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Arcelor-Mittal Merger


Submitted by,
Vishwanath Sukhasare

Mittal Steel
Mittal Steel is the world's largest and most global steel company, with shipments of 49.2
million tons and revenues of over $28.1 billion in 2005. They own steel-making facilities
in 16 countries, spanning four continents. They employ 224,000 people spanning 49
different nationalities. Their shares are listed on the New York and Amsterdam stock
Mittal Steel has set the pace for the consolidation and globalization of the world steel
industry. They have taken on a range of acquisitions, many of them formerly public
sector-owned companies, and made successes of them. In the process they have spread
best practice and modern production techniques throughout their plants. Their capital
investment programme is unmatched in the industry.
Their 5000 strong customer base, spanning 150 countries, includes household names in
the automotive, engineering and appliance sectors. A force in every segment of the steel
market, Mittal Steel produces a broad range of high-quality finished and semi-finished
products for the flat and long products markets.
Mittal Steel is among the most efficient steel producers in the world. They encompass all
aspects of modern steelmaking, combining both integrated and mini-mill facilities and
producing much of the iron ore and coking coal used in their furnaces. They are also
among the most advanced steel makers, operating a range of modern technologies. They
have pioneered the use of direct reduced iron (DRI) as a raw material source and are now
the world’s biggest producer of DRI. With two technical research facilities, their product
development teams are ready to meet the needs of the most demanding customers.


Arcelor was created by the merger of Aceralia, Arbed and Usinor, and the determination of these
three European groups to mobilise their technical, industrial, and commercial synergies in a joint
venture to create a global leader with the ambition of becoming a major player in the steel
Officially launched on February 19, 2001, the merger became effective on February 18, 2002,
when the Arcelor share was listed on several stock exchanges. The choice of the name Arcelor
was announced on December 12, 2001.

On January 27, 2006, Mittal Steel unveiled an unsolicited $22.7 billion bid for Luxembourg-
based Arcelor.

As both the companies had been acquiring others in the industry. Both thought that it was
a competition against each other. They had been part of various bidding fights for
acquisitions of steel companies. But at least one side was not thinking of both going hand
in hand against all others.
In one such typical bidding, the steel company, Kryvorizhstal of Ukraine was on the
block. Many companies entered the fray and the price kept on increasing. Mittal Steel and
Arcelor were the last two remaining in the tussle, and the price increased from $3.5bn
(when the last company left leaving these two) to $4.8bn where Mittal Steel won the bid.
There was clear scope for “saving” money in such context. Mr. Aditya Mittal, son of
Lakshmi Mittal, was of the view that there were a large number of synergies between the
two companies – not to mention getting better valuations while buying different
companies. There were complementary strengths that could be leveraged. After intense
internal discussions, they decided to take the leap, and find ways to make this acquisition

The Process of the Initial Offer

Generally, in such acquisitions, the acquirer company would like to have a co-operative
discussion and settlement. After acquiring, the acquirer is dependent on the target firm
for collaboration – from executives, employees etc. In addition, the acquirer would like to
be seen not as a predator but someone who would make the company achieve greater
heights and also help the employees improve their standard of living – something which
makes it preferable to go for a co-operative process.
As we know that, they finally had to resort to go towards a competitive process but they
did that when it became a necessity. I believe one has to be ready for this as well for the
other side’s rationale might be very different and sometimes there might be seemingly
irrational behavior as well that would necessitate such a process.

Whom to approach – The best foot forward

One important issue is how the discussion with the target should get started. Research
suggests that extroversion, agreeableness and cognitive ability of the negotiators play a
major role in the negotiation. So, a person on the other side with these attributes should
be preferred, especially when it comes to the initial stages. This particular person is the
potential harbinger of the proposed deal in the target.
The Mittals found such a person at Arcelor – Mr. Alain Davezac, Senior Vice-President,
International Business Development, Arcelor (Cognitive Ability). He had been dealing
with the extended Mittal family before (Agreeableness) and was an outgoing person
(Extroversion). He was enchanted with Buddhism and had dealt with Indians & Indian
Companies extensively before in his career.
Mr. Aditya thought that it was important to make Mr. Alain up to terms with what has
been going on at the Mittals side, and show him the benefits of the collaboration between
the two companies. In addition, if everything goes on well, it is Aditya and Alain that
would have to do bulk of the work during integration, and so it was best that they became
acquainted with each other at the earliest.

