Analysis of Mittal’s Acquisition of Arcelor

Analysis of Mittals Acquisition of Arcelor1.0 Executive SummaryThis examination of the spinal fusion of Arcelor and Mittal in the brand pains give examine the success and or shortcomings of this major deal that has created an indus puree organiseer that is con attituderably larger that its nearest competitor. In examination the link upr, this study looks at the steel diligence from the perspectives of historical underpinnings and ramifications, pricing, laws, monopolies, emerging market places, mature markets, new areas for exploration, as salutary as the resulting post merger effects of this union. To achieve the front, this study has organised the foregoing into a comprehensive lit review that will grok into the indicated areas, following this with a findings and analysis section to equate the earlier.The organisational method has been selected to in defecate as headspring as guide one through the intentness and the merger process to result in a clear understanding of the present momentant and salient points that wedge the merger process, and its resultant effects on the industry. The conclusion brings forth the summary of either of the sections that preceded it to equate the results and potential areas for add togetheritional study owing to the newness of this union. The bold escape by Mittal in acquiring a gild if its same size and then moving forward as a unified new entity tag a new period in the steel industry worthy of examination as an history making event.2.0 IntroductionThe purpose of this investigation is to delve into an understanding of the steel industry as the means to reach a determination as to the potential benefits and ramifications of the ArcelorMittal merger that is just about a category old. As such there is little in the way of case studies, and or historical data to equate the effect of the merger, this examination shall utilise historical as well as current information to understand the steel sector and and the n d rude(prenominal) deductions on the effectiveness of the merger in footing of competition, the industry and economical ramifications. The research question thus stems from the examination of the Mittal blade and Arcelor merger, and how it developed, along with the advantages as well as disadvantages of the process in terms of the dickens companies.The Research Objective is to determine if the merger made ArcelorMittal a market leader in a highly competitive market, and the manner via which this was accomplished as well as if the foregoing brought about new opportunities, and or projects in terms of real ones, and or potentials for the future. The research hypothesis pretends equating the impact of the Arcelor Mittal merger in terms of the industry dynamics in pricing, market positioning, competitive advantages, or other areas as uncovered by research to prove or disprove the basis for the merger as a sound proposition in the face of the preceding.To achieve the foregoing, thi s study shall look at the steel industry objectively through extensive research into its importance with regard to economics, workmanship, pricing within the industry, applicable laws, monopolies, the importance of emerging markets that might pose weighed on the purpose to seek a merger, the importance and or considerations of mature markets, and new locations of exploration and or supply. The approach to equating the foregoing was to conduct and extensive review of lit on the aforementioned points to provide a comprehensive view of the steel industry, where is has been, presently is, and is going. The preceding will provide a reference point to try to determine what the executives of Mittal saw in reaching the ratiocination to attempt the Arcelor acquisition. That insight, their decision process to seek the acquisition of Arcelor, was based upon the federations intimate acquaintance and understanding of the steel sector, and a plan to capitalise on those emergences based upo n the projected future occurrences in the market.Donaldson and Lorsch (1983, p. 112) tell us that in strategic decision making executives must consider thatUnder certain parcel, the firms real economic and financial constraints perpetuate stability in the financial goals system that is central to incorporate strategy. The first such circumstance occurs when the composition and objectives of managements triad primary constituencies remain constant over time. If the existing financial goals system truly represents a equilibrize response to each constituencys minimum acceptable requirements for continued participation in the usher inprise, then external pressure for change is not likely to develop in the absence of some fundamental change in the constituencies themselves.The decision to seek an acquisition as a means to growth represents a process that a accompany decided upon long before taking such an action. Wall and Wall (2000, p. 39) observe that Companies that are using acq uisitions as a strategic prise are rarely making solitary(prenominal) a single deal acquisitions are ongoing and oftentimes overlapping, with several happening at once and to a greater extent to come. Mueller (2000, p. 57) states that most acquired companies were and are usually healthy strong firms in their own right that add some underlying competitive advantage in the face of market realities. He goes on to add that the rationales can be economies of scale, to obtain a to a greater extent dominant market position, to gain access to