The Steel War: Mittal vs. Arcelor
The take over of Arcelor, a European steel company, by Mittal Steel, an Indian MNC, is considered to be one of the most heated take over battles in recent history. The new company Arcelor-Mittal would combine the Number 1 and Number 2 steel producers in the world and would control over 10 percent of global steel output. Lakshmi Mittal in January 2006 launched an unsolicited bid to acquire Arcelor, the Luxembourg high-end steel manufacturer. Arcelor has a French heritage, and its executives were sharply dismissive of the initial offer made by Mittal and even made a vow that the deal would not go through (Moral, Abbott, 2009, p. 2).
The five-month battle turned out to be an extremely bitter one, with even the French media and the French government being dead against the deal. In addition, there was a huge outcry from the French unions and the left-wing politicians who were stunned to discover the powerlessness of the government over such a major business decision (van de Kuil, 2008, p. 24). The hostile takeover also involved poison pill and white knight takeover defense strategies – extreme forms of self defense employed by the company that is in danger of being taken over. There were bitter recriminations too from Arcelor, undermining Mittal steel. However, in the end pragmatic shareholder interests won out and the merger proceeded when the boards of both the companies agreed to a merger of equals (Bouchentouf, 2006, p. 282-283).
This M&A deal is the focus of the present case study, the mechanics of hostile M & A transactions in Europe in the present times, and the reaction of investment bankers to such transactions. In addition, the change in corporate control in Continental Europe in response to globalize industry economics and associated competitive pressures as well as performance pressure from institutional investors controlling global equity holdings will also be discussed.
The business environment in present times has become extremely competitive as well as complex in the last 20 years. The reasons for this are both due to rapid development in technology as well as the increase focus on globalization. Businesses have to find ways to survive in the business and also grow in terms of size as well as profit. Businesses, in their need to survive in competitive times, explore various options. There are two major ways to expand a business – by setting up new production facilities or through mergers and acquisitions. One of the main methods that many of the companies worldwide have employed to increase their global reach as well as to increase their market share is through mergers and acquisitions M&As, both in the domestic as well as the international market. Because of the increasing globalization of all the business, mergers and acquisitions have become a fact of life. Employing mergers and acquisitions as a business strategy is clearly the emerging trend. Cross border mergers and acquisitions too are on a rise and have become a common and important occurrence in the international business scenario.
Arcelor was created in 2001 by melding steel companies in Spain, France, and Luxembourg. Most of its 90 plants are based in Europe. In contrast, most of Mittal’s plants are outside of Europe in areas with lower labor costs. The primary reason of Mittal for acquiring Arcelor was to accelerate industry consolidation to reduce industry overcapacity. The combined firms’ could have more leverage in setting prices and negotiating contracts with major customers such as auto and appliance manufacturers, suppliers such as iron ore and coal vendors, and eventually realize $ 1 billion annually in pretax cost saving (DePamphilis, 2007, p. 126).
As soon as Arcelor received the bid, it was immediately rejected. The governments of Luxembourg and Belgium, which both own a slice or Arcelor, expressed doubts about the approach. Although it did not have a stake in Arcelor, the French government joined the country’s media and trade unions in knocking Mittal’s plans. The range of concerns expressed varied from the number of job losses to the lack of European values by Mittal steel. The acquisition was fiercely contested by Arcelor’s management who favored a tie-up with Severstal, a Russian competitor, to create a firm larger than Mittal. However, Arcelor’s shareholders favored the Mittal offer which, after several weeks of legal maneuvering, was accepted (Haberberg, Rieple, 2008, p. 586).
The bid for Arcelor, the second largest competitor, in 2005, was considered to be one of the most audacious bids. The five-month long takeover of Arcelor by Mittal Steel was one of the most acrimonious in the recent European Union history. After decades in which hostile transactions were rare, the battle between the two steel titans illustrates Europe’s move towards less regulated markets. Hostile takeovers are now increasingly common in Europe. In fact the battle between Arcelor and Mittal is seen by many analysts as a test case as to how far a firm can go in attempting to prevent an unwanted takeover (Barnes, 2008, p. 49).
The present study will analyze the various aspects of the Arcelor acquisition by Mittal steel.
