Wow.. is the only word that I can say at his guts and boldness. None other than Lakshmi Mittal. Trying to take over Arcelor, the second largest steel maker ( Please note: In capacity Arcelor is second to Mittal group, while in terms of revenues greater than Mittal's. ), with a market share more or less the same, scripting a new, but much needed trend in the steel industry is simply good.
Think of this: the world's three biggest iron ore producers (BHP Billiton,(BHP) CVRD & Rio Tinto (RTP)) control about 75% of production of steel's major raw material and the top 3 car companies have about 30% of global sales while the top 10, I think have about 20% of the total output of steel making them sandwiched between suppliers and car makers. Added to this, when the steel prices go down ( for various reasons because of increased supply at some parts or decrease in growth of construction etc... ) the smaller companies cannot reduce the supply soon while the bigger ones can. Hence, the smaller companies react by reducing prices in order to sell their inventory , ofcourse, incurring huge losses. Hence, the need for consolidation. Mittal was right to see the need as did Arcelor's Dolie. Infact, an analyst said, "we knew about Mittal's talks on consolidation and expected him to bid for a small-to-mid sized company, but not arcelor! We should have predicted!" True, we should have predicted.
Now, the next question? - why does Arcelor make sense for Mittal Steel?
1. Arcelor deals with high value steel while Mittal Steel is more on the low end steel. This is the reason why although Arcelor has higher revenues, it has lower capacities than Mittal Steel. The strengths are complementary. Mittal steel manufactures low end steel at developing nations and is a volume game more than the quality game. If mittal Steel can integrate Arcelor properly, it can diverge its production to Arcelor's manufacturing units, deliver high quality steel reducing costs and improving cost arbitrage.
2. The geographical location of Arcelor is complementary to Mittal Steel. Mittal Steel is concentraed around Asia, North America andwhile Arcelor is mostly into Europe. Arcelor's acquisition would give Mittal Steel a presence in almost all the major markets. If it had to improve its presence in Europe and other places, what is better than acquire small units and integrate all of them together into the mother unit? Buy a big unit which has till now grown by several acquisitions and has a good presence.. So easy to say, but so gutsy move!
Any negative points while acquiring Arcelor for Mittal Steel?
Arcelor is mainly into developing high quality steel in high cost developed countries ( in Europe ). This would, in my guess, be the major drawback for Mittal Steel. But again this is minor compared to Arcelor's brand image in Europe. If I were he, I would integrate Arcelor ( ofcourse if the deal happens, thats a big question ) just as it is, no lay offs nothing, synergise both of them, gain cost arbitrage, reduce costs, increase revenues, gain more customers because of the increased brand. Slowly, ( a few years later) move the backend manufacturing and technology of Arcelor to low cost developing nations. The front end of Arcelor would still remain in Europe - you see, you cannot take on governments of Europe especially in the steel domain . This would give you an ability to further increase revenues and decrease costs.
Think of this: the world's three biggest iron ore producers (BHP Billiton,(BHP) CVRD & Rio Tinto (RTP)) control about 75% of production of steel's major raw material and the top 3 car companies have about 30% of global sales while the top 10, I think have about 20% of the total output of steel making them sandwiched between suppliers and car makers. Added to this, when the steel prices go down ( for various reasons because of increased supply at some parts or decrease in growth of construction etc... ) the smaller companies cannot reduce the supply soon while the bigger ones can. Hence, the smaller companies react by reducing prices in order to sell their inventory , ofcourse, incurring huge losses. Hence, the need for consolidation. Mittal was right to see the need as did Arcelor's Dolie. Infact, an analyst said, "we knew about Mittal's talks on consolidation and expected him to bid for a small-to-mid sized company, but not arcelor! We should have predicted!" True, we should have predicted.
Now, the next question? - why does Arcelor make sense for Mittal Steel?
