Mergers and Acquisitions: Hostile Mergers - Essay Example

Table of Contents Introduction 2 Case study- ArcelorMittal 2 Mittal Steel Company and Arcelor 2 1.Strategy 3 Why the changes implemented 3 2.Regulatory 5 3.Valuation 6 4.Financing 7 5.Defence tactics 7 6. Implementation 9 7. Risk 10 Conclusion 10 References 11 Introduction Merger can be defined as a consolidation of two same size companies, which creates a new company. An acquisition is, when a company buy another company and a new company will form (Sherman and Hart, 2006, p.1). There are different types of merger and acquisition can find in the business world, among which the takeover of Arcelor by Mittal steel Company is considered as hostile merger. Hostile merger is that kind of merger, where the management of the one company is forcefully acquires the other company by replacing its management and other operation sectors. In this case the Mittal Steel may do not forced Arcelor to change its management or operation system, but they pay more than the actual share price of Arcelor. The offer made by Lakshmi Mittal is the highest bid made in the steel industry. The offer explained four Mittal shares with 35.25 euro will be exchanged for every five shares of Arcelor. As a result the value of Arcelor’s share valued as 28.21 euro, which implicates that it will involves 27% premium over the closing price on the stock market from the previous day. This brings the conclusion that the merger between Mittal and Arcelor companies is an example of Hostile merger. Case study- ArcelorMittal Mittal Steel Company and Arcelor In the year1978, the steel company was formed as “Ispat International” by the father of Lakshmi Mittal. Different disagreements between the father and son made a separation in the year of 1995. It’s headquartered in Rotterdam, Netherlands. The company grow high within few years by different investment and acquisition throughout the world. Among which, the most controversial merger was with Arcelor. Before the acquisition , Arcelor was the largest steel producer in terms of turnover and second largest in terms of steel output, whereas Mittal Stand first in terms of output. The CEO of Arcelor is Guy Dolle, and it’s headquarter is situated in Luxembourg City (Kumar, 2012). 1. Strategy In recent years few industrial mergers has captured the imagination of the business world like Arcelor and Mittal Steel. These two companies are the largest complementary company in terms of steel production (Rao and Sivaramakrishna, 2009, p. 3). In the year 2006 Mittal Steel asked the shareholders of Arcelor to create the world’s first steel producer , which will produce steel more than 100 million tonne plus. Mittal offered $22.7 billion to the share holders of Arcelor as a deal value. This will be split as 75% of Mittal’s shares and 25% in terms of cash (Zabihollah, 2011, p. 72). However soon it creates a big controversy. Now the question is come up why Mittal Steel chooses and offers Arcelor for their acquisition. It offers several answers like- Arcelor is an attractive target. Mittal had only 34% merger revenue from Europe, whereas Arcelor had 71%, which is near about the double amount which Mittal had. In terms of production unit of steel, Archelor was the strongest competitors for Mittal steel (Nancy, 1999, p. 4) Why the changes implemented Both the companies wanted to achieve the number one position in the steel industry, which is not possible, if they try it individually. These two companies want to achieve the economy of scale. However there are different factors are come as obstacle in terms of growth for these companies. Competitors are one of the main factors. Abolishment of competitors will help them to achieve the economy of scale. According to the experts from the year 2006 there was a high demand for the steel industry. However it will be not possible in one way growth for the companies, changes were necessary for them. In terms of volume as well as revenue, both the companies were very attractive to each other. They are well known about strengths and as well as their weakness. The requirement for the companies is also same, which is known to each other. So the companies are trying to adopt changes which will help both of them in a mutual way. Step change in steel sector consolidation- The consolidation in the steel sector has been changed due to the merger of Mittal Steel and Arcelor. After the merger it is expected to having 320000 employees throughout the world. Annual sales value will reach approximately 70 Billion and the total output will be near about 115 Metric tons. The merger of the top two steel giants will help to achieve a sustainable operating environment among the steel industry (Kamal, 2010, p. 21). Expanding through geographic wise and culture wise- Individually both the companies Mittal Steel and Arcelor was having their limited overlap. The combination between these two companies will help them to diverse the steel from Europe to South America to Africa. Near about the whole world will be captured after the acquisition. Help to accumulate the global customers as well as strengthening the range of product- In terms of product diversification as well as acquiring the global market, now the merged company will be more efficient. Each others weakness can be making as their strong points with the help from others. As well as reduction in price volatility and value added contract will help to generate better opportunity for the company. This will help to increase the previous goodwill. Global distribution and trading network will help to maximize the opportunity- the merger between these two companies will make them able to generate trading and distribution network in worldwide basis. The new company is able to doo cross border trade flows which will generate substantial savings. Efficiency will increased combining asset based through investment and operational excellence- The major initiatives after the merger will be taken like developing a better research and development department, By achieving the global benchmark the product quality will be improved. Specialized production units should be made. By maximizing the efficiency from mining and steelmaking the input cost can be controlled The operational synergies are needed to be extended. The financial opportunities are need to be maximized. 