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International business

Lakshmi mittal and the growth of mittal steel

Class / Group : Ax / 2 Lecturer Group Members : : PROF NIZAM JIM WIRYAWAN Ph.D Anton.T Stefanus.H.B Irvin Carlo Andry Ivan Adhi Tjahyadi Denny Rionardi Denny Michael.S Stefan.D Andrew.D 115090011 115090009 115090074 115080217 115090032 115090050 115090365 115090441 115090124 115090088 115090246 115080074 DEPARTMENT OF MANAGEMENT FACULTY OF ECONOMY TARUMANAGARA UNIVERSITY 2012

CASE 2

Lakshmi mittal and the growth of mittal steel

Case summary :
The Mittal steel company, one of the most successful steel company in India in early 70s, has became the world largest steel company in 2007. This makes some people, who havent even heard about how could they managed to grow only from a local company to enormous worlds scale company. We must track back to mid 70s, a time when Mittal corp has been through various type of tough situations such as limitations for their growth in india (because of governmental regulations) and also two competitors which are SAIL (state owned) and Tata Steel ( private national champion ). The Mittals thought of an opportunity to expand their business, through FDI (Foreign Direct Investment). They set up a steel making plant from scratch in Indonesia in 1975. Lakshmi Mittal also did some interesting tactics that leads him to acquire Trinidad steel firm which used to be their supplier for iron pellets. Furthermore, his steps didnt stop there. Eventhough the global steel industry had been in a slump due to excess capacity for the last 25 years, Mittal stand still on his belief that in near future, the demand of steel will rise again. His predictions were based by china, india and several other countries that were developing their industrialization sector. Lakshmi made his next move in 1990s. At first, he acquired Sibalsa of Mexico (owned previously by state). Then he bought the fourth-largest Canadian steel maker from the government, then purchasing a midsized German steel maker and Kazaksthans largest steel company. At this stage, Lakshmis obsession of growth has led the company into constrained capital situation. Nevertheless, he managed to enter the stock market, receiving $776 million through New York and Amsterdam stock exchanges. Mittal companys headquarter was also moved to rotterdam, so that they could enter the capital market with full liquidity system. Over the next few years, Mittal steel company bought some more steel makers all over the world. And Lakshmis predictions became true in 2005, a year that prove that the global demand ofsteel boomed once more time. Because of their spectacular earnings, Mittal company offer a staggering amount of $32 million to acquire Acelor, a European firm that formed from the mergers from the steel makers from Luxembourg, France and Spain. The negotiations didnt go well at first, since many of Acelors managers thought handing over a European company to an Indian company was a joke. However, Acelors shareholders saw value of the deal, and agreed to sign the deal. These steps took more than 30 years to complete, but it doesnt matter. Because at 2007, with $110 million sales and net income of $10.2 million, Mittal Steel company has stated itself as the largest steel company in the world.

Case discussions question


1. What forces drove mittal steel to start expanding across national borders? 2. Mittal steel expanded into different nations through mergers and acquisitions, as opposed to Greenfield investments. Why? 3. What benefits does mittal steel brings to the countries that it enters? Are there any drawbacks to a nations when mittal steel invest there? 4. What are the benefits to mittal steel from entering different nations? 5. The acquisitions of arcelor was very acrimonious, with many politicians objecting to it. Why do you think they objected? Were their objections reasonable?

Case Discussion Answers:


1. Mittal steel was forced by 3 things, which are : - Limited growth opportunities in India - Regulations which constrained (limited) expansion opportunities - Competition that Mittal faced from both a state owned rival, SAIL and Tata Steel. 2. Mittal company expanded through mergers and not with greenfield investments, because mergers and acquisitions have lower risk than greenfield investment. The benefits are quick access to enter foreign market, higher market power and higher competitive advantage among other company. These things are totally different in greenfields investment, where the newly established company must start from the lowest point and gamble all their capital to win the market. 3. Mittal steels FDI brings many benefits to countries it enters, such as : - Supplying capital, technology and managenement resources that would not be available otherwise. These things boost the host countries economic growth rate - Mittal steel provides jobs to the host countries, and help people in their host country to have a better living. This also means the country itself also gets a benefit, which is tax paid by those who works at Mittal steel. - Helps the countries to increase their total exports and also reducing their imports, so that their balance of-payment accounts and current account will be equal or even surplus. - Helps the countries to develop their economics growth, and also stimulating other investor to invest at those countries. Mittal steels investment also brings a few minor drawbacks to the countries where they invested, for example: Some countries that sold their governmental company lost a littleof pride because people will get the sense that the government agent cant run state company properly, and that decrease the governments reputation among their citizens. Other local steel company would probably suffer some loss, because the consumer tend to buy cheaper goods, and large company like Mittal corp usually offers better price than the competitors.

4. Mittal Steels benefits from entering different nations are : - Higher productivity. Mittal steels output has been massively grown since they open their factories all over the world. This helps them to provide the demand of steel when it boomed in 2005. - No limitation of growth an no constrained expansion opportunities. The Indias government has no rights to stop the growth of Mittal steels company, since they opens their branch in other countries. - Posssibility to go public / enter the stock market with full liquidity. One thing that they cant get in India, because in india, the liquidity of capital markets is limited. - Lower labour rate in some countries - Lower exporting cost, because the company can ship the orders from the nearest country from the customer. 5. The acquisitions of arcelor was very hard, with many politicians objecting to it. They object the acquistions because in their opinion, they will lose their pride if a european company (and a large one too) is sold to an Indian company. And for politicians, the acquisitions will affect their image negatively in front of the public. Europeans are tend to be proud of their own country / homeland and their own products, so when a foreign asian company is buying their company, they would feel like they are losing to that country. However, their objections arent reasonable at all. Emotional way of thinking isnt eligible in economic world. Mittal Steels acquisitions offer so many benefits for the shareholders, therefore the shareholders decide to follow their logical thoughts and decide to approve the negotiations.