This is the second of the two posts detailing the Arcelor Mittal deal. The first post gave the background of the deal and the process in which the offer was communicated. This post details the happenings after the offer was made.

Where did they stand?

The offer was rejected almost instantaneously and it was not that it came as a surprise to Mittal Steel. The offer got instant publicity and became the talk of the business community across the globe. All stakeholders (which included multiple governments from Europe that have been known for their pro-worker stance) became active at one go.

Positions vs. Interests

The position taken by everyone on the Arcelor side was that this deal is very aggressive and not at all beneficial to them. Going into the reasons for this position, gives a better understanding of the interests involved. The management was opposed since they thought that the price was too low and there was lack of strategic fit between the two companies. They knew that a takeover would mean loss of the clout they enjoyed while managing an independent company. The Arcelor employees thought that this was more of a hostile takeover and in the merged entity, they would have a lower status as compared to Mittal Steel employees. They were also scared of the ensuing job cuts that normally follow such large mergers / acquistions. The different governments with stakes in Arcelor were afraid of workers from their countries losing jobs and the fact that they were not consulted before the bid.

As is clear, behind the positions of different parties lie specific interests, which sometimes might not match with the reasons which get stated. Though Mr. Mittal knew that these interests would have to be addressed and satisfied, he later mentioned that the process went on much longer than he anticipated.

Pooling Resources

Both sides took a stock of which stakeholders can be on their sides and started talking to them.

Arcelor management found that mostly everyone from the employees to the different governments were opposed to the deal. So, they focused their attention on these parties to convince them to oppose any deal from the Mittals.

On the other hand, the Mittals found almost no one on their side initially. They thought that the investors are the only ones who they can currently manage to get on their sides. They started contacting them but were not as successful as they would have liked.

Meanwhile, Arcelor management continued doing their bit to remove any possibility of the bid going through. They kept their aggressive pursuit for Dofasco, declared a huge dividend, laid out its medium-term aggressive acquisition strategy and promised healthy growth of the company. It subsequently acquired Dofasco and locked it into an independent Dutch trust making it impossible for Mittal Steel to part with it (in case Arcelor gets acquired).

Rationale vs. Emotions

The most difficult task before the Mittals was to deal with the emotions of the European population. There was widespread concern in some of the stakeholder countries about the increased globalization and how that is leading to jobs moving oversees and is adversely affecting their economies. These countries had invested heavily in the steel industry and were worried about the future of the large scale employment provided by the industry.

As a result, before the Mittals could sufficiently communicate their proposal, there was heavy backlash against them. The Mittals had expected the emotional uproar but were confident that rational thinking would soon takeover, once the concerns were addressed. What they did not plan for was the fact that nobody would want to listen to their proposal in the first place.

Working their way through

The Mittals were clearly the disadvanteged side in this process of getting to a deal. Research shows that the negotiations that seek to neutralize differences among various stakeholders in a multistakeholder negotiation, pose considerable risks for the disadvantaged groups. They say that negotiations that involve selective alliance-building, among other things, promise better outcomes for disadvantaged groups.

As we interpret it, the Mittals decided to do the same and select specific stakeholders with which an alliance can be built and then branch out.

Selective Alliances

The Mittals believed that investors / shareholders would be willing to agree if the deal is sweetened in terms of the price. They thought that this can be done sooner or later and so is not the immediate priority. The main issue was emotions and the different governments personified these. If the governments can be explained the proposal and their concerns incorporated, a major fight would be won (though not the war).

So, Mr. Lakshmi Mittal decided to have a round of face-to-face meetings with all the government representatives. Face-to-face meetings are very critical for there is a large amount of risk of mis-communication in such cases. Also, such meetings allow for instant responses to concerns raised. The Mittals had to make concessions ranging from guaranteeing the pension, healthcare benefits to restraining any kind of job losses. They even had to agree to make Luxembourg as the headquarters of the merged entity (and not Netherlands in which Mittal Steel was headquartered nor London where Mr. Mittal has his residence). Slowly but surely, the governments agreed to the modified agreement and the European Commission gave a nod to the deal.

Double whammy

As soon as it became clear that the governments would start supporting the deal (or at least they would be neutral towards it), Mr. Mittal formally launched the hostile takeover and upped the bid price.

The Arcelor management and board found itself cut short at two ends. On the one hand, the government no longer was opposed to the deal. On the other hand, the investors starting flocking towards the Mittals on account of the premium price being offered. The only recourse the management had would be to convince another player (white knight) to pitch in a more attractive counter bid.

Counter bid does the trick

In its quest to keep away the Mittals, it had become clear that Arcelor management was not thinking in the best interest of the shareholders. Arcelor executives, in a way alienated them. The shareholders also were angry at the outright disinterest shown by the Executives to the Mittal deal and the lack of thought given to evaluate it. Arcelor management had refused to meet with the Mittals even after repeated requests.

Arcelor convinced Severstal, a Russian steel company, by May end  to bid for it at a higher price than Mittal Steel. Though shareholders were not too happy with the management, the better offer was always welcome.

The actions that followed show how one side can use the trick of the other side and leave them armless. In negotiations, it is important to realize that one would have to stick by the rules set by oneself or else your integrity might be lost.

The Mittals started publicizing how the merged entity (Severstal and Arcelor) would be fully controlled by the Severstal’s Russian CEO, Mr. Aleksei Mordashov. The different governments started listening and saw how he would be holding a substantial stake. Also, the merger would lead to a Russian steel company with European operations (rather than it remaining a European steel company as was the case in the Mittal deal), something that they were very afraid of. They had opposed the Mittal deal initially on the basis of the harmful effects of globalization and this was a more severe case of that.

In addition, the Arcelor management kept behaving as if it did not need to take the shareholders into confidence. It called for a vote on the merger with Severstal and allowed the deal to be approved unless, the meeting was attended by an unprecedented number of Arcelor shareholders and they voted it down. This angered the shareholders and investors and even the government had to stop supporting the Executives seeing this wrath.

Mittal Steel raised the offer again (and increased the cash component %) so that it would be higher than the Severstal’s offer and there would be no reason why it should not be chosen.

Finally, Arcelor management had to budge and meet the Mittals. Still they opposed their offer and urged the shareholders to support the Severstal offer. At this point, Mr. Mittal took the case in the public forum and put in ads in the newspapers. These were directed to the Arcelor shareholders and asked them to veto the Severstal deal. Severstal did better the offer one more time, but the intentions of the management supporting the deal came under suspicion. We here see the cost of losing one’s integrity and once that happens, even better deals are seen skeptically.

Finally, the Arcelor board had to approve the Mittal offer, which was followed by the shareholder approval.

(The numbers involved in the various offers are not specified for that is not the focus of the post.)

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