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Analysis of Mittal’s Acquisition of Arcelor

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1.0 Executive Summary

This examination of the merger of Arcelor and Mittal in the steel industry will examine the success and or shortcomings of this major deal that has created an industry leader that is considerably larger that its nearest competitor. In examination the merger, this study looks at the steel industry from the perspectives of historical underpinnings and ramifications, pricing, laws, monopolies, emerging markets, mature markets, new areas for exploration, as well as the resulting post merger effects of this union. To achieve the foregoing, this study has organised the foregoing into a comprehensive literature review that will delve into the indicated areas, following this with a findings and analysis section to equate the preceding.

The organisational method has been selected to inform as well as guide one through the industry and the merger process to result in a clear understanding of the important and salient points that impacted the merger process, and its resultant effects on the industry. The conclusion brings forth the summary of all of the sections that preceded it to equate the results and potential areas for additional study owing to the newness of this union. The bold move by Mittal in acquiring a company if its same size and then moving forward as a unified new entity marks a new period in the steel industry worthy of examination as an history making event.

2.0 Introduction

The purpose of this investigation is to delve into an understanding of the steel industry as the means to reach a determination as to the potential benefits and ramifications of the ArcelorMittal merger that is just about a year old. As such there is little in the way of case studies, and or historical data to equate the effect of the merger, this examination shall utilise historical as well as current information to understand the steel sector and thus draw deductions on the effectiveness of the merger in terms of competition, the industry and economic ramifications. The research question thus stems from the examination of the Mittal Steel and Arcelor merger, and how it developed, along with the advantages as well as disadvantages of the process in terms of the two companies.

The Research Objective is to determine if the merger made ArcelorMittal a market leader in a highly competitive market, and the manner via which this was accomplished as well as if the foregoing brought about new opportunities, and or projects in terms of real ones, and or potentials for the future. The research hypothesis represents equating the impact of the Arcelor Mittal merger in terms of the industry dynamics in pricing, market positioning, competitive advantages, or other areas as uncovered by research to prove or disprove the basis for the merger as a sound proposition in the face of the preceding.

To achieve the foregoing, this study shall look at the steel industry objectively through extensive research into its importance with regard to economics, trade, pricing within the industry, applicable laws, monopolies, the importance of emerging markets that might have weighed on the decision to seek a merger, the importance and or considerations of mature markets, and new locations of exploration and or supply. The approach to equating the foregoing was to conduct and extensive review of literature on the aforementioned points to provide a comprehensive view of the steel industry, where is has been, presently is, and is going. The preceding will provide a reference point to try to determine what the executives of Mittal saw in reaching the decision to attempt the Arcelor acquisition. That insight, their decision process to seek the acquisition of Arcelor, was based upon the company’s intimate knowledge and understanding of the steel sector, and a plan to capitalise on those developments based upon the projected future occurrences in the market.

Donaldson and Lorsch (1983, p. 112) tell us that in strategic decision making executives must consider that:

“Under certain circumstances, the firm's real economic and financial constraints perpetuate stability in the financial goals system that is central to corporate strategy. The first such circumstance occurs when the composition and objectives of management's three primary constituencies remain constant over time. If the existing financial goals system truly represents a balanced response to each constituency's minimum acceptable requirements for continued participation in the enterprise, then external pressure for change is not likely to develop in the absence of some fundamental change in the constituencies themselves.”

The decision to seek an acquisition as a means to growth represents a process that a company decided upon long before taking such an action. Wall and Wall (2000, p. 39) observe that “Companies that are using acquisitions as a strategic lever are rarely making only a single deal; acquisitions are ongoing and often overlapping, with several happening at once and more to come”. Mueller (2000, p. 57) states that most acquired companies were and are usually healthy strong firms in their own right that add some underlying competitive advantage in the face of market realities. He goes on to add that the rationales can be economies of scale, to obtain a more dominant market position, to gain access to markets, to stave off competition, to limit merger options of rival firms as well as a strategy for growth. Mueller (2003, p. 82) adds:

“A company faced with a slow-growing or declining market has two choices for avoiding stagnation and decline: it can expand its share of this market, or diversify into new ones. Growth can be sustained indefinitely only through diversification. Thus, we expect the maturing company to resort to internal diversification by developing new products and/or external diversification through mergers. Even in a steady-state world, a company must (continually) diversify to sustain a growth rate above that of its company’s market.”

Wall and Wall (20000, p. 39) add “…he most successful acquirers have developed a clear, logical, and replicable approach that they use to manage the entire process from initiation of the deal to the ongoing and longer-term development of the new organization post integration”. There is an integration process that accompanies every merger, where the rationales for preceding are thus put to the realities of the finalised merger process. This is where the decision to merge answers the questions, and or solves the issues that brought about the process in the first place. This study shall seek to equate the foregoing in the case of ArcelorMittal.

