Professional Documents
Culture Documents
Arcelor Mittal 2
Arcelor Mittal 2
IN STEEL INDUSTRY
ABSTRACT
Driven by slow growth, inability to make sustainable profits and volatility in the steel industry, companies in steel industry have joined
the starting wave of mergers and acquisitions. Mergers and Acquisitions have become distinctive trend in steel industry worldwide
since the beginning of the 21st century.
This case study examines the results on drivers and impact of recent mergers and acquisitions (M&A) in steel industry. The case study
focused on recent major acquisitions of Arcelor by Mittal Steel during the recent mergers and acquisitions wave of 2000s.
The important findings of this study is that synergies, overcapacity, extreme fragmentation, concentration amongst suppliers and
better buying power of customers are some of the other major factors that are driving steel industry into mergers and acquisitions.
In the case study, improvement in post acquisition stock performance of the combined entity was noticed. Futher in the case study,
tremendous increase in post acquisition accounting profit and operating efficiency was also noticed. It has been predicted that M&A in
steel industry will have positive impact on return on capital employed (ROCE). It was found that the company had paid fair price for
the acquisition to gain in short term as well as in long term. In the results of this project the future structure of steel industry has also
been predicted.
Background of Arcelor
Arcelor was formed in 2002 as a result of the merger of Arbed of Luxembourg, Aceralia of France and Usinor of Spain. The three
companies joined together in order to create the largest Iron and Steel company in the world in 2002. [Agarwal, 2006]
As of 2005, Arcelor comprised 371 fully consolidated companies and 180 companies that were consolidated by distributing the equity.
Arcelor had 84.39% shares with the public in the open market and the largest stakeholder being the state of Luxembourg with 5.6
percent stake. Arcelor also used the strategy of growing through acquisitions. In 2005, it bought Poland‟s Lucchini Group and
expanded its operations in Eastern Europe. In early 2006, it acquired Dofasco, the Canadian steel producer and hoped to establish its
market in North America as well. In February 2006, Arcelor acquired 38 percent stake in China‟s largest producer of sections and
beams, Laiwu Steel Group (capacity of 7 million tonnes), for Rmb 2.1 billion. [Gayathri, 2006]
In 2005, Arcelor had crude steel capacity of 43 million tonnes and was the second largest steel producer after Mittal steel, which
overtook Arcelor in 2004 as the largest producer of Steel in the World with capacity of 63 million tonnes. Arcelor had been declared
the „Corporate jewels of Europe‟. That‟s why Mittal‟s bid for Arcelor created turmoil in some European countries (especially France
and Luxembourg) [Gayathri, 2006].
Markets and Product range of Arcelor
Arcelor had very rich product mix and 70 percent of the output consists of flat product and Stainless steels. These occupies higher price
per tonne as compared to the normal steel product [Mathew, 2006]. The company was also market leader in high valued steel
produced for European car makers, construction, household appliances, packaging and general industrial applications. [Gayathri, 2006]
Arcelor had a strong presence in the European Union, with 71% of its sales coming from the latter. This made it the market leader.
North America, South America and rest of the world accounted for 9%, 11% and 9 % respectively [Agarwal, 2006]. Its plants were
located mainly in Western Europe with two plants in France, one in Belgium and one in Spain [Gayathri, 2006].
SWOT Analysis
SWOT Analysis has been chosen so that it can measure the benefits as well as the drawbacks that company is likely to face in long term
and short term.
Strengths:
The combined entity will control 10 percent of the global steel market, leading with 3 times of its nearest competitor, Nippon steel.
The Arcelor Mittal combination will allow them to win customer orders from the global automakers and construction companies. This
is because of their global presence as discussed in the above-mentioned case study.
The combination of low value steel produced by Mittal Steel and high value steel produced by Arcelor, along with the wide product
range of the Arcelor- Mittal combination, would give the company competitive advantage over business rivals.
Mittal Steel itself can meet 45 percent of Arcelor - Mittals iron ore requirements, which would help in reducing the combination’s
costs, and enable it to further grow along the down-stream supply chain.
The Arcelor-Mittal combination has become a truly global company.
Weaknesses:
Arcelor has been a very innovative company and had thousands of patents; on the other hand Mittal had only 20 odd patents.
Although both the companies had almost the same size, Mittal Steel did not have much interest in R&D. This might also affect on the
combined entity and consequently affect the business in long run. [la tribune, 2006]
Mittal Steel had till now been a family-controlled enterprise, with the Mittal family owning 88 percent stake. Even in Arcelor-Mittal,
the Mittal family owns 43 percent stake. Therefore even the combined entity may lack shareholders value.
Recently Mittal steel was accused of monopoly in United States and South Africa for charging excess pricing. By virtue of having a
combined entity, the company will be more exposed globally and may get into conflict with several competition tribunals across the
world.
