DRIVERS AND IMPACT OF MERGERS AND ACQUISITIONS IN STEEL INDUSTRY

ABSTRACT Driven by slow growth, inability to make sustainable profits and volatility in the steel industry, companies in steel industry have joined the starting wave of mergers and acquisitions. Mergers and Acquisitions have become distinctive trend in steel industry worldwide since the beginning of the 21st century. This case study examines the results on drivers and impact of recent mergers and acquisitions (M&A) in steel industry. The case study focused on recent major acquisitions of Arcelor by Mittal Steel during the recent mergers and acquisitions wave of 2000s. The important findings of this study is that synergies, overcapacity, extreme fragmentation, concentration amongst suppliers and better buying power of customers are some of the other major factors that are driving steel industry into mergers and acquisitions. In the case study, improvement in post acquisition stock performance of the combined entity was noticed. Futher in the case study, tremendous increase in post acquisition accounting profit and operating efficiency was also noticed. It has been predicted that M&A in steel industry will have positive impact on return on capital employed (ROCE). It was found that the company had paid fair price for the acquisition to gain in short term as well as in long term. In the results of this project the future structure of steel industry has also been predicted.

Arcelor-Mittal Case study

Background of Mittal Steel Mittal Steel has been one of the most successful steel companies in the world with 49.2 million tonnes of crude steel production, and revenues of USD 31.2 billion in 2005. Its steel production accounted for 6 percent to the total steel market of the world. [Gayathri, 2006 & Mathew, 2006] Mittal Steel was started by its Chairman and CEO Lakshmi Niwas Mittal. He started his career working in his fathers Steel Company during his college times at Calcutta, India. In 1976, visualising the opportunity in the steel industry he moved on to Indonesia to set up a steel company and founded Ispat Indo. In 1989 he made his first acquisition of government-owned steel firm at Trinidad and Tobago and turned it around. He doubled its output and brought it in profit. Over the years he bought many more government and privately owned steel enterprises, which have been mentioned in Table [Gayathri, 2006 & Mathew, 2006]. Mittal Steels Acquisitions prior to Arcelor
Year 1989 1992 1994 1995 1995 1998 1999 2001 2001 2003 2004 2004 2004 2005 2005 2005 Company and Country Iron and Steel Company of Triniad & Tobago Sibalsa (Mexico) Sidbec-Dosco (Canada) Hanburger Stahlwerke (Germany) Karmet (Kazakhstan) Inland Steel Company (USA) Unimetal (France) ALFASID (Algeria) Sidex (Romania) Nova Hut (Czec Republic) Polski Huty Stali (Poland) BH Steel (Bosnia) Macedonian facilities from Balkan Steel ISG (USA) Kryvorizshtal (Ukraine) Stelco subsidiaries (Canada) Capacity (million tonnes per annum) 0.9 3.4 1.4 2.8 3.8 5.3 1.5 1 3.8 2.9 N/A 0.2 N/A 20 7.7 N/A

Source: Compiled by Author from Gayathri, 2006, Sinha, 2006 & Mittal Steel, 2006 (A)

Mittal succeeded largely from turning around state owned loss making firms by cutting costs, exploiting economies of scale and selling higher-value products. Mittal steel came into highlight when he merged its companies Ispat International and LNM Holdings and bought International steel group in 2005 for USD 4.5 billion. Mittal got access to US markets and thereby began getting orders from automobile and appliance industries for high margin metal sheets and hence improved company margins. [Gayathri, 2006 & Mathew, 2006] In 2005, Mittal bought Kryvorizshtal which produced approximately 20 percent Ukraines Output. Mittal paid USD 4.8 billion (initial bid amount USD 2.8 billion) for this deal because of the presence of competitor Arcelor. This might have prompted Mittal Steel to takeover Arcelor. Moreover, in January 2006 Mittal Steel completely changed the scenario of the Steel industry by placing bid for Arcelor, which was the second largest steel company with 4 percent of the worlds steel market. [Gayathri, 2006 & Mathew, 2006]

Markets and Product Range of Mittal Steel Mittal Steel had strong presence in North America. Mittal Steel was market leader in Eastern and central Europe, Asian and African market. This shows that Mittal steel had right mix of developed and developing markets [Sinha, 2006 (B)]. Markets of Mittal Steel