markets, to spoke off competition, to limit merger options of rival firms as well as a strategy for growth. Mueller (2003, p. 82) addsA company faced with a slow-growing or declining market has two choices for avoiding stagnation and dec aura it can expand its share of this market, or diversify into new ones. Growth can be sustained indefinitely only through diversification. Thus, we expect the maturing company to resort to internal diversification by development new products and/or external diversification through mergers. Even in a steady-state introduction, a company must (continually) diversify to sustain a growth rate above that of its companys market.Wall and Wall (20000, p. 39) add he most successful acquirers have developed a clear, logical, and replicable approach that they rehearse to manage the stainless process from initiation of the deal to the ongoing and longer-term development of the new organization post integration. There is an integration process that accompanies e precise merger, where the rationales for preceding are thus put to the realities of the finalised merger process. This is where the decision to merge answers the questions, and or solves the issues that brought about the process in the first place. This study shall seek to equate the foregoing in the case of ArcelorMittal.3.0 Literature ReviewThis review of literature shall examine what has been written about the topical areas that are covere d herein to gain a picture of the overall steel industry, the merger of ArcelorMittal, and the market factors essential in the sector. The preceding shall seek to uncover the questions as posed the research objectives and find the answers to the research hypothesis3.1 The Steel applicationSteel is the material that is the economic backbone of world(a) economies, representing the prime material in building, infrastructure projects, refineries, vehicles, industrial as well as consumer goods. The recent emergence of new world(prenominal) players that have significantly amplificationd their work and export capacities and thus has harkened a change in the inter content structuring of the industry whereby consolidation has become a critical dowry in competitiveness (DCosta, 1999, pp. 11-12). chinas application and accession to the World Trade Organization has had major implications in terms of the global market as a result of the countrys modernisation programmes, cheap labour sup ply and pursual in becoming a significant part of global production and export (ChinaDaily.com, 2007). The foregoing only adds to the rounds of consolidation in an industry where economies of scale in terms of raw materials as well as production are key foundational factors in a highly competitive sector (Mangum et al, 1996, pp. 2-6). The above factors are important background aspects in the context of this study in that it is providing insight as to the attitude of the market.The aforementioned consolidation has been basically built upon the rounds of joint ventures that the industry seriously embarked upon during the mid 1980s in response to the want to tap emerging markets as well as areas of exploration for raw materials (Mangum et al, 1996, pp. 11-14). Steel, along with oil and uranium and a few other raw materials, represent concerted efforts and concerns by national governments and their important industry producers to ensure domestic effectivity in these sectors is maint ained, owing to their importance in their economies (Visclosky, 1999). Restructuring within the steel industry is described by DCosta (1999, p. 11) as an organizing concept to analyze capitalist development in general and reorganization of industrial capacity in particular. He adds that (DCosta, 1999, p. 11-12)Restructuring also refers to the various ways by which a national industry adjusts to the capitalist imperatives of competition, profitability, market control, and national development (DCosta 1989). more specifically, restructuring is viewed as a complex process by which the steel industry is evolving as a result of technological developments, corporate strategy, and government policies. With innovations and the diffusion of applied science at the core of capitalist industrialization, restructuring of the steel industry globally can be conceptualised in terms of different national technological trajectories. By juxtaposing the factors that lead innovating countries like the US to fall behind technologically with the mechanisms by which late industrializing countries acquire technologies we can establish the uneven diffusion of technology and the process of restructuring.The preceding represents an important understanding in this examination, as the traditional powers in the steel sector have been either challenged and or replaced by other companies / countries in the global sphere. Anwar (2006) presents an important summary overview of the steel industry that includes some of the foregoing factors, as well as providing additional insight areasThe increasing ramifications of industry volatility has been and is associate to the levels of consolidation, the cyclical nature of the industry, along with the emergence of China as an important and critical player in the market.The importance of tapping into emerging growth markets has helped to fuel industry consolidation.Chinas emergence as a consuming nation as well as producer , and its huge international market has caused a shifting in the strategic focus of the industry, and thus its companies.The heightened