2.1 Type of M&A
Wübben in his book gives explained the concept of M&A as given by COPELAND and WESTON as “traditional subject of M&A has been expanded to include takeovers and related terms of corporate restructuring, corporate control, and changes in ownership structure of times” (Wübben, 2007, p. 5). Halibozek and Kovacich in their book give the definition of merger as given in the Black’s law dictionary as “the union of two or more corporations by the transfer of property at all, to one of them, which continues in existence, at others being swallowed up or , merged therein” (2005, p. 3). That is to say a merger is a generic term employed for a full and final coming together of two previously separate corporations or commercial interests. Mergers are generally conducted between equal partners and are something akin to a business combination. Sherman and Hart define acquisition in their book as “the purchase of an asset such as a plant, a division, or even an entire company” (2006, p. 11). Halibozek and Kovacich in their book give the definition of acquisition as given in the Black’s law dictionary as “the act of becoming an owner or a certain property” (2005, p. 3).
That is to say an acquisition is an addition to an established entity or group. Acquisitions are generally conducted between unequal partners, as here one of the party buys subsumes another party and the target company is integrated into the corporate group of the acquirer. Mittal, during an informal discussion with arcelor CEO Guy Dolle had enquired about the possibility of a merger between two companies, but two days later offered to acquire the company through a hostile bid.
Mergers and acquisitions have various expressions that are interchangeably used in different countries. Some common terms used for expressing the M&A activities are “takeover, transaction, consolidation, concentration, fusion, amalgamation, business combination, tender and sell-off” (Wübben, 2007, p. 5). Needless to say the different terms are used in different contexts, and are based on the reasons why a particular merger or acquisition takes place. Hence, the M&As can be divided used various criteria which are shown in detail in the Figure – 1 below.
Figure – 1, Criteria for categorizing mergers and acquisitions (Wübben, 2007, p. 7)
As can be seen from the figure above, M&A activities are divided into horizontal, vertical and conglomerate types. The deal between Arcelor and Mittal is a horizontal type of merger. This is because both the companies are operating and competing in the same kind of business activity i.e. both are steel trading companies. The deal was considered to be a merger of equals, however, the attitude of the merger had been extremely hostile. The deal was through a combination of cash and security and the financing too was based on loans as well as bringing in the Mittal’s equity. The merger was public in nature which resulted in various poison pill and white knight strategies. Finally, the merger had been a cross-border acquisition which was one of the biggest deterring factors towards the success of the merger. Mergers and Acquisitions make the acquiring company bigger than it used to be, but not necessarily richer or better managed. Yet, M&As have merits, provided the proper homework preceded them.
KPMG’s report of 1999 titled Unlocking Shareholder Value: The Keys to success in M&A, identified selecting the management team, resolving cultural issues and integration project planning as three of the six critical keys to successful mergers and acquisitions. The results of the study also pointed out that the management of the integrations stage of the M&A is the key to achieving post-acquisition success. KPMG’s study also pointed out that 26% of the mergers and acquisitions are more likely to be successful if the acquiring company and its management teams focus on identifying the cultural issues. The details of the study are shown in detail in the Figure- 2 below.
Figure – 3, Pre-deal activities and the increased chances of success (Howson, 2003, p.5)
Frits Grotenhuis in the year 2001, stated that the impact of the cultural differences in mergers and acquisitions are significant but they are not insurmountable and can be managed (Rodenberg, 2008, p.53). The rigid attitude of Guy Dolle was hence uncalled for and also extremely short sighted since he failed to viewed the changing dynamics of the steel industry. In fact he was also late in even taking the cue from the market response towards the Mittals’s bid, which led to a a lot of consusions as well as bad blood between the Arcelor management and its shareholders. The Mittal’s bid for Arcelor, though audacious was extremely well planned which is one of the major reasons for its success, which can be seen from its side clause of reversing the takeover of Dofasco in order to avoid American antitrust issues.
2.2 Hostile takeover
Mergers and acquisitions are considered to be an important aspect of strategic financial management. Viewing markets from a dynamic perspective it is argued that an efficient market for corporate control encourages firms to redraw their boundaries in a search for the best configuration of assets. Acquisition and subsequent divestment are not, therefore, seen as necessarily a sign of failure or greed. The threat of takeover whether it materializes or not, is regarded as a vital discipline of management. In a hostile takeover, an investor or a group of investors, intend to purchase a majority stake in a corporation, often secretly, against the wishes of its board. The case of the takeover of Arcelor by Mittal steel is a textbook case of a hostile takeover.