3.0 Literature Review

This review of literature shall examine what has been written about the topical areas that are covered herein to gain a picture of the overall steel industry, the merger of ArcelorMittal, and the market factors inherent in the sector. The preceding shall seek to uncover the questions as posed the research objectives and find the answers to the research hypothesis

3.1 The Steel Industry

Steel is the material that is the economic backbone of global economies, representing the prime material in building, infrastructure projects, refineries, vehicles, industrial as well as consumer goods. The recent emergence of new global players that have significantly increased their production and export capacities and thus has harkened a change in the international structuring of the industry whereby consolidation has become a critical component in competitiveness (D’Costa, 1999, pp. 11-12). China’s application and accession to the World Trade Organization has had major implications in terms of the global market as a result of the country’s modernisation programmes, cheap labour supply and interest in becoming a significant part of global production and export (ChinaDaily.com, 2007). The foregoing only adds to the rounds of consolidation in an industry where economies of scale in terms of raw materials as well as production are key foundational factors in a highly competitive sector (Mangum et al, 1996, pp. 2-6). The above factors are important background aspects in the context of this study in that it is providing insight as to the status of the market.

The aforementioned consolidation has been basically built upon the rounds of joint ventures that the industry seriously embarked upon during the mid 1980s in response to the need to tap emerging markets as well as areas of exploration for raw materials (Mangum et al, 1996, pp. 11-14). Steel, along with oil and uranium and a few other raw materials, represent concerted efforts and concerns by national governments and their important industry producers to ensure domestic strength in these sectors is maintained, owing to their importance in their economies (Visclosky, 1999). Restructuring within the steel industry is described by D’Costa (1999, p. 11) as “…an organizing concept to analyze capitalist development in general and reorganization of industrial capacity in particular”. He adds that (D’Costa, 1999, p. 11-12):

“Restructuring also refers to the various ways by which a national industry adjusts to the capitalist imperatives of competition, profitability, market control, and national development (D’Costa 1989). More specifically, restructuring is viewed as a complex process by which the steel industry is evolving as a result of technological developments, corporate strategy, and government policies. With innovations and the diffusion of technology at the core of capitalist industrialization, restructuring of the steel industry globally can be conceptualised in terms of different national technological trajectories. By juxtaposing the factors that lead innovating countries like the US to fall behind technologically with the mechanisms by which late industrializing countries acquire technologies we can establish the uneven diffusion of technology and the process of restructuring.”

The preceding represents an important understanding in this examination, as the traditional powers in the steel sector have been either challenged and or replaced by other companies / countries in the global sphere. Anwar (2006) presents an important summary overview of the steel industry that includes some of the foregoing factors, as well as providing additional insight areas:

  1. The increasing ramifications of industry volatility has been and is related to the levels of consolidation, the cyclical nature of the industry, along with the emergence of China as an important and critical player in the market.
  2. The importance of tapping into emerging growth markets has helped to fuel industry consolidation.
  3. China’s emergence as a consuming nation as well as producer ¡, and its huge international market has caused a shifting in the strategic focus of the industry, and thus its companies.
  4. The heightened competition and cost variables of the industry help to explain the increased rounds of consolidation that in the interests of cost efficiencies utilises more supply chaining to set up production facilities in important developing countries, as well as close to natural steel resources.

The consolidation as well as fragmentation of the global steel industry is amply illustrated in the following Chart:

Chart 1 – Global Steel Industry

(Anwar, 2006)

The cyclical nature of the industry is caused by price significant drops due to the selling of steel at bargain prices as companies keep their production facilities running when industry sectors in certain countries are working off their own inventories (Matthews, 2007). It may sound illogical, but it is actually more cost effective to keep plants running as opposed to temporarily shutting them down and restarting again, even at the cost of dramatic price drops that occur in the process (Matthews, 2007). Consolidation has enabled important companies in the market to fend off competitors in their areas, and leverage their positions (Matthews, 2007). The rapid growth of China’s internal market, as well as upgrading of its steel production capabilities has significantly added to global tonnage output (Anwar, 2006).

The heavy rounds of consolidation is in keeping with the regionalization of the international market as The North American Free Trade Agreement, that entails the United States, Canada and Mexico, competes with the European Union’s 25 countries, Mercosur that includes Brazil, Paraguay, Uruguay, and Argentina, and of course China, whose domestic market and size provides a market that is larger than almost all of these combined (UC Atlas, 2006). The significance of the foregoing is that these trade blocs represent associations that have been formed by the attending governments to aid in the management as well as trade promotion activities for their regions, and countries within these blocs (UC Atlas, 2006). The foregoing dynamics of globalisation thus helps to explain the consolidation that has been and is taking place in the industry.

Figure 1 – Regional Trade Blocs / European Union

(Europa, 2008)

Map of Europe

Figure 2 – Regional Trade Blocs / NAFTA

(UC Atlas, 2006)

Figure 3 – Regional Trade Blocs / MERCOSUR

(UC Atlas, 2006)

3.2 ArcelorMittal

In 2006 Arcelor one of the world’s biggest steel producers as represented by turnover and output, was acquired by Mittal for $31.9 billion USD in a deal that ended over five months of a hard fought takeover battle (White, 2006). Born out of a prior merger of Spain’s Aceralia, France’s Usinor, and Arbed of Luxembourg in 2002 (Reed, 2006), the acquisition by Mittal of Arcelor that was formed out of the preceding triumvirate is a further example of industry consolidation. The company, that consisted of in excess of 94,000 people in excess of 60 countries, was a major company in supplying the automotive, metal processing, construction, household appliance as well as general industry segments (wcbstv, 2006).

