Arcelor Mittal Case Study PDF

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Why did Mittal Steel merge with Arcelor? Creating the world’s largest steel company, Mittal Steel and Arcelor reached an agreement in June 2006 to combine the two companies in a merger of equals. The terms of the transaction were reviewed by the Boards of Arcelor and Mittal Steel which each recommended the transaction to their shareholders. The final price paid by Mittal Steel valued Arcelor at €12.8 billion more than its stock market valuation at that time. Arcelor and Mittal Steel both belonged to the global steel industry. However, they were inherently different companies. While Mittal Steel was mainly a low-cost producer of lowerend products, Arcelor had the most advanced plants in the industry and spent 10 times more than Mittal Steel on R&D. Mittal Steel’s ownership of its iron ore supply was 43% versus 12% average for the top global manufacturers, and the same for coal was 52%. Arcelor, on the other hand, did not own substantial mining reserves. A few days after Mittal Steel announced plans to take over Arcelor, CEO of Arcelor, Guy Dolle said: “Arcelor is producing aristocratic perfume whilst Mittal is making plebeian eau de cologne”. He suggested there was no industrial logic to the takeover plan. He even said he did not want his shareholders to be paid with the Indian-born Mr Mittal's “monkey money”. On the whole, steel producers around the world had posted significant economic losses for decades. In the US, steel had persistently been most unprofitable of the major US industry groups between 1978 and 1996. The pattern was repeated in most major mature markets across the world. However, 2004 and 2005 were exceptions because of huge demand from a rising Chinese economy, which had emerged as the biggest importer of steel worldwide. The Chinese growth story was expected to continue in the short to middle term. The prices of steel varied considerably across countries due to a host of reasons. These reasons included difference in raw material prices, governmental tariffs, transport costs etc. Cyclicality of global demand was also a major issue facing the industry. Iron ore, for many years, was priced on the basis of international benchmarks, which were negotiated annually. In contrast, steel had no global benchmark pricing mechanism. One driver of the difference between iron ore and steel pricing was that the iron ore suppliers were much more consolidated, and the major players treated the world as one market. Between 1994 and 2004, the cost of coal increased from €28 to €44 per ton while cost of iron ore went from €22 to €31 per ton. The prices of raw materials were expected to continuously rise in the near future. The market for steel consisted of several thousand distinct products. Some of the major products were flat rolled plates, or sheet and strip, (largely used by the automobile and appliance sector), bars and wire rods (largely used in construction) and hollow pipes and tubes. Flat sheet was by far the most important product, both because of volume as well as higher value-add required in automotive and appliance sector. Price, quality and dependability were considered the three most important buyer purchasing criteria, although it was difficult to get qualified by major buyers such as automobile companies. International trade in the steel industry was substantial – close to 40% of all steel production was exported in some years – but close to one-half of it was intra-regional. In the past, there had been many international merger and acquisition (M&A) activities in the steel industry. However, Mittal Steel’s story was the most prolific. During 2004, out of all the M&A activity

in the steel industry in the record breaking year (€25.3 billion), Mittal Steel contributed 66% (more than €14.3 billion) of the same by merger of International Steel Group (US), Ispat International and LNM Holdings and acquisition of Kryvorizhstal (Ukraine). Interestingly, in the Kryvorizhstal case, Arcelor and Mittal Steel had engaged in a bidding war leading to a final price of $4.8 billion (versus the Ukranian government expected price of ~ $3 billion). Mittal Steel was known to acquire loss making integrated steel firms across the world and transforming their profitability through the use of shared best practices. It was known for its discipline in deal-making, turnaround, and value creation processes. However, Mittal Steel had till now largely focused on small, developing, previously communist ruled countries. These countries’ steel firms had traditionally suffered from inefficient management systems. Arcelor on the other hand presented a different challenge. Arcelor, many believed, had better technological and management capabilities than Mittal Steel. The principal strategic rationale that Mittal Steel had long offered for its international expansion had to do with the importance of global scale and scope, broadly defined: according to the company’s website, it was founded on the philosophy “that to be able to deliver the range and quality of products customers demand the modern steel maker must have the scale and worldwide presence to do so competitively.” The benefits of being big were supposed to include risk-reduction as well. COO Malay Mukherjee noted that a company with one blast furnace would have trouble shutting it in a downturn but that a company with 20 might be able to idle one or two.

Appendix

Some parameters compared across top steel manufacturers in 2004 Top steel producers (2004) Mittal

Arcelor

Nippon

JFE

POSCO

Corus

Nucor

Thyssen Krupp

Crude Steel Production (m tonnes)

59

50.6

31.4

31.1

31.1

19.9

17.9

17.6

Revenue/Ton (€)

436

684

665

634

617

481

472

833

Implied Operating Cost/ Tonne (€)

339

611

569

553

480

448

395

762

Operating Income/Tonne (€)

97

72

96

81

137

32

76

72

Sources of expected cost synergies for ArcelorMittal as per Mittal Steel

Assume a 10% cost of capital. Source: http://euacademic.org/uploadarticle/358.pdf

Raw material positions in 2004

Source: OECD 2005 Steel Outlook Report

Operating Costs/Tonne versus Output 1000 ThyssenKrupp

900 800

Arcelor Nippon JPE

700 600

POSCO

US Steel Corus NucorBao Steel

500

Mittal

400 300 200 100 0

0

10

20

30

40

50

60

70...