2. Regulatory The legal complexities of the merger can be subdivided in basic four subheads which are followed down- Multinational jurisdictions-All the securities listed by Arcelor’s in different countries like Belgium, France, Luxembourg and Spain has to be maintained by the takeover regulations. Approval by each relevant securities regulator in each jurisdiction is needed during the time of the offer. European council directive-Before the Directive 2004/25/EC was made on the takeover bids, Mittal’s offer was made. As Arcelor was the first company from Luxembourg, which was targeted for a hostile takeover offer, make the politicians to consider the draft of the legislation implementation deal more closely. Arcelor also lobbied for the amendments, which may have assisted hostile targets, including the provisions, that would required during the exchange of shares (Luc and Greg, 2007, p. 23). Anti competition laws- In EU, US and Canada Flings regarding competition and antitrust is required. Mittal Steel suffered from strategic and competitive issues as its operations in North America were already extensive. Shareholder resolutions- The deal was structured as a contribution of assets by Mr Mordashov in return for the shares in Arcelor. This means that the share considerations could be controlled by the board of directors only. 3. Valuation The offer proposed by Mittal steel to Arcelor is the value of each share of Arcelor share will be priced at 28.21 Euro. It implicates that a 27% premium over the closing price. In 26th January of the year 2006 the Arcelor’s share price became all time high price. In the preceding months the volume weighted average price is become 31%. Whereas in case of the next twelve months the weighted average share price will become 55% over the volume. These all made the equity value of Arcelor become 18.6 Euro on a fully diluted basis (Donald, 2009, p. 5). Under the valuation Arcelor’s shareholders were expected to receive four shares of Mittal Steel and 3.25 Euro cash for the exchange of every five Arcelor’s share. They also have the right to receive a mixture of stock and cash in any proportion they choose, provided that 25% of the consideration according to the agreement will be paid to the shareholders of Arcelor. Among which 25% will be paid in cash and 75% in stock. In exchange of every five Arcelor’s convertible bonds, four new Mittal Steel shares and 40 Euro should be paid to the holder. The share holders of Arcelor’s can be choosing among from the following. They can either choose 16 new Mittal Steel shares for every 15 Arcelor shares or they can choose to receive 28.21 Euros for each Arcelor’s share. 4. Financing In the month of January of 2006 the offer made by Mittal Steel to Arcelor’s shareholder was amounted $22.7 Billion. It was divided in terms of 75% Mittal Shares and 25% of cash. As a result the share holders of Arcelor can get 4 MittalSteel share and 35euros for every 5 Arcelor’s share they hold. The decisions to buy or sell the shares depend upon the shareholder as the management can only give them advice to accept or reject the project. On 26th January the share value of Arcelor’s was at 28.21 each, which is 27% premium over the closing price. In the preceding month it became 31% premium over the volume of weighted average price, and for the next year it was 55%. To acquire the outstanding shares Mittal Steel offered three terms to Arcelor. The terms are as follows. The primary mix cash and exchange offer Arcelor shareholders as four new Mittal Steel Shares with Euro five Arcelor’ 3.25 cash in exchange of five Archelor’s share. The second offer cost Euro 28.21 for every Arcelor’s share. The third offer in terms of exchange. It cost 16 new Mittal’s share for every 15 Arcelor’s shares. The shareholder’s of Arcelor’s could not make their decision by choosing any of the above offers. However in aggregate they choose 75% in Mittal’s share and 25% in cash. 5. Defence tactics On 27th January of the year 2006 Mittal steel first offered Arcelor 18.6 Billion euro for acquisition. However on 29th January The director of Arcelor reject the offer of Mittal’s saying that the offer was 150% hostile. He also said that these two companies were sharing different vision, business model and values. On 31st January the prime minister of Luxembourg Mr. Jean-Claude Juncker the 5.6% holder of Arcelor said that all necessary means are fended off for the unsolicited offer of Mr. Mittal (Peter and Pervez, 2002, p. 12). On 16th February Arcelor raises its dividend by 85% over the year of 2005. On the beginning of the month of April Arcelor announced that it will distribute 5 billion shares among the shareholders to raise the previous dividend. End of this month the chairman of Arcelor announced that they will rethink about the agreement with Mittal, if they made a cash bid. On 9th may Mittal said that they will be happy if the Arcelor board recommends its bid. In the reply of Mittal Arcelor asked for five billion shares for buy back option. On 17th may with the approval from the regulators launched the deal. Mittal’s family would make control over the group as they raise the offer by 34% to 25.8 Billion with a 57% increase in the cash components. With the forces of Russian steelmaker, Severstal Arcelor agreed to join the force. However the leading shareholders of Arcelor