Where to discuss and the occasion?

Issues such as where do the meetings take place; who all are part of the meeting; how are
they treated etc, though they might seem trivial, play a very important role.
After discussions with Alain for some time and a couple of meets, the Mittals thought
that it was now time to involve the CEO of Arcelor, Mr. Dollé. Instead of having a formal
meeting at some office or hotel, Mr. Dollé and Mr. Alain were invited to a dinner
meeting on 13th January, 2006 at the grand Mittal’s home in London (the world’s most
expensive house at that time). We believe that it was a way to show the other party that
they would be dealing with someone who is not less equal in any possible way. It was
also to settle any apprehensions regarding the Mittal’s ability to handle the large
company that might arise once they come to know about their proposal. The Mittals
might also be looking to gain an upper hand (through the venue and the fact that they are
the hosts) before the start of the formal negotiations.
The negotiations before the negotiation – The notorious dinner
When the dinner was planned, little did anyone know that it would become such a quoted
event in the future. The Mittals did not want to indicate on an outright basis that there
would be a deal coming. They wanted to explore the possibility and see the reaction of
the other side. As per Mittal Steel’s prospectus for the Arcelor offer, the issue of the
merger was brought up at the dinner meeting but Mr. Dollé’s reaction was “non-
committal” and that he pointed out the issues that would arise and the risks involved.
The part of the conversation related to the merger was only for 4-5 minutes. Mr Dollé
later said that the conversation was friendly but did not give any details. A week after the
dinner, both sides decided to meet again to discuss about the merger specifically, but the
meeting could not take place as Mr Dollé had to follow-up on their proposed acquisition
of the Canadian company, Dofasco.

Now or Never
This was an inflection point in the whole deal. The Mittals knew that if Arcelor went
ahead with the Dofasco deal, it would get tougher to merge, possibly due to anti-trust
conditions and due to Arcelor becoming a larger company. So that Dofasco can be done
away with, they needed to find an alternate for Dofasco in case they are successful in
going ahead with merging with Arcelor. They signed a binding agreement with
ThyssenKrupp AG (that was also involved previously in bidding for Dofasco) about
selling Dofasco to them, after the merger.
Without wasting any more time, the Mittals informed Mr. Dollé (who reportedly hung up
on hearing about the Offer announcement) and Mr. Alain on 26th January, 2006 (after
markets closed) about their plans to announce an Offer on 27th January. The Mittals had
gotten the sense that management at Arcelor, specifically Mr. Dollé would not be too
keen on such a proposal. However, they wanted to do as much as possible that would
make them look as if the were on the “right” side; and it was their counterparts that did
not co-operate.

The Initial Bid and the Rejection

January 14: LN Mittal talked to Arcelor CEO Guy Dolle about the possibility of Mittal Steel
acquiring Arcelor. Guy Dolle categorically turns Mittal down.

January 27: Mittal Steel launches a formal takeover bid for $22 billion dollars.

January 29: Arcelor rejected the offer and the French government said it has "great concerns"
about the merger. Arcelor has plants in France.
The market sent Arcelor's Paris-listed shares soaring 29%, to EURO 28.6. Mittal shares listed in
Amsterdam closed up 6.2%, at EURO 27.63. Steel shares around the world also rose.

Mittal said that Arcelor Chief Executive Guy Dolle wasn't positive about the approach, but he
was confident Arcelor's shareholders will back the bid.

A tie-up between the two companies would create a company with $70 billion a year in revenue
and the most global production capacity in the industry. Arcelor is primarily a European producer
while Mittal is scattered around the globe.

The next largest producers after Mittal and Arcelor are Nippon Steel Corp and Posco.

Mittal would become the leader in providing steel to the automotive industry in Europe and the
U.S., and would lead in the North American Free Trade Area in appliances and packaging.