Mittal Steel, which is based in Rotterdam, was the world’s largest steep producer in terms of volume prior to the merger, and still retains that title post merger, is a family controlled company by Chief Executive Officer Lakeshmi Mittal (ArcelorMittal, 2008a). The resulting company after the merger, ArcelorMittal, represents a concern that has “… 310,000 employees in more than 60 countries” (ArcelorMittal, 2008b). The new company become the overall global leader in the automotive sector, construction industry, household appliance as well as packaging industries, along with becoming the leader player in technology as well as volume of steel produced (ArcelorMittal, 2008b). In terms of size, the new union creates a company that dwarfs the competition:

Table 1 - Largest Steel Companies

(editgrid.com, 2007)

Metal Bulletin’s top steelmakers of 2006

Millions of Tonnes

Company Country 2006 2005

1Mittal Steel1 Netherlands 63.66 49.89

2Arcelor Luxembourg 54.32 46.65

3Nippon Steel Japan 33.7 32.91

4JFE Steel Japan 32.02 29.57

5Posco South Korea 31.2 31.42

6Shanghai BaosteelChina 22.53 22.73

7US Steel USA 21.25 19.26

8Nucor USA 20.31 18.45

9Tangshan China 19.06 16.08

10Corus UK 18.3 18.18

11Riva Italy 18.19 17.53

12Severstal Russia 17.6 15.16

13ThyssenKrupp Germany 16.8 16.55

14Evraz Russia 16.1 13.85

15Gerdau Group Brazil 15.57 13.7

16Anshan China 15 11.9

17Jiangsu ShagangChina 14.63 12.02

18Wuhan China 13.76 13.05

19Sumitomo Metal IndJapan 13.58 13.48

20Sail India 13.5 12.22

21Techint Argentina 12.83 11.42

22China Steel Corp Taiwan 12.48 11.65

23Magnitogorsk Russia 12.45 11.38

24Jinan China 11.24 10.43

25Maanshan China 10.91 9.65

26Laiwu China 10.79 10.34

27Shougang China 10.55 10.44

28Hunan Valin GroupChina 9.91 8.45

29Imidro Iran 9.79 9.41

30Ind Union/DonbassUkraine 9.52 8.55

The preceding Table has been utilised here to indicate that out of the top 30 steel companies globally, nine are located in China, with one in India and just three others coming from the European Union. The highlighted companies in colour have relevance in other sections of this study. The importance of the merger, as brought forth by the preceding discussion of the significance of regional trade blocs and national interests, is illustrated by the fact that at the time, then French President Jacques Chirac endorsed the union after the merger talks eased from being unfriendly to friendly in the face of certain guarantees concerning jobs as well as research operations (Noon, 2006). The new company represents 10% of the global market in steel and becomes a highly significant company for the European Union in the face of competition from and in China, as well as India, providing it with the resources and economies of scale to wrest deals from its rivals.

3.3 Pricing

In terms of pricing, the steel industry is cyclical running through periods whereby supply exceeds demand, and then when demand exceeds supply. The recent trends has seen demand exceeding supply as steel prices have been inching upward since 2003 as China’s economy has begun to heat up, along with India taking steps to increase the demand in its economy for more products and production (domain-b.com, 2004).

Table 2 – World Carbon Steel Transaction Prices

(Steelonthenet.com, 2008)

World Steel Prices US $/tonne

Hot Rolled Steel Coil

Hot Rolled Steel Plate

Cold Rolled Steel Coil

Steel Wire Rod

Medium Steel Sections

Jan 2007

549

747

647

495

735

Feb 2007

562

748

654

507

751

Mar 2007

577

758

670

533

768

Apr 2007

617

788

698

577

798

May 2007

623

800

696

606

815

Jun 2007

611

800

686

602

812

Jul 2007

599

808

681

590

819

Aug 2007

603

814

686

594

825

Sep 2007

602

810

673

580

821

Oct 2007

611

826

680

584

844

Nov 2007

615

833

688

584

853

Dec 2007

630

837

705

598

859

Jan 2008

639

847

716

621

871

Feb 2008

699

887

772

687

905

The preceding Table shows that upward movement that has and is making a new trend for the long embattled steel sector that had gone through heavy dumping in the 1990s as markets and the global recession dried up demand. But, that scenario seemingly looks like a thing of the long gone past, with China’s appetite just getting started, and India beginning its sit at the steel table. Prices are on the way up, as production capacity has remained relatively static with 1999 levels (DiCianni, 2007):

Chart 2 – Steel Production Capacity

(DiCianni, 2007)

The upward trending in steel prices as a result of production capacity is reflected in the following Chart:

Chart 3 – Steel Price Comparisons in Key Regions

(DiCianni, 2007)

The foregoing rise in steel prices is reflective of increased global demands as illustrated by the following:

Table 3 – Global Steel Demand

(DiCianni, 2007)

The prognosis for increased prices is forecast by a broad consensus of industry analysts as caused by heightened production costs, and increased consumer demand as a result of growth markets (rediff news, 2007). Spot prices for ore are a prime contributor to the foregoing as prices have been on the increase since 2003:

Chart 4 – Iron Ore Spot Prices

(DiCianni, 2007)

The preceding trend is highly different from the one facing the steel industry during the mid and late 1990s when too much capacity was the problem and steel prices dropped (Denoel et al, 2002).

