o r g a n i z at i o n

february 2008

Integrating steel giants:

An interview with the
ArcelorMittal postmerger
managers
The merger of two large, complementary companies presented an unusual challenge:
sustaining growth as well as focusing on integration and cost savings.

Seraf De Smedt and Michel Van Hoey

Article A key challenge of any merger is the integration of everything from management and sales
at a teams to operating assets and procurement divisions.
glance
Few industrial companies have tackled this challenge on the same scale as has ArcelorMittal,
the giant steel group formed in 2006 through the combination of Arcelor and Mittal Steel.

In this interview, the two managers who led the integration effort discuss the nuts
and bolts of the mergerthe way the new organization was structured and how it
identified synergies and addressed cultural issues. Speed and energy emerge as two
vital success factors.
Few industrial mergers in recent years have captured the business worlds
imagination quite like the combination of giants Arcelor and Mittal Steel. The two
were brought together in June 2006 to form the worlds biggest steel company,
ArcelorMittal. It now has 320,000 employees in more than 60 countries and is a
global leader in all its major customer markets, including automotive, construction,
household appliances, and packaging. In 2007, the company earned revenues of
more than $105 billion, while its steel production accounts for roughly 10 percent
of the worlds output.

Vital statistics
Born July 1953

Married, with 3 children

Education
Graduated with degrees in engineering from cole Polytechnique (1977) and

civil engineering from cole Nationale des Ponts et Chausses (1979)

Alumnus of AVIRA (INSEAD)

Career highlights
ArcelorMittal (2007present)

Vice president and CEO of tubular products

JRME
GRANBOULAN Arcelor

Executive vice president of substainable development

(200506)

Executive vice president of innovation research and

development (200205)

Usinor

Executive vice president and CEO of packaging steel business

(19982002)

Sollac (Usinor)

Vice president of planning and strategy and head of sales

packaging steels (1998)

Head of management control (199298)

Fast facts
Chairman of boards of ArcelorMittal Tubular Products holding and companies

1
The creation of ArcelorMittal was significant for several reasons, not least of which
was the mergers sheer scale. While unambiguously shaped and driven by the vision
of President and CEO Lakshmi Mittal, the two parts were of roughly equal
proportions, so in that sense the deal constituted a merger of equals. Both Mittal
Steel and Arcelor were relatively young companies: the former resulted from a string
of international acquisitions, while the latter was the product of three primarily
European steel companies (Arbed, Aceralia, and Usinor).

Vital statistics
Born October 1958, in Newcastle, NSW, Australia

Married, with 2 children

Education
Graduated with BS in metallurgy in 1982 from University of Newcastle, NSW,

Australia

Earned MBA in 1992 from Warwick Business School, UK

Career highlights
ArcelorMittal

Executive vice president, member of management committee

WILLIAM A.
and head of strategy (2007present)
SCOTTING
Executive vice president, member of management committee

and head of performance enhancement (200607)

Mittal Steel (200206)

Director of Continuous Improvement

McKinsey & Company (19952002)

Associate principal

Fast facts
Member of board of directors of ArcelorMittal Kryviy Rih, ArcelorMittal

Temirtau JSC, ArcelorMittal Galati, and ArcelorMittal Liberia; formerly

member of supervisory board of Mittal Steel Hamburg (200507)

Awarded Australasian Institute of Metals Prize (1980) in metallurgy at the

University of Newcastle

2
Unusually, the deal involved two corporations whose geographic and market
strengths were remarkably complementary, though Mittal Steels vertically
integrated business model (it owned iron ore mines around the globe) contrasted
with Arcelors greater downstream concentration.

Behind the headlines, the primary challenge of any industrial merger is to integrate
the separate management teams, sales and product groups, operating assets, and
procurement divisions. At ArcelorMittal, the responsibility for driving this effort fell
to Bill Scotting and Jrme Granboulan, two experienced steel men and veterans of
earlier mergers at Mittal Steel and Arcelor, respectively. The London-based Scotting,
an executive vice president responsible for strategy at the combined group, and
Granboulan, CEO of ArcelorMittals tubular-products division headquartered in
Rotterdam, recently met McKinsey associate principals Seraf De Smedt and Michel
Van Hoey to analyze the lessons of the integration and to review the progress to date.

