MODI INSTITUE OF MANAGEMENT AND TACNOLOGY

Assignment 1
Department: Management
Subject: Seminar on contemporary issues
Topic: Acquisition and Merger

Submitted To: Submitted By:

Mrs. Prachi Vijayvergiya Anjali Meena
M.B.A. I-Sem
DECLARATION

I, Anjali Meena, hereby declare that the Assignment entitled

“Merger of Mittal and Arcelor” prepared by me under the guidance of
Mrs. PRACHI VIJAYVERGIYA, Faculty Member, Management Department,
Modi Institute of Management & Technology.

I also declare that this project work Is towards the partial fulfillment of the
university regulation for the award of the degree of Master of Business
Administration by Rajasthan Technical University, Kota (Raj.).

I further declare that this project is based on the original study undertaken
by me and has not been submitted for the award of any degree/diploma
from any other university/institution.

Anjali Meena
ACKNOWLEDGEMENT

Words are indeed inadequate to convey my deep sense of gratitude to all

those who have helped me in completing this project to the best of my
ability. Being a part of this project has certainly been a unique and a very
productive experience on my part.

I am really thankful to Mrs. PRACHI VIJAYVERGIYA, for making all kinds of

arrangement to carry the project successfully and for guiding and helping
me to solve all kinds of quarries regarding the project work. Her systematic
way of working and incomparable guidance has inspired the pace project to
a great extent.

I would like to thank my mentor and project-coordinator, for assigning me

a project financing and acquainting me with real life project financing and
appraisal.

I am highly thankful and obliged to all my faculties who have given me the
opportunity together with their useful guidance and advice to do this
project on merger of Mittal and Arcelor.

Anjali Meena
CONTENT

Executive Summary
Introduction to the Merger and Acquisition
Benefits if the Merger and Acquisition
Trends in Global Steel Industry
Background of Mittal Steel
About Arcelor Mittal
Why Arcelor?
The ArcelorMittal Steel Merger
Synergies Claimed
Arcelor’s Defense
How Mittal Swung the Arcelor Deal: Arrangement for Aces
Impact of takeover
Subsequent Performance
Did The Deal Create Value?
Conclusion
EXECUTIVE SUMMARY

Arcelor-Mittal steel merger has been one of the most fascinating stories of
corporate merger that redefined the nature of global steel business. The
newspapers were replete with the development of events that led to the
merger and its implication for people across continents. Even today in India
a book or a simple talk on corporate acquisition would not be complete
without the mention of this intriguing corporate takeover. It has been
considered as the most talked about corporate merger in India that
attracted popular interest.

On August 1, 2006, Mittal steel gained 91.9% of the offer capital of

Arcelor [on a completely weakened premise). Through resulting exchanges
Mittal Steel expanded its possession to 94.2%, which incorporated the
issued and extraordinary shares of Arcelor and the greater part of Arcelor’s
convertible securities, which were procured in return for roughly 680
million Mittal Steel class A typical share and around 410.4 billion in real
money. On August 1, 2006, Arcelor turned into an auxiliary of Mittal Steel
and its consequences of operations were incorporate into Mittal Steel’s
united aftereffects of operations from that date. The obtaining was
represented utilizing the buy technique for bookkeeping, which requires
that the benefits gained and liabilities expected be recorded at their
assessed reasonable qualities at the date of securing.

In a Memorandum of understanding entered into among Mittal Steel,

Arcelor and the significant shareholder on June 25, 2006,
(The “Memorandum of Understanding” or “MoU”). Mittal Steel agreed that
it would merge into Arcelor as soon as practicable following completion of
its revised offer for Arcelor, and that the combined entity would be
incorporated, domiciled and headquartered in Luxembourg. Following
discussion at a meeting held on April 27, 2007, the Mittal Steel Board of
Director to organize a tow-step process pursuant to which Mittal Steel
would first be merged into ArcelorMittal, which would subsequently be
merged into Arcelor as the ultimate surviving entity.
 ArcelorMittal was incorporated on August 13, 2004 under the name
Verger Investments S.A. it was a wholly-owned subsidiary of Mittal Steel
from April 24, 2007 and was renamed “ArcelorMittal” on April 26, 2007.
It did not conduct any operations prior to the merger summarized below.
Effective September 3, 2007, Mittal Steel merged into ArcelorMittal, by way
of absorption by ArcelorMittal of Mittal Steel and without liquidation of
Mittal Steel, and the combined company was renamed “ArcelorMittal”.
INTRODUCTION TO THE MERGER AND ACQUISITION
Merger, acquisition and takeover have been a business’ piece world for a
considerable length of time. In today’s dynamic financial environment,
organizations regularly confronted with choices concerning these
activities- all things considered, the employment of administration is to
amplify shareholder esteem. Through merger and acquisition, an
organization can (from a certain perspective) build up an upper hand and
eventually expand esteem.