Source: Mittal Steel, 2006 (C)

The product portfolio of Mittal as shown in the Figure below consisted of mostly low value products. Still it had very appropriate mix of long and flat products. Product Portfolio of Mittal Steel based on 2004

Background of Arcelor Arcelor was formed in 2002 as a result of the merger of Arbed of Luxembourg, Aceralia of France and Usinor of Spain. The three companies joined together in order to create the largest Iron and Steel company in the world in 2002. [Agarwal, 2006] As of 2005, Arcelor comprised 371 fully consolidated companies and 180 companies that were consolidated by distributing the equity. Arcelor had 84.39% shares with the public in the open market and the largest stakeholder being the state of Luxembourg with 5.6 percent stake. Arcelor also used the strategy of growing through acquisitions. In 2005, it bought Polands Lucchini Group and expanded its operations in Eastern Europe. In early 2006, it acquired Dofasco, the Canadian steel producer and hoped to establish its market in North America as well. In February 2006, Arcelor acquired 38 percent stake in Chinas largest producer of sections and beams, Laiwu Steel Group (capacity of 7 million tonnes), for Rmb 2.1 billion. [Gayathri, 2006] In 2005, Arcelor had crude steel capacity of 43 million tonnes and was the second largest steel producer after Mittal steel, which overtook Arcelor in 2004 as the largest producer of Steel in the World with capacity of 63 million tonnes. Arcelor had been declared the Corporate jewels of Europe. Thats why Mittals bid for Arcelor created turmoil in some European countries (especially France and Luxembourg) [Gayathri, 2006]. Markets and Product range of Arcelor Arcelor had very rich product mix and 70 percent of the output consists of flat product and Stainless steels. These occupies higher price per tonne as compared to the normal steel product [Mathew, 2006]. The company was also market leader in high valued steel produced for European car makers, construction, household appliances, packaging and general industrial applications. [Gayathri, 2006] Arcelor had a strong presence in the European Union, with 71% of its sales coming from the latter. This made it the market leader. North America, South America and rest of the world accounted for 9%, 11% and 9 % respectively [Agarwal, 2006]. Its plants were

located mainly in Western Europe with two plants in France, one in Belgium and one in Spain [Gayathri, 2006].

Hostile Takeover of Arcelor

On 27th January, 2006 Lakshmi Nivas Mittal, the founder and chairman of Mittal Steel (worlds largest Steel Company) launched a hostile bid worth Euro 18.6 billion for Arcelor, the second largest steel company in the world. The combined entity would be the Mittals vision to create the world largest steel company in the history of steel industry, three times the size of its nearest competitor Nippon Steel. It was also considered to be one of the largest hostile bids in the European History. Time line of the Hostile Takeover: The timeline of the acquisition has been given below [Compiled by Author from Gayathri, 2006, Sinha, 2006 (A) & The Hindu Business Line, 2006] Jan. 27: Mittal Steel announced the open offer for all the Arcelor ordinary shares and convertible bonds for Euro 18.6 billion (US$ 22.6 billion). The primary offer was mixed cash and share offer for Arcelor Shares. The deal consisted of 0.8 Mittal Shares and Euro 7.05 for each Arcelor share. Jan. 30: The hostile acquisitions offer of Mittal Steel shocked Europe. Luxembourg, France, Belgium and Spain government opposed the move stating that proposed bid may put thousands of employees at risk. Guy Dolle, CEO of Arcelor, ruled out the proposal by commenting that deal price was very low and they had a different target market culture. He also pointed to Mittal Steels corporate governance, stating that it is completely a Mittal family- run enterprise. Feb 16: Arcelor declares 85 percent dividend hike disregard Mittals bid. April 4: Arcelor unveils some more takeover defences. Arcelor declared payment of US$ 6 billion to the shareholders and proposed to make recently acquired Dofasco as an independent Dutuch Foundation control over the unit. April 28: Some of the institutional shareholders opposed Arcelors opposition to the Mittal Steels bid. May 15 2006: Mittal sweetened the deal going through severe criticism by Arcelor Board by increasing the bidding price to Euro 25.8 billion (US$ 33 billion). Arcelor Board studied the revised offer and commented that all decisions will be made protecting the interest of the shareholders. May 16, 2006: The market regulators in France, Belgium, Luxembourg and the Netherlands cleared the bid. May 26, 2006: Arcelor announced a Euro 13.6 billion merger proposal with severstal, leading steel company of Russia. The proposed merger would have made it number one steel maker, dislodging Mittal Steel. In this deal, Mardashov (Chairman of Severstal) will own 32.2% stake and 68.8 % by existing Arcelor shareholders. June 6: European Commission approved the merger of Arcelor and Mittal. June 20: Severstal revised its terms and raised the bid and agreed to settle on the 25 percent rather than 32.2 percent earlier. June 23: Arcelor and Mittal decided to meet on June 25, 2006. Structure of the final Deal and Financing: After 5 months of hostility, on June 25, 2006 Arcelor board recommended shareholders merger with Mittal Steel. Mittal Steel decided to raise its offer to 1.084 Mittal Shares and Euro 12.55 in cash for each share of Arcelor. This made total of Euro 40.4 per Arcelor share. Mittal Steel also offered 13 Mittal Steel shares and Euro 188.42 for every 12 convertible bonds of Arcelor. Arcelor shareholders received 69 percent of offer in shares of Mittal Steel and balance 31 percent in cash. The total offer came to USD 33.7 billion [BBC news, 2006 & The Tribune, 2006]. After the merger Mittal would hold 43 percent stake in the merged company. Mittal on terms also agreed to limit his holdings to below 45 percent. This was done so reduce the control of Mittal family in the combined enterprise [The Tribune, 2006]. The post merger 18 member board will consist of 12 existing board members of Arcelor and six Mittal nominees. Arcelor chairman Joseph Kinch would become the chairman of Arcelor Mittal and Lakshmi Mittal would become the president of the Board [The Tribune, 2006].

