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Mittal Steel
TEACHING NOTE
05/2013-5412
This teaching note was written by Martin Flash, Managing Director of Mega Associates, with the help of Professor
Jonathan Story, Emeritus Professor of International Political Economy at INSEAD, and Professor James Burnham,
Murrin Professor in Global Competitiveness, Donahue Graduate School of Business, Duquesne University, Pittsburgh,
Pennsylvania, USA. It is intended to be used as an aid to instructors in the classroom use of the case The Takeover of
Arcelor by Mittal Steel.
Instructors can register and login at cases.insead.edu to access instructor-only material supporting INSEAD case
studies (e.g., videos, handouts, spreadsheets, links).
There are two cases. Both concern the six-month battle in 2006 to create the steel group
Arcelor Mittal, by far the largest steel company in the world, combining as it did the two
largest companies. The takeover was of interest because it was the focus of three bitter
debates: shareholder interests versus stakeholder interests, European champions versus global
champions and the merits of either, and financial strategy versus industrial strategy.
The first case concentrates essentially on the political, financial and environmental issues (all
in the wide sense) of the takeover. The second case looks more deeply at the specifically steel
(and hence industrial) issues.
The case is a more or less chronological retelling of events from start to finish. At the end of
July 2006 Lakshmi Niwas Mittal (LNM) gets 92% of Arcelor. But:
The case is a vehicle for exploring shareholder versus stakeholder concerns, and managerial
versus financial issues.
Appendices
Shortly after winning control Mittal has to consider what to do with Dofasco, the specialised
company bought by Arcelor just before the battle. The reasons for and against disposing of
Dofasco turn around arguments of size versus focus. The case is a development of the
strategic issues in the steel industry encompassing the adjustments in the West, the rise of
globalisation, and the emergence of the strategies of size.
Appendices
Industry note
Industry structure, changes in industry structure, the politics of steel, the US
market
Company histories
Mittal, Arcelor
Case A
The case raises many issues, almost lessons in themselves, and not all need to be treated at
once. The political establishments of France, Belgium and Luxembourg were caught flat-
footed. Here was a European champion being challenged, and there was little they could do
about it. What lessons should they draw from the exercise? The politicians had difficulty
grasping that once corporations go out to the global capital markets they fall under different
rules than if they were nationally supported. This is still an open debate in Europe.
Second, and related to the first point, is that the whole debate about stakeholder versus
shareholder was posed, to the detriment of the former. The one stakeholder whose voice was
not strident, in part because market control mechanisms exist, was the customer, and perhaps
by extension the consumer. Their interests were nominally secured by required disposals in
Europe and the US. Otherwise national governments, local governments, unions (sotto voce)
and managers had a field day. Thierry Bretons article in the appendices is certainly a
respectable defence of the stakeholder position. But the defence lacks tools to implement it in
international capital markets. Above all, if national interests are to be protected, this needs to
be done before and not after a company goes out to international stormy waters.
Fourth, one may take an interest in Guy Dolls tactics. As noted in the case, Arcelor knew it
was a potential target. Could anything have been done to avoid this? Mittals union with ISG
transformed its capability in 12 months. Doll could plausibly be defended as being a devoted
company man with a coherent vision that was a better industrial plan. He himself said that a
merger with Severstal had always been his intention, but the timing was not of his choice.
Was the Severstal merger idea therefore a straw man? From the documents produced to
support it, it was clearly not a last-minute effort. Was the mistake just in the choice of
approval process? Or could an industrial vision never have won out against the barbarian
interests of international finance?
A minor but relevant issue is the difference between a merger and an acquisition. This is
essentially a difference in premium. An acquisition has to show a premium, paid for out of
synergies. In a low-growth industry such as steel, acquisitions pose problems, because in
order to show value assets have to be written off (in the process of rationalisation). This
means a strong balance sheet. This is only the case in periods of strong profits. Without
growth mergers are realistically the only option. Acquisitions are feasible only if the company
has profitable growth. Cyclical, growing only in developing markets, the steel industry is not
an easy field for acquisitions (any more than any other mature industry).
Case B
The direct issue of case B is whether to dispose of Dofasco. But more subtly the case poses
the issue of whether size and its benefits will bring better shareholder returns than focus in the
future. The two strategies are not mutually incompatible, but the main argument of Arcelor
was that a focused, optimised company would produce better returns than a large, unfocused
company, one that owed its success and growth to a long string of acquisitions. This
contention has additional force when one reasons that Arcelor Mittal cannot now get much
bigger. Antitrust laws will constrain it in Europe and North America, and nationalism will
constrain it in China and Russia, leaving only the relatively small markets: Latin America,
Africa, the Middle East, and of course India, the last with a very large un-privatised company
not likely to be privatised soon.