There are two sides of arguments for a hostile takeover. On one side, one could argue that hostile takeovers are ultimately possible only because shareholders want to sell their stocks, otherwise they would keep them anyway. On the other side, an ethical concern arises with the remaining shareholders that do not want to sell. If the company is taken over by someone who has different ides about the corporation, for instance, who wants to split the company and sell off certain parts, a hostile takeover might interfere quite significantly with the property rights of those remaining shareholders (Crane, Matten, 2007, p. 231). Hostile takeovers can reduce managerial agency costs in public firms. The stock price of the mismanaged forms will sag, and takeover entrepreneurs or managers at other forms will buy up the stock cheaply, improve the target firms’ operations, and thereby profit. While the debate in the 1980s in the United States was wide as to whether this was the primary goal and effect, surely it was one effect, and a shareholder-oriented takeover policy would cull out the extraneous causes and effects. Also you can read the answer on “what can be concluded about the demise of the knights of labor?“
2.3 Hostile takeovers in Europe
Hostile takeovers have been notoriously harder in continental Europe than in United States and Britain. True, there are fewer fully public European firms, making the background rate necessarily low. But, although a few hostile takeovers were attempted in Germany, they usually floundered due to political pressure one would expect in a social democracy, as workers campaigned to block the takeovers and politicians sided with employees and against capital owners (Roe, 2006, p. 43). The overriding concern of the European Commission is to promote the restructuring of European industry. Even though there are large fluctuations over the time in individual countries, the general perception is that at least, during the 1970s and 1980s, the Untied States has been more successful in restructuring its industry. A considerable share of this restructuring was achieved through hostile takeovers, and even when transactions were negotiated the potential for a hostile bid played an important role. However, within Europe, the hostile takeovers were confined primarily to he United Kingdom, Hostile takeovers, in the sense of tender offers launched in the market, have been very rare in Continental Europe, at least until very recently. For instance, in 1989, there were only four hostile takeovers in all the rest of EU15, compared to thirty two in United Kingdom. This number was however equaled at 21 in the year 1999 (Huizinga, Jonung, 2005, p. 36).
2.2.1 Barriers to takeover in Europe
A number of features of the Continental European economies (i.e. Europe minus UK or non-UK regions of Europe) have been put forward to explain the differences in the level of their takeover activity. The takeover barriers are functionally similar to takeover defenses, in that they both help to entrench target management. Takeover barriers are common in Continental Europe, while takeover defenses are widely used in the United States, though in case of Arcelor-Mittal both are equally significant (de Menil, Portes, 2003, p. 78). Many continental European countries have structural and/or regulatory barriers to takeover activity: control over voting rights, privileges granted to management to take actions without shareholder approval, and restrictions on shareholders access to information. These barriers are sufficient in some case to preclude takeover attempts. However, in general these barriers are increasingly being dismantled though gradually (Smith, 1994, p. 89). Also funds have been found to finance even the hostile takeover moves by local banks, as is seen in the case of the Societe Generale bank in the Arcelor-Mittal takeover. This section will discuss the takeover barriers existing in Europe in detail, as they are applicable to the Arceor-Mittal case study. It must be noted here that many of the takeover barriers that are usually applicable for companies based in Continental Europe either did not matter or mattered very less in case of Arcelor, as will be seen in the discussions below.
Takeover barriers can be broken down into structural and technical barriers. Structural barriers are part of the institutional setting such as the influence of banks, the ownership structure and the size of the equity market. Technical barriers, on the other hand are part of each individual firm’s governance structure, as laid down in the corporate charter and allocating the powers among its constituencies i.e. shareholders, management, workers etc. Examples of such common technical barriers that are specifically aimed at frustrating hostile bids are restrictions on the transferability of shares and voting restrictions. Dual-class shares, pyramidal groups and cross-shareholdings are devices to separate ownership and control, thereby also providing against unfriendly acquisition attempts (de Menil, Portes, 2003, p. 78).
184.108.40.206 Influence of banks
In, Europe the relationship between banks and firms act as one of the chief deterrents to hostile takeovers. However, this assumption rests on the argument that employees and banks naturally form alliances with the incumbent management for controlling owners. This, in turn, hinges on the distribution of gains from takeovers, the assumption being that employees and creditors would somehow lose out. However, a close relationship to a bank is not always a guarantee against a hostile bid. In many cases it is also seen that a target company’s house bank exerted considerable influence over the outcome through the chairmanship of the supervisory board (de Menil, Portes, 2003, p. 79).