Synergies Mittal and Arcelor have both been at forefront of the consolidation in steel sector in the last 10 years. This combination accelerates this process and leaves us uniquely positioned to benefit from the opportunities created. - Laxmi Niwas Mittal, Chairman and CEO, Mittal Steel as cited by Sinha, 2006 (B) The combination of Arcelor and Mittal Steel will create a company that will account to 10 percent of the global steel production with capacity of 110 million tonnes per annum. The combined company will have 61 pants in 27 countries with 320000 employees and an annual turnover of USD 69 Billion [Agarwal, 2006 & Sinha, 2006 (B)]. The combined company will generate financial synergies, as shown in Table below. The other financial synergies are that the company will also benefit from lower cost of capital, improved cash flow and improved access to capital markets [Sinha, 2006 (B)].

Source: Mittal Steel, 2006 (B)

This combination will enable to create an unmatched geographic presence with very limited geographic overlapping as shown in figure mentioned below. This would help the company to be leader in five main markets i.e. South America, NAFTA, European Union, Central Europe and Africa. The combined assets of the company will give them good combination of developed and developing markets. [Sinha, 2006 (B)]

Source: Mittal, L.N. 2007

According to some of the analysts it will create one stop shop for the customers. This is so because Arcelors market and high value steel will be complimented by Mittals market and low cost commercial steel [Mathew, 2006]. The merger would allow the company to expand its product portfolio and help winning orders from automotive, appliances, packaging, construction, oil and gas spread across different regions.[Sinha, 2006 (B)] The product portfolio offered by the combined company in 2006 has been shown in Figure.

Source: Mittal, L.N, 2007

The Merger wouldnt give synergies in Marketing and product range but also purchasing, manufacturing and shipping as shown in figure. This synergy is expected to be around USD 1 billion till year 3. Analysts expect that the combined company will give ability to change the impact of cyclical fluctuations in the economy [Mathew, 2006].

Purchasing marketing and manufacturing synergies of Arcelor Mittal

Source: Mittal Steel, 2006, (B)

Other synergy is that significant amount can be saved on use of in-house raw materials of Mittal Steel. Mittal steel has reserves of iron ore (one of the major raw material for steel production) in Kazakhstan, Ukraine, North America and Bosnia. Whereas, Arcelor does not have much of reserve like Mittal but have reserves of Dofasco. The combined company will make it self- sufficient with 45 percent of iron ore requirement as shown in figure. [Mathew, 2006] Raw material self sufficiency and internal distribution centres

Source: Mittal, L.N. 2007

The combination of Arcelor and Mittal will also give some synergies in marketing and trading as the group will have 38 percent of the total distribution by internal centres as shown in figure.