Hostility and Racism

There was a lot of hostility by Arcelor’s Management Board as they felt that Mittal Steel
was resorting to underhanded techniques to merge with them. They dismissed the idea of
a merger with a "company of Indians".
The European Union said it was against racial discrimination and the issue would be
treated only on commercial considerations.
There was a lot of controversy where racist remarks were made against LN Mittal.
The bid stirred up passions amongst politicians, other leaders, and common man. With
the European Commission being accused of protectionism and racism, Arcelor's CEO,
Guy Dolle, offered a laundry list of ills in Mittal Steel because of which the merger
should not take place.
In London, a columnist for The Guardian spoke of how the bid unleashed a new wave of
'economic patriotism,' adding that Mittal and his family were often portrayed as aliens --
'the Indians' -- rather than as global entrepreneurs.

Increasing Offers and Pressure

April 19: Mittal Chairman and Chief Executive Lakshmi Mittal calls Arcelor Chairman Joseph
Kinsch to ask for "friendly discussions'' about revising his proposal in return for support from

April 28: Mittal tells Kinsch he is ready to make "significant corporate governance changes'' and
revise the offer.

May 4: Kinsch says the offer is "wholly inadequate'' and Arcelor has significant concerns about
the real value of Mittal shares.

May 9: Mittal Steel says it is ready to revise the offer and make corporate governance changes
"in the event of a recommended deal.''
May 10: Arcelor Chief Executive Guy Dolle describes as "insufficient'', Mittal's offer to revise its

May 11: Arcelor says it has filed a lawsuit in the United States against Mittal for copying a type
of steel for the auto industry.

May 12: Both companies announce better-than-expected results, although profits suffer due to
higher costs of raw materials. Arcelor toughens its stance, announcing plan to spend up to $9.5
billion to buy back almost a quarter of its shares.

May 18: Mittal formally launches its offer.

May 19: Mittal raises its offer by 34 percent, bringing it up to $32.90 billion and says it would
reduce the Mittal family's stake in the company.

Severstal – A New Player

Severstal is a Russian company mainly operating in the steel industry, centered in the northern
city of Cherepovets. As such it is the second largest steel company in Russia, behind Evraz
Group. The company is owned by Alexei Mordashov.

May 26: Arcelor announces a deal with Severstal that will give it a controlling stake in Russia's
steelmaker and $16.4 billion for 32 percent of Arcelor.

June 2: European Union antitrust regulators approve Mittal bid on condition the new combined
steel giant sell off some of its facilities if the bid succeeds.

June 6: The European Commission approved the Mittal-Arcelor merger.

June 9: Arcelor confirms it has held talks with Mittal on the term of its bid.

June 12: Arcelor rejects Mittal revised bid and recommends shareholders accept deal with
Severstal. Arcelor says the revised offer still undervalues the company and urges shareholders to
support the Severstal merger instead, but mandates its board to explore possible improvements to
the Mittal offer at a later date. Mittal says it won't budge on price, but is prepared to make
changes related to corporate governance.

June 20: In a bid to woo Arcelor, Severstal revised the terms of its merger proposal, saying that
majority owner Mr Alexei Mordashov would settle for 25 per cent of the new group rather than
the initially proposed 32.3 per cent and raised its offer by about 2 billion.

Agreement to Merger and Final Merger

June 19: Arcelor cancels shareholder meeting on share buyback amid growing shareholder

June 21: Market regulators in France, Spain, Luxembourg and Belgium suspend Arcelor shares,
saying they want more clarity on the state of talks with Mittal and Severstal.
June 24: Talks on between Mittal Steel and Arcelor

June 25: Arcelor's board agrees to sweetened bid from Mittal worth about $32.3 billion.

June 30: Paving the way for a merger between Arcelor and Mittal Steel, an overwhelming
majority of shareholders of the Luxembourg-based firm vote down a merger proposal from
Russia's Severstal.

57.95% per cent of Arcelor shareholders voted against the Severstal offer.

In the process, they accept Mittal Steel's $32.3 billion offer, which was approved by the Board of
Arcelor on June 25 after a five-month long battle.

Arcelor had recommended acceptance of share and cash from Mittal Steel valuing at about $32.3
billion, which creates a group with 3, 20,000 employees producing about 116 million tonnes of
steel annually, accounting for about 10% of the world market.

Arcelor chairman Joseph Kinsch told shareholders that the long fight with Mittal was worth it,
saying the India-born steel tycoon L N Mittal and the markets had finally recognised Arcelor's
"true value."

"We have created in five months more than EURO 12 billion in value," Kinsch said.