There are few ways that two or more organizations can consolidate their
endeavors. They can accomplice on an undertaking, commonly consent to
unite and union, or one organization can inside and out get another
organization, assuming control over every one of its operations, including
its property and obligation, and here and there supplanting administration
with their own particular agents. It’s this last instance threatening takeover
that is the wellspring of a lot of M&A’s brilliant vocabulary.
BENEFITS OF THE MERGER AND ACQUISITION
✓ Gain market share
✓ Economic of scale
✓ Enter new markets
✓ Acquire technology
✓ Utilization of surplus fund
✓ Managerial Effectiveness
✓ Strategic Objective
✓ Vertical integration

TRENDS IN GLOBAL STEEL INDUSTRY

▪ Consumption of steel increased after 1950 and trend was continued
till 1970
▪ Consumption of steel started decline from 70s to 80s
▪ After 80s, demand for steel increased continually
▪ International Iron and Steel Institute (IISI) forecasted increment in
demand for steel from 1.32 billion tones (in 2010) to 1.62 billion
tones (in 2015)
▪ This demand will increase due to countries like India and china
▪ To capture this demand, biggest steel producer of India (TATA Steel
ltd.) has been increased its production base by acquiring 4th largest
steel producer of world (Course steel)
BACKGROUND OF MITTAL STEEL
MR. Lakshmi Mittal founded Mittal Steel in 1976 in India. After a few year,
Mr. Mittal found that it would take him long to grow significant and wanted
a way to grow fast. He found that there were various steel companies
around the world, which had been performing badly, due to cyclical nature
of the industry and poor management of the companies. He started
acquiring these companies and turning them around through better
management and economies of scale.

In 2005, when Mittal Steel acquired the American steel company, ISG, it
overtook as the world’s largest steel maker, in term of output and the
largest by turnover. Mittal Steel was headquartered in Netherlands.

Arcelor was created in 2002 through merger of three major European steel
companies, Arbed (Luxembourg), Aceralia (Spain) and Usinor (France). The
idea was to leverage their technical, industrial, and commercial resources
in order to create a global leader in the steel industry. It was headquartered
in Luxembourg and Mr. Guy Dolle was the CEO. Arcelor employed
thousands of people across 60 counties. Most of the employees were from
Western Europe and in countries with a traditionally strong labor union.
Arcelor were still in the process of integrating the business and were
neither expecting nor ready for any deal, let alone a takeover offer.

It is important to understand where the main people stood when the deal
was proposed. This is because, finally it is after all these individual who
would consider and negotiate the deal. The personal interest would play a
critical role in the entire process. Mr. Mittal, aged 55 and Mr. Dolle, aged 63
shared the same vision. They believed that the steel industry was too
fragmented (top 5 companies controlled just 20% business) and was being
exploited by the raw material/ commodity producers (top 3 iron ore
companies controlled 70% business) as well as consumer companies (top 5
automobile companies control 70% business). Consolidation was required
and both wanted to emerge as the leader once it gets achieved. Both had
contributed their fair share to this process of consolidation in the industry.
Their aim was to do things in a way that, before they retire, the companies
reach a dominating position in the industry. And that they are considered
responsible for that leading position of their companies.
ABOUT ARCELOR-MITTAL
ArcelorMittal is the world's largest steel company, with operations in more
than 60 countries. The company was formed in 2006 by the merger from
Arcelor and Mittal Steel and is headquartered in Luxembourg City.
Additionally, the company ranks 28th on the Fortune Global 500 list. They
produce a range of finished and semi-finished carbon steel products and
stainless steel products. They provide their products to the automotive,
appliance, engineering, construction, and machinery industry in
approximately 170 countries.

ArcelorMittal predominates in major global steel markets, including

automotive, construction, household appliances and packaging, with
leading R&D and technology, as well as sizeable captive supplies of raw
materials and outstanding distribution networks. With an industrial
presence in over 20 countries spanning four continents, the Company
covers all of the key steel markets, from emerging to mature.

