Arcelor–Mittal Merger

45

In 1967, the world produced less than 500 million tons of steel. In 2016 the world
produced over 1600 million tons. The global growth in steel industry is accounted
by the new industrializing nations like Brazil, China, India, Iran, and Mexico. The
global steel industry had long fragmented capacity. According to statistics, the top
ten auto companies and major buyers of steel control about 95% of the market,
while the top three ore companies control 75% of supply. Consolidation in the form
of mergers and acquisitions would increase the pricing power for both suppliers and
buyers. Capacity fragmentation is such that the top five steel companies control
approximately 20% of the business. The major 20 global steel companies have 30%
share of the one billion capacity.

Growth of Mittal Steel

Before its merger with Arcelor, Mittal Steel was the fourth largest producer of steel
with Indian origin. Mittal Steel was formed in the year 2004 by the merger of two
sister companies belonging to the Mittal family  – LNM Holdings and ISPAT
International. The growth of Mittal steel was centered around mergers and acquisi-
tions. During the period 1985–2005, Mittal Steel acquired many steel making com-
panies like Trinidad, Tobago, Sibalsa, Dosco, Ispat International, Island Steel
Company, Unimetal, Alfasid, Iscar, Novahut, Polskie Huty, Balkan Steel, etc.
During the above period, Mittal Steel made 19 acquisitions in countries ranging
from China to Poland. Through acquisitions, the company made it to the list of
Fortune 500 companies. Mittal Steel increased its capacity by ten times on account
of these acquisitions. The products of Mittal Steel consisted of semifinished steel,
flat products, finished products, wire rod, coated steels, tubes, and pipes. The strat-
egy of Mittal Steel had been to acquire loss making companies owned by formerly
public enterprises and then make investments to reduce their production costs and
expand capacity.

© Springer Nature Switzerland AG 2019 355

B. R. Kumar, Wealth Creation in the World’s Largest Mergers and Acquisitions,
Management for Professionals, https://doi.org/10.1007/978-3-030-02363-8_45
356 45  Arcelor–Mittal Merger

Arcelor Steel

In February 2002, Arcelor Steel was formed due to the merger between France’s
Usinor, Spain’s Aceralia, and Luxembourg’s Arbed. The Luxembourg government
owned 5.6% of Arcelor. Arcelor products were used in all major steel segments
which included automotive, construction, metal processing, primary transforma-
tion, household appliances, and packaging. Arcelor Steel had employed approxi-
mately 94,000 employees in over 60 countries. At the time of the deal, Arcelor was
the world’s largest steel manufacturer in terms of sales turnover. The company had
a turnover of over euro 30 billion. Arcelor Steel produced long steel products, flat
steel products, and inox steel. In the year 2006, Arcelor tool over Dofasco, Canada’s
largest steel producer for a deal valued at Can $ 5.6 billion. The deal came through
after an intense bidding war against German ThyssenKrupp.

Arcelor–Mittal Deal

In January 2006, Lakshmi Mittal the chairman of Mittal Steel announced a hostile
bid for Arcelor. After an intense struggle, the two companies merged to become the
world’s largest steel which controlled 10% of the global steel business. The deal was
valued at $38.3 billion.
Arcelor’s directors, including Chief Executive Guy Dolle, had opposed the take-
over. The French, Luxembourg, and Spanish governments strongly opposed the
takeover. The Belgian government, on the other hand, declared its stance as neutral
and expressed interest in associating with both companies for future investments in
research in Belgian steel plants. Indian government also took the stance that the
attempts to block the deal would lead to trade war. Mittal’s bid for Arcelor had
stirred up passions in Europe, with politicians, ministers, and ordinary citizens join-
ing in. Other steel makers, like Japan’s Nippon Steel, have adopted poison pills to
thwart hostile takeovers in the future. Goldman Sachs, Credit Suisse, and Citigroup
were the advisors for Mittal Steel. The advisors for Arcelor included Merrill Lynch,
Morgan Stanley, Deutsche Bank, AG, BNP Paribas SA, and UBS AG. JPMorgan
was the advisor for the government of Luxembourg. Lazard was the counsellor for
the Belgian government.

The Merger Battle

Defensive Mechanism Against the Deal

In its first step to prevent the deal, Arcelor transferred its subsidiary, Dofasco, into a
trust and adopted the poison pill strategy to keep Mittal from buying Arcelor. The
adoption of poison pill made it difficult for Mittal Steel to carry out the deal. Mittal
met European governments and convinced them that the takeover would not result
in any loss of jobs.
The Merger Battle 357

Arcelor CEO brought in the Russian Steel major Severstal, as its white knight.
On May 26, 2006, Arcelor announced a deal with Severstal that would give it a
controlling stake in Russia’s largest steelmaker and $1.59 billion in cash in exchange
for 32% stake in Arcelor. But shareholders were apprehensive. Arcelor also adopted
a mechanism by which over 50% shareholders were required to vote against the deal
for it to fail instead of a simple majority (Aiyar, 2006).

