Product Acquisition: A Case Study of a Hostile Takeover

Product companies often invest in creating innovative products by hiring professional product managers who create brilliant product management practices and rules. Together with them, product teams establish product development practices for designing and creating the real product.

Before continuing with the story, we recommend that you familiarize yourself with the following topics:

Product strategy

With this strategy, product directors, in turn, are able to promote a product that is marketable to direct users.

Often, however, finished products that have great potential often look into discussions for direct acquisition from other larger product companies.

Product Acquisition: A Case Study

It was on 18 June 2006 that Lakshmi Niwas Mittal, Chairman of Mittal Steel Ltd., the seventeenth-largest steel manufacturer in the world, was to meet Joseph Kinsch, Chairman of Arcelor AG, the second-largest steel manufacturer in the world. The Mittals had made a bid for the acquisition of Arcelor AG in accordance with the proposal made by Arcelor and the Government of Luxembourg. L. N. Mittal, having made a very competitive bid, had come on the appointed day along with his very senior executives for the crucial meeting with J. Kinsch to consider the Mittals’ offer for the acquisition of Arcelor AG. After three long hours, the meeting broke up without any outcome, although the Mittals had made the highest bid till date and had expected to clinch the offer of sale. L. N. Mittal and his negotiating team were naturally disappointed to see that the senior management of Arcelor had rejected their offer without any rational reasoning.

L. N. Mittal and his crack team of mergers and acquisitions (M&A) from Mittal Steel have a global reputation of taking over companies in the steel industry and turning them around to make profits at high speed. Mittal Steel is one among the worlds’ largest steel producers. It is the largest steel producer in the North and South Americas and Africa, and the second largest in Europe. Mittal Steel was founded in 1989 by L. N. Mittal, its Chairman and CEO, and the company has experienced rapid and steady growth, largely through the consistent and disciplined execution of a successful consolidation strategy. The acquisition of Arcelor AG would step jump the steel-producing capacity at Mittal Steel from a mere 23 mtpa to more than 100 mtpa and give it a global positioning as the worlds’ largest steel producer. It is a lifetime opportunity for sure for the Mittals.

Arcelor AG was created in February 2002 by three steel-making companies, Aceralia Corporacion Siderurgica, Arbed and Usinor. Arcelor is the second largest steel producer in the world in terms of production. It is the market leader in Western Europe and also has a strong position in South America, particularly due to its Brazilian operations. Arcelor has also made significant acquisitions, particularly in South America and Eastern Europe. Most recently, Arcelor acquired Dofasco, a leading Canadian steel manufacturer, for 5.6 billion Canadian dollars. Arcelor’s management was not inclined to accept the Mittals’ offer; they used several tactics to attack Mittal’s ethnicity (Indian background) and started questioning Mittal’s credentials in the successful revival of Arcelor’s huge capability in steel manufacture post-acquisition.

The Status-Before the Acquisition

It was one of the toughest challenges faced by the Mittals so far. Although the business logic and the business plan made some sense to the shareholders of Arcelor, there was a stronger base required in the proposal on certain issues of corporate governance and value propositions, few of which are as follows:

In June 2001, Mittal Steel adopted corporate governance guidelines that are considered to be in line with the best practices of corporate governance in the world. Mittal Steel had also monitored the U.S. and Dutch corporate regulatory requirements, made adjustments to its corporate governance controls and procedures accordingly, and ensured compliance with these requirements. Mittal Steel was committed to meeting the corporate governance mandates and requirements as applicable.

During the Mittal Steel annual general meeting of shareholders held on 26 May 2005, the shareholders approved amendments to Mittal Steel’s articles of association to reflect recent changes in Dutch company law as contained in Book 2 of the Dutch Civil Code.

L. N. Mittal had made the formal offer for takeover of Arcelor AG in May 2005. However, Arcelor’s management was not convinced, and it started a negative campaign to malign the capability of the Mittals, since only on financial terms Mittals cannot qualify for the acquisition of Arcelor.

Guy Dolle, Arcelor’s CEO, brought in a white knight in the form of Alexei Mordashov, a billionaire who ran the Russian steel giant Severstal. On 26 May 2006, Arcelor announced a deal with Severstal that would give it a controlling stake in Russia’s largest steel manufacturer and thereby stall the acquisition moves of L. N. Mittal. Guy Dolle made a statement in one of his addresses to the shareholders of Arcelor that denigrated the Mittals’ proposal as ‘monkey money’ in look out for a lottery. This was the beginning of the loss of shareholder confidence in Guy Dolle. He went on to rule out the prerequisite that a minimum 50 per cent of shareholders of Arcelor must approve its acquisition of M/s Severstal of Russia. Arcelor met its Waterloo with this move, which was a manipulative approach adopted to reject the legitimate offer made by the Mittals.