In 2008, ArcelorMittal had revenues of $124.9 billion and crude steel

production of 103.3million tons, representing approximately 10 per cent of
world steel output. Through midyear2009 the company had experienced
revenues of $ ArcelorMittal is listed on the stock exchanges of New York
(MT), Amsterdam (MT), Paris(MT), Brussels (MT), Luxembourg (MT) and
on the Spanish stock exchanges of Barcelona, Bilbao, Madrid and Valencia
(MTS).
WHY ARCELOR?
Attractive Target:

Arcelor had 71% pre merger revenue share from Europe while Mittal had
only 34%. While in North America the revenue share for Arcelor was only
9% but Mittal had 42%. So they had complementary industrial and market
footprint.

Fig: ArcelorMittal in the steel industry

Products & Services

ArcelorMittal is the only producer offering a full range of steel products

and services. From commodity steel to value-added products, from long
products to flat, from standard to specialty products, from carbon steel to
stainless and alloys, ArcelorMittal offers a complete spectrum of steel
products - and supports it with continuous investment in process and
product research.
THE ARCELORMITTAL STEEL MERGER
Introduction
For the nearby spectators of business world the ascent of Mittal Steel has
not been astonishing. Despite the fact that no one can disregard the
remarkable ascent of Mittal Steel in the course of recent years to end up the
world's biggest steel maker however the story is not the same as the late
media and masses caught it: 'the conception of a behemoth' ,'the
conception of a monster', and so forth. The ascent of Mittal Steel is not to be
clarified by the Big Bang hypothesis, its fundamental engineer Lakshmi
Mittal has voyage a long trip from the waterless deserts of Rajasthan to his
gem encrusted swimming pool in his 70 million pounds in addition to
London house, a standout amongst the most costly house on the planet! In
the way he purchased the battling steel plants far and wide and
deliberately sewed them in a chain to make world's greatest steel
organization - the Mittal Steel. The development of this organization speaks
to the beneficial interaction of scholarly and money related quality, which
in a systemic and arranged way, were used to turn 'straws into gold'. The
takeover of Arcelor by Mittal Steel can be termed as one of the most
strenuously contested takeover attempts in the recent business history
(The Hindu, June 27, 2006). It was a five month long business battle for
taking control of the world’s second largest steel company (i.e. Arcelor) by
the world’s largest steel making company (i.e. Mittal Steel).
The various events that led to the merger of Mittal Steel and Arcelor can be
summarized as follows-

Date Events
Jan 27,2006 Lakshmi Mittal, CEO Mittal Steel, make an unsolicited $22.7
billion for Arcelor
Jan 29 Arcelor rejects the offer
Feb 2 France oppose Mittal’s bid:
Mittal accused of not respecting ‘the grammar of
international politics’
Feb 17 Mittal Steel officially files proposal for Arcelor takeover
May 19 Mittal raises his offer by 34%, new deal valued at $ 30.90
billion
May 26 Arcelor eyes merger with Severstal
June 2 EU anti-trust regulators clear Mittal’s bid
June 20 Severstal revises terms of its merger proposal saying it is
ready to settle 25% of the new group
June 24 Talks on between Mittal and Arcelor
June 25 Deal clinched

The Rational behind the merger

It is of the view that “Mr. Mittal’s daringly ‘hostile’ bid for the Arcelor was
based on a vision of reaping at least two vital synergies, viz-

1. The combined entity would have a product range across the entire
spectrum of steel products, in terms of value as well, as quality as
Arcelor’s product mix is tilted towards high-end products while
Mittal Steel has focused on large volume, but relatively low-value
products; and
2. The second synergy would be between Arcelor’s strength in Europe
and Mittal Steel’s strong focus on Americas. Also with Mittal Steel
having announced plans to set up a new venture in Jharkhand (India),
the combined entity would have a footprint in all the major steel
producing and consuming regions of the world”.
Apart from this other important benefits accruing through this merger is as
follows-

(i) Unprecedented Scale and Diversification -

The unification of world’s two largest steel companies will create the
world’s first 100mt+ steel company. The united company’s annual
production will be more than three times larger than its next competitor i.e.
Nippon Steel. The accrued scale and diversification by the new entity
will provide for reduced volatility in earnings and access to unique growth
opportunities. It will be able to attract best customers and suppliers due to
its enhanced product development, R & D, and operational flexibility.

