DRIVERS AND IMPACT OF MERGERS AND ACQUISITIONS 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.

Arcelor-Mittal Case study
Background of Mittal Steel Mittal Steel has been one of the most successful steel companies in the world with 49.2 million tonnes of crude steel production, and revenues of USD 31.2 billion in 2005. Its steel production accounted for 6 percent to the total steel market of the world. [Gayathri, 2006 & Mathew, 2006] Mittal Steel was started by its Chairman and CEO Lakshmi Niwas Mittal. He started his career working in his father’s Steel Company during his college times at Calcutta, India. In 1976, visualising the opportunity in the steel industry he moved on to Indonesia to set up a steel company and founded Ispat Indo. In 1989 he made his first acquisition of government-owned steel firm at Trinidad and Tobago and turned it around. He doubled its output and brought it in profit. Over the years he bought many more government and privately owned steel enterprises, which have been mentioned in Table [Gayathri, 2006 & Mathew, 2006]. Mittal Steel’s Acquisitions prior to Arcelor
Year 1989 1992 1994 1995 1995 1998 1999 2001 2001 2003 2004 2004 2004 2005 2005 2005 Company and Country Iron and Steel Company of Triniad & Tobago Sibalsa (Mexico) Sidbec-Dosco (Canada) Hanburger Stahlwerke (Germany) Karmet (Kazakhstan) Inland Steel Company (USA) Unimetal (France) ALFASID (Algeria) Sidex (Romania) Nova Hut (Czec Republic) Polski Huty Stali (Poland) BH Steel (Bosnia) Macedonian facilities from Balkan Steel ISG (USA) Kryvorizshtal (Ukraine) Stelco subsidiaries (Canada) Capacity (million tonnes per annum) 0.9 3.4 1.4 2.8 3.8 5.3 1.5 1 3.8 2.9 N/A 0.2 N/A 20 7.7 N/A

Source: Compiled by Author from Gayathri, 2006, Sinha, 2006 & Mittal Steel, 2006 (A)

Mittal succeeded largely from turning around state owned loss making firms by cutting costs, exploiting economies of scale and selling higher-value products. Mittal steel came into highlight when he merged its companies Ispat International and LNM Holdings and bought International steel group in 2005 for USD 4.5 billion. Mittal got access to US markets and thereby began getting orders from automobile and appliance industries for high margin metal sheets and hence improved company margins. [Gayathri, 2006 & Mathew, 2006] In 2005, Mittal bought Kryvorizshtal which produced approximately 20 percent Ukraine’s Output. Mittal paid USD 4.8 billion (initial bid amount USD 2.8 billion) for this deal because of the presence of competitor Arcelor. This might have prompted Mittal Steel to takeover Arcelor. Moreover, in January 2006 Mittal Steel completely changed the scenario of the Steel industry by placing bid for Arcelor, which was the second largest steel company with 4 percent of the world‟s steel market. [Gayathri, 2006 & Mathew, 2006]

it acquired Dofasco. Arcelor acquired 38 percent stake in China‟s largest producer of sections and beams. Markets of Mittal Steel Source: Mittal Steel. Laiwu Steel Group (capacity of 7 million tonnes). [Agarwal. Aceralia of France and Usinor of Spain. [Gayathri. That‟s why Mittal‟s bid for Arcelor created turmoil in some European countries (especially France and Luxembourg) [Gayathri. 2006]. In February 2006. [Gayathri. In early 2006. packaging and general industrial applications. 11% and 9 % respectively [Agarwal. for Rmb 2. 2006] In 2005. These occupies higher price per tonne as compared to the normal steel product [Mathew. 2006] Arcelor had a strong presence in the European Union. Asian and African market. the Canadian steel producer and hoped to establish its market in North America as well. 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. which overtook Arcelor in 2004 as the largest producer of Steel in the World with capacity of 63 million tonnes. Mittal Steel was market leader in Eastern and central Europe. 2006]. Arcelor had 84. 