3.4 Laws

The rules governing trade laws is overseen by the World Trade Organization that also oversees the varied treaties its member nations make (WTO, 2008a). The principle tactic and the one that is subject to attention in terms of laws has been anti-dumping policies utilised by Japan as well as Russia and recently China in the early 1980s and 1990s to gain a footing in supplying steel when prices were depressed as a means to enter and secure contracts (WTO, 2008b). Dumping represents the selling of steel in foreign markets below what is charged in home markets in order to secure a foothold, and or longer term supply contracts to keep factories running (Scheurman, 1986). The anti-dumping provision has long been a measure whereby countries seek to prevent lower priced steel from competing with domestic producers and thus threatening their home markets (WTO, 2008b).

An example of the foregoing is provided by Jones (2004, p. 23) in his book “Who’s Afraid of the WTO?”:

“When steel imports from Japan and other countries surged in the United States in the wake of the crisis, however, it became a “trade problem, ” and WTO rules prohibiting unilateral trade restraints as a stabilization tool by governments shifted blame over to the system of trade rules itself.”

The laws on steel stem from this foundation, contained within World Trade Organization rules, thus it represents a confusing as well as under most circumstances self-servicing provision enacted frequently by the target country. The following provide illumination on the foregoing (Tarullo, 2002):

“While not specifically proscribed by international agreements, dumping has been internationally identified as deserving of condemnation if it causes injury to an industry in the importing country. (2) U.S. law, since emulated by other countries, added to the definition sales below fully allocated cost of production, even where the price charged for the merchandise was the same as that in the importing country. Anti-dumping law generally provides for imposition of an additional import duty to equalize the price of the imported goods with the "normal value," as calculated from foreign sales or from the cost of production. Most economists find the entire premise of anti-dumping law misguided--at least where there is no predatory intent or effect--because it discourages some forms of price competition in some circumstances. Certain domestic interests--particularly those in industries with high fixed costs--are equally insistent that anti-dumping laws are necessary to protect them from foreign producers suppressing prices by flooding domestic markets. The laws and regulations enacted by countries, which can be very complex, reinforce the suspicion of liberal traders that the laws are rigid, biased implementations of a misguided premise.

Not surprisingly, disputes over imposition of dumping duties have been frequent. Exporting countries have often complained that, quite apart from the principle that dumping is bad, importing countries misuse their anti-dumping laws. The first "code" negotiated in the GATT to supplement the rules of the original GATT agreement was one that limited the use of anti-dumping measures. (3) New, more detailed agreements to limit national anti-dumping measures were included in both the Tokyo Round and Uruguay Round of trade negotiations. Meanwhile, use of anti-dumping measures had spread from the United States, European Union, and other industrialized countries to developing countries as well. (4) Thus, while international disagreements over dumping continue to pit some industrialized countries against Japan and many developing countries, the lines are not as clearly drawn as they were twenty years ago.”

The fray over anti-dumping continues to dominate the steel sector, but the recent surge in demand is lessening such occurrences and companies scramble to ramp up production and meet increasing demand. This has been a significant tactic used in the market that could very well continue after the shakeout over which companies dominate in China as well as India settles in.

3.5 Monopolies

Steel represents an important component in the health of national economies by virtue of the broad range of industries it supplies. Automotive, construction, appliances, equipment, industries machinery, pipes, plumbing and a host of other areas that underpin production are all industries that need steel. As such national interests step in, as indicated under regional trade blocks, whereby steel is akin to a national resource, in the securing of raw materials and finished output, thus the strengthening of company positions in the sector is a priority that regional and national governments seek and endorse, as evidenced by former French President Jacques Chirac’s positive comments on the Arcelor Mittal merger. From this stance, having too many producers, steel companies, weakens their position in the global market, and size enables them to introduce economies of scale in production and sales. Thus, monopolies simply are not a term that applies in this sector as a result of intense global competition and national interests.

In steel, bigger is better! Better for the steel company, national interests, domestic market supplies, and in terms of strength against their rivals. In the European Union, monopoly like status is not punishable as it is in the United States, as long as such does not harm the consumer or restrict competition (European Union, 2002). In the European Union a Monopoly is defined as (Europa, 2008):

“Market situation with a single supplier (monopolist) who - due to the absence of competition - holds an extreme form of market power. It is tantamount to the existence of a dominant position. Under monopoly, output is normally lower and price higher than under competitive conditions. A monopolist may also be deemed to earn supra-normal profits (i.e. profits that exceed the normal remuneration of the capital). A similar situation on the demand side of the market, that is with a single buyer only, is called monopsony.”