(ii) Significant Cost Synergies –

Mittal Steel’s Investor Presentation on Sept 7, 2005 gives following sources

of expected cost synergies amounting around US$ 1bnannual synergies
with minimum implementation costs, given below in a tabulated form
Source Total Synergies Drivers Examples Purchasing $ 600m 1.25% of
COGS of combined entity Improved purchasing power Optimized material
flows to reduce landed cost Access to non-traditional suppliers ISG
(Achieved $67m annualsynergies-1.2% of COGS) Inland (achieved $225m
of synergies-7.5% of COGS in 3years) Marketing and Trading Opportunities
$ 200m Savings in distribution costs by integrating distribution channels
Additional quantities to be available for Arcelor distribution network Cross
product flows Estimated cost savings of approx $10-15/ton 18mt of
production in Europe Estimated cross product flows of 2-4mt
Manufacturing Process $ 200m Optimize capacity utilization-right product
at Inland/ISG capacity utilization savings of 5123 Optimization right mill
Specialization of facilities-larger order size per facility $2.5/t on 20mt
forecasted 6 month realized synergies of $13m 1% yield improvement in
Europe will translate into $150m on60mt of shipments

(iii) Growth and value creation opportunities will be maximized through

the availability of unique global platform; and

(iv)Financial strength and strategic flexibility will get reinforced; and

(v) Leadership in R&D/ product development; and

(vi)Increase in stock market capitalization, liquidity and sustainability; and

(vii) This consolidation will create value in steel industry by offering

product solutions for global customer base, etc. However, in spite of these
concrete statistics to support the rationale

Synergies Claimed
1. Step change in steel sector consolidation.

The blend of Mittal Steel and Arcelor speaks to a stage change in the steel's
combination part. The consolidated gathering was relied upon to have
around 320,000 workers around the world, yearly offers of more than
US$69 billion and yearly unrefined steel generation of roughly 115million
metric tons, which speaks to a worldwide piece of the pie of around 10 for
every penny by volume. This exchange was required to make a steel
organization with uncommon scale, in number worldwide vicinity and
expansive based item advertising. This novel stage was required to furnish
the joined organization with unrivaled budgetary quality and vital
adaptability to seek after development and worth creation opportunities. In
spite of a pattern towards expanding solidification in the course of recent
years, the worldwide steel industry remained moderately divided
contrasted with end-market clients and crude materials suppliers. Late
combination has prompted expanded center amongst makers on changing
generation to economic situations. The top's blend two steel organizations
on the planet were required to speak to a further step towards
accomplishing an economical working environment for the steel business.

1.2 Expanding geographic footprint with leading positions in a number of

regions.

The geographic overlap between Mittal Steel and Arcelor was limited. This
combination was expected to create a truly global steel company with
leading positions in the five main regions (South America, NAFTA,
European Union, Central Europe and (Africa). Geographic diversification
was expected to reduce volatility for the enlarged group while presenting
numerous strategic opportunities. Through its diverse asset base in both
emerging and developed markets, the company was expected to be ideally
placed to take advantage of multiple market opportunities.

Mittal Steel’s North American activities were to be complemented by

Arcelor’s strong position in Western Europe. These developed markets had
expertise in producing highly value-added products and provided
opportunities for new product development. Mittal Steel had
leading positions in emerging markets in Eastern and Central Europe, Asia
and Africa. These regions offered low cost production, high growth
prospects and in many cases, access to significant raw material reserves.

1.3 Strengthening the range of products and solutions for global customers.

The developed gathering was relied upon to have driving positions in

various item portions and can supply clients over a scope of geographic
districts and in end-markets, for example, car, residential apparatuses,
bundling, development and oil and gas. The organization was likewise
anticipated that would have an in number worth included contract
business which will take into consideration decreased evaluating
unpredictability.

In the car part, the new gathering was relied upon to be the pioneer in both
the European Union and NAFTA locales and will likewise have driving
positions in South America, Eastern Europe, Africa and Asia. In machine
and bundling, the gathering was relied upon to be the pioneer in the NAFTA
locale and one of the pioneers in the European Union. In development, the
gathering will have a main position in the greater part of the business
sectors it serves and developing vicinity in the oil and gas division. The skill
of both gatherings in the different applications and end markets could be
consolidated to grow new market opportunities.