2006 (B)].Markets and Product Range of Mittal Steel Mittal Steel had strong presence in North America. North America. South America and rest of the world accounted for 9%.39% shares with the public in the open market and the largest stakeholder being the state of Luxembourg with 5. 2006] As of 2005. 2006]. Product Portfolio of Mittal Steel based on 2004 Background of Arcelor Arcelor was formed in 2002 as a result of the merger of Arbed of Luxembourg.6 percent stake. Arcelor comprised 371 fully consolidated companies and 180 companies that were consolidated by distributing the equity. This made it the market leader. construction. The three companies joined together in order to create the largest Iron and Steel company in the world in 2002. Arcelor had crude steel capacity of 43 million tonnes and was the second largest steel producer after Mittal steel. Arcelor had been declared the „Corporate jewels of Europe‟. Arcelor also used the strategy of growing through acquisitions. 2006 (C) The product portfolio of Mittal as shown in the Figure below consisted of mostly low value products. it bought Poland‟s Lucchini Group and expanded its operations in Eastern Europe. This shows that Mittal steel had right mix of developed and developing markets [Sinha. Its plants were . with 71% of its sales coming from the latter. The company was also market leader in high valued steel produced for European car makers.1 billion. household appliances. Still it had very appropriate mix of long and flat products. In 2005.

2006]. He also pointed to Mittal Steel‟s corporate governance.8 % by existing Arcelor shareholders. Luxembourg. This made total of Euro 40. The primary offer was mixed cash and share offer for Arcelor Shares. Mardashov (Chairman of Severstal) will own 32. Mittal Steel decided to raise its offer to 1. Belgium. CEO of Arcelor. one in Belgium and one in Spain [Gayathri.8 billion (US$ 33 billion).2% stake and 68. Arcelor chairman Joseph Kinch would become the chairman of Arcelor Mittal and Lakshmi Mittal would become the president of the Board [The Tribune. Structure of the final Deal and Financing: After 5 months of hostility. 30: The hostile acquisitions offer of Mittal Steel shocked Europe. May 26. It was also considered to be one of the largest hostile bids in the European History. 27: Mittal Steel announced the open offer for all the Arcelor ordinary shares and convertible bonds for Euro 18. Arcelor Board studied the revised offer and commented that all decisions will be made protecting the interest of the shareholders. 2006 Arcelor board recommended shareholders merger with Mittal Steel.4 per Arcelor share. 2006]. France. Mittal on terms also agreed to limit his holdings to below 45 percent. leading steel company of Russia. Time line of the Hostile Takeover: The timeline of the acquisition has been given below [Compiled by Author from Gayathri. 2006: The market regulators in France. Mittal Steel also offered 13 Mittal Steel shares and Euro 188. May 15 2006: Mittal sweetened the deal going through severe criticism by Arcelor Board by increasing the bidding price to Euro 25. Belgium and Spain government opposed the move stating that proposed bid may put thousands of employees at risk.located mainly in Western Europe with two plants in France. on June 25. May 16. stating that it is completely a Mittal family. 2006] Jan. 2006]. Jan. The deal consisted of 0. 2006: Arcelor announced a Euro 13. The total offer came to USD 33. the founder and chairman of Mittal Steel (worlds largest Steel Company) launched a hostile bid worth Euro 18. Luxembourg and the Netherlands cleared the bid. June 23: Arcelor and Mittal decided to meet on June 25. dislodging Mittal Steel. June 20: Severstal revised its terms and raised the bid and agreed to settle on the 25 percent rather than 32. Hostile Takeover of Arcelor On 27th January. 