In case of the Arcelor-Mittal takeover, the entry of the French bank Societe Generale is considered to be one of the turning points of the deal. Prior to this all the bid offers by Mittal had been rejected outright by Arcelor. However, this time the board said that they would consider the deal if it would be an all-cash deal. This was both an opportunity as well as a challenge to Mittal, as while the offer was not rejected raising such an amount of loan would not be an easy one. The idea of involving a French bank with Citibank and Goldman Sachs – the banks who were initially mandated for the cash part of the bid, was strategic considering the extremely hostile reactions of both the French government and the media towards the deal. Also the French wholesale market being the largest in Europe and the fact that most French banks had some kind of relationship with Arcelor, made such a move extremely important strategically. The move, on the part of Societe Generale, was considered to be bold an audacious since it would put the bank’s relationship with Arcelor at risk. However, the pros of such a move could not be ignored since in case the deal succeeded the bank would emerge as a clear winner. While the size of the takeover loan was not unprecedented, Mittal was a privately owned firm in a highly cyclical sector, which made the idea of loan a challenge. Ultimately the bank, after weighing the pros and cons of such a deal, decided to go ahead and support Mittal, which set an uncomfortable precedent in the relationships between banks and firms in Continental Europe (Cagna, n.d. p. 8-9).
220.127.116.11 Size of Equity markets
As for the size of equity markets as a structural barrier, it is undoubtedly true that only firms listed on exchanges can be subjected to hostile bids. For instance, in Continental Europe, in countries like Germany and Italy, only a small share of the total number of the country’s firms is listed. Hence, in these countries this fact constitutes as a limit to the contestability of control in that country’s industry. An obvious way to foster contestability is to encourage the public listing of firms. Takeover regulation indirectly affects the incentives to list through its impact on the distribution of gains from a future takeover bid. Obviously takeover rules that create uncertainty about the fundamental property rights of the controlling owner also discourage listings. Arcelor was formed by merging the Spanish firm Acerlia, France’s Usinor and Luxembourg’s Arbed in 2002, with headquarters in Luxembourg. The Luxembourg’s government remained an active shareholder in the company (de Menil, Portes, 2003, p. 80). The company is hence a special case by not being located in a single country and hence the chances of its takeover were high from the very start, since this particular takeover barrier was not present
18.104.22.168 Ownership and control
Ownership and control in corporate Europe is put forth as a serious obstacle to hostile takeovers, and possibly, to restructuring more generally. Corporate Europe spans a wide range of ownership and control structures, ranging from closely held family firms to firms with widely dispersed shareholdings, but – as in much of the rest of the world – most companies have a large controlling shareholder. While corporations in the United Kingdom and the United States stand out as having more widely dispersed ownership than those in the rest of the world, but there is also considerable variation in ownership concentration within continental Europe. In half of the listed non-financial firms in Austria, Belgium, Germany and Italy, a single shareholder controls more than 50 percent of the votes, compared to 9.9 percent in the United Kingdom. In Dutch, Spanish and Swedish firms the median block holder holds 43.5, 34.5 and 34.9 percent respectively (de Menil, Portes, 2003, p. 81).
In France, share ownership is more concentrated than in the UK or USA, since relatively few French quoted companies have widely dispersed shareholdings. Most companies have major shareholders who are institutions, other firms e.g. cross-share holdings or the founders of the company. In addition, by law, French companies may issue non-voting shares for up to one quarter of their capital. Non-voting shares are entitled to priority dividend but cannot be held by the directors and the officers. It is estimated that almost 99 percent of all shares are held in bearer form. Despite the recent appearance of associations or groups intended to support the interests of the small shareholders, French shareholders in general have a low expectation for dividends. When companies are performing well they are expected to retain their profit. The system supports steady though unspectacular growth which produces a commensurate capital appreciation. Small shareholders play no significant role in corporate governance partly because of concentrated share ownership and partly because of institutional arrangements, which imply that relevant information is not costlessly available. So the system strengthens the dominance of the corporate or institutional shareholders who has the resources to acquire the relevant information.
Only about one third of the French companies are quoted and many of these have floated onlu 10 percent of their shares while others are wholly controlled subsidiaries. Also there are very few barriers to takeovers, in France, and the market is an active one. It is certainly more open than Japanese or the German market but obviously less open than the UK or the USA markets. The main reason for this is the interlocking of shareholdings and the presence of major shareholders or their representatives on the board of directors which makes companies invulnerable. The French government is often reported as using its influence to stop an agreed merger especially when foreign interests are involved. French companies seem to use mergers and acquisitions as strategic moves and hence hostile takeovers are not very frequent (Moschandreas, 1999, p. 200-201).
Luxembourg has benefited greatly from openness to foreign investment flows and maintaining a business friendly regulatory environment. Despite some apparent hesitations and some initial feeble tries, the Luxembourg’s authorities widely maintained this approach in the Arcelor-Mittal affair, deciding against using legislative means to block the takeover. In the end, the authorities simply accelerated implementation of the EU directive on Takeover and left the two companies to deal with the takeover issue within this framework (OECD, 2006, p. 134)
While this data does not indicate the general ownership details for all the countries involved with Arcelor, it is not necessary either. This is because of the share divisions of the company already present involved multiple countries and hence the general ownership and control provisions that acted as barriers to hostile takeovers in Europe did not amount to very much in this case.
