In this and the next post, I would try to give an account as to how the “impossible” Arcelor-Mittal merger became possible.

With a large number of parties involved, with different cultures in play, and a lot at stake, this deal promises to give many insights into the negotiation techniques used.

Background

Mr. Lakshmi Mittal founded Mittal Steel in 1976 in India. After a few years, Mr. Mittal found that it would take him long to grow to a significant size and wanted a way to grow fast. He found that there were various steel companies around the world, which had been performing badly, due to cyclical nature of the industry and poor management of the companies. He started acquiring these companies and turning them around through better management and economies of scale.

In 2005, when Mittal Steel acquired the American steel company, ISG, it overtook Arcelor as the world’s largest steel maker, in terms of output. Towards the end of 2005, it made up its mind to acquire Arcelor, the second largest steel producer by output and the largest by turnover. Mittal Steel was headquartered in Netherlands.

Arcelor was created in 2002 through merger of three major European steel companies, Arbed (Luxembourg), Aceralia (Spain) and Usinor (France). The idea was to leverage their technical, industrial, and commercial resources in order to create a global leader in the steel industry. It was headquartered in Luxembourg and Mr. Guy Dollé was the CEO. Arcelor employed thousands of people across 60 countries. Most of the employees were from Western Europe and in countries with a traditionally strong labor union. Arcelor were still in the process of integrating the business and were neither expecting nor ready for any deal, let alone a takeover offer.

It is important to understand where the main people stood when the deal was proposed. This is because, finally it is after all these individuals who would consider and negotiate the deal. The personal interests would play a critical role in the entire process.

Mr. Mittal, aged 55 and Mr. Dollé, aged 63 shared the same vision. They believed that the steel industry was too fragmented (top 5 companies controlled just 20% business) and was being exploited by the raw material / commodity producers (top 3 iron ore companies controlled 70% business) as well as consumer companies (top 5 automobile companies control 70% business). Consolidation was required and both wanted to emerge as the leader once it gets achieved. Both had contributed their fair share to this process of consolidation in the industry. Their aim was to do things in a way that, before they retire, the companies reach a dominating position in the industry. And that they are considered responsible for that leading position of their companies.

The Offer

On January 27, 2006, Mittal Steel unveiled an unsolicited $22.7 billion bid for Luxembourg-based Arcelor.

As we have already seen, that both companies had been acquiring others in the industry. Both thought that it was a competition against each other. They had been part of various bidding fights for acquisitions of steel companies. But at least one side was not thinking of both going hand in hand against all others.

In one such typical bidding, the steel company, Kryvorizhstal of Ukraine was on the block. Many companies entered the fray and the price kept on increasing. Mittal Steel and Arcelor were the last two remaining in the tussle, and the price increased from $3.5bn (when the last company left leaving these two) to $4.8bn where Mittal Steel won the bid.

There was clear scope for “saving” money in such context. Mr. Aditya Mittal, son of Lakshmi Mittal, was of the view that there were a large number of synergies between the two companies – not to mention getting better valuations while buying different companies. There were complementary strengths that could be leveraged. After intense internal discussions, they decided to take the leap, and find ways to make this acquisition possible.

The Process of the Initial Offer

Generally, in such acquisitions, the acquirer company would like to have a co-operative discussion and settlement. After acquiring, the acquirer is dependent on the target firm for collaboration – from executives, employees etc. In addition, the acquirer would like to be seen not as a predator but someone who would make the company achieve greater heights and also help the employees improve their standard of living – something which makes it preferable to go for a co-operative process.

As we know that, they finally had to resort to go towards a competitive process but they did that when it became a necessity. I believe one has to be ready for this as well for the other side’s rationale might be very different and sometimes there might be seemingly irrational behavior as well that would necessitate such a process.

Whom to approach – The best foot forward

One important issue is how the discussion with the target should get started. Research suggests that extroversion, agreeableness and cognitive ability of the negotiators play a major role in the negotiation. So, a person on the other side with these attributes should be preferred, especially when it comes to the initial stages. This particular person is the potential harbinger of the proposed deal in the target.

The Mittals found such a person at Arcelor – Mr. Alain Davezac, Senior Vice-President, International Business Development, Arcelor (Cognitive Ability). He had been dealing with the extended Mittal family before (Agreeableness) and was an outgoing person (Extroversion). He was enchanted with Buddhism and had dealt with Indians & Indian Companies extensively before in his career.

Mr. Aditya thought that it was important to make Mr. Alain up to terms with what has been going on at the Mittals side, and show him the benefits of the collaboration between the two companies. In addition, if everything goes on well, it is Aditya and Alain that would have to do bulk of the work during integration, and so it was best that they became acquainted with each other at the earliest.

Where to discuss and the occasion?

Issues such as where do the meetings take place; who all are part of the meeting; how are they treated etc, though they might seem trivial, play a very important role.

After discussions with Alain for some time and a couple of meets, the Mittals thought that it was now time to involve the CEO of Arcelor, Mr. Dollé. Instead of having a formal meeting at some office or hotel, Mr. Dollé and Mr. Alain were invited to a dinner meeting on 13th January, 2006 at the grand Mittal’s home in London (the world’s most expensive house at that time). We believe that it was a way to show the other party that they would be dealing with someone who is not less equal in any possible way. It was also to settle any apprehensions regarding the Mittal’s ability to handle the large company, that might arise once they come to know about their proposal. The Mittals might also be looking to gain an upper hand (through the venue and the fact that they are the hosts) before the start of the formal negotiations.

The negotiations before the negotiation – The notorious dinner

When the dinner was planned, little did anyone know that it would become such a quoted event in the future. The Mittals did not want to indicate on an outright basis that there would be a deal coming. They wanted to explore the possibility and see the reaction of the other side. As per Mittal Steel’s prospectus for the Arcelor offer, the issue of the merger was brought up at the dinner meeting but Mr. Dollé’s reaction was “non-committal” and that he pointed out the issues that would arise and the risks involved.

The part of the conversation related to the merger was only for 4-5 minutes. Mr Dollé later said that the conversation was friendly but did not give any details. A week after the dinner, both sides decided to meet again to discuss about the merger specifically, but the meeting could not take place as Mr Dollé had to follow-up on their proposed acquisition of the Canadian company, Dofasco.

Now or Never

This was an inflection point in the whole deal. The Mittals knew that if Arcelor went ahead with the Dofasco deal, it would get tougher to merge, possibly due to anti-trust conditions and due to Arcelor becoming a larger company. So that Dofasco can be done away with, they needed to find an alternate for Dofasco in case they are successful in going ahead with merging with Arcelor. They signed a binding agreement with ThyssenKrupp AG (that was also involved previously in bidding for Dofasco) about selling Dofasco to them, after the merger.

Without wasting any more time, the Mittals informed Mr. Dollé (who reportedly hung up on hearing about the Offer announcement) and Mr. Alain on 26th January, 2006 (after markets closed) about their plans to announce an Offer on 27th January. The Mittals had gotten the sense that management at Arcelor, specifically Mr. Dollé would not be too keen on such a proposal. However, they wanted to do as much as possible that would make them look as if the were on the “right” side; and it was their counterparts that did not co-operate.

The offer was announced the next day.

(Edit: Response to queries about references: Any reference to prior published literature would be purely coincidental)

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