2006 (A) & The Hindu Business Line. Arcelor declared payment of US$ 6 billion to the shareholders and proposed to make recently acquired Dofasco as an independent Dutuch Foundation control over the unit.42 for every 12 convertible bonds of Arcelor.6 billion (US$ 22. The proposed merger would have made it number one steel maker. Sinha. After the merger Mittal would hold 43 percent stake in the merged company.7 billion [BBC news. In this deal.05 for each Arcelor share.2 percent earlier. This was done so reduce the control of Mittal family in the combined enterprise [The Tribune. April 28: Some of the institutional shareholders opposed Arcelor‟s opposition to the Mittal Steel‟s bid. Arcelor shareholders received 69 percent of offer in shares of Mittal Steel and balance 31 percent in cash. 2006]. .run enterprise. April 4: Arcelor unveils some more takeover defences. 2006. Feb 16: Arcelor declares 85 percent dividend hike disregard Mittal‟s bid. ruled out the proposal by commenting that deal price was very low and they had a different target market culture. 2006 Lakshmi Nivas Mittal. three times the size of its nearest competitor Nippon Steel.6 billion). 2006 & The Tribune. June 6: European Commission approved the merger of Arcelor and Mittal. the second largest steel company in the world.8 Mittal Shares and Euro 7.6 billion merger proposal with severstal. Guy Dolle.6 billion for Arcelor.55 in cash for each share of Arcelor. 2006.084 Mittal Shares and Euro 12. The post merger 18 member board will consist of 12 existing board members of Arcelor and six Mittal nominees. The combined entity would be the Mittal‟s vision to create the world largest steel company in the history of steel industry.

This is so because Arcelor’s market and high value steel will be complimented by Mittal’s market and low cost commercial steel [Mathew. The combined company will generate financial synergies.[Sinha.N. The merger would allow the company to expand its product portfolio and help winning orders from automotive. NAFTA.N. Central Europe and Africa. 2006]. manufacturing and shipping as shown in figure. Source: Mittal. European Union. This synergy is expected to be around USD 1 billion till year 3. improved cash flow and improved access to capital markets [Sinha. This combination accelerates this process and leaves us uniquely positioned to benefit from the opportunities created. 2006 (B)]. Mittal Steel as cited by Sinha. 2006 (B) This combination will enable to create an unmatched geographic presence with very limited geographic overlapping as shown in figure mentioned below. appliances. Source: Mittal Steel. This would help the company to be leader in five main markets i. 2006 (B)] The product portfolio offered by the combined company in 2006 has been shown in Figure. 2006 (B)] Source: Mittal. The combined assets of the company will give them good combination of developed and developing markets. L. 2006 & Sinha. construction. 2006 (B) The combination of Arcelor and Mittal Steel will create a company that will account to 10 percent of the global steel production with capacity of 110 million tonnes per annum.Synergies ‘Mittal and Arcelor have both been at forefront of the consolidation in steel sector in the last 10 years.’ . The other financial synergies are that the company will also benefit from lower cost of capital. as shown in Table below. South America. packaging. The combined company will have 61 pants in 27 countries with 320000 employees and an annual turnover of USD 69 Billion [Agarwal. 2006]. 2007 The Merger wouldn’t give synergies in Marketing and product range but also purchasing. L. . Analysts expect that the combined company will give ability to change the impact of cyclical fluctuations in the economy [Mathew. 2006 (B)].Laxmi Niwas Mittal. [Sinha. 2007 According to some of the analysts it will create „one stop shop for the customers. Chairman and CEO.e. oil and gas spread across different regions.