The Quarterly: In what ways did this merger differ from previous ones you have been
involved with?

Jrme Granboulan: Besides the huge size of ArcelorMittalwhich was a new

experiencea big difference this time was that we did not face the sort of difficult,
sometimes terrible, problems that arise when capacity has to be rationalized. In this
case, there was limited overlap between the two entities.

Two other key features have been the speed with which the integration has been
achieved and the balance of the objectives. In many mergers the integration process
seems so delicate that the sole objective set by senior management is to succeed in
merging; the other issues are considered at a later stage. In our case, top management
decided to set three clear objectives right from the outset: first, to achieve an efficient
and rapid integrationaligning people, delivering synergies, creating the
appropriate organization; second, to secure and manage the day-to-day business;
and third, to drive continued growth. The first two are fairly common objectives in
any merger, though generally with more emphasis on integration than on managing
the business. The third one was more unusual.

Bill Scotting: The scale of what we were doing and the history of both companies
gave us greater visibility than in most mergers. Many more people inside and outside
the company were following our activities to see how things would progress. This
was quite different from being involved in a local acquisition in a single national
market.

As Jrme has noted, the fact that the merger was strategically driven by growth
rather than by restructuring objectives is particularly significant. The aim has been
to combine two complementary businesses with a wide range of capabilities in order

3
to create a more complete entity. In contrast, many of our earlier acquisitions at
Mittal Steel were turnarounds focused on cost and productivity improvements.

The Quarterly: Has the experience taught you things that would be useful in more
conventional mergers, or is the approach always dictated by individual
circumstance?

Bill Scotting: I believe we would always seek to integrate quickly, as we have here. It is
also always critical to be aware of internal perceptions. In this merger, we conducted
interviews and surveys with employees to gain a better understanding of their views
about the two companies, a process that culminated in an entire rebranding exercise.
We questioned people about the companys strengths and weaknesses and what
they thought ArcelorMittal should stand for. I had not done this sort of thing in the
past, but based on our recent experience it is something I would definitely apply in
the future to any type of merger. Having ones antennae up with respect to what
people are thinking is extremely useful.

The Quarterly: What were the main issues at the outset of the merger?

Jrme Granboulan: One of the greatest challenges was to get line managers involved
and to sell the merger to the operating teams. This was time consuming. Our initial
communication efforts, including the launch of a top-management road show, were
extremely successful. We established a Web site and introduced Web TV, which as
far as I know represented the first large-scale application of this tool. Top executives
recorded two- to three-minute interviews on various topics, and everyone with
access to a PC was able to watch them onscreen.

The launch of our new brand and the employee convention at which we gathered the
companys top 500 executives, in spring 2007, provided a great boost and put an
end to the formal integration process. So far as communication is concerned, the
theory of integration and how it is managed does not interest people particularly.
When cascading information throughout the organization, focus on concrete
messages rather than general ones.

The Quarterly: Did the challenge lie with the line managers themselves, the employees
at large, or merely the ability of the line managers to translate your vision?

Bill Scotting: It could have been a number of things. In the early days of the merger,
inevitably everyone was wondering what impact this process would have on them,
and the uncertainty level was quite high. Managers need to have a well-structured
message about the significance of the merger and the direction the company is going
in, and we learned that this should be done very clearly and as a matter of urgency.
With relatively few operational overlaps, initially the merger only directly affected

4
employees working in procurement, sales and marketing, and the corporate
centerbesides those operating managers involved in benchmarking and the
integration task forces, of course. So a lot of time may have elapsed before it had a
direct impact on the activities of many other employees. That time lag may have
contributed to the uncertainty.

