After five months of bitter resistance, the management of Arcelor, Europe’s largest steel maker, last weekend agreed to a merger with Mittal Steel. If the deal goes through — shareholders still have their say — it will create the world’s largest steel company. Equally important, the agreement could signal a shift in thinking in European boardrooms about stockholder rights. Perhaps most significant, however, the deal is a sign of new business realities: Expect more takeovers of established companies by “upstarts” in the new global economy.
Mittal Steel announced in January that it was prepared to take over Arcelor with an unsolicited $22.7 billion bid. Mittal is run by Mr. Lakshmi Mittal, who has built an empire purchasing failing steel plants around the world and turning them around through the adoption of practices that focused on standardizing production. The bid was fiercely resisted by Arcelor’s management, which tried a variety of tactics — from share buybacks to restructuring assets — to fend off Mittal. Mittal only upped its offer. After the company raised its bid by 34 percent, Arcelor turned to a “white knight,” Russian steel company Severstal, to help defeat the Mittal offer.
Mittal launched an aggressive PR campaign to unnerve shareholders about the results of any deal with the Russian company. That unease was compounded by Arcelor’s seeming disregard for the terms of the Mittal offer.
In fact, those details seem to have been overlooked throughout the takeover bid. Instead, Arcelor’s management — and parts of the European political establishment that stood behind Arcelor (governments are among key shareholders) — regarded the offer itself as an affront. Mr. Guy Doller, Arcelor’s chief executive, compared Mittal steel’s “eau de cologne” with Arcelor’s “perfume.” Severstal, the white knight, was called a “true European”; Mittal, by contrast, was a “company of Indians.”
Yet something odd happened on the way to the consummation of the marriage with Severstal: Shareholders became increasingly disgruntled with Arcelor’s response and demanded that their interests be considered. Throughout the fight, Mittal had upped its bid; the final offer was nearly twice the price at which Arcelor was trading when the battle commenced. This was part of the aggressive campaign to court Arcelor shareholders, a group virtually neglected by the company’s management.
Shareholders were especially angered by the way the deal with Severstal was put together. In addition to a lack of clarity about the terms, special voting rules were adopted that seemed to “fix” the deal. A revolt began, with talk of a recall of Arcelor’s management. The focus of attention on Arcelor’s management prompted renewed negotiations with Mittal. Those talks yielded a higher offer from Mittal as well as new terms regarding management of the new company, mostly limiting Mr. Mittal’s influence. Last weekend, Arcelor management agreed to the deal and shareholders will soon put that to a vote.
Arcelor’s newfound respect for shareholder sensitivities is a promising development: European boards have long ignored those concerns, preferring instead to focus on “national interest” as part of an outdated version of mercantilism that is at odds with the realities of the 21st-century global economy — and which, conveniently enough, often parallels the interests of management. The idea that shareholders should receive value for their investment typically raises eyebrows. The Mittal revolt suggests that there is change afoot in European boardrooms.
The racial twist to this case is indicative of another 21st-century economic reality: Plenty of ambitious, expanding companies from “emerging” markets are eager to consolidate their presence in established markets. The bids for IBM’s computer division by Lenovo (successful) and Unocal by CNOOC (unsuccessful) were early signs of this new business landscape. Expect more. These companies are successful, they are building up reserves and they will spend them as their predecessors in the West did: by expanding into new markets. The West must be prepared to accept that basic fact.
The Arcelor-Mittal merger would create the world’s largest steel company with 320,000 employees, $70 billion in revenue, and a 10 percent share of the world steel market. It would be the first steel maker with annual capacity of more than 100 million tons, more than three times that of its nearest rival, Nippon Steel.
The success of the venture, however, is by no means guaranteed. The bitter takeover fight could make it difficult for the two companies to merge. It is unclear how the new company will remain competitive without layoffs. The stress created by such basic business decisions will be intensified by the “racial” prism evident during the takeover bid. But the outcome, like the merger itself, should be decided by economic considerations alone.
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