in the steel industry the top 5 players account for only 20 percent of steel production. It has not set up any Brownfield project and has grown only by acquiring several steel companies. Growing inorganically enables the steel companies to expand their capacity immediately and capture the market along with it. We found that government owned many steel plants were privatised and the era of consolidation in steel industry begun in 2002. The reason for this is the small number of raw material suppliers to the steel industry. All the research questions have been answered in this section. i.Purchasing marketing and manufacturing synergies of Arcelor Mittal Source: Mittal Steel. The combined company will make it self. L. Getting the proper mix of low value and high end steel products to serve the wider range of markets has been one of the main motives of Steel companies. slow growth in developed markets or mature markets and high growth in developing markets.N. It also included the right mix of markets. Ukraine. Motives of Mergers and Acquisitions in steel industry The history of the steel industry has already been discussed in the Global steel industry chapter. Improved product portfolio: Mittal Steel had acquired companies in order to improve their product portfolio. First we will start the discussion with the motives behind mergers and acquisitions. Proportionate negotiation power with the suppliers and customers: Steel industry has been the victim of disproportionate negotiation power with its suppliers and customers. 2006. On the other hand.e. North America and Bosnia. (B) Other synergy is that significant amount can be saved on use of in-house raw materials of Mittal Steel. [Mathew. Mittal steel has reserves of iron ore (one of the major raw material for steel production) in Kazakhstan. . Market Share and Global Presence: The Company focused on expanding their operations globally and grabbing the market world wide. 2007 The combination of Arcelor and Mittal will also give some synergies in marketing and trading as the group will have 38 percent of the total distribution by internal centres as shown in figure. Results and Analysis This chapter is based on the study of the last four chapters. and a small group of customers for the steel thus produced. That is why it has become very important to analyse the motives that is driving steel companies into mergers and acquisitions. 2006] Raw material self sufficiency and internal distribution centres Source: Mittal. This was the key strategy of Mittal Steel. Sinha. Arcelor does not have much of reserve like Mittal but have reserves of Dofasco. Here the Author analyses and discusses the main objectives of the research. the steel industry has been highly fragmented. It would also take years to fix the market and win customers over their competitors. Furthermore. Inorganic growth: It takes at least 5 years to set up an integrated steel plant as quoted by Wharton (2007).sufficient with 45 percent of iron ore requirement as shown in figure. Whereas. 2006 stated that three Iron ore major companies control 75 percent of the supply of Iron ore and top ten auto companies account for 95 percent of automobile production.

Economies of scale: Economies of scale is one of the important motives of the company to gain manufacturing and R&D synergies. on the other hand Mittal had only 20 odd patents. which would help in reducing the combination’s costs. with the Mittal family owning 88 percent stake. Downturn in the industry may lead to drastic reduction in profit margins. Many other companies like Severstal. they have better strength to face the downturn of the industry. Iron and steel Industry being the key industry for other industries. Therefore even the combined entity may lack shareholders value. More and more acquisitions in the industry will lead to consolidation. Since both the companies have global presence Arcelor Mittal can supply steel to all Ford plants globally. Therefore. Nippon steel. the company will be more exposed globally and may get into conflict with several competition tribunals across the world. The benefit for them is that they will have lesser per ton R&D cost and the expertise of both the companies would be available for the development of better products. Even in Arcelor-Mittal. This might also affect on the combined entity and consequently affect the business in long run.Mittals iron ore requirements. On the other hand. Nicor and POSCO are playing a leading role in consolidating the steel industry. would give the company competitive advantage over business rivals. Better Service to the Customers: One of the other important reasons for steel companies’ interest in M&A is to provide integrated service to the consumers and help in global procurement. there is a threat of mismatch of management culture in Arcelor-Mittal. The Arcelor-Mittal combination has become a truly global company. Mittal Steel did not have much interest in R&D. leading with 3 times of its nearest competitor. The motive is to win orders and gain competitive advantage against their competitors. This may help in reducing the cyclicality of the industry. The Arcelor Mittal combination will allow them to win customer orders from the global automakers and construction companies. Economies of scale enable companies to invest more in research and development. government may intervene on price and on further acquisitions. 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. the company can acquire some more government owned steel units or other steel companies. Strength to face down turn: When steel companies turn big. This is so because the combined entity has better cash flow and a wider range of market than their competitors. Both the companies have had a history of acquisitions but there was a difference in culture. For example: Ford Motors can tie up with Arcelor-Mittal to provide them with all the steel related products like metal sheets and other special steel products. the Mittal family owns 43 percent stake. Mittal Steel was more of a family-run organisation. This is because of their global presence as discussed in the above-mentioned case study. Mittal Steel itself can meet 45 percent of Arcelor . the cyclicality of the steel industry cannot be reduced. Recently Mittal steel was accused of monopoly in United States and South Africa for charging excess pricing. and expand their operations in other countries. Due to this existing high rate of fragmentation.Mittal Steel has expected their purchasing and marketing synergies to improve by reducing the negotiation power of its suppliers and customers. Weaknesses: Arcelor has been a very innovative company and had thousands of patents. Arcelor being more professional had 12 members in their board. 2006] Mittal Steel had till now been a family-controlled enterprise. Opportunities: In the era of consolidation. This has also been steel companies’ primary motive. Tata Steel. . Strengths: The combined entity will control 10 percent of the global steel market. which will help them earn sustainable earnings in the long run. 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. and come up with the newer products. and enable it to further grow along the down-stream supply chain. By virtue of having a combined entity. It will also enable the steel companies to carry combined research and development with their consumers. behind getting into mergers and acquisitions. despite the process of consolidation having begun. Although both the companies had almost the same size. Threats: The deal of Arcelor-Mittal was opposed by the government of France and Luxembourg. Although the Steel industry is in the process of consolidation. [la tribune.Mittal combination. 70 percent of the industry is still highly fragmented. with most of its board members belonging to the Mittal family. This may enable both the companies to work together towards R&D and new product development.