Agreeing on the medium-term value plan for the new group was also an intense
effort. Fortunately, the budgeting cyclethe integration effort started in August
2006, and budgets for 2007 had to be finalized in Novemberworked in our favor
and added impetus to the process.

The Quarterly: Youve mentioned speed as a critical factor. How did you generate it?

Jrme Granboulan: Our goal at the beginning was to complete the formal phase of
integration within the first six months. It was therefore critical to agree quickly the
role of the integration office; the essential characteristics of the integration process,
including how decisions would be made; and what problem-solving mechanisms
might be needed.

In large mergers such as this, progress is often reviewed on a monthly basis, but in
our case the cycle was weekly. The group-management board,1 essentially the
top-executive team, met every Monday, and the integration office, which Bill and I
headed up, met every Wednesday.

This allowed us to review the progress of the 20 to 25 decentralized task forces in the
middle of every week, identify roadblocks, and bring them to the management board
meeting a few days later, where decisions could be made. This cycle continued
throughout the integration effort.

I believe this was an extremely efficient way to maintain tension and momentum
within the organization, and this fast-beating pulse was a key to the success of the
integration.

It was also critical at the beginning to work in parallel, instead of in sequence. In

many mergers, teams from the two merging entities are nominated. These teams then
propose a draft organization to the management board. The profiles of the people
who will occupy the senior positions are defined and committees established to select
them. Once these senior managers are nominated, they build their own teams to
identify the synergies and build action plans. In our case, all these different tasks
were conducted in parallel. Teams were formed before the organization had been
fully announced; the implementation of certain actions was started before the
detailed plans had been developed.

The Quarterly: Can you say more about how you structured the new organization

5
and the integration team?

Jrme Granboulan: Everything was initially divided 5050 between the two
companies. There were 6 members on the new group-management board, for
example3 from each side. The integration office comprised 10 to 12 people, again
evenly split. In many mergers this team is much larger, but I believe that 10 to 12 was
an optimal size and contributed to the speed at which we moved. Typically, the larger
the team, the more complicated the process becomes.

The role of the integration office is not to lead the company, nor is it a body located in
a remote corporate office to manage processes. Although its an instrument of the
management board, it must establish its credibility with the managers of the large
units separately. The managers must feel that they can receive assistance and
facilitation from the integration office.

Bill Scotting: It was clear from the first day that the CEO and the group-management
board were effectively the integration board. They were the ones who laid out the
expectations. They decided what actions should be taken, and at what speed. They
also outlined the core principles and guidelines and the weekly cycle.

The small size of the integration team, which as Jrme says was deliberate, raises a
second key design element of the mergerin addition to speedwhich we termed
integrating integration. When we established the task forces, the people leading
them came from the business units. Thus, commercial integration issues were
handled by the commercial business units; technical-benchmarking issues were
handled by the operations experts.

The role of the integration team was to coordinate all these efforts. Each integration
coordinator was responsible for three or four task forces and maintained contact
with them on a daily basis.

The Quarterly: Did these task forces achieve the targets they had identified?

Bill Scotting: At the outset there was a high-level, top-down target of $1.6 billion of
synergies, based on earlier acquisitionsfor example, ISG 2 in the United
Statesknowledge sharing, and the use of benchmarks. The role of the task forces
was first to validate this number from the bottom up and then to tell us how the
synergies could be achieved. As the merger progressed, it was necessary to get the
business units to assume ownership of the process and to formulate the action plans
for delivering the synergies. We pushed hard to obtain the plans, details of the
initiatives, timetables, and, where possible, key performance indicators that we could
use to track the delivery of objectives. We were able to obtain this information for
some areas, but not all. In some cases we discovered the scope for savings was larger

6
than we thought, in others smaller. Overall, we managed to validate our target of
$1.6 billion to be achieved by mid-2009. The realization of these synergies,
incidentally, is well ahead of schedule, with more than $1.4 billion of annualized
savings captured by the end of the fourth quarter 2007.

