelor boards demand of greater professionalism and better corporate governance by agreeing to a majority representation 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 of ArcelorMittal 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 so much, it would have been tragic if the merger had not worked out well. Laksmi Mittal devoted the same energetic attention to post merger integration that he had unleashed for overcoming corporate and political objections when he had launched the takeover bid. However nothing of the kind happened. It is important to note that before the merger, both companies had grown strongly and had demonstrated 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 breakneck pace through acquisitions. These past experiences ensured that the merged entity had plenty of integration 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 the clear priorities for 2007 is ensuring a successful integration he said, and It was clear from the beginning that the two businesses benefited from complementary business models, which formed the basis for a positive integration. Two very senior professionals, Bill Scotting and Jrme Granboulan were in charge of speedy integration. The top management had set three clear objectives to them: first, to achieve an efficient and rapid integrationaligning people, delivering synergies, creating the appropriate organization; second, to secure and manage the day-to-day business; and third, to drive continued growth. The first two are fairly common objectives in any merger, though generally with more emphasis on integration than on managing the business. The third one was unusual. The merger process also suffered from the fact that it was highly visible. The scale of the merger operation 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 integration activities to see how things would progress. A particularly significant factor was that the merger was strategically driven by growth rather than by restructuring objectives. Its aim was to combine two complementary businesses with a wide range of capabilities in order to create a more complete entity. In contrast, many of earlier acquisitions at Mittal Steel were turnarounds focused on cost and productivity improvements. Bill and Jrme conducted interviews and surveys with employees to gain a better understanding of their views about the two companies, a process that culminated in an entire rebranding exercise. They questioned people about the companys strengths and weaknesses and what they thought ArcelorMittal should stand for. This clearly indicated what people are thinking and both found it extremely useful. As could have been expected one of the greatest challenges was to get line managers involved and to sell the merger to the operating teams. The top management top-management conducted road show which was very successful and so was the communication programme launched to keep the people informed of what was happening. The integration team established a Web site and introduced Web TV, which is perhaps the first large-scale application of this tool. Top executives recorded two- to three-minute interviews on various topics, and everyone with access to a PC was able to watch them onscreen. The new ArcelorMittal brand was launched with an employee convention at which the companys top 500 executives had gathered. This provided a great boost and marked the end of the formal

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 level was quite high. Managers need to have a well-structured message about the significance of the merger and the direction the company is going in, and this should be done very clearly and as a matter of urgency. With relatively few operational overlaps, initially the merger only directly affected employees working in procurement, sales and marketing, and the corporate center besides those operating managers involved in benchmarking and the integration task forces, of course. So a lot of time may have elapsed before it had a direct impact on the activities of many other 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 new group. The budgeting cycle, started in August 2006, and budgets for 2007 had to be finalized in November. 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 integration within the first six months. It was therefore critical to agree quickly the role of the integration office; the essential characteristics of the integration process, including how decisions would be made; and what problem-solving mechanisms might be needed. In large mergers progress is often 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 the progress 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 on them a few days later. This cycle continued throughout the integration effort. This was an extremely efficient way to maintain tension and momentum within the organization and this pace is 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 propose a draft organization to the management board. The profiles of the people who will occupy the senior positions are defined and committees established to select them. Once these senior managers are nominated, they build their own teams to identify the synergies and build action plans. In ArcelorMittal case, all these different tasks were conducted in parallel. Teams were formed 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 two companies. There were 6 members on the new group-management board, for example3 from each side. The integration office comprised 10 to 12 people, again evenly split. In many mergers this team is much larger, but many believe that 10 to 12 is an optimal size and makes the movement 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 remote corporate office to manage processes. Although its an instrument of the management board, it must establish its credibility with the managers of the large units separately. The managers must feel that they can receive assistance and facilitation from the integration office. Integration process 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 Mittal himself and the management board were the ones who laid out the expectations. They decided what actions should be taken, and at what speed. They also outlined the core principles and guidelines and the weekly cycle. The integration team size was deliberately kept small. This is a second key design element of the mergerin addition to speed. Some people have termed it integrating integration. In task forces, the people leading them came from the business units. Thus, commercial integration issues are handled by the commercial business units; technical-benchmarking issues are handled by the operations experts. The role of the integration team is to coordinate all these efforts.