In other words, if the status of an extremely large company is not harming consumer markets and or increasing prices that are out of line with the normal costs of production, then, it is basically non actionable. The European Union’s actions against Microsoft were of a different nature in that Microsoft’s actions were restricting competition in the entire industry sector, and the company was convicted of unfair tactics (European Union, 2004).

3.6 Emerging Markets

The merger of Arcelor and Mittal provided the new company with the size as well as clout to make a significant difference in emerging markets such as China due to its enhanced capabilities across all market and industry sectors (ArcelorMittal, 2008b). The foregoing increased size as well as capabilities also provides the new company with advantages in the high growth Indian market (ArcelorMittal, 2008b). The company announced immediately after its bid for Arcelor was accepted that the new plans call for boosting its presence in both the Chinese as well as Indian markets (EarthTimes, 2007). Lakshmi Mittal is of Indian decent, thus this new and larger company will provide him with increased presence in that market as a result of long standing contacts and the company’s enhanced capabilities (Forbes.com, 2007). As the world’s fifth richest person whose wealth is estimated as $32.0 billion that influence helps his aims in many areas (Forbes.com, 2007).

Of particular interest is the discussion of the formation of a new regional trading block in Asia consisting of China, Japan, South Korea and India, a union that along with other countries would account for 20 percent of the world’s Gross Domestic Product, that would relegate the other major trading blocs and lesser players (Bergsten and Scollay (2001).

The potential for such an arrangement has gained in strength since 2001, with increasing talks being held between China, South Korea and Japan (Asia Times, 2003). Increasing ties between China and India, as a result of the proposed cross border trade route would open up trading in the region and serve as the foundation for a new trading bloc (Hasan, 2006). The present trading Bloc, ASEAN, which was formed in 1967, consists of Indonesia, Malaysia, the Philippines, Singapore and Thailand, that represents a combined population of approximately 560 million (Association of Southeast Asian Nations, 2008). China, with its population of 1,321,851,888 (Rosenberg, 2007), along with India’s 1,027,015,247 people (indianchild.com, 2007), and Japan’s 127,288,419 (CIA World Factbook, 2007), would result in a combined trading bloc population of 2,476,155,554, or slightly more than one-third of the world’s total population of 6,602,224,175 (World Factbook, 2007a). That would dwarf the population counts of the European Union, 490,426,060 (World Factbook, 2007b), as well as NAFTA (446,078,489), with its U.S. population of 303,987,457 (United States Census, 2008), Canadian, 33,390,141, (World Factbook, 2007c), and Mexican population of 108,700,891, (World Factbook, 2007d).

Figure 4 – Map of Asia

(WorldAtlas.com, 2007)

Such a union, China, Japan, and India would have raw materials such as iron ore, oil, and other minerals, in addition to the technology expertise of the Japanese to make such a trade bloc formidable as well as feasible. China represented the largest steel importing country as 275 million tons, which was followed by Japan, at 132 million tons thus indicating the benefits to Japan for its automotive and other industries in a country that imports almost all of its raw materials to be used in domestic consumption as well as export (Anwar, 2006).

Figure 5 – Top Exporting Countries

(Anwar, 2006)

As the two most important emerging markets for steel as well as a long shopping list of consumer and other products are represented by China and India, thus having a foothold in these markets is critical. Something that Mittal’s associations and new largest steel company fits.

3.7 Mature Markets

Mature markets, or developed markets for steel represent those that have had a long-standing infrastructure and established industry sector. The foregoing refers to countries, as well as industry sectors within countries whereby the market for certain steel products is past the growth phase and settled into an annual percentage of sales and or production mode that is within 2% to 7% (steelonthenet.com, 2005). Canada, the United States, the United Kingdom, France, Italy, Germany, Spain, Belgium and the Japan are a few examples of mature markets, with China, India, and the African region in general termed as emerging markets, although Africa has yet to develop infrastructures and policies, by and large, to be classified in the aforementioned in terms of growth volume and potentials.

Mittal’s acquisition of Arcelor strengthens its position in the European theatre, and provides it with internal capacity strength to service the emerging markets of the ten new countries admitted into the European Union, as represented by “…Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia” (new to denmark.dk, 2007). The positioning, as represented by the new company’s size enables it to defend its home market position in the European Union, as well as to be aggressive in its policies concerning emerging markets, an important double edged sword in the battle for market share and growth.

3.8 New Exploration Locations

The Major exporters of iron ore are presently Australia which exported 239 million tons in 2007, followed by Brazil at 224 million tons, making these countries highly important in global steel production (Anwar, 2006). Brazil is situated in the perfect shipping alignment with Europe, while Australia is strategically positioned to supply Asia, and the important locations for the booming markets of China and India. Brazils iron ore deposits have made Vale the largest iron ore digger in the world, and Rio Tinto as the other company in Brazil that are dominant suppliers (MineWeb, 2008). There are many large iron ore deposits through the world, thus entailing large-scale dispersion of the industry as supplies are plentiful in terms of known and potential sites. The key in the process is accessibility as well as infrastructure (MineWeb, 2007). The size of ArcelorMittal provides it with contractual clout to secure arrangements in raw material supply, an important factor. With locations in over 60 countries, the company is a recognised major and dominant company in the sector, thus enhancing its ability to secure supplies.