Jrme Granboulan: Within a month we had refined the $1.6 billion savings target,
which is an annualized figure, divided it into four main chapterspurchasing, sales,
operations, and miscellaneousand assigned parts of it to the business units and
task forces. Each task force had about five weeks to confirm that the figures seemed
correct and to present their action plan. As Bill mentioned, the timing worked in our
favor, as the integration objectives could be incorporated into our 2007 budget
plans, which were being finalized at the time. Without this, people might have tried to
suggest that the environment had changed.

Some of the task forces were named after large business entities, such as Flat Carbon
Europe (FCE) operations and Long Carbon Europe operations. Others, such as
purchasing or sales, were functional. However, all were staffed by people from the
business and deeply rooted in the business. The key point is that the task forces did
not operate independently of the business operations.

The Quarterly: What was your approach to stakeholders such as customers,

communities, and suppliers?

Bill Scotting: The external communication was conducted in several ways. In the
early days, members of the group-management board traveled to all the major cities
and sites of operationsthe road show we referred to earliertalking to local
management and employees in these environments. Typically, media interviews were
also conducted around these visits, providing an opportunity to convey our message
to local communities through the press.

Because of the size of the merger, it has generated ongoing interest from the financial
and business press. We organized a media day in Brussels in March 2007, offering
presentations on the status of the merger and the results and inviting journalists to
go to the different businesses and review the progress themselves.

Jrme Granboulan: With respect to investors and other stakeholders, I believe the
fact that group-management board members came from both companies was
significant.

A key objective of the commercial task force during the integration phase was to
create, and quickly, a single face to the market, rather than two separate
propositions. Besides the synergies this task force was asked to deliver, it was
instructed to set up the appropriate organization for communicating with customers

7
in this waysomething that was achieved by the end of the first three months.
Customers were informed about the advantages of the merger for them, such as
enhanced R&D capabilities and wider global coverage.

The Quarterly: What characteristics or key skills are required to run an integration
office?

Bill Scotting: The leader of an integration office must be collaborativein the

ArcelorMittal case, the office played a facilitating roleand at the same time possess
a degree of process orientation: for instance, to manage the weekly cycle and obtain
all the mandates.

In addition, I believe the role requires a thorough understanding of the business. For
example, we held some intense debates on the changes that could, or could not, be
made in the value plans. The leader must possess an understanding of such matters.

Jrme Granboulan: I would also say that key qualities are cultural openness, the
capacity to understand people, and the ability to see how they can fit together.
However, its also important not to accept any diversions and to adhere to the
schedule and the key objectives of the organization.

The integration leader should also be able to form a close, trusting relationship with
the senior management of the group. The integration offices credibility and
authority, which are essential for the tougher aspects of a merger, rely on the support
of the CEO and senior management.

The Quarterly: From your perspectives, what is the appropriate role of the CEO in a
merger?

Jrme Granboulan: Clearly, the CEO sets the tone, the speed, the direction, the key
principles, and the requirements. In this case, he insisted that the business units
should be fully involved and take the reins as soon as possible. The CEO also plays a
critical role with respect to communication and developing the personality of the
new company. A merger is like a river flowing into the sea. When the tide is changing,
the boats do not know exactly how to align. Then, progressively, they manage to do
so. The role of the CEO is quickly to set everybody on the same axis and to reassure
people. At the same time, though, he is responsible for what in French we call
exigencethat is to say, being demanding.

Bill Scotting: Id stress that the river needs to be flowing; it cannot be a stretch of still
water. There is also the accountability aspect. CEOs should not merely announce
that the merger is important; they should demonstrate its importance by ensuring
that it is placed on the agenda every week. The CEO plays an extremely important
role in communication, both internal and external, but in our model it is vital that

8
the whole top-executive team should be visible, cohesive, and that it should provide
leadership. We could not afford its members to be pulling in different directions. It is
the CEOs role to ensure that the top team is aligned and speaking with a single voice.

The Quarterly: Some people talk about merging or combining cultures, while others
seek to create a new culture that is separate from those of the legacy companies.
What was your approach?