The company claims that this improvement in the performance has been due to the high demand of steel and higher selling prices for all the major segments. Price chart of Arcelor Mittal at NYSE from (August 2005 –August 2007) Source: Reuters. as discussed in chapter 3. as compared to pro forma half yearly result of June 2006. in order to be competitive in the industry it is very important for steel companies to be self.Mittal increased by 42 percent. Graph showing world crude steel production and iron ore price trend Source: Mukherjee. Operating Income for the same half yearly June 2007 has increased by 50 percent and reached US$ 7687 million. The stock price almost doubled in just one year of the merger. The uptrend indicates that the company has been performing very well.Mittal deal was among companies that were almost at par with each other. 2007 Arcelor-Mittal has iron ore mining assets all over the world as shown in figure below. iron ore and coking coal prices have surged by 71 % and 111 %. 69%of the acquisition has been paid for by shares. Although the steel industry has been in its best shape since 2002. Depreciation. This gives the company competitive advantage by allowing it to use the resources closest to the production facility. while 31 percent has been paid in cash. in 2005.equity ratio to face the cyclicality of the steel industry.9 percent to 14. The other point is that the Arcelor. For example: South African mines can feed the plants of Arcelor- .sufficient in raw materials. there has been an uptrend in the share price of Arcelor-Mittal since the merger. There has been a tremendous improvement in the operating profit as compared to the last half yearly operating profit of the combined firm. In conclusion. 2007 As is evident in the graph above. Taxation and Amortisation) of Arcelor. for they had almost the same capacity. iron ore prices have been soaring as the production has been increasing as shown in figure. respectively. As shown in figure below. because of which they were not under pressure to arrange cash. Operating margin for the period was increased from 11. This constitutes the perfect example of achieving efficiency and higher price for the products through Mergers and acquisitions.9 percent.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. as reflected in the half yearly result of June 2007. Mittal Steel paid majority by shares. Financing of the Acquisitions: In the case of Arcelor-Mittal. So. Margin picture & raw material self-sufficiency: Iron ore and Metallurgical coal are the two major raw materials for steel industry. Arcelor Mittal deal will not face the burden of debt and will have a normal debt. Operational Efficiency: EBIDTA (Earnings before Interest. The EBIDTA amount has increased to US$ 9672 million. This shows that stock market reacted positively on this merger.