Summary of the Offer Made by Mittal Steel Ltd.

Mittal Steel offered to acquire Arcelor shares and convertible bonds through two separate offers:

  • The European offer
  • The U.S. offer
  • (The settlement of the European and U.S. offers was to come into effect concurrently.)
  • The European offer was, in principle, governed by the takeover regulations of the jurisdictions where the European offer is made to the public.

The U.S. offer was in compliance with applicable U.S. tender offer procedural rules, which have been reflected in the terms and conditions of the offer as described by the Mittal Steel company.

Corporate Governance-The Mittals’ Readiness

Regarding compliance to corporate governance regulations, the following actions were undertaken by Mittal Steel:

  • In June 2001, Mittal Steel adopted corporate governance guidelines that are considered to be in line with the best practices of corporate governance in the world.
  • Mittal Steel monitors new, proposed and final U.S. and Dutch corporate regulatory requirements and makes adjustments to its corporate governance controls and procedures to continue to comply with these requirements on a timely basis.
  • Mittal Steel is committed to meeting the corporate governance mandates and requirements under applicable current and proposed Securities and Exchange Commission (SEC) regulations, NYSE listing standards and laws of The Netherlands.
  • During the Mittal Steel annual general meeting of shareholders held on 26 May 2005, the shareholders approved amendments to Mittal Steel’s articles of association to reflect recent changes in Dutch company law as contained in Book 2 of the Dutch Civil Code.

Risk Factors

The major risk factors of the deal are summarized in this section. For the Mittals, the major risk factors are the following:

Mittal Steel has not been given the opportunity to conduct a due diligence review of the non-public records of Arcelor. Therefore, Mittal Steel may be subject to unknown liabilities of Arcelor that may have a material adverse effect on Mittal Steel’s profitability and results of operations.
The existence of minority interests in Arcelor’s share capital may reduce the anticipated benefits of the offer to Mittal Steel.
Mittal Steel is a Dutch company, and being a shareholder of a Dutch company involves different rights and privileges than being a shareholder of a Luxembourg company.

Mittal Steel must make a mandatory tender offer for minority interests in Arcelor’s listed Brazilian subsidiaries at a price determined by independent experts, which may be higher than expected.

The organization will substantially increase its outstanding debt in connection with the acquisition of Arcelor, which may lower its credit rating. Cyclical downturns in the steel industry could also lead to downgrading of credit rating. Credit rating downgrades could significantly harm Mittal Steel’s refinancing capacity, increase its cost of funding and limit its flexibility in managing its business.

The organization has not verified the reliability of the Arcelor information included in this information document.
Investors may sell Mittal Steel’s shares that they receive in the offer, which could put pressure on the market price of Mittal Steel’s shares following the offer.

For Arcelor, the major risk factors are the following:
  • The consummation of the offer could trigger change of control payments in the employment agreements of certain members of Arcelor’s senior management, as well as change of control provisions in other contracts of Arcelor.
  • In certain limited circumstances, Mittal Steel has the right to withdraw and terminate the offer any time before the settlement date of the offer, including the period between the end of the acceptance period and the settlement date. In this case, the value of Arcelor’s securities may decrease during the period between their tender in the offer and the return of such securities.
  • It is possible that the acceptance period for the European offer may be extended beyond the thirtieth business day following its commencement, which would prolong uncertainty as to the ultimate outcome of the offer and would delay an Arcelor security holder’s ability to receive consideration for the tendered securities.
  • If the offer is successful, the liquidity and market value of Arcelor’s securities not tendered in the offer may be significantly reduced.
For both companies, the following risk factors exist:
  • The consideration offered for Arcelor’s shares may be adjusted any time prior to settlement in the event of certain actions taken in relation to Arcelor’s net equity.
  • The fixed exchange ratio will not reflect market fluctuations.
  • Even if Mittal Steel consummates the offer, there may be a delay before Mittal Steel can obtain management control of Arcelor.
  • Regulatory approvals of the offer may not be obtained or may impose adverse conditions and obligations.
  • The integration of the operations of Arcelor and Mittal Steel may not be fully successful, and the integration process may disrupt normal operations of both companies.
  • Consummation of the offer may negatively impact Mittal Steel’s or Arcelor’s corporate tax position.
  • L. N. Mittal can appoint Mittal Steel’s directors and determine the outcome of shareholder votes. If the offer is completed, other holders will be unable to determine the outcome of shareholder votes with respect to most corporate events.