speak out against the proposal of Severstal merger. Some of the investors of Arcelor also demanded the voting rights. Now Arcelor agreed to meet the representative from Mittal Steel. In the meeting the bid of 25.8 billion which was offered by Mittal was rejected by Arcelor, however they were willing to accept the offer if they increased the offer from the shareholders and also implemented a chance of voting. After all this different agreements and disagreements was made between Arcelor and Severstal. On 25th June commends an upgrade recommendation was made by Arcelor of 26.9 billion over the offer of Mittal after different intensive talks. Finally a final deal was disclosed with the agreement from both the parties as Arcelor accepted the offer of Mittal which offered 33.5 Billion Euro (Ullrich and Piero, 2004, p. 15). There are mainly two steps are taken by Arcelor to counter the bid of Mittal. They are as follows. Dividend declaration: 1.2 Euros dividend per share was declared by Arcelor on the month of February of the year 2006. This dividend payout was around 85% higher than past year’s dividend payout of 2004. The company is done to show the shareholders that the current scenario of the management is extremely positive, which was accused as “creative accounting” by many analyst. The Russian angle: A 13 billion Euro merger plan was accomplished with Severstal, which is a Russian company. All these make it complex for the Mittal Steel Company to purchase as the shareholders rejected the merger. 6. Implementation The main issues for the outset of the merger are discussed below. After the merger initially everything was divided equally between the companies. The new management group was consisted 6 members, three from each side. 10 to 12 people were evenly spited in the integration office. From the very first day it was made clear that the CEO and the management group can effectively participant in the integration board, who can make the expectations. The core principles and weekly guideline also be made by this group. To coordinate all the efforts are managed by the integration team, each of the coordinator was responsible for three or four task forces, and to maintain regular contact with them. The greatest challenges after a merger is to get the line managers involved and sell the merger in terms of operating. The communications between the companies help them to maintain a top management road show where they were extremely successful. A web site with a web TV was launched which was the first large scale application for this kind of tool (Martin, Anne and Jens, 1998, p. 7). Everyone can access the TV, where they can see the interviews the top executives, as they discussed about different topics. A new brand was launched with the convention of the employees at which, they gathered the top 500 executives. In terms of communication concentrate is made on throughout the organisation rather than the general one. 7. Risk Risk of the project can be implemented in three different parts like – risk during the deal, risk Immediately after the deal proceed and the total risk after the deal proceed. Risk during the deal- Arcelor has its own fame as a giant steel industry in the world steel market. This might build trust among the customers after the acquisition. European government also have its own resistance which may not allow Mittal Steel for the acquisition. The rises of Arcelor also create risk for the acquisition. Changes in the exchange market may also create risk for the acquisition. Risk immediately after the deal- as the deal of acquisition is proceed , the management will split which may create risk for the new company. As the acquisition is created the two different separated company is now will be not able to work as previous they do. So the maintains among the management is very vital for the operation of the new company. Risk after the deal- As the company is now started working; they will also face different risks from the different unions and politicians in Europe. Dependence on the trade policy as well as on EU economic may hamper the productivity of the company. Previous agreements may get cancelled due to the acquisition, which will hamper the productivity (Linda and Ada m, 2008, p. 12). Conclusion The acquisition has several advantages as well as disadvantages. The revenue was increased from $28.123 billion to 105.2 billion, whereas the operating income increases near about four times than the previous one. The new company started venturing in new market line, and looking for the developing market like Senegal, Liberia to expand its market. As the competition is decreased the value of market share is increased. Now the brand portfolio is enlarged from the previous one. The current swap ratio is about 1:1. However from the year 2008 the net profit decreased by 10%. In 2009 the sales decreased by 47.5% and the net profit decreased by 98.7%. These implicate visible financial losses. References Donald, D. 2009. Merger, acquisitions and other restructuring activities: an integrated approach to process, tools cases and solutions. Elsevier. UK. Kamal, R. 2010. Mergers and Acquisitions: Strategy, Valuation and Integration. PHI Learning Public Limited. India. Linda, S. and Adam, R. 2008. Business risk management handbook: A sustainable approach. Elsivier. UK. Luc, R. and Greg, G. 2007. Corporate Governance and Regulatory Impact on Mergers and Acquisitions: Research and Analysis on Activity Worldwide Since 1990. Academic Press. UK. Martin, G., Anne, S. and Jens, T. 1998. Cultural Dimensions of international Mergers and acquisitions. Walter de Gruyter. UK. Nancy, H. 1999. Acquisition: Strategy and Implementation. Purdue University Press. UK. Paul, S. 2005.Corporate Finance, Mergers & Acquisitions. Oxford University Press. US. 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