The case cannot provide the answer. The jury is out on the central issue, and the evidence
supporting Arcelors case is decidedly mixed; this is one reason it lost the takeover.
Financial View
The 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. Whatever the rights and
wrongs of this, steel companies, indeed all companies, should take note, especially in Europe
where the scalp of Arcelor can be added to that of Deutsche Brse (with the failed takeover of
London Stock Exchange). In both cases the role of hedge funds (international capital) was
decisive.
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 dont 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.
The original plan brought value in three years only through three types of synergy
purchasing, marketing and process for a total of $1 billion. 1 The final plan had a year-3
target for synergy gains of $500 million for purchasing, $470 million for manufacturing and
process, and $570 million for marketing and trading, plus an SGA 2 of $60 million. Doll
never won enough support for his plan with Severstal, which had a lot of industrial logic. Nor
did he convince the outside world with his argument of having a higher proportion of value-
added products, and hence being a different business.
Perhaps part of the reason for this was that Arcelor was unconvincingly different from Mittal,
at least to the outside world. It was certainly more focused than Mittal, but not by enough to
convince financial markets that it genuinely had a different approach. It was in too many low-
margin products and in too many different products. Not least of the reasons for the lack of
conviction was the proclaimed identity of strategy of each company, which was present from
1 In this context and misleadingly, because it says as much about how the companies are organised and not
whether they are over- or under-manned and hence the source of synergies the Mittal head office in
London numbers about 100 people, and the Arcelor main office in Paris numbers nearly 1,000 (plus those in
Luxembourg).
2 Sales General Administration.
Strategic View
Clearly the strategy of being big triumphed, and whether it will prove to be correct will be
answered only in the future. Others might argue that focus is a better strategy (although this
does not preclude size). Running a lowvalue-addedproduct steel mill (hence emphasising
productivity) is not the same job as running a highvalue-addedproduct steel mill (hence
emphasising quality). The argument for focus would be that product focus permits greater
efficiency throughout the company, and clearly size has a role in providing a platform for
optimising mill loadings (i.e., managing investments and assets), and for optimising and
serving an international customer base (i.e., managing prices). In essence, focus could
produce higher financial returns. The argument of size is that size itself is essential for
confronting oligopolistic suppliers of raw materials (i.e., controlling costs) and for addressing
concentrated customer bases (i.e., controlling prices), as well as for managing international
economic imbalances. Thus the bigger one is, the better the financial returns. Whereas there is
some evidence already for the former strategy, 3 the latter is still to be proven. As Mittal
himself has said, the steel industrys record of profitability is not good.
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.
Both cases test the ability of the students to understand a complex situation, to identify the
main forces influencing it, and to present a coherent account of the trade-offs involved. These
difficult tasks are focused by asking the students to take a position: what you do, or have
done? The basic approach should therefore be of setting an analytical framework first, then
working in groups around an analysis of the case, and finally conducting a class discussion
around the results.
Case A. In addressing the questions below one should take into account the historical
dimension as well the corporate, financial, political and global perspectives. The bid itself can
be seen from a financial, an industrial and a strategic viewpoint. One should consider the main
actors (people and organisations) and the tools at their disposal.
1. What was in this deal for Mittal?
2. What was at stake for Arcelor?
3. Evaluate the takeover: who won?
4. What challenges face the new Arcelor Mittal group going forward?
5. Would you invest in the new group, and in the industry?
Case B. How does one analyse an industry? How does one analyse markets? And how does
one determine the best corporate strategy? One should develop a strong analytical framework
around the case facts to address the following questions:
1. What are the major forces with which the steel companies have to grapple?
2. What are the alternative industrial strategies?
3. What would you do?
J.Story
Strategy framework
Global system
Economic input factors
Country context
Cultural &
religious issues
Markets
Forces
Politics For Arcelor there was intense interest from the countries where the
steel industry was important, had been painfully adjusted in the past,
and arguably had more adjustment in front of it: France, Belgium and
Luxembourg. (Note that Spain was less vocal, for reasons about which
one can only speculate.) Despite not being involved, there was an
interest from India to see one of theirs succeed. No interest at all at
government level was expressed by the two other countries closest to
Mittal, the UK and the US.
Markets 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.
Note that in automotive sheet, the product most discussed in the
merger, there was no antitrust action.