Reactions from Mittal Steel

Investment banks advising Mittal Steel activated shareholders across regions to sen-
sitize the deal. Mordashov of Severstal Steel offered to hold only 25% of the Arcelor
stock but was unsuccessful. Romain Zaleski, who owned 7.8% of the Arcelor stock,
triggered the opposition to the deal with Severstal. Mittal had the support of Jose
Aristrain who held 3.6% of shares of Arcelor. The unions too swung behind the deal
as Mittal promised no job cuts. Mittal capped his stake under 45% and offered 12 of
18 seats on the board to independent directors, including those from the unions, and
also agreed to a lock in on his shares for 5 years. By mid-June, the board of Arcelor
was under pressure to consider the deal. Mittal raised his bid once again by 40%
over the original offer price and a premium of 80% on the pre-offer price of Arcelor
shares.
Severstal increased its valuation of Arcelor. The Arcelor management came
under fire as the markets believed that the company had been undervalued. Arcelor
presented a strategic plan to investors in a bid to persuade them that the company
could generate more value as a stand-alone, than as part of Mittal Steel, and raised
its dividend to euro 5 billion. This has provoked the institutional shareholders not to
reelect the Arcelor Chairman and Vice Chairman as a protest against them for not
being consulted over the anti-takeover defense mechanisms (Mukerjea, 2006a).
On June 25, 2006, the Arcelor board decided to go ahead with the merger with
Mittal Steel and scrapped plans for Severstal Steel. The new company was called
ArcelorMittal. Arcelor also paid Severstal euro 140 million as fine for the fallout of
their talks. Lakshmi Mittal the owner of Mittal Steel became the president, and
Joseph Kinsch, formerly, Arcelor chairman, was appointed the chairman of the new
company till his retirement. Roland Junck, Arcelor’s senior executive vice presi-
dent, became the CEO of the company. Aditya Mittal became the CFO of the merged
entity. ArcelorMittal sold Thuringen long carbon steel plant to Grupo for euro 591
million and Italian long carbon steel production, Travi e Profi lati di Pallanzeno, to
Duferco for euro 117 million for regulatory approval from the European Commission
(Mukerjea, 2006b).
The combined company was based in Luxembourg and called ArcelorMittal.
358 45  Arcelor–Mittal Merger

Terms of the Deal

According to the terms of the deal, Arcelor investors received 50.5% of ownership,
and Mittal Steel investors received 49.5% of ownership of the merged company (ET
Bureau, 2016). Arcelor shareholders received 13 Mittal Steel shares plus euro
150.60 in cash for 12 Arcelor shares. After the $33.7 billion deal, approximately
43% of the shares remained with the Mittal Family (Kumar, 2010). The new board
had 18 members of which 6 were from Arcelor, 6 from Mittal Steel, 3 from Arcelor
shareholders, and 3 representatives of employees. The management board consisted
of seven members – four from Arcelor and three from Mittal Steel. Mittal family
agreed to a standstill at 45% of share capital and a 5-year lock in period.

Expected Benefits of Merger

The combined ArcelorMittal with production of 110 million tons became three
times larger than its nearest rival. The combined ArcelorMittal accounted for 10%
of world’s steel production. It occupied number one position in North America,
South America, Europe, and Africa. The merger was expected to give Arcelor entry
into emerging markets and access to raw materials through low-cost operations of
Mittal Steel. It also created leadership position for Arcelor in North America. The
merger was expected to give leadership position for Mittal Steel in high-end steel
segment in Western Europe and access to low-cost manufacturing in Brazil. The
merger was beneficial as Mittal got access to Arcelor products like flat products,
cold rolling, and stainless steel which Mittal Steel was not producing. Mittal’s
access to raw materials and commodity steel became value additions at Arcelor
plants which resulted in cost savings of $1 billion dollars (Knowledge@Wharton,
2006).
In 2011, ArcelorMittal split of the stainless steel division as a new company
named Aperam. In 2012, low demand and excess capacity led 9 of the 25 blast fur-
naces to become idle. In October 2012, ArcelorMittal permanently shut down two
furnaces at Florange, France. By December 2012, ArcelorMittal wrote down the
goodwill in its European businesses by approximately $4.3 billion. During
September 2014, ArcelorMittal and its partner Gerdau Ameristeel sold of its stake
in Gallatin Steel to Nucor Corp for $770 million.

Merger Announcement and Wealth Creation

The public announcement of the hostile bid of Mittal on Arcelor was made on
January 27, 2006. Arcelor agreed to the takeover by Mittal Steel on June 25, 2006.
The analysis was done from the first hostile bid announcement event to the final
acceptance event date. On announcement of the hostile bid, the Arcelor stock price
increased by 4.56%, 6.07%, and 4.30%, respectively, on the 3-day window event
period (−1 to +1 event period) (Fig. 45.1).
References 359

Cumulative Returns
45.00%

40.00%

35.00%

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
-5 -2 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100 103106
-5.00%

Fig. 45.1  Cumulative returns for Arcelor stock during the takeover period

References
Aiyar S (2006) The art of the deal. Cover story. Arcelor takeover. India Today, pp 36–42, July 10
ET Bureau (2016) Tale of two acquisitions: Mittal Steel’s acquisition of Arcelor and Tata Steel’s
acquisition of Corus. https://economictimes.indiatimes.com/industry/indl-goods/svs/steel/tale-
of-two-acquisitions-mittal-steelsacquisition-of-arcelor-and-tata-steels-acquisition-of-corus/
articleshow/51624431.cms. Accessed 14 Aug 2018
Knowledge@Wharton (2006) Forging a Steel giant: Mittal’s bid for Arcelor. http://knowledge.
wharton.upenn.edu/article/forging-a-steel-giant-mittals-bid-for-arcelor/. Accessed 14 Aug
2018
Kumar R (2010) The Mittal Arcelor merger. Mergers and acquisitions, text and cases, 1st edn. Tata
McGraw Hill Education, India, p 391–396
Mukerjea DN (2006a) Battleground Arcelor. Business World, pp 31–42, May 15
Mukerjea DN (2006b) Special report. Outmaneuvering Arcelor. Business World, pp 39–40, July 10