Intentions of the Acquisition

Rationale for the Offer

M/S Mittal Steels, as a part of their global growth strategy in steel manufacturing, were in look out for a major opportunity for takeover, and the proposal of Arcelor offered a perfect strategic fit for the Mittals. Hence, acquisition of Arcelor at any cost was the motive behind Mittals efforts in taking over of Arcelor. The intentions of Mittal Steel in making the takeover bid can be summarized as follows:

Mittal Steel plans to expand energetically into emerging markets where future growth, the drive for greater economies of scale in plant utilization and R&D, and the overall objectives of reducing earnings volatility and creating sustainable returns on capital will be highest.
Mittal Steel believes that the combination of Mittal Steel and Arcelor has a strong strategic and economic rationale. It represents a step jump in the consolidation efforts, which will bring together two largely complementary businesses both in terms of geographic presence and product offerings to create a Europe-based leading global steel supplier accounting for approximately 10 per cent of worldwide crude steel production.
Mittal Steel believes that the acquisition will lead to better service to a globalizing customer base, lower production costs, enhanced R&D and better resilience to volatility in a highly cyclical industry. The Mittals estimate that the value of synergies of the acquisition will be in the range of US$ 1.0 billion (€830 million) annually by 2009 (approximately 1.5 per cent of the group’s sales in 2005) from synergies in supply chain value addition and manufacturing and process optimization, along with additional value obtained through the integrated marketing and trading activities.
Mittal Steel also anticipates that as the largest global producers of steel, the integrative efforts postacquisition would lead to overall capacity improvement to 150–200 million tonnes by 2015. This represents 12–15 per cent of the global steel market by 2015.

Mittal Steel and Arcelor are highly complementary:

Arcelor and Mittal Steel have been following a similar strategy with respect to growth by acquisitions, particularly in emerging markets. Mittal Steel has been a pioneer, acquiring over 20 companies of various sizes and activities over the last 15 years.
Mittal Steel and Arcelor are committed to substantial levels of capital investment.
Mittal Steel practises disciplined capital management. This investment represents a commitment to maintaining the company’s existing asset base at a competitive level of productivity.

Implications of the Strategy for Arcelor (as Seen by M/s Mittal Steel)

The various implications of the strategy for Arcelor from the side of Mittal Steel are as follows:

Mittal Steel anticipates no negative impact on the overall level of employment in Western Europe as a result of the combination.
Further, Mittal Steel believes that the overall growth of the group is likely to lead to increased employment in managerial positions in Europe, as has occurred following prior acquisitions in Central and Eastern Europe in the marked expansion of its Rotterdam corporate office.
Mittal Steel intends to provide employee representation on the board of directors of the group, and the practice of European works council will be maintained.
The role of R&D will be enhanced.
Greater capital efficiency, with savings to be re-invested in other value-creation activities.
Mittal Steel does not intend to close, sell or discontinue any existing locations, activities, product lines or geographic areas.
Mittal Steel’s external growth policy will be to continue making targeted investments and acquisitions, particularly in countries of higher growth like Brazil, Russia, India, China, Eastern Europe and Turkey (BRICET).

Corporate Governance

The Mittals’ vision regarding corporate governance encompasses the following factors:

Mittal Steel’s vision is to build the world’s most admired steel conglomerate. Its corporate culture is based on the spirit of entrepreneurship, diversity and, most importantly, respect for its employees; it seeks to promote the qualities of openness, expertise, reliability and innovation. Mittal Steel has a non-hierarchical structure, specially designed thus to encourage managers at all levels to think in an entrepreneurial way, make decisions in the best interests of the company, take responsibility and support one another in all efforts to continually improve the company. Mittal Steel believes that Arcelor shares these values and that the strength of the group will arise from the culture and principles that will unify all employees.

The management of Mittal Steel will allocate management responsibilities on the basis of the best available talent within both Mittal Steel and Arcelor, and the current expectation is that a substantial number of management positions in the group will be allocated to current members of Arcelor’s management. Mittal Steel will continue to employ best practices across the organization designed to meet the highest standards in health and safety, social responsibility, cultural diversity and respect for the environment. The combination with Arcelor substantially increases and deepens the talent pool and the new and innovative ways of conducting business. The group will have a sustainable future and, therefore, sustainable employment in the competitive world of steel manufacture.

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