Opportunities:
In the era of consolidation, the company can acquire some more government owned steel units or other steel companies, and expand
their operations in other countries.
Many other companies like Severstal, Tata Steel, Nicor and POSCO are playing a leading role in consolidating the steel industry. This
may help in reducing the cyclicality of the industry.
Threats:
The deal of Arcelor-Mittal was opposed by the government of France and Luxembourg. Iron and steel Industry being the key industry
for other industries, government may intervene on price and on further acquisitions.
Both the companies have had a history of acquisitions but there was a difference in culture. Arcelor being more professional had 12
members in their board. On the other hand, Mittal Steel was more of a family-run organisation, with most of its board members
belonging to the Mittal family. Therefore, there is a threat of mismatch of management culture in Arcelor-Mittal.
Although the Steel industry is in the process of consolidation, 70 percent of the industry is still highly fragmented. Due to this existing
high rate of fragmentation, the cyclicality of the steel industry cannot be reduced, despite the process of consolidation having begun.
Downturn in the industry may lead to drastic reduction in profit margins.
Post Acquisition Performance measurement
Stock Price comparison
In this measurement criterion we will observe the stock market reaction to the merger till date in addition to Arcelor-Mittal share price
movement.
Price chart of Arcelor Mittal at NYSE from (August 2005 –August 2007)
CONCLUSION
Implications of the Study:
In this chapter, the key implications and contributions of this research has been presented. Apart from the theory and analyst’s
suggestions, in this research, some thoughts were also generated by the author during the development of this project.
The core objective of this is to find out the motives and impact of mergers and acquisitions in steel industry. There are several other
objectives related to the core objective of the project which will be concluded one by one.
The first objective of the company was to highlight the motives that drive steel companies into mergers and acquisitions. It is found
that steel firms are acquiring companies in order to improve their product portfolio, achieve global presence, improve market share,
grow inorganically, gain proportionate negotiation power with the suppliers and customers, gain strength to face downturn, provide
quality service to the customers and get economies of scale.
The second objective of the company was to enquire if the acquiring firm gets any benefits from the mergers and acquisitions activity.
For this purpose SWOT Analysis was performed. In SWOT Analysis, it was noticed that economies of scale, better product portfolio,
enhanced R&D capabilities and proper mix of markets were some of the important benefits that the combined entities enjoyed. High
interest and debt burden on Mittal Steel’s corporate governance are the main weaknesses that the respective companies are likely to
face. Better funding and further growth through acquisitions by Arcelor Mittal are the opportunities that the company may avail of in
the future. There are certain threats like downturn in the industry and increase of government intervention which may be faced by the
company in future.
While measuring post-acquisition performance, it was observed that Mittal Steel’s stock price doubled within one year. It was also
found that Merger and acquisition had a positive impact on accounting profit and operating efficiency. This shows a perfect example of
achieving efficiency and effectiveness through Mergers and Acquisitions.
The third objective of the research was to identify the main payment methods used by steel firms for mergers and acquisitions. It was
found that Mittal Steel has used the mix of shares and cash reserves to fund Arcelor’s acquisition.
The fourth objective of the research was to investigate whether steel companies are paying appropriate price for the acquisitions. It
was found out that Mittal Steel paid fair price for the deal to get immediate returns. This was so because the combined entity will have
45 percent Self sufficiency in iron ore and less interest burden on the company, because of which the company would enjoy benefits of
higher return in short term as well as long term.
The fifth objective of the research was to identify the issues that steel companies will be dealing with, with respect to Human Resource
and Cultural aspects of Merger & Acquisitions. It was noticed that Mittal steel is a family-owned commercial company with profit
maximisation as its main motive, while Arcelor was a highly technical public company with no one owner.
The sixth objective was to determine the critical factors driving steel industry into Mergers and Acquisitions. It was found that the
threat posed by the industry’s cyclicality, concentration amongst suppliers, High competition, Extreme fragmentation, geographic price
differences, and above all overcapacity and high buying power of the customers, were the main factors pressurising steel industry to
consolidate further.
The seventh objective of the company was to discuss whether Mergers and Acquisitions will help in improving the returns on capital
employed (ROCE) of the steel industry. It was predicted that the share of top 5 steel producers will be 30 percent by 2015, from 20
percent currently. It has also been predicted that crude steel production in the future will shift to BRIC (Brazil, Russia, India and China)
countries due to expected increase in demand of steel and low cost advantage of BRIC. Studying the relation between the
consolidation in industries and ROCE (Return on Capital Employed), it has been observed that consolidated industries get better ROCE.
Thus, with its consolidation, the steel industry might be able to earn a return of more than 10 percent on capital employed, in the
future.