Usually an integration coordinator is made responsible for three or four task forces and maintains contact with them on a daily basis. The high-level, top-down target of synergies to be realized was $1.6bn. (Please contrast with the expected 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 the integration team how the synergies could be achieved. As the merger progressed, it was necessary to get the business units to assume ownership of the process and to formulate the action 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 be used to track the delivery of objectives. The duo in charge of integration was able to obtain this information for some areas, but not all. In some cases they discovered the scope for savings was larger 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 well ahead of schedule, with more than $1.4 billion of annualized savings captured by the end of the fourth 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 confirm that the figures seemed correct and to present their action plan. As mentioned earlier, because of the budget cycle, the timing worked in o favour, as the integration objectives could be incorporated into 2007 budget plans. Without this, people might have tried to suggest that the environment 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 the business. The key point is that the task forces did not operate independently of the business operations. 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 show referred to earliertalking to local management and employees in these environments. Typically, media interviews were also conducted around these visits, providing an opportunity to convey message to local communities through the press. Because of the size of the merger, it had generated sustained interest from the financial and business press. The integration team organized a media day in Brussels in March 2007, offering presentations on the status of the merger and the results and inviting journalists to go to the different businesses and review the progress themselves. Investors and other stakeholders were reassured to a great degree from the fact that groupmanagement board members came from both companies. A key objective of the commercial task force during the integration phase was to quickly create a single face to the market, rather than two 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 way something that was achieved by the end of the first three months. Customers were informed about the advantages of the merger for them, such as enhanced R&D capabilities and wider global coverage. ArcelorMittal merger throws some light of the traits of the people leading integration effort. Such leaders must be collaborative. In the ArcelorMittal case, the office played a facilitating role and at the same time possessed a degree of process orientation: for instance, to manage the weekly cycle and obtain all the mandates. In addition, the role requires a thorough understanding of the business. For example, there could be some intense debates on the changes to be made in the

value plans. The leader must possess an understanding of such matters. Key qualities, many would affirm, are cultural openness, the capacity to understand people, and the ability to see how they can fit together. However, its also important not to accept any diversions and to adhere to the schedule and the key objectives of the organization. The integration leader should also be able to form a close, trusting relationship with the senior management of the group. The integration offices credibility and authority, which are essential for the tougher aspects of a merger, rely on the support of the CEO and senior management. Role of the CEO in a merger CEO sets the tone, the speed, the direction, the key principles, and the requirements. In ArcelorMittal, Laxmi Mittal insisted that the business units should be fully involved and take the reins as soon as possible. The CEO also plays a critical role with respect to communication and developing 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, they manage to do so. The role of the CEO is quickly to set everybody on the same axis and to reassure people. At the same time, though, he must be demanding. There is also the accountability aspect. CEOs should not merely announce that the merger is important; they should demonstrate its importance by ensuring that it is placed on the agenda every 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 pulling in different directions. It is the CEOs role to ensure that the top team is aligned and speaking with a single voice. On merging cultures The formal integration may be over soon. In ArcelorMittal it was completed when the new organization, the brand, the one face to the customer requirement, and the synergies were finalized, two and a half quarters after the start. But it will take more time to fully integrate including all the cultural aspectstwo entities such as Arcelor and Mittal Steel. Then the passion of a professional does remarkable things. It always provides an immediate common 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 exchanging ideas after a few minutes. ArcelorMittal is progressively building a common culture combining the best of both entities. It is combining 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 health and safety, quality, and performance, it has set for itself high standards and that if some parts of the 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 a very clear majority as much as could be had while still keeping the company publicly listed. How do you think Mittal will go about increasing his stake and how long would you give him to control 50% of ArcelorMittal?