Jrme Granboulan: We are not in the position of groups that have existed for, say,
50 years, and therefore it may be more useful to speak of company cultures. Our
approach has been to take the best genes of the two groups, in order to create the
DNA of the new entity, but that process takes time. The formal integration was
completed when the new organization, the brand, the one face to the customer
requirement, and the synergies were finalized, two and a half quarters after the start.
But it will take more time to fully integrateincluding all the cultural aspectstwo
entities such as Arcelor and Mittal Steel.

The passion in the industry is remarkable, and there is always an immediate common
ground when steelmakers meet. The first time we got the senior management from
the two sides together some may have had apprehensions, but they were discussing
steel and exchanging ideas after a few minutes.

We are progressively building a common culture combining the best of both entities.
We are combining the speed and vision that characterized the genes of Mittal Steel
with the steady, long-term, step-by-step approach that characterized the genes of
some of the ex-Arcelor entities. In areas like health and safety, quality, and
performance, we are conveying the message that this group has high standards and
that if some parts of the group do not meet these standards it is possible for them to
obtain help from other parts.

Id particularly single out our health and safety day, which was a highly effective way
of aligning people during the integration phase. It did not merely convey a direct
message, in this case relating to health and safety. By involving all operations in the
same activities, it subliminally reinforced the notion that ArcelorMittal is now a
worldwide organization.

Bill Scotting: I would say that the cultural differences within the two legacy groups
are more significant, as a result of their history. In effect, neither company was overly
homogenous, at least from a cultural perspective. One of the beauties of mergers is
that the less homogenous the two merging entities, the greater the opportunity to
learn new ideas, combine existing ones, and gain fresh perspectives.

The Quarterly: Whats the next big challenge?

9
 Bill Scotting: In mid 2007, we held a strategic seminar and subsequently published
an addendum to our growth plan, extending it beyond 2012 and focusing on
internal opportunities. We used the same approach to develop this plan as we did to
formulate the initial strategy. The main agenda and direction were set at the top, and
many internal opportunities were identified. Then, a bottom-up process conducted
at the business unit level led to the development of specific growth initiatives. Meeting
these objectives is one of our priorities going forward.

Beyond this we have the challenge of fulfilling our aspirations and truly achieving the
potential from the merger. It has created a clear leader in the industry in terms of scale
and scope. Such a position brings responsibilities and an opportunity to shape the
development of the steel industry and make it truly sustainable.

To accomplish this goal, we must continue to expand, particularly in the

faster-growing emerging markets. In addition to looking for further consolidation
opportunities, we have the new challenge of managing greenfield expansion in these
geographiesfor example, in India and West Africa. Innovation will be important
to make our steelmaking processes more energy efficient and environmentally sound
and to improve our product capabilities: lighter, stronger steels can meet the
evolving needs of our customers, for example. Success in these areas will help make
steel a material of choice in many applications. We also face the organizational
challenge of managing this large, diverse group: capitalizing on the benefits of our
scale and scope, such as product and market capabilities, technical knowledge, and
so forth, while at the same time meeting the needs of local customers and local
About the Authors
communities.
Seraf De Smedt is
an associate principal
in McKinseys The merger and the integration process unleashed a lot of goodwill and energy. Its
Brussels office, and
Michel Van Hoey is always important to look for new ways to maintain energy levels.
an associate principal
in the Luxembourg
office. Notes

1
ArcelorMittal, as with many European companies, has a two-tier board structure: a board of directors, responsible
for oversight, and a group-management board, responsible for day-to-day operations. The president and CEO is a
member of both boards.

2
Mittal Steel completed its merger with International Steel Group (ISG) in April 2005.

Related Articles on mckinseyquarterly.com

Creating value from mergers

What's next for Tata Group: An interview with its chairman

The elusive art of postmerger leadership

10
Habits of the busiest acquirers

Smoothing postmerger integration

Copyright 2008 McKinsey & Company. All rights reserved.

11