Technology 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
Contexts
Industrial analysis For case B an analysis based on Porters industrial forces is more
appropriate. Porters five-forces analysis of an industry reposes like most analyses on
definitions. What is an industry? In the case of steel there are some internal boundaries to
keep in mind:
- Iron orebased mills versus scrap-based mills (blast furnaces versus electric arc
furnaces). Both mills can make all types of products. However, 20% of scrap demand
comes from blast furnaces (which account for 65% of world steel). But the two mill
types have different minimum scales by a factor of 45, blast furnaces being larger,
not least because they are frequently integrated upstream to raw materials and
downstream to finishing processes.
- Flat products versus long products (a 60:40 split). Rolling mills are product-specific.
Flat products are largely the preserve of blast furnacebased mills.
- Highvalue-added customers versus lowvalue-added customers. The former (largely
automotive, white goods and packaging mostly flat products) are concentrated and
demanding, but provide only some 20% to 30% of demand. Even specialised mills
have to supply the fragmented balance of the market.
- Scale. Steel is an intermediate product; there are industries between it and final
demand (automotive stamping and forging plants, tube makers, processors,
distribution, etc.). These companies are nearly always smaller-scale companies than
steel companies.
- Scope. Although a global industry (however defined), steel is fundamentally a low-
value highfreight-cost product.
Bargaining leverage For buyers in certain special segments it is high. And finding
alternative volumes for steel mills is difficult. Customer lists
tend to be stable.
Buyer volume Per mill, per buyer this is surprisingly low except in dedicated
facilities.
Buyer information Usually extensive. As steel is an intermediate product both sides
need the information.
Brand identity Low.
Price sensitivity For some intermediate users the steel cost can be 50% of their
cost. For all it is an important input.
Threat of backward None.
integration
Product differentiation On the physical product usually none, but on the extended
product it can be real, although rarely enough to overturn a two-
supplier policy.
Buyer concentration Very great for automotive, white goods and packaging (plus a
vs. industry few others) but otherwise low.
Substitutes available Directly there are few, e.g., glass, plastic, aluminium in
packaging, concrete in building (although it contains almost as
much steel, but of a different type from a different mill).
Indirectly wood or aluminium, but both with serious
disadvantages.
Buyers incentives Buyers are usually as much concerned with ensuring their
smooth production as with shaving the prices of inputs.
Relatively low. Aluminium is the biggest threat, but it is much
Threat of more expensive, less strong and more volatile in price. Plastics
substitutes are an alternative for some applications.
Strategy options for steel companies based on this analysis could be the following:
Focus mills on single (few) product Rolling mills can make and serve all types of
segments (e.g., automotive sheet) markets, hence barriers can be low to others.
Requires specific (dedicated) investment.
Co-ordinate between proximate Freight costs (high). Inability to load mills with
markets optimal order mix.
Important but difficult to defend when clients
Differentiation have multi-supplier strategies.
Exploit technical margins, i.e., make Increases cost, but brings real benefit.
product more accurately than
specified.
Provide superior service. Emphasise Easily imitated; adds cost. Distribution channels
tangible and intangible products. can blot out differences.
Think of customers customer Adds marketing cost. Understand trade-offs (e.g.,
flexibility versus on-time performance).
The lowest-cost producer is the survivor in the
Cost leadership long run.
Draft article: Why there never was, and never will never be, a European champion in the
steel industry. Isabelle Lescent-Giles. This excellent article shows the confusion of those
who think that European entities acting on a world scale can somehow have an existence
insulated from globalisation forces, exactly the clash between Arcelor and Mittal. The article
is part of a project led by Harm Schroter of Bergen University and Franco Amatori of
Bocconi, Milan, looking at the Americanisation of European business. Publication should
occur in 2007.
Feedback
Students identify quickly the various interest groups involved (governments, management,
politicians, press, banks, unions, shareholders), although they differ on ranking them.
Equally they pick up the culture clash between the new-world entrepreneurial Mittal
(company and man) and the solid but historically compromised Arcelor.
In terms of who won, most agree the politicians did not. That leaves aside value judgements
about stakeholder interests. Opinions differ on whether Mittal or Doll won, but most agree
that Goldman Sachs was a clear winner.
There is no clear answer on the industrial issue around Dofasco. The merits of either
argument (scale or focus) will be seen only in the future. However, Mittal did not try hard to
sell Dofasco. Most industry observers concluded he was glad of the excuse of the trust around
Dofasco to be forced to look at other alternatives.
For the (potential) investor the issue was and is cash generation, but this takes one back to the
industrial analysis. Will the focus on size, and on internal cost-cutting, produce a better
answer than a strategy based on focus and high added value, remembering that neither Arcelor
nor Mittal is strong in the growing markets?