Results and Analysis

This chapter is based on the study of the last four chapters. Here the Author analyses and discusses the main objectives of the research. All the research questions have been answered in this section. First we will start the discussion with the motives behind mergers and acquisitions. Motives of Mergers and Acquisitions in steel industry The history of the steel industry has already been discussed in the Global steel industry chapter. We found that government owned many steel plants were privatised and the era of consolidation in steel industry begun in 2002. That is why it has become very important to analyse the motives that is driving steel companies into mergers and acquisitions. Improved product portfolio: Mittal Steel had acquired companies in order to improve their product portfolio. Getting the proper mix of low value and high end steel products to serve the wider range of markets has been one of the main motives of Steel companies. Market Share and Global Presence: The Company focused on expanding their operations globally and grabbing the market world wide. It also included the right mix of markets, i.e. slow growth in developed markets or mature markets and high growth in developing markets. Inorganic growth: It takes at least 5 years to set up an integrated steel plant as quoted by Wharton (2007). It would also take years to fix the market and win customers over their competitors. Growing inorganically enables the steel companies to expand their capacity immediately and capture the market along with it. This was the key strategy of Mittal Steel. It has not set up any Brownfield project and has grown only by acquiring several steel companies. Proportionate negotiation power with the suppliers and customers: Steel industry has been the victim of disproportionate negotiation power with its suppliers and customers. The reason for this is the small number of raw material suppliers to the steel industry, and a small group of customers for the steel thus produced. Furthermore, the steel industry has been highly fragmented. Sinha, 2006 stated that three Iron ore major companies control 75 percent of the supply of Iron ore and top ten auto companies account for 95 percent of automobile production. On the other hand, in the steel industry the top 5 players account for only 20 percent of steel production.

Mittal Steel has expected their purchasing and marketing synergies to improve by reducing the negotiation power of its suppliers and customers. This has also been steel companies primary motive, behind getting into mergers and acquisitions. Strength to face down turn: When steel companies turn big, they have better strength to face the downturn of the industry. This is so because the combined entity has better cash flow and a wider range of market than their competitors. More and more acquisitions in the industry will lead to consolidation, which will help them earn sustainable earnings in the long run. Better Service to the Customers: One of the other important reasons for steel companies interest in M&A is to provide integrated service to the consumers and help in global procurement. It will also enable the steel companies to carry combined research and development with their consumers, and come up with the newer products. For example: Ford Motors can tie up with Arcelor-Mittal to provide them with all the steel related products like metal sheets and other special steel products. Since both the companies have global presence Arcelor Mittal can supply steel to all Ford plants globally. This may enable both the companies to work together towards R&D and new product development. The motive is to win orders and gain competitive advantage against their competitors. Economies of scale: Economies of scale is one of the important motives of the company to gain manufacturing and R&D synergies. Economies of scale enable companies to invest more in research and development. The benefit for them is that they will have lesser per ton R&D cost and the expertise of both the companies would be available for the development of better products.

