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

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 BIRTH OF ARCELORMITTAL

Mittal Steel Company, world’s 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 shareholder’s approval in June 2006 and the
merged entity ARCELORMITTAL came into existence in November 2007

Acquirer: Mittal Steel Company NV (MSC), was a The Man: Lakshmi Mittal-one of the richest
Holland based company of India born industrialist men in the world- was born in India in 1950. He
L N Mittal. A very young company, MSC was started his career with Ispat, his family business
formed in 2004 after a $4.5bn takeover of in India and in 1976 bought an Indonesian steel
International Steel Group of the US, and a merger maker - his first acquisition. Over the following
of Mittal’s existing assets LNM and Ispat decades, he built up an empire buying up
underperforming steel plants, many in eastern
International. The result, Mittal Steel, became the
European countries, and then turning them
first truly global steel company. Before the around. He was at times called an asset
takeover of International Steel Group, described stripper, (which he denied). He ran into trouble
by many as “bold”, Mittal had been acquiring steel with his 1996 takeover of an Irish steelmaker
assets all over the world, mostly in the developing that subsequently closed with the loss of 400
countries including Eastern Europe. None of his jobs.
other acquisitions were in the same league as
International Steel Group, which itself was a His companies LNM and Ispat International also
minnow compared to Arcelor. The opening bid received some flak for lack of transparency.
This however, changed, with the creation of
placed a deal value for Arcelor at $22.7bn, i.e.
Mittal Steel in 2004. New York and Amsterdam
about four times as much as Mittal paid for stock exchanges, where MSC is listed, have
International Steel Group. ensured more disclosure about Mittal’s
operations than had previously been available.
Target: Arcelor was headquartered in Mittal once said that he wanted to be the
Luxembourg, with works in France, Spain, Brazil lowest-cost steel producer in every single
and other countries. A young company, Arcelor market. Mittal Steel in 2005 had steelmaking
came into existence in 2001 with merger of three facilities in 14 countries, and it had highlighted
steel companies- Aceralia, Arbed and Usinor. its strategy of sharing know-how and generating
product synergies between different operations.
(Usinor was France’s biggest steel maker.) In
It said all of its operations benefited from the
2005, Arcelor had revenues of 32 billion Euros and increased purchasing power created by scale,
produced over 48 MMT of steel. Arcelor had and global sales and marketing network.
greater concentration on downstream facilities and
was more in value added steel market. Though publicity-shy, Mittal has often been in
news and not always for acquisitions. In 2002
Offer: The original offer of MSN valued the target he had donated £125,000 to Tony Blair’s
at $22.7bn. The offer was part cash part stock - Labour Party which coincided with Blair’s
Mittal Shares (75 percent) and cash (25 percent). expression of support for his attempt to take
over Sidex, a state-owned Romanian steel
Under the offer, Arcelor shareholders would have
company. Later in 2004 he captured popular
received 4 Mittal Steel shares and 35 euros for imagination when he hired Versailles, outside
every 5 Arcelor shares they held. The offer was Paris and the singer Kylie Minogue - to entertain
valued at about 27% premium over Arcelor’s 1,500 guests at his daughter’s wedding. For an
closing price on the previous day. 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.

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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
Mittal’s 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 Mittal’s 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 Commission’s 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 Indian’s attempt to takeover of European assets. (Aside, why
so few BPO deals are originating from Europe?)

Expert’s 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

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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
60
Million Metric Tonnes (MMT)

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

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 management’s 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 pre-
tax 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 Arcelor’s 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 Dollé had set sights on becoming the global leader through
acquisitions. In an interview published in Arcelor’s annual report for 2005 Dollé in response to
how do you see Arcelor’s 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 Dollé 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

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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 Steel’s bid from the beginning. Arcelor repeatedly played the patriotic
card to urge the shareholders to reject the bid. The CEO of Arcelor, Guy Dollé 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
Arcelor‘s best interests). Dollé 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. Dollé 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 2004’s 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 Arcelor’s profitability”, and that the group was
“committed to keep increasing shareholder remuneration year on year”.

Guy Dollé, 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, Arcelor’s 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 steel’s share prices have much higher volatility (MSC had offered to pay 75% of
consideration by stocks)
3. Arcelor’s 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,

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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-à-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.
th
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 one-
way 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

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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

Expert’s 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 target’s 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”.