22.214.171.124 Protectionist attitude prevalent in continental European countries
For the companies based in continental Europe, the fact that a bid is friendly or hostile is less important than the identity of the firm making the bid. This even decides the nature and dynamics if corporate governance in the firm. EU member states in general consider to implement the takeover directive in a protectionist way. Due to the growing fear of the power of hedge funds, private equity groups and other activist investors, EU countries are likely to pursure their strategy of protectionism resulting in lifting takeover barriers – even thought the Commission has analyzed that takeover offer benefits for companies, investors, and ultimately the European country as a whole. France, Germany, Spain and Italy are the countries with the highest degree of concentration of share ownership, according to the European Corporate Governance Advisory Service. Especially Germany and Sweden have strongly resisted against the directive, whereas Estonia, Latvia, and Lithuania have opted into the clause. Nevertheless, this only represents less than 1 percent of the listed companies in the EU applying rules on a mandatory basis.
Analysts also contend that French and German companies will remain in the focus of foreign investors; on the one hand it is sometimes complex to acquire them through a hostile takeover, on the other hand they are seen as highly profitable and are said to be integrated easily. Nevertheless there are European national legislations which want to find their individual solutions regarding poison pills and even actively fight for it. The battle for Arcelor inspired France and Luxembourg to adopt legislation to permit poison pill takeover defenses (Steinbacher, 2007, p. 45)
2.4 Defenses employed against takeover
2.4.1 Takeover defenses in case of a hostile bid
Following are the takeover defenses that companies can take while defending themselves against hostile bids, and the reasons why Arcelor choose them or was not able to adopt them:
Cross-jewel options: This is a form of lockup in which an option on a target’s most valuable asset i.e. crown jewels, is offered to a friendly firm in the event of a hostile takeover (Boatright, 1999, p. 157). Clearly Arcelor did not take this option as it was the second largest steel manufacturing company and did not see any other company as worthy of offering its most prized assets.
Golden parachute: In this type of defense, there is a part of the employment contract with a top executive that provides for additional compensation in the event that the executive departs voluntarily or involuntarily after a takeover (Boatright, 1999, p. 157). Arcelor did not try this option mostly because of is bases in multiple countries which made common employment contracts complex.
Greenmail: This is the repurchase by a target of an unwelcome suitor’s stock at a premium in order to end an attempted hostile takeover (Boatright, 1999, p. 157). This might have been a viable option, certainly Arcelor was audacious enough to try is and was derisive enough of Mittal’s company to attempt a form of payback. However, the facts were indeed damning. The share prices of Arcelor had doubled in anticipation of the takeover, which meant that the market as a whole was reacting extremely favorably to the deal and unless the management came up with either a better deal or a major flaw with the present offer, there was bound to be trouble.
Lockup option: This is an option given to a friendly firm to acquire certain assets in the event of a hostile takeover (Boatright, 1999, p. 157). Usually, the assets are crucial for the financing of a takeover. An example would be of the hostile bid of Microsoft for Yahoo!, where certain assets of the target company were considered to be crucial This does not however apply to the Arcelor-Mittal case, as the prime reason for Mittal’s interest in the company was the reach the merged company would be able to garner be joining their combined assets, the clout which the combined company would have in terms of price fixing, and of course the cost savings.
Pac-man defense: This is a form of defense in which the target makes a counteroffer to acquire the unwelcome suitor (Boatright, 1999, p. 157). Obviously this was not possible in case of Arcelor-Mittal, as in the first instance Arcelor management did not really wish for a merger of any kind with Mittal. Secondly and most importantly Arcelor had already begun to respond to the deal by taking potshots at Mittal as a person as well as the corporate governance of his company. After taking this stand, Arcelor could not very well say that it was interested in acquiring a stake in the Mittal steel, and hence the option was unfeasible.
Poison-pill: This is a general term for any device that lowers the price of a target’ stock in the event of a takeover. A common form of poison pill is the issuance of a new class of preferred stock that shareholders have a right to redeem at a premium after a takeover (Boatright, 1999, p. 157). Arcelor did try poison pill as a takeover defense strategy and this will be discussed in the next section.
White knight: White knight here refers to a friendly suitor who makes an offer for a target in order to avoid a takeover by an unwelcome suitor (Boatright, 1999, p. 157). Arcelor did try this strategy will the Russian steel giant Severstal, which will be discussed on the next section.