SWOT Analysis
SWOT Analysis has been chosen so that it can measure the benefits as well as the drawbacks that company is likely to face in long term and short term. Strengths: The combined entity will control 10 percent of the global steel market, leading with 3 times of its nearest competitor, Nippon steel. The Arcelor Mittal combination will allow them to win customer orders from the global automakers and construction companies. This is because of their global presence as discussed in the above-mentioned case study. The combination of low value steel produced by Mittal Steel and high value steel produced by Arcelor, along with the wide product range of the Arcelor- Mittal combination, would give the company competitive advantage over business rivals. Mittal Steel itself can meet 45 percent of Arcelor - Mittals iron ore requirements, which would help in reducing the combinations costs, and enable it to further grow along the down-stream supply chain. The Arcelor-Mittal combination has become a truly global company. Weaknesses: Arcelor has been a very innovative company and had thousands of patents; on the other hand Mittal had only 20 odd patents. Although both the companies had almost the same size, Mittal Steel did not have much interest in R&D. This might also affect on the combined entity and consequently affect the business in long run. [la tribune, 2006] Mittal Steel had till now been a family-controlled enterprise, with the Mittal family owning 88 percent stake. Even in Arcelor-Mittal, the Mittal family owns 43 percent stake. Therefore even the combined entity may lack shareholders value. Recently Mittal steel was accused of monopoly in United States and South Africa for charging excess pricing. By virtue of having a combined entity, the company will be more exposed globally and may get into conflict with several competition tribunals across the world. Opportunities: In the era of consolidation, the company can acquire some more government owned steel units or other steel companies, and expand their operations in other countries. Many other companies like Severstal, Tata Steel, Nicor and POSCO are playing a leading role in consolidating the steel industry. This may help in reducing the cyclicality of the industry. Threats: The deal of Arcelor-Mittal was opposed by the government of France and Luxembourg. Iron and steel Industry being the key industry for other industries, government may intervene on price and on further acquisitions. Both the companies have had a history of acquisitions but there was a difference in culture. Arcelor being more professional had 12 members in their board. On the other hand, Mittal Steel was more of a family-run organisation, with most of its board members belonging to the Mittal family. Therefore, there is a threat of mismatch of management culture in Arcelor-Mittal. Although the Steel industry is in the process of consolidation, 70 percent of the industry is still highly fragmented. Due to this existing high rate of fragmentation, the cyclicality of the steel industry cannot be reduced, despite the process of consolidation having begun. Downturn in the industry may lead to drastic reduction in profit margins.

Post Acquisition Performance measurement

Stock Price comparison In this measurement criterion we will observe the stock market reaction to the merger till date in addition to Arcelor-Mittal share price movement. Price chart of Arcelor Mittal at NYSE from (August 2005 August 2007)

Source: Reuters, 2007

As is evident in the graph above, there has been an uptrend in the share price of Arcelor-Mittal since the merger. This shows that stock market reacted positively on this merger. The stock price almost doubled in just one year of the merger. The uptrend indicates that the company has been performing very well. Operational Efficiency: EBIDTA (Earnings before Interest, Depreciation, Taxation and Amortisation) of Arcelor- Mittal increased by 42 percent, as reflected in the half yearly result of June 2007. The EBIDTA amount has increased to US$ 9672 million, as compared to pro forma half yearly result of June 2006. Operating Income for the same half yearly June 2007 has increased by 50 percent and reached US$ 7687 million. The company claims that this improvement in the performance has been due to the high demand of steel and higher selling prices for all the major segments. Operating margin for the period was increased from 11.9 percent to 14.9 percent. There has been a tremendous improvement in the operating profit as compared to the last half yearly operating profit of the combined firm. This constitutes the perfect example of achieving efficiency and higher price for the products through Mergers and acquisitions. Financing of the Acquisitions: In the case of Arcelor-Mittal, 69%of the acquisition has been paid for by shares, while 31 percent has been paid in cash. Mittal Steel paid majority by shares, because of which they were not under pressure to arrange cash. The other point is that the Arcelor- Mittal deal was among companies that were almost at par with each other, for they had almost the same capacity. In conclusion, Arcelor Mittal deal will not face the burden of debt and will have a normal debt- equity ratio to face the cyclicality of the steel industry. Margin picture & raw material self-sufficiency: Iron ore and Metallurgical coal are the two major raw materials for steel industry. As shown in figure below, iron ore and coking coal prices have surged by 71 % and 111 %, respectively, in 2005. Although the steel industry has been in its best shape since 2002, as discussed in chapter 3, iron ore prices have been soaring as the production has been increasing as shown in figure. So, in order to be competitive in the industry it is very important for steel companies to be self- sufficient in raw materials. Graph showing world crude steel production and iron ore price trend

Source: Mukherjee, 2007

Arcelor-Mittal has iron ore mining assets all over the world as shown in figure below. This gives the company competitive advantage by allowing it to use the resources closest to the production facility. For example: South African mines can feed the plants of Arcelor-

Mittal in South Africa, and Ukraine ore can be used in the production facility at Ukraine. The destination of consumption of iron ore has been shown in Table. Iron ore mine assets of Arcelor Mittal