4.0 Research Methodology

The examination of the subject matter lent itself to secondary research that leaned toward more contemporary materials, such as journals, newspaper articles and Internet sources. The foregoing represents the timeliness of the subject matter that talks about the steel industry in today’s terms as well as the factors to be considered in relationship to the AcrelorMittal merger.

4.1 Method

As a result of the foregoing, it was determined that the best course of action in terms of information entailed secondary research as it offers many differing “… types of data and information” (Patzer, 1995, p. 5). The foregoing can consist of (Powell, 1991, pp. 28-31) 1. books, 2. journals, 3. magazines articles, 4. newspaper articles, and 5. surveys.

Secondary source material represented the widest ranging technique in the gathering of data as it permitted the review of a large database of materials to sort through differing views which could be compared against other sources, thereby increasing the degree of objectivity and quality (Patzer, 1995, p. 3). Secondary data is used extensively, because it widens the field of choices and thus information sources to yield more viewpoints as well as theories and other approaches to a study that might potentially be overlooked and or not considered when using primary research (Patzer, 1995, p. 11). The broad based fields of inquiry entailed in this examination leant itself as particularly well suited to secondary research.

Secondary research is information that has been researched and written about by other people as well as agencies for some end purpose, which is revealed in the applicable study that was under investigation (MacFarlane, 1991, pp. 35-36). Secondary research often utilises other materials, secondary research as well as primary research that is germane to the examination where such has applicability to the focus of the study. Powell (1991, pp. 29-30) tells us that all research entails some utilisation of secondary research as a component of its investigation. He continues (Powell, 1991, pp. 29-30) that the benefits derived from utilising secondary research are:

The benefits of utilising secondary research sources is that

  1. The secondary sources are generally more plentiful as well as available.
  2. In electing to utilise secondary sources, information selection is an important variable.
  3. Through the use of secondary research, large volumes of data can be obtained over short time frames, thus making for an inexpensive, and cost effective means of gathering information over a reasonable time frame.
  4. Secondary research entails less cost in terms of data collection and time than is the case for primary data
  5. Secondary information can in most cases provide data that is more accurate that can be obtained through primary sources as said information can be compared against a number of source materials.

Even with all of the aforementioned benefits to secondary research, there are downsides to its utilisation as indicated by the following (Powell, 1991, p. 231-32):

“1. The meaning of definitions:

The meaning of certain words, and or phrases in a particular context can have different connotations than those of another field, thus attention must be paid to the type of study and or examination at hand, an of the preceding aspect represents an area of concern.”

“2. Measurement error:

In the instances of certain types of surveys and questionnaires, measurement error can potentially contribute to inaccuracies in any such work. The researcher needs to equate any statistical, survey and or other type of data tat is subject to measurement error by comparing such against other information forms from other sources, balancing all such sources into a consensus as opposed to reliance on any one piece of material.”

“3. Source bias:

This aspect represents what is termed as a vested interest and or preconception on the part of the author and or source of information. The preceding can thus skew information, replies and or data to a particular direction, and or point of view that is valued by the source. Secondary research sources can guard against the preceding through the use of many different materials to obtain a broad consensus of views to thus reduce and or eliminate bias.”

“4. Reliability:

Information gathered at any given point in time can be subject to either change and or being outdated as a result of newer data, more information, and or other variables. Secondary sources permit the gathering of a broad range of views, opinions, information and data that provides objectivity, thus aiding in reliability as long as more than one source is reviewed.”

The research methodology utilised for this study centred upon varied books, journals, magazine articles, and other sources as the means to obtain information for a potentially balanced view of all sides. The methodology utilised also looked for consistency in terms of information content, as well as for similarities. The contemporary nature of the subject ruled out the possibility of primary research being conducted as time was a limiting factor, as was the availability of sources. Secondary research has its other drawbacks in that it has the limitation whereby all of the possible and or potential sources covering the subject can be reviewed as a result of sheer volume and the constraints of time. The preceding means that it is possible that more relevant and or timely data may not have been utilised in this study, which potentially could change and or amended the outlook and or conclusions reached. To guard against this possibility, a broad range of sources were researched entailing books, journals, newspaper articles as well as the Internet to scan for older as well as the latest information utilising a variety of search engines, as well as key words.

The preceding combination of various methods used quantitative research in a lesser degree which aided the study in the understanding of key facets of the questions of the research as represented by factors in the markets, along with historical information. Further insight with respect to the advantages of quantitative research with regard to its applicability to this study is provided by Daymon and Holloway (2002. p. 8) who stated:

“Other features of quantitative methods are that they tend to be large-scale with a focus on specific factors which are studied in relation to specific other factors. This requires researchers to isolate variables from their natural context in order to study how they work and their effect”

In order to achieve a more balanced assessment of the information researched, both techniques were used in this study. Research than the researcher does not participate in is termed as quantitative, and thus the researcher does not influence the subject matter. In qualitative research, there is the potential for the researcher to be immersed in the subject in order to become versed in it, thus the potential for bias to occur.