1.4 Maximizing opportunities with a global distribution and trading

network Mittal Steel and Arcelor together was expected to have the ability
to optimize production and distribution on a global basis. The international
production base of the group was expected to facilitate global sourcing of
materials and products that can be directed to the markets where they are
ultimately required. The combined company’s access to a broad range of
customers enabled the group to capitalize on market opportunities and
expand into new areas. The combined company was expected to eliminate
cross-border trade flows and thus generate substantial savings.

1.5 Increasing efficiency of the combined asset base through investment

and operational excellence Mittal Steel aimed to maximize the value and
opportunities within the combined portfolio of assets. Major initiatives
included:

(i) Leveraging Mittal Steel’s R&D capabilities for processing and product
innovation.

(ii) Improving productivity through global benchmarking and continuous

improvement programmers across the network of operating units.

(iii) Maximizing industrial potential between units, for example through

product specialization by unit.

By organizing and optimizing product flow and investments throughout the

production system, the company was expected to have the ability to realize
more potential and value from its asset base.

1.6 Controlling input costs by maximizing the synergies from integration of

mining and steelmaking Integration of mining activities with steel
production was a key element of the group’s strategy. The combined
company was expected to be one of the five largest producers of iron ore
worldwide and also have direct ownership of DRI plants, coal mines, coke
production and certain infrastructure assets. The group was expected to
have the opportunity to expand its mining operations in order to reduce
the dependency on third-party supplies of iron ore and coal. By 2010, the
combined group aimed to be about 50 per cent self -sufficient in iron ore.
1.7 Targeting operational synergies of US$1 billion

Target annual cost synergies were expected to reach US$1 billion before
tax by the end of 2009.The integration and restructuring costs to realize
this level of synergies were expected to be minimal. The industrial plan for
the combined entity identified several synergies, primarily from
purchasing, marketing opportunities and manufacturing process
optimization.

1.8 Maximizing financial opportunities

Based on the closing Mittal Steel share price on the New York Stock
Exchange of US$32.30 (equivalent to €26.45 per share at an exchange rate
of US$1.2214 per €1) on 26 January 2006, the pro forma equity market
capitalization of the enlarged group was expected to be approximately
US$40 billion and the free float was to be significantly increased to
approximately 43% (assuming 100% acceptance of the Offer). The Group
was expected to benefit from a lower cost of capital, improved access to the
capital markets, enhanced profile with investors and a high level of
liquidity for trading of the company’s shares. Finally, the financial
resources of the enlarged company were expected to provide the flexibility
for the Group to pursue both internal and external growth opportunities.
Mittal Steel was committed to maintaining an investment grade rating.

GAINS FOR ARCELOR

• 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 capabilities
• Access to raw materials and upstream integration
• Access to very low cost slab potential in Ukraine to serve West
Europe
GAIN FOR MITTAL STEEL

• 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
• Successful distribution business in Europe
Arcelor’s Defense
PROJECT TIGER
While facing the hostile bid from Mittal Steel, Arcelor developed a
communication plan, ‘Project Tiger’, in hope to prove to and to persuade its
shareholders that the company was better off without Mittal Steel’s
involvement and to not sell their shares to Mittal Steel. They introduced a
‘2006-2008 plan’ with the aim to ‘maximize value creation for
shareholders’ and the board of Arcelor even promised an increase in
results by 24 per cent and generous bonuses. In the last week of May 2006,
the management of Arcelor announced a €13.6 billion merger proposal
with Severstal, the largest Russian steelmaker, as an attempt from being
hostelry overtaken by MittalSteel. If this merger would have succeeded, a
combination of the second largest steel company and the largest Russian
steel company would have created globally the largest and most profitable
steel company in the world, removing Mittal from its number one position.
The offer from Severstal was described as friendly as they valued each
share of Arcelor to a price at €44, which represented a 100 per cent
premium compared to Arcelor’s closing share price on 26 January 2006. 28
The possible merger did not get positive reactions from analysts, who
described a merger with Mittal Steel as a more attractive and reasonable
option than merging with Severstal. Severstal Arcelor would geographical
have been mainly restricted to the EU, Russia and Latin America, whereas a
merger with Mittal would contribute to a greater global presence, a larger
production capacity and a greater self-sufficiency for iron ore
(ArcelorMittal, 2011). Even though rumors were cited in the press about a
defense strategy against the Hostile bid from Mittal, Arcelor did not adopt
the in our theoretical framework mentioned ‘White Knight’ defense
strategy by Weston (2001) in 2.5.2, which in theory would have made the
offer by Mittal even more expensive and time consuming. Eventually Mittal
agreed to pay €40.27 for each Arcelor share, almost double the amount
they first offered, and a merger between the two giants occurred.
Furthermore, Arcelor had to pay Severstal a fine of €140 million, as a result
in failing to close a deal after negotiations with the Russian giant.
TAKEOVER DEFIANCE:

Arcelor later implemented a white knight defence through a transaction

structure contemplating the issuance of shares to a friendly strategic
partner (SeverStal of Russia), which was also a technique allowed in certain
jurisdictions in Europe (but not in the U.K.) and used in the U.S. Just as
Arcelor took actions to protect Dofasco with the S3, Arcelor believed that
an opportunity to acquire SeverStal was consistent with Arcelor’s
corporate interest and should, if possible, be presented as a viable
alternative to Mittal Steel’s original offer, which Arcelor believed was a
adequate offer. While Arcelor had a previous mandate from its
shareholders to issue the Arcelor shares proposed to be issued to Mr.
Mordashov (SeverStal’s controlling shareholder), the
Arcelor Board felt it was important to give the shareholders an opportunity
to express their opinion on the transaction, in particular given the
outstanding takeover offer from Mittal Steel. The Arcelor Board called an
extraordinary meeting of shareholders on June 30, 2006, to vote on the
SeverStal transaction. Unless more than 50% of the then outstanding
Arcelor shares opposed the transaction, the merger with SeverStal would
proceed. While the 50% unwind mechanism was criticized by the market,
including institutional investors, the SeverStal transaction caused Mittal
Steel to increase the price of its offer and to deliver better overall corporate
governance and other terms. And in the end, the proposed SeverStal
merger was unwound as over 50% of Arcelor’s shareholders voted to
unwind it.

How Mittal Swung the Arcelor Deal: Arrangement for Aces

Indeed it appears from the beginning that Mr. Guy Dolle’s choice, decisions
and reactions were driven more by his desire to keep an “Indian” out than
by overall interest of the company and its shareholders. The attempt to
procure a white knight in the form of Severstal was a bad idea from the
start as the deal was a win-win situation for both Arcelor and Mittal
shareholders see the table below-
 For Arcelor’s Shareholders For Mittal’s Shareholders
➢ Integrate Arcelor’s strengths into a ➢ Globalize North American added
stronger global network value leadership in West Europe.
(incliding#1 position in north ➢ Reinforce low cost leadership
American). position with South America.
➢ Accelerate growth by accessing ➢ Gain undisputed technological and
new markets in China, India, East product development leadership.
Europe, Africa and Central Asia. ➢ Reduce volatility with long term
➢ Improved margins and control contract and geographical
costs through mining integration. diversification.
➢ Partnership with the most ➢ Realize US$ 1bn of synergies.
successful entrepreneur of the
industry.
➢ Realize US$ 1bn of synergies.

However, overlooking these benefits, Arcelor under the compulsion of its

racial prejudice hurriedly penciled the deal with Severstal and announced
it as a fait accompli to its shareholders, allowing the agreement to be
automatically approved unless an unprecedented number of its
shareholders voted it down. The Ensuing shareholder revolt-hedge funds,
small shareholders, and institutional investors all planning to oust the
Arcelor management and sue its board members-obliged the Arcelor
management to enter into top level secret negotiations with Mr. Mittal.
Taking stock of this situation De Tijd, Belgium (2006) writes Arcelor
shareholders have the feeling that the steel group’s management is doing
too little to defend their interests. They feel, by contrast, that Lakshmi
Mittal, the Indian founder of Mittal Steel, is scoring points. The general view
is that ‘at least he knows what to do with his assets and is putting together
a fortune.

However, all did not go as planned for Mr. Mittal either. The possibility of a
merger between Arcelor and Severstal obliged Mr. Mittal too consistently
and substantially to raise his offer from initial 18.6 billion Euros to a hefty
26.9 Billion Euros.
Arcelor’s share price as a consequence went up from 23euros/share to the
40.40euros/share. Also as a result of merger there was another 6.7% spurt
in the Arcelor share valve. Such moves by Mr. Mittal clearly made the
shareholders the main victor, who in turn by an overwhelming majority
obliged Mr. Mittal by voting down his’ Russian rival’s bid.
IMPACT OF THE TAKEOVER