Source: Mukherjee, 2007

Destination of Iron ore consumption

Source: Mukherjee, 2007

Iron ore is essential to be competitive in the steel industry. Currently Mittal Steel is self sufficient in 45% of its iron ore requirement. This helps the company to be less reliable or dependent on the suppliers. Suppliers of iron ore in the industry have been dictating terms because of concentration among them as shown in figure further. Along with self- sufficiency, Arcelor-Mittals large production capacity around the world can bring huge purchasing synergies in iron ore, coking coal and other raw materials. With self- sufficiency of 45 percent, Arcelor- Mittal will be more viable. This is beacuse Arcelor- Mittal has the supply of ore all around the world. In conclusion, Mittal Steel paid fair price to make profits and achieve synergies in short term as well as long term. Human Resource and Cultural Issues: Mittal Steel may also face enormous cultural differences. Arcelor had focused on value- added products, while Mittal steel was more focused on profits and produced products that can earn good return. Mathew argues that Arcelor was a highly technical company and focused more on research and development, while Mittal steel was a more commercial company and stressed less on R&D (Mathew, 2006). Arcelor had 18 members on its board comprising of six nationalities, with no single organisation holding large stake in it. On the other hand the Mittal family held 88% stake in Mittal steel and its board members belonged mostly to the Mittal family. This huge difference in management culture may lead to conflict between the management of Arcelor and Mittal Steel. Factors driving steel industry into consolidation: This section describes the factors that are driving steel industry as a whole towards consolidation. These factors are basically the challenges can be minimised by mergers and acquisitions. Those challenges are as follows: Threat from cyclicality of the industry: There is possibility that steel companies are trying to consolidate the steel industry because of the threat of falling prey to the cyclicality of the industry, which may lead them to go out of business as it happened between 1975 and 2002. If handfuls of producers dictate the steel market, they can form a cartel during the downturn. Concentration amongst supplier: A few suppliers alone are responsible for providing raw materials to the steel industry. Top 3 companies controlled 70 percent of the iron ore supply and top 5 companies controlled 58 percent of the coking coal market in 2005. On the other hand, only 17.9 percent steel was produced by the top 5 producers of steel. This has caused imbalance in the negotiation

power. Therefore, the raw material suppliers keep on increasing the iron ore and coking coal price. Consolidation in steel industry will allow the steel companies to have proportionate negotiation power with their suppliers. Buying power with the customers: Steel industry being fragmented, customers (Automobile manufacturers) have huge dominance because of the concentration in automobile industry. Wharton states that Steel industry customers, especially the Automobile industry, had been purchasing from steel suppliers at rates that had driven the steel industrys profit margins to unsustainable levels. As the industry consolidates, Steel producers would enjoy better negotiation power, and would be able to provide integrated service to their customers. Consolidation will also help the steel companies in acquiring mining resources for their backward integration. High competition and Extreme fragmentation: Steel industry has been highly fragmented throughout the world. From the beginning there has been high competition between steel players worldwide, and between smaller steel players within countries. So there was pressure from global companies as well as many local companies. Figure appended below shows that steel industry was fragmented to such an extent that the top five players controlled only 14.6 percent of the total steel production in 2000. With consolidation, there would more global producers of steel. This would help in reducing the number of competitors in the industry. Geographic Price differences: Steel industry has always been a victim of geographical price differences. The cost of production differed across the world because of the different economic and political situations of the country. For example: the cost of production is lower in China than in developed countries because of low labour costs [Regani, 2005]. This competitive advantage enables China to sell at a lower price; thereby affecting the profitability of the European firms. Consolidation in steel industry will create big players with global presence and would reduce the price differentials in different parts of the world. Overcapacity: Steel industry has been suffering with over capacity for a long time. Over capacity leads to higher costs (due to lower capacity utilisation) and price imbalance. Consolidation will reduce this problem, if top few players form a cartel and manage the capacity effectively. Future Structure of the Steel Industry: Steel Industry has always been a very fragmented industry because of the several restrictions imposed on the industry by the state, and the different policies of each state. This is one of the reasons that the steel industry went through depression in the period from 1975 to 2002. Since 2002, it has been observed that the industry is going through the period of consolidation. As shown in the figure below, the share of top five players in North America, Latin America and Asia have gone through major consolidation. On the other hand top five players in the world produced 14.6 percent of the steel in 2000 as compared to 17.9 percent in 2005. Shares of Top five players in North America, EU, China, Asia & Worldwide