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Role of Guy Dollé: Ever since the first offer of Mittal Steel Dollé, 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 Steel’s 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 Arcelor’s 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 MSC’s 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; Acquisition

issues shares in exchange in addition to cash completed

Mittal Steel gets absorbed into a new company (We call

it vehicle for transition), share holders of MSC get shares First step
in the transition vehicle

The transition vehicle will automatically get listed on all

exchanges where MSC was listed – (Reverse Merger)

Transition vehicle gets absorbed into Arcelor. Second step

Shareholders of transition vehicle get shares in Arcelor

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

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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 Steel’s 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 Steel’s outstanding shares on May 31, 2007, representing 44.79% of Mittal Steel’s
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.

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 th
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.

ARCELOR: Revenue & EBIDTA Mittal Steel: Revenue & EBIDTA

€ mn € bn
35000 35
30000 30
25000 25
20000 20
15000 15
10000 10
5000 5
0 0 1 2 3 4
2001
1 2002
2 2003
3 2004
4 2005
5 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 Steel’s 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.

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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 ArcelorMittal chokes on its own poison pill
for Mittal Steel? Merger made the new entity by
far the biggest player in Americas. But Mittal To deter Mittal Steel from takeover, Arcelor had
were already bigger in Americas as the table set up a Dutch foundation (akin to a trust in India),
Strategic Steel Stichting in April 2006 to hold
would show:
shares of Dofasco. Its creation had evoked
$ bn
outcries of foul play from Mittal camp during those
Americas Europe RoW Total politically charged early days of the takeover
Arcelor battle. The foundation’s directors, mandates
2004 6.6 9.9 7.6 24.1 included taking an independent view on sale of
shares of Dofasco entrusted to them for and on
2005 12.5 7.7 9.8 30.0 behalf of Arcelor.
Mittal Steel
2004 4.4 23.4 2.4 30.2 In November 2006 when the two fighting
companies had already made truce and ink had
2005 6.5 23.2 2.9 32.6
dried on their well publicized merger agreement,
ArcelorMittal Sichting foundation refused to wind itself up,
2005 19.0 30.9 12.7 62.6 despite requests for it to do so from the boards of
both Arcelor and Mittal. Insisting on carrying out
Arcelor had a big lead over Mittal Steel in their original responsibility of taking an
independent view of any sale of Dofasco, Stichting
Europe. And despite being Dutch incorporated it directors were objecting on the grounds that
seems Mittal Steel was viewed by many as an Dofasco owns technology important to Arcelor and
Indian company and it must have been that that the price offered by ThyssenKrupp was too
much more difficult for Mittals to enter the low.
fortress. The differences become still starker if
we bifurcate the data in EU and Rest of Europe. By this time, the United States Department of
It may be right to say that the merger had Justice had made the sale of Dofasco a
allowed Mittal to grow in home turf. 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
The other difference that can be seen in the would satisfy them. In the end however, the
operations of the giants is the realization of Foundation did agree to dissolve itself and
value per tonne. Mittal Steel produced and Dofasco was sold to ThyssenKrupp at $68 a
dispatched much more than Arcelor in 2005 and share, i.e. $3 less than what was paid by Arcelor
realized less! (Though Arcelor was charged of at the time of purchase.
creative accounting when it came out with its
2005 results in the thick of the takeover battle, How did Sichting directors change their hearts?
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 Dollé’s ranting about empire of the size of ArcelorMittal in 17 years if
eau d’ Cologne and parfum? One thing is clear; you can’t 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 Arcelor’s 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.

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“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.

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 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 board’s 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 Arcelor’s 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 company’s 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 Jérôme Granboulan were in charge of speedy
integration. The top management had set three clear objectives to them: first, to achieve an
efficient and rapid integration—aligning 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 Jérôme 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 company’s 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 company’s
top 500 executives had gathered. This provided a great boost and marked the end of the formal

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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 team’s 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 50–50 between the two
companies. There were 6 members on the new group-management board, for example—3 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 it’s 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
merger—in 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.

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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 parts—purchasing, sales, operations, and miscellaneous—and 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 operations—the road show
referred to earlier—talking 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 group-
management 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

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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, it’s 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 office’s 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 CEO’s 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 aspects—two 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 entity’s operations from Laxmi

Mittal’s 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?

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