2.4.2 Citing cultural barriers
In case of a hostile takeover bid, one of the first instincts of the management is to show how incompatible the companies would be in the event of a merger or a takeover. This is done to make the company incompatible to the company that has made the hostile bid. Arcelor’s CEO Guy Dolle, shared his management’s view that a merger between the two companies would be impossible due to cultural differences. This does not merely mean the cultural differences that exist between European countries and Asian countries – though they are major in nature, it means the differences in environments in which the companies operate – Arcelor in high end devoping countries, and Mittal Steel in low-cost labor countries; and also the governing style of the two companies – Arcelor’s slow bureaucratic style and Mittal’s entrepreneurial and efficient style. Combing these two styles was definitely a challenge, one which Dolle found and also vocally expressed as unsurmountable.
2.4.3 Deriding the takeover company’s management
Arcelor’s management led by its CEO Guy Dolle, openly criticized Mittal and his company’s management style. In fact Dolle openly compared Mittal to eau de cologne and his company to expensive perfume. He further added that Mittal is focused on making commercial-grade products while Arcelor was a very technical company geared more to producing a higher-value type of steel. Dolle also raised doubts about Mittal’s willingness and ability to maintain high safety standards for its employees. He dramatically claimed that “whereas Arcelor’s accident rate had fallen by 75 percent in the past four years, the accident rate at a former Arcelor plant now owned by Mittal soared 10-fold”. While mittal did successfully counter the points raised by Dolle, the icing on the cake was that many of the trade unions as well as members of the French media found his accusations baseless pointing out that the plants occupied by Mittal were objectively not worse than those plants belonging to the European communities (Lander, Nair, 2008, p. 77-78).
Many would point this as a strategic mistake – one that closed many of the defensive strategies to Arcelor, as is seen in the section above. However, it is interesting to note that event the French government and media shared this viewpoint. In fact the politicians expressed concerns about industriak relations evene when trade unions themselves defended the record of the Indian company and in fact argued that Arcelor was less sensitive to its concerns (Sauvant, Mendoza, Irmak, 2008, p. 187). This shows the culturally-superior mindset in Continental Europe that even prevailed in purely business decisions, and acted as one of the takeover barriers in the region.
2.4.4 Poison-pill defense strategy
Description of what constitutes a poison-pill strategy has been given in the section above. Arcelor management never actually agreed that it had employed a poison-pill strategy, however as there was no other possible explanation to why they took the particular decision, it cannot be anything else either. Mittal Steel, as a part of its takeover strategy had analyzed the impact of its takeover on various countries, since the operations of Mittal as well as the potential Arcelor-Mittal were global. One possible problem would have arisen due to the acquisitions both Arcelor and Mittal had made in America recently. The first was the acquisition of US-based International Steel Group ISG in 2005 by Mittal in 2005. This was followed in January 2006, by the hostile takeover of Canada’s largest selling steel producer Dofasco by Arcelor who had topped a bid by Germany’s ThyssenKrupp. The combination of Arcelor and Mittal would give rise to possible anti-trust issues which Mittal was keen to avoid. Hence, the main takeover bid for Arcelor was accompanied by a side deal that reversed the Dofasco takeover by giving it back to ThyssenKrupp. Though a side-deal, this was one of the crucial aspects of the merger which would be scrutinized by American regulatory authorities (Cagna, n.d. p. 4-6).
Arcelor’s management decided to block Mittal’s bid by deciding that Dofasco could not be sold to any other company because of its technological significance. The company vested the rights to the aforementioned technology to a Dutch foundation with independent control over decision to sell, as a means to prevent the company being sold. In case Mittal still agreed to go ahead with the deal, it would have to sell assets to overcome the anti-trust issues, since it would not be possible to sell Dofasco for at least a period of five years. In addition, the company had already committed to sell Dofasco to ThyssenKrupp, once the Arcelor-Mittal deal went through. This poison-pill however had a complete reverse effect from what was intended, as it enraged the European and American shareholders of the company, who had expected the management to fight fairly and keeping the shareholder’s interests in view. In fact shareholders demanded an immediate meeting with the management to sort the issue, which was an unprecedented move. In addition, Mittal indicated that he was ready to swallow the poison-pill and was prepared even in case he was not able to sell Dofasco immediately (Warner, 2006; Tieman, 2006; Timmons and Austen, 2006)
Earlier, Arcelor did mull on using another lesser known clause as a poison-pill. This was a 2001 clause called Change of Control in an agreement that Arcelor had with Nippon Steel according to which the latter company had a right to withdraw the patents for any technology that it shared with Arcelor in case of a change of ownership of the company, which Nippon Steel considered as a threat. However, nothing ever came out of that clause (Lewis, 2006).