Source: Tata Steel, Annual Report, 2006-07

The industry saw regional consolidation in 2002-03, while cross boarder consolidation was initiated in 2004-06. It is expected that the industry will see many global companies being formed between 2007 and 2015. Only in China has it been noticed that the share of top 5 players have decreased from 35.7 percent in 2000 to 19.7 percent in 2005. This has happened due to many new capacities being added in the last few years due to the economic boom in China. This boosted economy allowed the regional players to expand their capacity. Expected share of top 5 steel producers

Above figure shows the growth of share of the top five steel companies in the last 10 years and predicted future growth by the author for next 10 years. In 2000 the top 5 players market share increased by 13 percent, as compared to 1995 and in 2005 by 22 percent compared to 2000. With the momentum that Mittal Steel has brought in the consolidation of the industry, it is predicted that more consolidation will take place in the next five years. The share of the top 5 companies is bound to increase by 25 percent every 5 years. Consequently it is expected that market share of the top 5 steel producers would increase to 30 percent till 2015. It is expected that this inclination towards consolidation in the industry would not remain restricted to the top level alone, but would also reach the lower levels as well. Since only 33 percent of world steel is produced by the top 15 producers of the world, there is a huge potential for consolidation in the rest of the 66 percent. As Wharton discusses, for instance, even in China there are around 125 integrated steel producers. Thus, there is huge opportunity for Chinese companies to consolidate Chinas production (Wharton, 2007). Slowly steel producers can shift the production of low end products to low cost countries and finish these close to the markets of developed countries. This will reduce the cost tremendously. As we can see in the figure below, more downstream production will shift to the countries like Russia, Brazil, India and China (BRIC countries) because of cost advantage and resource availability. Although China has a higher cost of production than rest of the BRIC countries, it also has a huge appetite for steel which makes it viable. All the finishing facilities can be near the market, either developed or developing, so that the product can be finished according to the customers specification.
Cost of production country wise for Hot rolled coil (USD)

Source: Chaudhary, 2007

Prediction of Future Crude Steel consumption

Source: IISI cited by Chaudhary, 2007

Not only are the costs lower in the developing economies, but these economies also constitute potential markets for steel. As shown in figure above, International Iron and steel institute (IISI) has predicted that the production capacity of emerging economies will catapult to 65 per cent of total production by 2020, from 51 percent in 2004. It can be observed in the figure that most of the future capacity additions and growth has been expected in developing countries. This is because per capita consumption in these countries is very low as compared to that of developed countries. Although initiatives are taken by the leading steel companies to consolidate the industry, the important question that arises is whether this would help in reducing the cyclicality of the steel industry and increasing the returns in the steel industry.

Graph showing relation between Consolidated Industries and ROCE

Source: Chaudhary, 2007

Studying the patterns of different commodities, vis--vis consolidation and its consequent impact on the return on Capital employed, as shown in figure above, one may conclude that consolidated industries boast of a better return on capital. So, as the steel industry will be moving towards the left of the graph and become more consolidated, the cyclicality will reduce with time and Return on Capital Employed will increase drastically. If the Industry consolidates in the way being predicted in, the steel industry might be able to earn a return of more than 10 percent on capital employed.