competition and cost variables of the industry help to explain the change magnitude rounds of consolidation that in the interests of cost efficiencies utilises more supply chaining to set up production facilities in important developing countries, as well as close to natural steel resources.The consolidation as well as fragmentation of the global steel industry is amply illustrated in the following ChartChart 1 Global Steel Industry(Anwar, 2006)The cyclical nature of the industry is caused by price significant drops due to the selling of steel at bargain prices as companies storage area their production facilities track when industry sectors in certain countries are working off their own inventories (Matthews, 2007). It may sound illogical, but it is actually more cost effective to keep plants running as opposed to temporarily shutting them down and restarting again, even at the cost of dramatic price drops that occur in the process (Matthews, 2007). desegregation has enabled important companies in the market to fend off competitors in their areas, and leverage their positions (Matthews, 2007). The rapid growth of Chinas internal market, as well as upgrading of its steel production capabilities has significantly added to global tonnage output (Anwar, 2006).The heavy rounds of consolidation is in keeping with the regionalization of the international market as The North American Free Trade Agreement, that entails the United States, Canada and Mexico, competes with the European Unions 25 countries, Mercosur that includes brazil nut, Paraguay, Uruguay, and Argentina, and of course China, whose domestic market and size provides a market that is larger than to the highest degree all of these combined (UC Atlas, 2006). The importation of the foregoing is that these trade blocs represent associations that have been string by the attending governments to aid in the management as well as trade promotion activities for their regions, and countries within these blocs (UC Atlas, 2006). The foregoing dynamics of globalisation thus helps to explain the consolidation that has been and is taking place in the industry.Figure 1 Regional Trade Blocs / European Union(Europa, 2008)Figure 2 Regional Trade Blocs / NAFTA(UC Atlas, 2006)Figure 3 Regional Trade Blocs / MERCOSUR(UC Atlas, 2006)3.2 ArcelorMittalIn 2006 Arcelor one of the worlds biggest steel producers as represented by turnover and output, was acquired by Mittal for $31.9 billion USD in a deal that ended over five months of a hard fought takeover battle (White, 2006). Born out of a prior merger of Spains Aceralia, Frances Usinor, and Arbed of Luxembourg in 2002 (Reed, 2006), the acquisition by Mittal of Arcelor that was formed out of the preceding triumvirate is a further example of industry consolidation. The company, that consisted of in excess of 94,000 people in excess of 60 co untries, was a major company in supplying the automotive, metal processing, structure, household appliance as well as general industry segments (wcbstv, 2006).Mittal Steel, which is based in Rotterdam, was the worlds largest proud producer in terms of volume prior to the merger, and still retains that title post merger, is a family controlled company by Chief Executive Officer Lakeshmi Mittal (ArcelorMittal, 2008a). The resulting company after the merger, ArcelorMittal, represents a concern that has 310,000 employees in more than 60 countries (ArcelorMittal, 2008b). The new company become the overall global leader in the automotive sector, construction industry, household appliance as well as packaging industries, along with becoming the leader player in technology as well as volume of steel produced (ArcelorMittal, 2008b). In terms of size, the new union creates a company that dwarfs the competition plank 1 Largest Steel Companies(editgrid.com, 2007)Metal Bulletins top steelmak ers of 2006Millions of TonnesCompany Country 2006 20051Mittal Steel1 Netherlands 63.66 49.892Arcelor Luxembourg 54.32 46.653Nippon Steel lacquer 33.7 32.914JFE Steel Japan 32.02 29.575Posco South Korea 31.2 31.426Shanghai BaosteelChina 22.53 22.737US Steel USA 21.25 19.268Nucor USA 20.31 18.459Tangshan China 19.06 16.0810Corus UK 18.3 18.1811Riva Italy 18.19 17.5312Severstal Russia 17.6 15.1613ThyssenKrupp Germany 16.8 16.5514Evraz Russia 16.1 13.8515Gerdau Group Brazil 15.57 13.716Anshan China 15 11.917Jiangsu ShagangChina 14.63 12.0218Wuhan China 13.76 13.0519Sumitomo Metal IndJapan 13.58 13.4820Sail India 13.5 12.2221Techint Argentina 12.83 11.4222China Steel Corp Taiwan 12.48 11.6523Magnitogorsk Russia 12.45 11.3824Jinan China 11.24 10.4325Maanshan China 10.91 9.6526Laiwu China 10.79 10.3427Shougang China 10.55 10.4428Hunan Valin GroupChina 9.91 8.4529Imidro Iran 9.79 9.4130Ind Union/DonbassUkraine 9.52 8.55The preceding duck has been utilised here to indicate that out of the top 30 steel companies globally, nine are located in China, with one in India and just three others coming from the European Union. The highlighted companies in colour have relevance in other sections of this study. The importance of the merger, as brought forth by the preceding discussion of the significance of regional trade blocs and national interests, is illustrated by the fact that at the time, then French President Jacques Chirac endorsed the union after the merger talks eased from creation unfriendly to friendly in the face of certain guarantees concerning jobs as well as research operations (Noon, 2006). The new company represents 10% of the global market in steel