Mittal Steel in 2006

Mittal Steal in 2006 Changing the Global Steel Game Industry abridgment Although steel was a exceedingly demanded favourable, the effort as a whole was largely unprofit competent. One reason for this was that the industry remained highly fragmented in pedigree to their suppliers and even some of their buyers, who were considerably more consolidated. Aside from the increased disputation that fragmentation contri exactlyed to, it overly degraded the steal industrys bargaining strength to raw material suppliers and in some cases, such as the auto industry, the buyers.The resulting high fixed costs, volatile raw material prices, and intense price competition fueled unstable profit competency. Adding to the fragmentation issues was a lack of differentiation in the market. For the longest time there were really only two employment possibilities. One, cosmos verti discovery integrated and producing higher-grade steel at a higher cost of operation, or two, de-verticalize and focus on low cost, low-grade steel production. Dep containing on the production selected, the resulting accessible customer base was limited.This lack of differentiation further fueled the limited bargaining power of steel manufacturers. As stated above, steel was highly demanded. The problem was that the growth of that demand remained quite stagnate for nearly 20 years. It wasnt until the explosion of growth in the Chinese construction industry, attributing to 25% of bestow steel consumption, that the steel industry saw any profitability. In an industry where customers demand a low cost and a consistent product, being able to maintain a reliable supply while being as cost efficient as possible was key to a firms success.Though there was a spike in Chinese demand, only those strategically positioned could access the true value of the Chinese market. This was because the steel industry operated primarily on an intra-regional basis. Many factors attributed to this, but a firms dependence o n raw material access, and trying to avoid high transportation and tariff costs, as well as delivery lags, were the primary reasons for high regional trade. In order to access the benefits of regional trade, firms had to expand their operations through high FDI in the form of M&As.This gained them access to highly profitable regions and it allowed firms to spread their risk over a larger area, reducing the impact of demand fluctuations in one bad-tempered region. The reason legion(predicate) of these M&A opportunities existed was because of a major shit from government delivered steel lay downs to privatization. Through privatization, FDI opportunities became possible in many countries, then make intra-regional trade more accessible and attractive. Consolidation & Integration Recognizing that the dynamics of the market were changing, LNM was quick to take advantage.He was steadfast in his belief that they only air to create sustained success was through consolidation and integ ration. With increased privatization opportunities available, LNM began a series of M&As that would gain him access to regions that were highly profitable, had refuse labor costs, and would position him to fox higher bargaining power with suppliers. LNM made the first moves in the industry toward consolidation, and was this strategic initiative that has since driven the evolution of the industry to where it is today.A major source of value creation was derived from their technological lead in DRI. LNM decided early on to focus their operations around integrated minimills, which was untraditional at the time. Through this structure he was able to capture the maximum value of his operation, using scrap in the minimills, then reverse integrating into DRI. formerly unreliable, DRI technology had advanced so much that its output was now comparable to the property of integrated steel plants.This technology stronghold submitd them better quality steel at a cheaper cost of production, providing them with a huge competitive advantage. Additionally, It was this technology, aided by a proven SWAT team and protocol, which supported their ability to transform underperforming government owned plants to profitable ones in a short period. LMNs initial approach was to resurrect distressed government owed plants then snorkel breather new life into them through technology sharing and smart practices.He soon sought larger targets that would provide him not only economies of scale, but also provide competitive advantages through geographical scope. Starting with Karmet, he began to shift his targeting toward plants that were either highly integrated, possessed significant mineral rights, or supplied a strategic geographic advantage. Through designing their activity architecture in this way, Mittal steel became the worlds largest and most integrated steelmaker providing strong positions in North America, Europe, Asia, and Africa.The result of their strategic positioning, uni te with their focus of coordination through KIP and KMP, made Mittal the first firm in the industry to operate as a transnational organization. Each plant provided its own uniqueness, providing different capabilities and skills that could be harnessed for the good of the whole organization. There was also a heavy flow of people, materials and finances between the interdependent plants, but at the center of it all was the Mittal Steel directing tight coordination and a dual-lane strategic decision making process. On a regional level, they operated through regional hubs.This allows Mittals positioning of adjacent plants to source from the same suppliers, increasing their bargaining power and reliability of supply, while not jeopardizing cannibalism of sales as each plants customer base was unique to their location. Mittals vertical integration in mining and low cost position helps support profitability and helps to lop capital expenditure inevitably. They are the most diversified st eelcompany in the world in terms of assetlocation and market presence. They also have a diverse product range, including both flat and long steel.As such, Mittal is not overly dependent on any singleregion, product, or end market. These benefits are somewhat mitigated however by the risks associated with Mittals rapid expansion through acquisitions. These include such things as institutional risks associated with emerging markets and uncertainties regarding the integration of newly acquired assets, although Mittalsintegration track record has been successful to date. Arcelor Acquisition In light of the above information, I believe that Mittal should pursue the Arcelor acquisition aggressively.Mittal Steel & Arcelor accompaniment each other in terms of geographical coverage and product mix, as there is no significant overlap. Mittal has strong positions in the U. S. market affordable operations in Central andEastern Europe, Asia and Africa and vertical raw-material integration. Arc elor is the leader in higher value-added products with strongholds in Western Europe and Brazil, as well as a focus on Russia, India, and China. I believe that the positioning of Arcelors plants and resource capabilities would integrate nicely to Mittals activity architecture.There would be very minimal duplications of effort, and many of the regions that Arcelor operates are in prime locations to source raw materials. The addition will only strengthen Mittals integrated transnational value chain. Through acquisition, Mittal would start nearly 110 million tonnes of steel per year, making them three times as large than their next competitor. Although this can lead to diseconomies of scale, in Mittals case, as the largest player in the steel industry both globally and in the key markets, the combined group would enjoy significant bargaining power.Additionally, through shared expertise, the combined entity would be in a better position to develop the high growth region of China and So uth East Asia. Arcelors adhesion with Nippon and Mittals acquisition of Karmet and stake in Valin will provide access to critical Asian markets. Regardless of the synergies the acquisition will create, caution still needs to be exercised by Mittal. There are evident signs that the acquisition will not be welcomed by Arcelor, assuming that Mr. Dolles canceled meeting and unreturned phone call was an indication to his temperature on the proposal.If the acquisition turned hostile there is a good chance Mittal would have to overpay for Arcelor, which could have adverse affects to it investment ratings. At the current bid price Mittal would already have to leverage 5 billion and would be in debt by 11. 5 billion. Although they have a good track record of ROI and the industry as a whole has seen a spike in ROIC, they do not want to spend more than they have to. Despite the favorable history and perceived synergies, Mittal should pay at a maximum 27. 1 billion for the deal. They should ob viously try to pay as fold up to the current bid as possible, but at 27. billion they are still in a position where they could access the capital needed devoted their successful history. Also, at the mark of 27. 1 billion their debt would raise to 20 billion, but with an EBITDA of over 5. 5 billion annually, not to mention the added revenues from the acquisition, the debt could be confidently paid off in a reasonable timeframe. If the bidding exceeds the mark of 27. 1 billion, the negotiations should be ceased and Mittal should pursue other opportunities to continue their global footprint expansion.