Snapshot View of the Merger

Transaction highlights

• Arcelor Mittal: A merger of equals with shared management for

successful integration
– Ownership of 50.5% for Arcelor investors and 49.5% for Mittal
Steel investors

• Recommended transformational merger of the world’s two largest steel

Companies with unrivalled global footprint
• The undisputed industry leader

• Creation of company with unprecedented scale and diversification to

manage cyclicality, stabilize earnings and increase shareholder returns

• Annual synergies increased by 60% to €1.3bn (US$1.6bn)

The Combined Vision

• Combination driven by simple and compelling industrial logic, spurring

consolidation in a fragmented industry
• Creation of European-based global champion best positioned to
capture new market opportunities
• New entity will capitalize on strong European heritage and presence, as
well as leading position in North America
• Enjoy unparalleled access to new high-growth markets: Central and
Eastern Europe, Africa, China and Latin America
• Company will be able to service global customers with broad and deep
product offering
• High level of direct access to raw materials making group more
profitable and less cyclical than most of its peers

The Combined Strategy

• Consolidate regional high-end leadership into global customer

• Achieve industrial excellence through state of the art assets sustained
by sound capital expenditure and best in class R&D
• Realise commercial leadership through strong distribution channels
• Capture growth in BRICET countries, utilising existing leadership in
high-end products in mature economies
• Accelerate growth in key emerging markets such as India and China
• Achieve cost leadership and operational excellence across product
• Maintain high level of vertical integration to hedge against raw
materials price fluctuations
• Focus on people management and social responsibility

A Win-win transaction for all stakeholders

From Mittal Point Of View

• Merger would take consolidation to a new horizon.

• Successful distribution business in Europe.
• Mittal Co. to have leadership position in high end segments in Western Europe with
strong R&D capabilities.
• Low Cost slab manufacturing in Brazil that can be expanded for export to Europe and
North America.
• Increased free float and liquidity

From Arcelor Point Of View

• Mittal Company will accomplish Arcelor’s stated plan in the most efficient way.
• Arcelor becomes a global player.
• Operations in high-growth economies with low-cost, profitable assets and local
operating expertise in numerous emerging markets.
• Leadership position in high-end segments in North America, with strong R&D
• Access to very low cost slab potential in Ukraine to serve West Europe.
• Access to raw materials and upstream integration.

Finer Details of Merger

• Shareholder voting rights

All shares with identical voting and economic rights: One share - one vote regardless of
holding period

• Composition of initial Board of Directors

o Mr Kinsch to be Chairman, Mr Mittal to be President
o Upon Mr Kinsch’s retirement, Mr Mittal becomes Chairman
o The Board of Directors will be composed of 18 members, all non executive
(majority independent)
• 6 members from Arcelor
• 6 members from Mittal Steel
• 3 current representatives of existing Arcelor major shareholders
• 3 employee representatives
o After expiry of three year period, shareholders to elect Board of Directors

• Board Committees
o an Audit Committee composed solely of independent directors
o an Appointments and Remuneration Committee composed of 4 members, including
the Chairman, President and 2 independent directors

• Composition of Management Board

o The Management Board will be comprised of 7 executive members
o 4 current Arcelor executives, CEO to be proposed by the Chairman
o 3 Mittal Steel executives
Key Contract Terms

• Other offers
Arcelor has agreed they will accept no other offer for Arcelor shares unless it is a
superior offer for the entire share capital of Arcelor
o No break-up fee required in contract
o If shares are issued under the Strategic Alliance Agreement, corporate
governance rules and certain other conditions terminate

• Standstill
Mittal family has agreed to a standstill at 45% of share capital. Exceptions in
certain circumstances - consent of a majority of the independent directors or in
case of passive crossing of such thresholds

• Lock up
Mittal family has agreed to a 5-year lock-up, subject to certain exceptions,
including the right to dispose of up to 5% of the share capital after the 2nd year

Increased identified synergies

Marketing and trading (US$570m)

• Accelerated growth of distribution in developing regions e.g., CEE, CIS, Africa

• Cross selling through enlarged and enhanced product portfolio
• Optimisation of order book for cross product flows and logistical savings

Manufacturing and process optimization (US$470m)

• Benchmarking and best practice alignment across all operating assets

• Optimisation of utilisation of assets through selected mill product specialisation
(e.g., productivity gains with better sequencing rates, fewer changeovers)
• Logistical and mill optimisation through transfers of semi finished products