The large volume of information that was available on the subject matter along with the varied sub categories that were covered in this study further limited the amount of time that could be devoted to each areas, thus said time limitation with regard to time did not permit all sources to be reviewed, as mentioned, thus important views and or opinions might have been overlooked or not obtained. The wide range of sub topics also entailed utilising a wide range of information searches to compare data, which lengthened the amount of time needed to examine the varied facets of this study. The technical areas as contained herein dictated that the utilisation of empirical analysis was better served through a review of a broad variety of sources in the formulation of this examination. In formulating the approach to eliminate the potential for bias that could have entered into the research as a result of views that were preconceived. A broad perspective of sources was use to minimise this possibility through opening the study to a large cross section of ideas, information, facts and opinions.

Qualitative research represented the foundational basis as it seeks to uncover the why, as opposed to the how that represents the methodology of quantitative research. Quantitative research seeks to find the reasons that are connected to how decisions are made, which differs from the what / where / when approach of quantitative research (Daymon and Holloway, 2002, pp. 7-10). There were instances in this examination however, whereby the what / where / when of quantitative research was called for that augmented and or supported what was uncovered. Easterby-Smith et al (2002, 13-15) tell us that there are varied ways in which the study of a subject can be approached. They advise that there is deductive along with inductive research whereby both of these can be combined to reach a determination regarding the views as well as opinions of both small and large samples to compare views and thus potentially arrive at a more enhanced and or new understanding.

The preceding was utilised in this study. Combining research methods is advised by Saunders (2006, p. 119) who cites Robson (2002, p. 59) indicates that such can enhance the study quality. Positivism is referred to by Saunders (2006, p. 119) as well as Remenyi et al (1998, p. 32), and a number of other sources such as Robson (2002) to make his point regarding descriptive research. Qualitative, along with quantitative research were both utilised in this study that followed the methodology rules as indicated by Denzin and Lincoln (1994, p. 2) as well as Newman and Benz (1998, p. 14).

4.2 Research Philosophy and Approach

The study utilised a combination of qualitative and quantitative research in combination with primary, and secondary sources. Saunders (2006) states that research philosophy is an “… overreaching term … (that) … relates to the development of knowledge and the nature of that knowledge”. He further advises that the development of knowledge and the nature of knowledge” is what research philosophy refers to (Saunders, 2006). Newman and Benz (1998, p. 14) state “…qualitative and quantitative strategies are almost always involved to at least some degree in every research study”. Denzin and Lincoln (1994, p. 2) amplify the preceding:

“Qualitative research is multi-method in focus, involving an interpretive, naturalistic approach to its subject matter. This means that qualitative researchers study things in their natural settings, attempting to make sense of, or interpret, phenomena in terms of the meanings people bring to them. Qualitative research involves the studied use and collection of a variety of empirical materials--case study, personal experience, introspective, life story, interview, observational, historical, interactions, and visual texts --the described routine and problematic moments and meanings in individuals' lives.”

The vast views of approach, and thought contained in understanding this subject take in a broad range of secondary research as this method provides exposure to a balanced view that is not skewed by what can occur in primary research. Secondary research allows us to be in touch with many different points of view, however, it can not always be relied upon as the researcher may have sourced the wrong materials in making the analysis, and or missed certain key points that were either not available, or unknown at the time the study was conducted.

4.4 Research Strategy

Saunders (2006, p. 119) advises that combining research methods can enhance the quality of a study, and states that he has found that “… it is often advantageous to do so”.

Saunders’ (2006, p. 121) tells us the direction of deductive research can be often faster in completing what is at hand, as data collection is more often based on “… one take”. Inductive research states Saunders (2006, p. 121) “… can be much more protracted …” in that in general the ideas are “… based on a much longer period of data collection and analysis...” that have to emerge gradually.

Positivism represents the approach utilised by social scientists which entails “… working with an observable social reality and that the end product of such research can be law-like generalisations similar to those produced by the physical and natural scientists” (Remenyi et al, 1998, p. 32). Via this method the phenomena observed points the path to data that is creditable, through the use of existing theory to develop the hypothesis (Remenyi et al, 1998, p. 32). Saunders’ (2006, p. 103) tells us the a benefit of using this type of approach, positivism, is the research path or direction consists of a method that is “… value-free …”. Remenyi et al (1998, p. 33) calls this deductive, in that the researcher “… is independent of and neither affects nor is affected by the subject of the research”.

5.0 Findings and Analysis

The merger of ArcelorMittal, as noted in the Emerging Markets section of the Literature Review, would provide the new company with increased clout not only in its home market region of the European Union, but in important emerging markets such as China and India. An example of how the union between these two companies was received can be found in the reaction of India after Mittal acquired Arcelor. In a report issued by “The Economic Times”, India’s premier financial newspaper, hailed the merger and noted the sense of national pride in having a company that is run and managed by a native of India succeed in becoming the largest steel producer in the world (International Business, 2006).