sufficiency of 45 percent. If handfuls of producers dictate the steel market. and Ukraine ore can be used in the production facility at Ukraine. With self. Arcelor had 18 members on its board comprising of six nationalities.added products. 2007 Destination of Iron ore consumption Source: Mukherjee. Arcelor had focused on value. Top 3 companies controlled 70 percent of the iron ore supply and top 5 companies controlled 58 percent of the coking coal market in 2005. which may lead them to go out of business as it happened between 1975 and 2002. Iron ore mine assets of Arcelor Mittal Source: Mukherjee. On the other hand the Mittal family held 88% stake in Mittal steel and its board members belonged mostly to the Mittal family. Currently Mittal Steel is self sufficient in 45% of its iron ore requirement. Mittal Steel paid fair price to make profits and achieve synergies in short term as well as long term. Those challenges are as follows: Threat from cyclicality of the industry: There is possibility that steel companies are trying to consolidate the steel industry because of the threat of falling prey to the cyclicality of the industry. while Mittal steel was more focused on profits and produced products that can earn good return. Mathew argues that Arcelor was a highly technical company and focused more on research and development. Factors driving steel industry into consolidation: This section describes the factors that are driving steel industry as a whole towards consolidation. This helps the company to be less reliable or dependent on the suppliers. Along with self. These factors are basically the challenges can be minimised by mergers and acquisitions. only 17. This huge difference in management culture may lead to conflict between the management of Arcelor and Mittal Steel. This has caused imbalance in the negotiation . coking coal and other raw materials. while Mittal steel was a more commercial company and stressed less on R&D (Mathew. On the other hand.sufficiency. The destination of consumption of iron ore has been shown in Table.Mittal in South Africa.Mittal will be more viable.Mittal has the supply of ore all around the world. Concentration amongst supplier: A few suppliers alone are responsible for providing raw materials to the steel industry. Arcelor-Mittal’s large production capacity around the world can bring huge purchasing synergies in iron ore. In conclusion. Human Resource and Cultural Issues: Mittal Steel may also face enormous cultural differences. 2006). they can form a cartel during the downturn. This is beacuse Arcelor.9 percent steel was produced by the top 5 producers of steel. Arcelor. 2007 Iron ore is essential to be competitive in the steel industry. Suppliers of iron ore in the industry have been dictating terms because of concentration among them as shown in figure further. with no single organisation holding large stake in it.

Steel producers would enjoy better negotiation power.7 percent in 2000 to 19. there would more global producers of steel. and would be able to provide integrated service to their customers. Consolidation in steel industry will create big players with global presence and would reduce the price differentials in different parts of the world. Since 2002. and the different policies of each state. Buying power with the customers: Steel industry being fragmented. 2006-07 The industry saw regional consolidation in 2002-03. while cross boarder consolidation was initiated in 2004-06. the share of top five players in North America. and between smaller steel players within countries. Consolidation in steel industry will allow the steel companies to have proportionate negotiation power with their suppliers. Asia & Worldwide Source: Tata Steel. Expected share of top 5 steel producers . Therefore. Over capacity leads to higher costs (due to lower capacity utilisation) and price imbalance.9 percent in 2005. Figure appended below shows that steel industry was fragmented to such an extent that the top five players controlled only 14. With consolidation. As the industry consolidates. if top few players form a cartel and manage the capacity effectively. For example: the cost of production is lower in China than in developed countries because of low labour costs [Regani.power. 2005]. This competitive advantage enables China to sell at a lower price.7 percent in 2005. This would help in reducing the number of competitors in the industry. it has been observed that the industry is going through the period of consolidation. Overcapacity: Steel industry has been suffering with over capacity for a long time. the raw material suppliers keep on increasing the iron ore and coking coal price.6 percent of the steel in 2000 as compared to 17. So there was pressure from global companies as well as many local companies. High competition and Extreme fragmentation: Steel industry has been highly fragmented throughout the world. Shares of Top five players in North America. Geographic Price differences: Steel industry has always been a victim of geographical price differences. China. Future Structure of the Steel Industry: Steel Industry has always been a very fragmented industry because of the several restrictions imposed on the industry by the state. customers (Automobile manufacturers) have huge dominance because of the concentration in automobile industry. This has happened due to many new capacities being added in the last few years due to the economic boom in China. Consolidation will reduce this problem. This is one of the reasons that the steel industry went through depression in the period from 1975 to 2002. Only in China has it been noticed that the share of top 5 players have decreased from 35. especially the Automobile industry. On the other hand top five players in the world produced 14. Latin America and Asia have gone through major consolidation. Consolidation will also help the steel companies in acquiring mining resources for their backward integration. This boosted economy allowed the regional players to expand their capacity. Wharton states that Steel industry customers. thereby affecting the profitability of the European firms. had been purchasing from steel suppliers at rates that had driven the steel industry’s profit margins to unsustainable levels. As shown in the figure below. EU. From the beginning there has been high competition between steel players worldwide. The cost of production differed across the world because of the different economic and political situations of the country. It is expected that the industry will see many global companies being formed between 2007 and 2015.6 percent of the total steel production in 2000. Annual Report.