Purchasing (US$500m)

• Scale effects on standardisation of procurement contracts

• Optimisation and efficiencies from maintenance services, subcontracting, spare
parts and consumables
• Logistics savings on optimisation of raw material flows

SGA (US$60m)

• IT synergies
• Reduction in external contracts e.g., consulting services
• Duplication in commercial network avoided

Unmatched Financial Strength

Arcelor Mittal pro-forma key financials Arcelor Mittal (US$bn)

Revenue 2005 US$77.4bn

EBITDA 2005 US$14.4bn
Margin (%) 18.6%
Net Debt Q1-06 * US$24.0bn
Gearing 56%
Net Debt / EBITDA 1.7x
Cash flow from operations 2005 US$9.7bn
Capex 2005 US$4.1bn
Free cash flow 2005 US$5.6bn

Financial policy for sustainable shareholder value creation

• Efficient capital structure and return of excess cash to shareholders

• 30% dividend payout ratio over the cycle
• Unparalleled financial flexibility to pursue internal and external growth
• Commitment to investment grade credit rating
• Maintain high returns on capital


The largest steel company in the world is created, a company larger than the next 3 largest steel
companies combined. According to the press releases issued by the companies, “Consolidation
creates value in the steel industry”.

Arcelor is the number 1 steel producer in the world by revenue.

Mittal is the number 1 steel producer in the world by shipments.

• Both companies have been leaders in steel industry consolidation

• Consolidation is contributing to increased discipline by producers
• Combination of top two players takes consolidation to a new level

Arcelor is primarily a European player, while Mittal has interests all around the world. Together,
they form

• World’s number 1 steel company

• Leading positions in 5 major markets
• 61 plants
• 27 countries
• Numerous international partnerships and Joint Ventures
• Opportunity to grow in China and India

The new company is number 1 in North America, South America, Africa, Western Europe,
Eastern Europe and CIS countries.
A very vital omission from this list is Asia and more importantly, LN Mittal’s home country,

Why has LN Mittal not concentrated on India so far? One can speculate that he was going at it
step by step, conquering the world markets one by one and now, only India is left.
Till now, he has shown virtually no interest in the Indian market.

Recently, he has shown interest in investing large amounts of money in Jharkhand and Orissa,
amounting to about Rs. 40,000 crore.
Logically his next stop would be Asia, as China and India are the fastest growing steel
consumption markets. In 2005, the US witnessed a 15.4% fall in consumption, and the fall in EU
was 11.7%. Total global consumption still managed to rise 5.3%, thanks to a massive 25.9% rise
in demand in China and an impressive 7-8% demand in India.

Some analysts say that Mittal had to pay a much higher price than was actually required to merge
with Arcelor. He also did not get the best deal that he could have, as his controlling stake in the
newly formed Arcelor-Mittal is lower than what was originally aimed for.

Mittal Steel is the world's largest steel producer at 70 million tonnes a year, almost double the
world's second largest producer - Arcelor. October 2005 saw the first battle between the big two-
Mittal and Arcelor, both bid for Ukraine's largest steel mill - Kryvorizhstal in an open televised
bid. Mittal beat Arcelor to the $4.8 billion deal, much more than the $3 billion at what analysts
had valued Kryvorizhstal.

Reports suggest that it was this bidding war with Arcelor that gave L N Mittal's son Aditya, the
CFO of Mittal Steel, the idea of taking over Arcelor. His reason was that it would eliminate any
future messy battles.

Why was the deal so important for LN Mittal? In a snapshot, the Mittal-Arcelor combine would
have an even larger share of the global steel market and would be able to get a better grip over
steel pricing.

Severstal had to be paid legal fees as they had been completely cut out of the deal. Now Severstal
has threatened a legal battle and a fresh bid. If that happens, the immediate future, at least, will
not be glinting enough to Mittal’s advantage.

It has been a win-win transaction for both parties.

• Creating the undisputed leading global steel company

• Growth and value creation opportunities maximized through unique
global platform
• Step change in steel industry consolidation
• Significant synergy potential
• Financial strength and strategic flexibility reinforced
• Leadership in R&D/product development
• Significant free float and liquidity
• Re-rating potential
• Positive for all stakeholders

In the end, a European company had to finally give in and merge with “a company of