and becomes a highly significant company for the European Union in the face of competition from and in China, as well as India, providing it with the resources and economies of scale to wrest deals from its rivals.3.3 PricingIn terms of pricing, the steel industry is cyclical running through periods whereby supp ly exceeds supplicate, and then when demand exceeds supply. The recent trends has seen demand exceeding supply as steel prices have been inching upward since 2003 as Chinas economy has begun to heat up, along with India taking steps to emergence the demand in its economy for more products and production (domain-b.com, 2004).Table 2 World Carbon Steel Transaction Prices(Steelonthenet.com, 2008)The preceding Table shows that upward parkway that has and is making a new trend for the long embattled steel sector that had gone through heavy dumping in the nineties as markets and the global recession dried up demand. But, that scenario seemingly looks like a thing of the long gone past, with Chinas appetite just getting started, and India beginning its sit at the steel table. Prices are on the way up, as production capacity has remained relatively static with 1999 levels (DiCianni, 2007)Chart 2 Steel Production Capacity(DiCianni, 2007)The upward trending in steel prices as a result of production capacity is reflected in the following ChartChart 3 Steel Price Comparisons in Key Regions(DiCianni, 2007)The foregoing rise in steel prices is reflective of change magnitude global demands as illustrated by the followingTable 3 Global Steel Demand(DiCianni, 2007)The prognosis for increased prices is forecast by a broad consensus of industry analysts as caused by heightened production costs, and increased consumer demand as a result of growth markets (rediff news, 2007). Spot prices for ore are a prime contributor to the foregoing as prices have been on the increase since 2003Chart 4 Iron Ore Spot Prices(DiCianni, 2007)The preceding trend is highly different from the one facing the steel industry during the mid and late 1990s when too much capacity was the problem and steel prices dropped (Denoel et al, 2002).3.4 LawsThe rules governing trade laws is overseen by the World Trade Organization that also oversees the varied treaties its member nations make (WTO, 2008a) . The principle tactic and the one that is subject to attention in terms of laws has been anti-dumping policies utilised by Japan as well as Russia and recently China in the early 1980s and 1990s to gain a footing in supplying steel when prices were depressed as a means to enter and secure contracts (WTO, 2008b). Dumping represents the selling of steel in foreign markets beneath what is charged in home markets in order to secure a foothold, and or longer term supply contracts to keep factories running (Scheurman, 1986). The anti-dumping provision has long been a measure whereby countries seek to prevent lower priced steel from competing with domestic producers and thus threatening their home markets (WTO, 2008b).An example of the foregoing is provided by Jones (2004, p. 23) in his book Whos Afraid of the WTO?When steel imports from Japan and other countries batchd in the United States in the wake of the crisis, however, it became a trade problem, and WTO rules prohibiting unilate ral trade restraints as a stabilization tool by governments shifted blame over to the system of trade rules itself.The laws on steel stem from this foundation, contained within World Trade Organization rules, thus it represents a confusing as well as under most circumstances self-servicing provision enacted frequently by the target country. The following provide illumination on the foregoing (Tarullo, 2002)While not specifically proscribed by international agreements, dumping has been internationally identified as deserving of condemnation if it causes injury to an industry in the importing country. (2) U.S. law, since emulated by other countries, added to the definition sales below fully allocated cost of production, even where the price charged for the merchandise was the same as that in the importing country. Anti-dumping law generally provides for imposition of an additional import duty to equalize the price of the imported goods with the normal value, as calculated from foreign sales or from the cost of production. Most economists find the entire acquaint of anti-dumping law misguidedat least where there is no predatory intent or effectbecause it discourages some forms of price competition in some circumstances. Certain domestic interestsparticularly those in industries with high fixed costsare equally insistent that anti-dumping laws are necessary to protect them from foreign producers suppressing prices by flooding domestic markets. The laws and regulations enacted by countries, which can be very complex, reinforce the suspicion of liberal traders that the laws are rigid, biased implementations of a misguided premise.Not surprisingly, disputes over imposition of dumping duties have been frequent. Exporting countries have often complained that, quite apart from the principle that dumping is bad, importing countries misuse their anti-dumping laws. The first code negotiated in the GATT to supplement the rules of the original GATT agreement was one that li mited the use of anti-dumping measures. (3) New, more detailed agreements to limit national anti-dumping measures were included in both the Tokyo Round and Uruguay Round of trade negotiations. Meanwhile, use of anti-dumping measures had spread