1. Arcelor deals with high value steel while Mittal Steel is more on the low end steel. This is the reason why although Arcelor has higher revenues, it has lower capacities than Mittal Steel. The strengths are complementary. Mittal steel manufactures low end steel at developing nations and is a volume game more than the quality game. If mittal Steel can integrate Arcelor properly, it can diverge its production to Arcelor's manufacturing units, deliver high quality steel reducing costs and improving cost arbitrage.
2. The geographical location of Arcelor is complementary to Mittal Steel. Mittal Steel is concentraed around Asia, North America and
Any negative points while acquiring Arcelor for Mittal Steel?
Arcelor is mainly into developing high quality steel in high cost developed countries ( in Europe ). This would, in my guess, be the major drawback for Mittal Steel. But again this is minor compared to Arcelor's brand image in Europe. If I were he, I would integrate Arcelor ( ofcourse if the deal happens, thats a big question ) just as it is, no lay offs nothing, synergise both of them, gain cost arbitrage, reduce costs, increase revenues, gain more customers because of the increased brand. Slowly, ( a few years later) move the backend manufacturing and technology of Arcelor to low cost developing nations. The front end of Arcelor would still remain in Europe - you see, you cannot take on governments of Europe especially in the steel domain . This would give you an ability to further increase revenues and decrease costs.
What are the possible challenges to this deal?
1. First, success of the merger itself is in a great question. I would guess Arcelor is worried about the same point - layoffs in the long term. Entire Europe ( the French government ) is so against the deal.
2. Till now, all the companies that were acquired by Mittal steel were running into losses. This, differently, is not so.
3.Also, all the recent acquisitions were related to the same business model vis, low cost units manufacturing low cost steel. Arcelor is a big challenge looked at from that angle.
These are some of the thoughts that came up while writing this article:
1. Can Mittal Steel be a role model to Indian IT Companies? Should Infosys, Wipro should make mid-sized acquisitions in Europe etc.. ? My advice would be that they do small sized acquisitions before making mid-sized acquisitions and build their strengths in merger and acquisition. Mittal Steel is very strong in acquisitions. It alwyas plays from the same strength.
2. What would be the next move of Mittal? If this deal gets finalised, hmm currently, integrate Arcelor. This would take a couple of years. Then think of another big company :) If this deal does not get finalised, then... hmmm, go for the next biggest company providing complementary strengths. Well, are there any? Good thing to think about when I have time..
Whatever happens, whether the deal succeeds or not - I am so happy, my steel stocks are going to rise. I did not know that steel runs in a commodity cycle and that was why investors are so afraid of it. I was just bothered about P/E values ( The P/E, an indicator of how priced the stock is relative to earnings). Initially, when I saw that Tata Metaliks had a very low P/E yet had great brand and clients, I thought I must have been lucky to find such a scrip so soon! Now, I know why I have been unlucky. Especially, with the news of China incraesing its supply to meet not only its demand but also export to other countries, all steel scrips have fallen down terribly. This news will definitely cheer up steel stocks.
Most importantly, it feels great to see that a first generation Indian Entrepreneur ( oh! alright business man ) could think of taking over a huge European behemoth :) Three cheers to Mittal.
3 comments:
When I heard about the steel companies & Mittal ,I used to think that 'why this fellow has chosen steel?.steel is non-renewable.After a few years there'll be no ores left,that means no steel'.A few weeks back , I had a chance to read an article in some magazine about 'how mittal attained this position'.And it described in detail how Mittal started and how he'll go for an aquisition.I think before every aquisition he could see something which can be avoided to avoid losses(since many of his aquistions involve aquiring loss-making companies).
(contd)and besides his moves need a lot of nerve.One wrong move,that'll wipe out the future.
True! Yes, He goes for loss-making units. More particularly, he goes for those which have good technology but have failed because of bad management. He puts in place his people and improves management... See, the power of management :)
Again, I do agree with you, one wrong move and it wipes the future! Thats the confidence he has in his management you see! I was reading about one of his acquisitions in Ukraine and he was mentioning that the company could be turned-around ebcasue of his management! True..
That too his management consists mostly of Indians.. Indians, when there is a good leadership and good money, can perform well...
Post a Comment