2.4.5 White Knight defense strategy
Description of White Knight defense strategy has been mentioned in the earlier section. In a final bid to stop Mittal from taking over Arcelor, the management tried one last time to put up a defense in the form of a merger with the largest Russian steel company Severstal. Again the management did not agree to call the strategy as a white-knight strategy, stressing instead on the advantages of the deal. While Severstal was already linked with Arcelor via technical agreements and shared investments, the deal was generally considered to be inferior to Mittal and became a turning point in the merger between Arcelor and Mittal. The issue that appealed best to the management was that Severstal was a European company, as against Mittal Steel, which it considered merely as a third world company and hence beneath its choice of a partner for a merger.
However, the battle was proving to be a long and futile one to the shareholders, who insisted on having a right to vote on the Severstal deal – a move that was outright by the management fearing an opposition of the decision, which is legal as per the European laws. Again as per Luxembourg’s laws, the Russian bid could only be vetoed if 50% of the shareholders were opposed to the bid. This was clearly a problem, since the attendance in the meeting are never more than 35 %. However, the shareholders used another Luxembourg’s law, according to which the management has to meet with the shareholders when more than 20% request for the meeting. The meeting was held, and while the deal will Mittal was rejected yet again, the company was asked to present another deal with better terms. In the meantime, the management themselves tried to convince the investors and shareholders that the deal will Severstal is a better one. However, both the investors as well as shareholders did not agree with this idea. All this pressure was taking a toll on the management which succumbed to the pressure and after a nine hour long meeting decided to accept the Arcelor deal.
2.5 Hostile takeovers and investment banks
In general, the investment banking firm plays an advisory role in the M&A market. In some cases, notably leveraged buyouts, the firm may also put up capital and take a position. But most of the time the investment banking firm is offering advice, perhaps negotiating on behalf of a client and being compensated through something analogous to a brokerage commission. Fees in mergers and acquisitions generally take the form of a percentage of the value of transaction (Williamson, 1988, p.224). The investment banking advisory fees in the Arcelor-Mittal deal was estimated to bet between a whopping US $90 million and US $100 million, on both the sides of the deal (Cagna, n.d. p. 8-9). One of the most interesting parts of the Arcelor-Mittal deal was perhaps the contrary role of the investment bankers.
Generally, at least the more substantial M&A groups within investment banking firms prefer to be associated with defending against a hostile takeover rather than with the aggressor (Williamson, 1988, p.237). Arcelor-Mittal case was however an exception to this rule. It was usually an unspoken norm of the Continental European banks that they would defend any European company against a non-European hostile takeover bid. While unspoken, this stand of the investment bankers had been so reliable that it was practically considered to be a strong barrier against the hostile takeover bids for companies based in continental Europe. Societe Generale proved to be an exception in this case. The bank’s French origins did not stop it from supporting the aggressor side of the deal – despite the clearly hostile stands taken by both the French government and the French media.
All major M&A groups occasionally find themselves associated with the aggressor in a hostile case, because the maintenance of long-standing relationships demands that a firm assist a valued client. Usually Goldman Sachs is considered to be an exception to this rule (Williamson, 1988, p.237). However, in Arcelor-Mittal case, even Goldman Sachs had taken over the mandate to arrange loan to raise the cash part of the deal. It was in fact one of the first two banks being mandated for raising cash – together with Citibank. The matters became even more interesting when Goldman Sachs changed its stand in the middle of the deal, when Severstal entered into the takeover arena, as a white knight. In fact Goldman Sachs also attempted to convince the minority shareholders of Arcelor to force a traditional vote favoring the Arcelor-Severstal deal (Metal Center News, 2006). However, the investment bank was yet again a part of the final cash offer of 8.1 billion pounds made in June 2006 that was finally accepted by the Arcelor management.
The deal between Arcelor and Mittal was hence also extremely significant regarding the change in the way investment banks were perceived by the Continental European business community. They could no longer rely on the blind acceptance of the local investment banks when opposing a hostile bid, and had to contend with the fact that the banks were capable and willing to join the aggressor in case the deal proved to be lucrative enough – as is evident in case of Societe Generale. Also the business community in general had to face yet another unpleasant fact that the loyalty of the investment banks could not be taken for granted while pursing any deal, which is an important strategic aspect in any hostile. As is evident in case of an extremely reputed bank like Goldman Sachs, the investment banks were fully capable of switching sides any number of time, should any opposing party in a hostile bid come up with a better deal.