it is predicted that more consolidation will take place in the next five years. but these economies also constitute potential markets for steel. It is expected that this inclination towards consolidation in the industry would not remain restricted to the top level alone. even in China there are around 125 integrated steel producers. there is huge opportunity for Chinese companies to consolidate China‟s production (Wharton. The share of the top 5 companies is bound to increase by 25 percent every 5 years. as compared to 1995 and in 2005 by 22 percent compared to 2000. India and China (BRIC countries) because of cost advantage and resource availability. With the momentum that Mittal Steel has brought in the consolidation of the industry. All the finishing facilities can be near the market. This will reduce the cost tremendously. 2007). It can be observed in the figure that most of the future capacity additions and growth has been expected in developing countries. As Wharton discusses. Slowly steel producers can shift the production of low end products to low cost countries and finish these close to the markets of developed countries. more downstream production will shift to the countries like Russia. This is because per capita consumption in these countries is very low as compared to that of developed countries. it also has a huge appetite for steel which makes it viable. from 51 percent in 2004. 2007 Prediction of Future Crude Steel consumption Source: IISI cited by Chaudhary. but would also reach the lower levels as well. As we can see in the figure below. Cost of production country wise for Hot rolled coil (USD) Source: Chaudhary. Brazil. As shown in figure above. either developed or developing. Thus. In 2000 the top 5 players’ market share increased by 13 percent. Although China has a higher cost of production than rest of the BRIC countries. International Iron and steel institute (IISI) has predicted that the production capacity of emerging economies will catapult to 65 per cent of total production by 2020. Since only 33 percent of world steel is produced by the top 15 producers of the world.Above figure shows the growth of share of the top five steel companies in the last 10 years and predicted future growth by the author for next 10 years. 2007 Not only are the costs lower in the developing economies. the important question that arises is whether this would help in reducing the cyclicality of the steel industry and increasing the returns in the steel industry. so that the product can be finished according to the customer’s specification. for instance. Consequently it is expected that market share of the top 5 steel producers would increase to 30 percent till 2015. there is a huge potential for consolidation in the rest of the 66 percent. . Although initiatives are taken by the leading steel companies to consolidate the industry.

