The Hindu Business Line : Mittal Steel bid for Arcelor — A lesson in economic globalisation

The Mittal Steel bid for Arcelor has elicited differing views from the companies, observers and politicians. With the Arcelor brass appearing to change tack from the initial opposition to the bid, it may be best for politicians to keep off, says B hanoji Rao, doing a quick recap of the bid's progress.

TOWARDS THE end of last month, a day after India celebrated the Republic Day, the steel giant Mittal Steel (according to BBC News on the Internet) " approached Arcelor ... in an attempt to boost its share of the heavily fragmented steel sector." Mittal Steel offered 18.6 billion euros (equal to a little more than $22 billion) to take over Arcelor.

Two days after the offer, it was reported that Arcelor rejected the Mittal Steel bid. It was not just a polite rejection, which is what one expects from the usually courteous and civilised Europeans. Arcelor not only recommended to its shareholders not to sell their shares to Mittal, which is fine, but also added that the two companies did not "share the same strategic vision, business model and values".

Facts available in the public domain on the two steel giants will give us an idea of the significance of the Mittal move and the Arcelor rejection.

Mr Lakshmi N. Mittal, born in Sadulpur in Rajasthan in 1950, founded Mittal Steel Company in 1976 (he was just 26 then). Mittal Steel has headquarters in London and Rotterdam. It isthe world's largest steel maker, withshipments of 42.1 million tonnes and revenuesof over $22 billion in 2004.The company's plants are in 14 countries: the US, Canada, Mexico, Trinidad, France, Germany, the Czech Republic, Poland, Romania, Bosnia, Macedonia, Kazakhstan, Algeria and South Africa. The company employs in all some 175,000. Mittal made the first acquisition in 1989 and has spearheaded and set the pace for the consolidation and globalisation of the world steel industry through acquisitions, many of them poorly performing (often public sector) companies, and making them successful and profitable. It produces a broad range of high-quality finished and semi-finished flat and long products. The customer base is 5000 strong, across 120 countries, and includes automotive, engineering and appliance sectors.

Arcelor was founded in 2002 by the merger of Arbed of Luxembourg, Aceralia of Spain and Usinor of France. Its plants, joint ventures and subsidiaries are in over 60 countries. It is the second largest steel producer in the world, and holds leadership positions in automotive, construction, household appliances and packaging as well as general industry. It has a turnover of around 33 billion euros and employment some 96000 people.

As the global steel industry is in a mood to consolidate, to ensure economies of scale and scope and move towards price stability, the take over would result in an unprecedented steel conglomerate producing some 10 per cent of the world output, with a quarter million employees in all. This is no creation of a monopoly, given that the market share is only a tenth of the total.

As can be seen from the brief profile of the companies, the advantages of consolidation and the fact that no monopoly power will be unleashed, the decision about Mittal acquiring Arcelor is best left to the strength of the Mittal purse and the appetite of the Arcelor shareholders. There is no political economy problem, no international relations issue and no immediate cross-border economic problem to solve. Yet, politicians spoke.

The French Finance Minister felt that he must take into account the good and bad points of the Mittal offer since they affect 28,000 French jobs. He termed the Mittal bid ill-prepared and hostile. In contrast, the Belgian Finance Minister opined that Europe must get used to investments by Chinese and Indian companies and one must not accept or reject a bid without a study of the merits. Arcelor has about 15,400 employees in Belgium. The head of Mittal Steel clarified that the deal would in fact safeguard European jobs against intense competition in steel from China.

As if the politician reactions need to be matched with a response from the East, the Commerce Minister, Mr Kamal Nath, wrote to the European Union's Trade Commissioner, Mr Peter Mandelson, arguing that trying to prevent the acquisition means that national treatment was not being given to cross-border investments, despite the EU's commitment to the World Trade Organisation to give such treatment. He reminded that in fact the EU had made a request to India that this sort of treatment should be provided on a reciprocal basis. He went on to point out that the EU's attitude impinged on the ongoing WTO services negotiations and the matter is viewed with serious concern.

The Commerce Minister is also believed to have written a letter on this issue to the Prime Minister, Dr Manmohan Singh, highlighting all aspects of the case, so that it can be taken up during the visit of the French President.

But let us see the latest.

The Independent (Internet edition) reported on February 17 that Arcelor profits jumped 66 per cent in 2005 against the 28 per cent drop in the profits of Mittal Steel. In the wake of the release of the results, the Arcelor Chief Executive said told shareholders that the future of Arcelor is bright and that it is in their interest to remain with the company.

The Times called the financial results of Arcelor the first plank of defence against the takeover by Mittal Steel. It added that Arcelor's sweetener to shareholders was announced as the Mittal offer was published by Belgian, Spanish and Luxembourg financial authorities in the first formal announcement by the regulators. The announcement discloses the main terms of the Mittal offer to Arcelor investors. After weeks of further review of the draft offer, the formal offer itself was made. In the interim, the regulators have stipulated that Arcelor is not to issue shares without investors' explicit consent.

The Independent report added that the Arcelor Chief Executive reiterated the company's rejection of Mittal's "mostly paper bid, made last month, but held out the possibility it would look more favourably at a sweeter offer". Quite contrary to earlier stance, the Chief Executive said: "I have a lot of respect for Mr Mittal."

The lesson: Money will any way do the talking. Politicians should keep off.

(The author, formerly with the National University of Singapore and the World Bank, is Professor Emeritus, GITAM Institute of Foreign Trade, Visakhapatnam. He can be reached at bhanoji@gmail.com)

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