CONCLUSION
Implications of the Study: In this chapter, the key implications and contributions of this research has been presented. Apart from the theory and analysts suggestions, in this research, some thoughts were also generated by the author during the development of this project. The core objective of this is to find out the motives and impact of mergers and acquisitions in steel industry. There are several other objectives related to the core objective of the project which will be concluded one by one. The first objective of the company was to highlight the motives that drive steel companies into mergers and acquisitions. It is found that steel firms are acquiring companies in order to improve their product portfolio, achieve global presence, improve market share, grow inorganically, gain proportionate negotiation power with the suppliers and customers, gain strength to face downturn, provide quality service to the customers and get economies of scale. The second objective of the company was to enquire if the acquiring firm gets any benefits from the mergers and acquisitions activity. For this purpose SWOT Analysis was performed. In SWOT Analysis, it was noticed that economies of scale, better product portfolio, enhanced R&D capabilities and proper mix of markets were some of the important benefits that the combined entities enjoyed. High interest and debt burden on Mittal Steels corporate governance are the main weaknesses that the respective companies are likely to face. Better funding and further growth through acquisitions by Arcelor Mittal are the opportunities that the company may avail of in the future. There are certain threats like downturn in the industry and increase of government intervention which may be faced by the company in future. While measuring post-acquisition performance, it was observed that Mittal Steels stock price doubled within one year. It was also found that Merger and acquisition had a positive impact on accounting profit and operating efficiency. This shows a perfect example of achieving efficiency and effectiveness through Mergers and Acquisitions. The third objective of the research was to identify the main payment methods used by steel firms for mergers and acquisitions. It was found that Mittal Steel has used the mix of shares and cash reserves to fund Arcelors acquisition. The fourth objective of the research was to investigate whether steel companies are paying appropriate price for the acquisitions. It was found out that Mittal Steel paid fair price for the deal to get immediate returns. This was so because the combined entity will have 45 percent Self sufficiency in iron ore and less interest burden on the company, because of which the company would enjoy benefits of higher return in short term as well as long term. The fifth objective of the research was to identify the issues that steel companies will be dealing with, with respect to Human Resource and Cultural aspects of Merger & Acquisitions. It was noticed that Mittal steel is a family-owned commercial company with profit maximisation as its main motive, while Arcelor was a highly technical public company with no one owner. The sixth objective was to determine the critical factors driving steel industry into Mergers and Acquisitions. It was found that the threat posed by the industrys cyclicality, concentration amongst suppliers, High competition, Extreme fragmentation, geographic price differences, and above all overcapacity and high buying power of the customers, were the main factors pressurising steel industry to consolidate further. The seventh objective of the company was to discuss whether Mergers and Acquisitions will help in improving the returns on capital employed (ROCE) of the steel industry. It was predicted that the share of top 5 steel producers will be 30 percent by 2015, from 20 percent currently. It has also been predicted that crude steel production in the future will shift to BRIC (Brazil, Russia, India and China) countries due to expected increase in demand of steel and low cost advantage of BRIC. Studying the relation between the

consolidation in industries and ROCE (Return on Capital Employed), it has been observed that consolidated industries get better ROCE. Thus, with its consolidation, the steel industry might be able to earn a return of more than 10 percent on capital employed, in the future. Limitations of the Study: However, it is very important to mention the difficulties and limitations that have been faced during the study. The most crucial limitation of the project is that only a limited number of companies have been studied. The second limitation of this research is the unavailability of sufficient data on the topic; for, the phase of mergers and acquisitions has but begun in the steel industry. Furthermore, the data available is very recent. Due to these reasons, it would be too early to confidently comment on the impact of mergers and acquisitions on steel firms. Lastly, the company studied is one of the biggest deals in the steel industry, and therefore, do not represent the common players in the industry. This study has neglected the consolidation happening in the bottom level of steel industry. Nevertheless, what is positive about this study is its potential to constitute the basis for further research in mergers and acquisitions in the steel industry. This study also takes into account all the recent data available on the subject, and the project is up to date.

Recommendations for future research

This study can be extended to see the performance impact on the Mittal-Arcelor merger. It would also be interesting to know if MittalArcelor would be facing any corporate governance issues in the future. It is expected that this wave of mergers and acquisitions in steel industry will last for long. There have been many other mergers and acquisitions, as mentioned above in one of the tables. More study can be performed on the impact of these mergers and acquisitions taking the aforementioned case into account. This study had focused on the mergers and acquisitions at the top level of the steel industry. It would be interesting to know the impact of mergers and acquisitions at bottom level of the steel industry. There is huge potential for research in BRIC countries as they are considered to be the low cost producers and future markets of steel. Study can be conducted on the evolving steel companies in these countries. Study can also be conducted to ascertain the potential buyers and seller in the steel industry. Further study can be done on the major companies like CSN, Severstal, US steel, POSCO of South Korea, Baosteel of china, Nippon steel of Japan, and Arcelor Mittal. These companies are expected to play a major role in consolidation of the steel industry.