from the United States, European Union, and other industrialized countries to developing countries as well. (4) Thus, while international disagreements over dumping continue to pit some industrialized countries against Japan and many developing countries, the lines are not as clearly drawn as they were twenty years ago.The fray over anti-dumping continues to dominate the steel sector, but the recent surge in demand is lessening such occurrences and companies scramble to ramp up production and meet increasing demand. This has been a significant tactic used in the market that could very well continue after the shakeout over which companies dominate in China as well as India settles in.3.5 MonopoliesSteel represents an important broker in the he alth of national economies by virtue of the broad range of industries it supplies. Automotive, construction, appliances, equipment, industries machinery, pipes, plumbing and a host of other areas that underpin production are all industries that need steel. As such national interests step in, as indicated under regional trade blocks, whereby steel is akin to a national resource, in the securing of raw materials and finished output, thus the strengthening of company positions in the sector is a priority that regional and national governments seek and endorse, as evidenced by origin French President Jacques Chiracs positive comments on the Arcelor Mittal merger. From this stance, having too many producers, steel companies, weakens their position in the global market, and size enables them to introduce economies of scale in production and sales. Thus, monopolies simply are not a term that applies in this sector as a result of intense global competition and national interests.In steel, bigger is better Better for the steel company, national interests, domestic market supplies, and in terms of strength against their rivals. In the European Union, monopoly like status is not punishable as it is in the United States, as long as such does not harm the consumer or restrict competition (European Union, 2002). In the European Union a Monopoly is defined as (Europa, 2008)Market situation with a single supplier ( monopoliser) who due to the absence of competition holds an extreme form of market power. It is tantamount to the existence of a dominant position. Under monopoly, output is normally lower and price higher than under competitive conditions. A monopolist may also be deemed to earn supra-normal profits (i.e. profits that exceed the normal remuneration of the capital). A similar situation on the demand side of the market, that is with a single buyer only, is called monopsony.In other words, if the status of an extremely large company is not harming consumer markets and or increasing prices that are out of line with the normal costs of production, then, it is basically non actionable. The European Unions actions against Microsoft were of a different nature in that Microsofts actions were restricting competition in the entire industry sector, and the company was convicted of unfair tactics (European Union, 2004).3.6 Emerging MarketsThe merger of Arcelor and Mittal provided the new company with the size as well as clout to make a significant difference in emerging markets such as China due to its enhanced capabilities across all market and industry sectors (ArcelorMittal, 2008b). The foregoing increased size as well as capabilities also provides the new company with advantages in the high growth Indian market (ArcelorMittal, 2008b). The company announced forthwith after its bid for Arcelor was accepted that the new plans call for boosting its presence in both the Chinese as well as Indian markets (EarthTimes, 2007). Lakshmi Mittal is of Indian decent, thus this new and larger company will provide him with increased presence in that market as a result of long standing contacts and the companys enhanced capabilities (Forbes.com, 2007). As the worlds fifth richest person whose wealth is estimated as $32.0 billion that influence helps his aims in many areas (Forbes.com, 2007).Of particular interest is the discussion of the formation of a new regional transaction block in Asia consisting of China, Japan, South Korea and India, a union that along with other countries would account for 20 percent of the worlds Gross Domestic Product, that would relegate the other major trading blocs and lesser players (Bergsten and Scollay (2001).The potential for such an arrangement has gained in strength since 2001, with increasing talks being held between China, South Korea and Japan (Asia Times, 2003). Increasing ties between China and India, as a result of the proposed cross border trade route would open up trading in the region and serve as the foundation for a new trading bloc (Hasan, 2006). The present trading Bloc, ASEAN, which was formed in 1967, consists of Indonesia, Malaysia, the Philippines, Singapore and Thailand, that represents a combined population of approximately 560 million (Association of Southeast Asian Nations, 2008). China, with its population of 1,321,851,888 (Rosenberg, 2007), along with Indias 1,027,015,247 people (indianchild.com, 2007), and Japans 127,288,419 (CIA World Factbook, 2007), would result in a combined trading bloc population of 2,476,155,554, or slightly more than one-third of the worlds total population of 6,602,224,175 (World Factbook, 2007a). That would dwarf the population counts of the European Union, 490,426,060 (World Factbook, 2007b), as well as NAFTA (446,078,489), with its U.S