the cyclicality will reduce with time and Return on Capital Employed will increase drastically. enhanced R&D capabilities and proper mix of markets were some of the important benefits that the combined entities enjoyed. If the Industry consolidates in the way being predicted in. achieve global presence. It is found that steel firms are acquiring companies in order to improve their product portfolio.Graph showing relation between Consolidated Industries and ROCE Source: Chaudhary. It was noticed that Mittal steel is a family-owned commercial company with profit maximisation as its main motive. geographic price differences. Apart from the theory and analyst’s suggestions. There are certain threats like downturn in the industry and increase of government intervention which may be faced by the company in future. High competition. The fifth objective of the research was to identify the issues that steel companies will be dealing with. In SWOT Analysis. with respect to Human Resource and Cultural aspects of Merger & Acquisitions. This was so because the combined entity will have 45 percent Self sufficiency in iron ore and less interest burden on the company. vis-à-vis consolidation and its consequent impact on the return on Capital employed. were the main factors pressurising steel industry to consolidate further. from 20 percent currently. Russia. It was found that the threat posed by the industry’s cyclicality. and above all overcapacity and high buying power of the customers. India and China) countries due to expected increase in demand of steel and low cost advantage of BRIC. Studying the relation between the . The sixth objective was to determine the critical factors driving steel industry into Mergers and Acquisitions. gain strength to face downturn. 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. CONCLUSION Implications of the Study: In this chapter. For this purpose SWOT Analysis was performed. grow inorganically. the key implications and contributions of this research has been presented. the steel industry might be able to earn a return of more than 10 percent on capital employed. While measuring post-acquisition performance. There are several other objectives related to the core objective of the project which will be concluded one by one. while Arcelor was a highly technical public company with no one owner. The core objective of this is to find out the motives and impact of mergers and acquisitions in steel industry. in this research. It was also found that Merger and acquisition had a positive impact on accounting profit and operating efficiency. concentration amongst suppliers. It was found out that Mittal Steel paid fair price for the deal to get immediate returns. it was noticed that economies of scale. Extreme fragmentation. gain proportionate negotiation power with the suppliers and customers. It was predicted that the share of top 5 steel producers will be 30 percent by 2015. This shows a perfect example of achieving efficiency and effectiveness through Mergers and Acquisitions. The first objective of the company was to highlight the motives that drive steel companies into mergers and acquisitions. it was observed that Mittal Steel’s stock price doubled within one year. as shown in figure above. It has also been predicted that crude steel production in the future will shift to BRIC (Brazil. It was found that Mittal Steel has used the mix of shares and cash reserves to fund Arcelor’s acquisition. some thoughts were also generated by the author during the development of this project. because of which the company would enjoy benefits of higher return in short term as well as long term. better product portfolio. The third objective of the research was to identify the main payment methods used by steel firms for mergers and acquisitions. 2007 Studying the patterns of different commodities. The fourth objective of the research was to investigate whether steel companies are paying appropriate price for the acquisitions. 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. So. one may conclude that consolidated industries boast of a better return on capital. improve market share. as the steel industry will be moving towards the left of the graph and become more consolidated. 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.

Nevertheless. in the future. it has been observed that consolidated industries get better ROCE. It would be interesting to know the impact of mergers and acquisitions at bottom level of the steel industry. POSCO of South Korea. More study can be performed on the impact of these mergers and acquisitions taking the aforementioned case into account. and therefore. This study has neglected the consolidation happening in the bottom level of steel industry. what is positive about this study is its potential to constitute the basis for further research in mergers and acquisitions in the steel industry. US steel. Further study can be done on the major companies like CSN. the phase of mergers and acquisitions has but begun in the steel industry. it is very important to mention the difficulties and limitations that have been faced during the study. These companies are expected to play a major role in consolidation of the steel industry. It is expected that this wave of mergers and acquisitions in steel industry will last for long. Lastly. the data available is very recent. for. do not represent the common players in the industry. as mentioned above in one of the tables. The most crucial limitation of the project is that only a limited number of companies have been studied. The second limitation of this research is the unavailability of sufficient data on the topic. There have been many other mergers and acquisitions. the company studied is one of the biggest deals in the steel industry. the steel industry might be able to earn a return of more than 10 percent on capital employed. It would also be interesting to know if MittalArcelor would be facing any corporate governance issues in the future. and Arcelor Mittal. it would be too early to confidently comment on the impact of mergers and acquisitions on steel firms. Severstal. Study can be conducted on the evolving steel companies in these countries. This study had focused on the mergers and acquisitions at the top level of the steel industry. Thus. Due to these reasons. .consolidation in industries and ROCE (Return on Capital Employed). There is huge potential for research in BRIC countries as they are considered to be the low cost producers and future markets of steel. with its consolidation. Nippon steel of Japan. Recommendations for future research This study can be extended to see the performance impact on the Mittal-Arcelor merger. This study also takes into account all the recent data available on the subject. Furthermore. Study can also be conducted to ascertain the potential buyers and seller in the steel industry. and the project is up to date. Limitations of the Study: However. Baosteel of china.