The most definitive benefit that has been derived from this merger is the
increment in the value of the steel assets worldwide and AreclorMittal has
emerged as one supergiant with almost no competition from others for
many years to come (Steel Consult International, 2007). As per Steel
Consult International, (2007) the merging of the top 2 players in the steel
market implies a 14%global market share in the next 10 years, which when
compared to the top players of other industries is much less. It is believed
that this deal would create global leadership in steel not just by tone but
also by value (Arabinda Kar, 2009). Also, the merger is believed to help
contain the volatility of prices in the steel industry (The Economic Times,
2006). Another aspect of the merger is that it will foster the consolidation
in the global steel industry and hence, steel producers will be able to
maintain consistent performance through higher efficiencies and
economies of scale (Anon., 2008). Aditya Mittal maintains that this merger
is expected to reshape the global steel industry and the financial strength of
the entity will support continued investment and growth initiatives. He also
believes that ArcelorMittal will be able to meet customer requirements in a
better fashion through broad product offering and will lead in technological
advancements (Javed Sayed, 2006).

But this merger has awakened in the other players a need to pursue
inorganic growth more aggressively and strategically. Such players are now
faced with powerful competitor (ArcelorMittal) whose activities show an
inclination towards not only horizontal expansion but also to expand
vertically over the entire supply chain. Thus, it can be believed that the
global steel market can now be faced with a stream of hostile takeovers. At
present, one can expect the consolidation to benefit the steel industry
worldwide but in future whether this will lead to imperfect economic
market conditions such as being oligopolistic in nature or highly skewed
month.
SUBSEQUENT PERFORMANCE

Pro forma results twelve months ended December 31, 2006 versus twelve
months ended December 31, 2005.

Arcelor Mittal pro forma net income for the twelve months ended
December 31, 2006, was $8.0 billion, or $5.76 per share, as compared with
pro forma net income of $8.3 billion, or $5.97 per share for the twelve
months ended December 31, 2005. Pro forma sales and operating income
for the twelve months ended December 31, 2006, were $88.6 billion and
$11.8 billion, respectively, as compared with $80.2 billion and $11.6 billion,
respectively, for the twelve months ended December 31, 2005.

As the table shows the book value of share has increase almost 116%.

Total steel shipments for the twelve months ended December 31, 2006,
were 110.5 million metric tonnes as compared with 102.9 million metric
tones for the months ended December 31, 2005. Pro forma depreciation for
the twelve months ended December 31, 2006, increased to $3.4 billion as
compared with $3.3 billion for the twelve months ended December31,
2005.Pro forma net financing costs for the twelve months ended December
31, 2006, remained flat as compared with $1.3 billion for the twelve
months ended December 31, 2005. Pro forma net financing costs for the
twelve months ended December 31, 2006, include a charge of $367 million
OCEANES1 and a gain of $450 million resulting from a Canadian dollar
swap. Pro forma income tax expense for the twelve months ended
December 31, 2006, increased to$1.7 billion as compared with $1.4 billion
for the twelve months ended December 31, 2005. The effective tax rate for
the twelve months ended December 31, 2006, was 14.9% as compared
with 12.6% for the twelve months ended December 31.2005. Pro forma
minority interest for the twelve months ended December 31, 2006,
remained flat at $1.5 billion as compared with the twelve months ended
December 31, 2005.

Pro forma results three months ended December 31, 2006 versus three
months ended September30, 2006

1. Arcelor Mittal pro forma net income for the three months ended
December 31, 2006, was $2.4 billion, or $1.72 per share, as compared with
pro forma net income of $2.2 billion, or $1.58 per share for the three
months ended September 30, 2006. Pro forma sales and operating income
for the three months ended December 31, 2006, were $23.2 billion and $3.2
billion, respectively, as compared with $22.1 billion and $3.4 billion,
respectively, for the three months ended September30, 2006. Total steel
shipments for the three months ended December 31, 2006, were
26.7million metric tonnes as compared with 26.9 million metric tonnes for
the three months ended September 30, 2006. Pro form a depreciation for
the three months ended December 31, 2006, decreased to $875 million as
compared with $910 million for the three months ended September30,
2006. Pro forma net financing costs for the three months ended December
31, 2006, was$4million income as compared with $352 million expense for
the three months ended September30, 2006, primarily due to a gain
resulting from a Canadian dollar swap in the three months ended
December 31, 2006. Pro forma income tax expense for the three months
ended December31, 2006, decreased to $642 million as compared with
$669 million for the three months ended September 30, 2006. The effective
tax rate for the three months ended December 31, 2006, was18.6% as
compared with 20.5% for three months ended September 30, 2006. Pro
forma minority interest for the three months ended December 31, 2006,
increased marginally to $443 million as compared with $420 million for the
three months ended September 30, 2006.

