seamless
Technology

Seamless – The Technology buzzword of 2013!

Lo and behold! More than 6 months of 2013 are already through and they have been simply explosive for the Indian Technology enthusiasts! India has been quoted as the fastest growing technology market in the world and the world is taking notice.

Three biggest things happened in India Internet / Technology / Product sector according to me in the first half of 2013-

1. Amazon entered India with Amazon.in – A company that I have been following for years, Amazon entered the Indian market and is already capturing sizeable market share, if not market share, at least eyeballs. It remains to be seen how many of those eyeballs can be sustained; also how other competitors react to it. Notice that Amazon is within 1.5 mn uniques of Flipkart within literally no time.

Comscore data amazon

 

2. Redbus acquisition and the aftermath – Redbus acquisition has proven to the world that Indian market is alive and well when it comes to potential M&A activity in the Internet / Technology sector and has definitely given a wave of hope through the entrepreneur / employee / VC / Angel ecosystem . This has also implied that a lot of startups hitherto struggling to find lead investors are finding the investor community a lot more approachable, provided the business basics are in place.

seamless

Seamlessness as a Critical success factor

3. Seamlessness – However, the biggest trend of 2013, in my opinion is Seamlessness – Everything of 2013 has to be seamless. If your product works ONLY on the web, sorry, thats just not good enough! Your product has to work cross platform. Do you have an IOS app? Well folks thats not enough too, for your app needs to also be on the app eco system that has 70% market share outside the US – Android. Android is taking over the world and the developer community knows it. Every company – a publicly listed one as well as fledgling startups are putting considerable effort and are placing considerable bets on the premise of attracting loyal userbase on the promise of a seamless experience.

Never has seamlessness been so important in my opinion.

What are your opinions? Let me know!

 

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Business, Finance

The biggest deal in the Global Steel Industry: Arcelor Mittal (2/2)

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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The biggest deal in the Global Steel Industry: Arcelor Mittal (1/2)

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

Arcelor Mittal

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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Ratan Tata – Too Fast Too Far

Ratan Tata has been a great leader for the Tata Group. The group has grown a lot during his term and he must be commended for all his efforts. I myself have great respect for him as a business leader in India. Tata as a brand is respected world over and even in India it means responsibility to the core. However in the past week the interview he gave regarding his acquisitions and in this article we will try to discuss it.

“If one had known there was going to be a meltdown, then yes (Tata went too far), but nobody knew. Both the acquisitions (JLR & Corus) were made, I would say, at an inopportune time in the sense that they were near the top of the market in terms of price.” Quoting Ratan Tata from Times of India Report.

Great leaders are those who can lead the companies through adverse events, who predict the unpredictable. The explanation given ‘that nobody knew about the meltdown‘ does not seem fair to me. The leaders across the world including RBS Ex-CEO Sir Fred Goodwin, Late Lehman Brother’s CEO Richard Fuld and many others can give the same reason for their firms performance. One firm went into the arms of the Government and another into bankrupcy. Their leaders were given the blame for ‘not being able to predict the meltdown‘, having overleveraged firms and removed from their positions. Thus Mr Ratan Tata also should take the blame himself for these pricey acquisitions and apologize to the shareholders of Tata Group of Companies. These acquisitions were done at the peak of the market, and both the companies have seen demand destruction. The world steel prices have fallen tremendously and luxury car market has also dissappeared. In the present situation both the acquisitions seem wrong.

At the same time, Ratan Tata should also be given credit for many other things which he has done right. He is not afraid to accept the mistake, which takes a lot of courage and also helps in correcting the companies future direction. The first step to solving your problem is admiting that you have one, and Ratan Tata has openly admitted the mistake. Moreover Ratan Tata is a visionary and his vision will lead to further growth in Tata Group. Tata Nano is just one example of what he dreams for India.

Overall I believe his statements in London regarding the acquisitions might be related to getting the UK Government aid for these companies. Since now Tata Group is the owner of these companies there might be a reluctance to give full support and these statements might be a way to catch attention!

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Business, Planning, Strategy

Oracle’s take over of Sun Microsystems

When a giant like Oracle takes over another giant like Sun Microsystems, it gets everyone on the street talking. Most of the people were quite surprised when out of all the companies Oracle decided to take over Sun. People expected IBM, Cisco or HP to be in the race to acquire Sun and when Oracle came out as the acquirer it was a a kind of shocker. Reading an article in the Economist about the strategy behind the deal, I decided to re-collect the major points behind the acquisition.

  • Company Culture following the CEO Mr Larry Ellison – Oracle has acquired more than 50 companies since 2005 at the cost of around $30 billion. Mr Ellison has a strategy to grow Oracle through acquisitions and Sun Microsystems looked like an opportunity to him.
  • Sun’s Software Abilities, namely Java, Solaris (and MySQL) – Java is a wonderful programming language which works across operating systems. With the recent development of most phone applications in Java its use has expanded further. Sun could never make money from it but probably Oracle can. Solaris, the highly reliable operating system by Sun Microsystems, is the preferred OS to run Oracle databases. Lastly, MySQL is a free open source database under Sun and how will Oracle deal with it is unknown. Oracle just might want to get rid of it to further lower the competition.
  • Creating a systems company with integrated hardware and software – With control over both Solaris and Oracle database system, Oracle will be able to give a perfect end to end solution to its customers. Sun Microsystems brings to Oracle expertise in systems and hardware servers.
  • Defence Mechanism against IBM – In the past few years each industry layer has been controled by a different company. Oracle has been a player in the database market like Cisco is in networking gear. In the current environment, customers want end to end solutions and thus companies are acquiring other companies and capabilities. Cisco will now enter the server segment as well. Similarly by acquiring Sun Microsystems, Oracle will further increase its capabilities and also play a defence against IBM which could have acquired Sun.
  • Becoming an Open Source Giant – By acquiring Sun Microsystems Oracle has become the world’s largest open source company. Will Oracle actually use these capabilities is to be seen but Oracle will get more market recognition and support from Open Source community for this.
  • Synergies between the companies – The synergy between Oracle and Sun will greatly enhance the deal’s value. There are going to be job losses but ultimately Sun Microsystems is expected to make big contributions to the bottom line at Oracle.
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