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The steel industry has undergone considerable restructuring and changes over the years due to production costs caused by cyclical boom and bust periods in the world economy. Although there has been specific radical innovation in the steel industry in recent years, the industry was under pressure to respond to production improvements and global demands. This commodity depends as much on customer demands for steel as it does on coal and iron ore prices. Driven by cost and commodity prices, steel industries in the world were looking for booth management improvements and the provision of superior quality products and services. Many tradition industry sectors have been transformed through path breaking technological and organizational innovations. Arcelor-Mittal deal was a landmark in the steel industry. Mittal Steel’s decision to take over the biggest European steel producer, Arcelor, with a Euro 33.4 billion cash and stock offer surprised European companies. The media glare was entirely focused upon the traditionalist Continental European companies and their management style as well as the fact that a company from a third world company had become such a significant steel player in steel production and had the audacity to make a hostile bid for one of the largest European steel producers. Since the takeover, Arcelor-Mittal became the largest steel manufacturer in the world (Liyanage, Wink, Nordberg, Jenni, 2007, p. 178-179).
The deal was also significant in many other ways. It was one of the largest and most significant deals in Continental Europe that had succeeded despite the many business and cultural barriers present in the region. Also the fact that the deal had succeeded in the face of resistance from governments, chiefly French and the French media, was also a major shock. This combined with the fact that despite their disapproval, the government could hardly do anything to stop the deal from going through, showed that the dynamics of business operations were changing rapidly in Europe, and that it was high time that the presence of the so-called barriers were reevaluated. In fact some of the pre-supposed barriers like the cultural differences, the shareholding mechanisms and the role of governments hardly seemed to deter Mittal from going right ahead and forging the deal, despite the stiff opposition.
In addition to this, yet another significant factor was the role of investment bankers in the deal. Usually the role of investment bankers is pretty much at the backside of the deal and they rarely gain media attention. This fact was also reversed in this case, as the investment banks became one of the major source of debates in relation to their role in the deal. One of the issues was that the local investment banks were practically relied on to oppose any non-European hostile bid, and act in league with the defending company without any thoughts. However, with the Societe Generale taking the risk and joining the opposition in the face of stiff resistance from in home country government and media, showed that the bottom line and future profits were more important to investment bankers than mere regional loyalty. Also as in the case of a reliable and reputed company like Goldman Sachs, it was expected that the firm would stick to one side and try to work the deal through. The company astonishingly did change its stand not once but twice, finally settling in with Mittal’s side showing that the only side which an investment banker could be expected to take was the winning side.
The role of shareholders in the deal can also not be ignored. Prior to the deal individual shareholders in Continental European companies did not play any significant role in the way the companies dealt with business deals such as mergers and acquisitions. Arcelor-Mittal was an exception even in this case. The shareholders here tried to find alternative means to force the management to take notice of their views and take them into consideration. The case was also interesting as the views of shareholders and the management team regarding what they considered as a viable and profitable option was diagonally opposite. Ironically the shareholders’ point of view was the one held by analysts and the highly skilled management team seemed to merely act on a ill-timed ego trip, which was in fact and embarrassing issue. Ultimately it was the shareholders who forced the management to consider the Mittal deal, even though they were extremely reluctant to do so.
The defense strategies taken by the Arcelor management team was also topic of much debate. The first line of defense taken by the management team was a ill-thought of smear campaign aimed to tarnish the image of Lakshmi Mittal and the companies held by him. The so-called concerned of the Arcelor management team and French government in general and the Arcelor CEO Guy Dolle in particular, were superficial to say the least. In fact the family style of management of Mittal was bettered to a more corporate style of management, because they chose to accept the criticism where it held merit. Also some of the charges levied by the management regarding the management and health standards of the various steel plants held by Mittal served to turn the erstwhile hostile media and the powerful trade unions in support of the deal, since the claims made by Dolle were melodramatic instead of having a basis in reality. Though the management never accepted it, both poison pill and white knight strategies were employed to stop the deal from going through. Surprisingly both the schemes were not only unsuccessful; they also backfired badly on the management team. In the first case, the attempt to block Mittal by stopping the sale of Dofasco was so transparent that many analysts were amused by the effort, though this did anger the shareholders enough to demand an immediate general meeting. The white knight strategy by bringing in a merger with Severstal, as opposed to Mittal was a fairly decent option, one that might have had a chance of succeeding had the company not been so defensive in its outlook. The deal came at a much later stage, by which time the deal offered by Mittal had become extremely lucrative, so much that it seemed ridiculous to opt for the Russian deal, just to pacify the Europhilic tendency of the Arcelor management.
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