The merger made the new company a behemoth that controls fully 10% of the global market in steel, as well as one that is three times the size of its nearest rival, Nippon Steel of Japan (International Business, 2006). Interestingly, ArcelorMittal has no operations in India, a fact that is sure to change in light of the growing emergence of the economy in India, its ties with China over the proposed cross border trade route that would link China with India and also serve as a meanings for Chinese goods to reach other Asian nations and open up trading in the region (Hasan, 2006). The preceding could potentially lead to the formation of a new trading bloc comprised of China, India and Japan that would be roughly three times the size of the European Union and NAFTA combined.

This examination has sought to equate the importance of the merger between Arcelor and Mittal Steel in terms of the examination of key industry factors as represented by competition, pricing, trade laws, monopolies, emerging markets, mature markets, new locations for exploration and supply, as well as overall factors in the industry sector. In equating the ramifications of this merger, a brief look at the situation preceding the merger will add understanding to the points thus far covered, as well as its impact (wordpress, 2006):

  1. Deal Background – Post Merger:

Prior to the acquisition, Mittal was the world’s largest steel producer in terms of volume. The company, although based in the Netherlands was perceived as not truly being a European company as a result of the decent of its owner Lakshmi Mittal who was born in India. Indications of this attitude were reported by Thomas (2006) who pointed out the attitude of the French over acquisitions by a foreigner, despite the fact that Lakshmi Mittal was raised and educated in the UK. Other concerns were raised over the status of French jobs as well as revenues. In terms of the merger, most in the business community in France were of the opinion that it should have been Arcelor that was acquiring Mittal, a company that was approximately the same size with respect to its operations in the industry.

Thomas’ (2006) views on the aforementioned were also reported by Giridharadas (2006) who stated:

“Polish plumber, step aside. The new archetype of the threat to Europe is the Indian in pinstripes. Or so it seemed this week, as French political and corporate elites shaped Mittal Steel's hostile bid of E18.6 billion, or $22.5 billion, for its European rival Arcelor into nothing less than a corporate clash of civilizations. The specter of a European industrial icon being taken over by an Indian company provoked a swift, united front among politicians and business leaders that is rarely seen on other issues that arise in the European Union.”

The foregoing represents a troubling series of comments that actually were a part of the post merger battle of ideals, cultures and outlooks that in reality was simply one European company taking over another. Another example of unwarranted comments were sounded by the Chief Executive of Arcelor, Guy Dolle, who stated in commenting on Mittal, that is represented “… a company of Indians …” adding that “…"group of less-than-average" businesses that would pay for Arcelor ‘ in monkey money’, which represents a French term meaning that something is worthless (Giridharadas, 2006). The company’s ties in China had helped Mittal Steel grow to the extent that is became the major volume producer as a result of that association and some other shrewd dealing (Giridharadas, 2006). It is important to note that Lakshmi Mittal was raised and educated in London and that his company had at the time no operations in his native company of India, which are part of future plans into emerging markets (Giridharadas, 2006).

The company’s business model has been location and expansion via emerging markets, a reason as to why it had and has achieved tremendous growth (Giridharadas, 2006). The foregoing expertise was achieved by its presence in markets such as Mexico, Trinidad as well as Kazakstan (Giridharadas, 2006). Eventually the rhetoric died and the merger offer was hailed as being a triumph for Europe in the important steel sector.

  1. The original merger bid:

Mittal’s bid for Arcelor was initiated in January of 2006 in a $22.7 billion offer that consisted of 25% cash and 75% in Mittal shares (wordpress, 2006).

  1. Steel Industry Consolidation:

In the Literature Review section of this study under 3.1 The Steel Industry, Anwar (2006) reported the fact that the steel industry was undergoing a series of acquisitions that was being fuelled by the quest to develop market positioning in emerging markets, a Mittal business model. Anwar’s (2006) Chart illustrated this facet:

Chart 1 – Global Steel Industry

(Anwar, 2006)

The importance of being able to produce in a cost effective manner, as well as responding to the acquisition growth plans of other companies. In equating this aspect of the industry, it should be remembered that Arcelor was the result of a series of mergers that created the company from Spain’s Aceralia, France’s Usinor, and Arbed of Luxembourg in 2002 (Reed, 2006). The composition of the steel sector is highly fragmented, with the five top manufacturers accounting for approximately 25% of the total market prior to the merger (wordpress, 2006). A perspective on the preceding is gained when one compares the steel industry against the automotive sector where the top five companies account for 73% of the total market (wordpress, 2006). Lakshmi Mittal, along with his executive brain trust have indicated that they believe that the rounds of consolidation will result in three to four companies dominated the sector sometime around 2010 (wordpress, 2006).

Bargaining power is a highly important aspect of the steel sector whereby economies of scale are extremely important and come into play. Size aids in improving the sourcing of raw materials as well as providing access to increased markets, heightened operating efficiencies, and increased flexibility in operations (wordpress, 2006).

  1. Merger Controversy:

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