Did The Deal Create Value?

• Strong financial performance in the second half of 2006

• Full-year (EBITDA) rose 2.1% to $15.27 billion from $14.96 billion in
2005
• Combined sales slightly decreased in 2006 but had a quantum jump
in 2007
• Sales figure for Mittal Steel more than doubled after the merger.
• Net Income of the company has risen from $3.36 billion to $6.10
billion in 2006 and to$11.8 billion in 2007
• Venture into new businesses and market like Luxembourg, Senegal,
Liberia
• Enlarged brand portfolio
Conclusion

Mittal & Arcelor According to what we have managed to learn from the
Arcelor-Mittal case, a hostile takeover goes rarely flawless or without
opposition. Since dealing with such a big player like Arcelor, one might
think that the opposition faced by Mittal Steel was inevitable, and surely
enough several governmental organs and actors opposed the bid issued by
Mittal. What Arcelor did to prevent the hostile takeover to a start, was to
develop a communications plan, ‘Project Tiger’, in hope to convince its
shareholders not to sell their stocks. Furthermore, they looked for
alternatives, thus engaging negotiations with Russian Severstal in hope to
create a mergence through what in media and press had been referred as a
‘friendly’ merger. The deal never closed and Arcelor failed to adopt what
potentially could have been a “White Knight” defense strategy .What we
would have liked to see from Arcelor’s side in its line of fending off the
hostile bid from Mittal Steel, is perhaps that they would have considered
implementing other strategic defense strategies, such as either Staggered
Board or even the Poison Pill defense. These options are available of course
only to Arcelor before receiving a hostile bid. Arcelor could have had issued
a proposal with the consent from their shareholders, to implement certain
defense actions that would have had a pro-active effects when facing a
hostile takeover. Furthermore, we believe it is rather ignorant of Arcelor
not to have prepared certain defense measurements against
future potential hostile takeovers, based on the share size and attractive
market position of the company. One would think that such a well-
established and big company such as Arcelor, competing globally, would
have had developed defense measurements to fend off any hostile attempt
on the company. With the implementation of the poison pill defense
measurement, Arcelor could have potentially diluted their stocks, thus
forcing the bidder to have consensus from the board of directors, in order
to be able to gain ownership over enough amount of stocks to control the
company. Furthermore, the poison pill defense strategy also works as a tool
for creating more time. More time for the target company to evaluate and
analyze the bid and logic behind it while potentially engaging negotiations
with the bidder in hope to increase its bid offer, thus receiving a higher bid
premium which in the end increases the wealth of the shareholders.36 A
Flip-in poison pill enables the target company to issue new shares when
facing a hostile bid. The new shares issued, are available to the target
company’s shareholders only and are usually sold at a price far beneath the
market price of the share. This makes it more difficult for the bidder to gain
a majority stake of the shares in the company, thus buying the target firm
sometime to reflect over the actual bid as well as potentially increasing the
bid premium received from the bidder. Furthermore, the poison pill
defense strategy could be implemented in combination with for instance,
the staggered board defense strategy. A combination of these two defense
measurements would potentially have made the bid issued by Mittal, far
more time consuming and probably a lot more expensive. In practice, the
Staggered Board defense strategy, prohibit are placement of the entire
board of directors of the targeted firm in one single year. By implementing
the Staggered Board strategy, the acquiring firm is only allowed to replace
parts of the management and board of directors each year, even if they
have control and the majority in shares. In conclusion of this case study,
based on the case study on Mittal-Arcelor and the different strategies used
in defense, we believe that the actions taken by Arcelor was relatively
rationale and reasonable. They did not implement any official conventional
defense strategy, but instead developed a communications plan, in hope to
persuade its shareholders not to sell to Mittal Steel. They engaged
negotiations with Russian Severstal, the possible White Knight for Arcelor,
but the deal never went through. According to our research, there were
possible alternatives for Arcelor in defending against the hostile bid. For
instance, they could have implemented either a poison pill defense
strategy, a staggered board defense strategy or even the two of them
combined for the best potential result. Instead, Mittal Steel increased its
offer for Arcelor and this time, a merger.