Aditya Mittal launched the largest merger in steel industry history late last January, a few days
after his 30th birthday. Following a bruising eight-month battle, which featured protectionist rumblings
from various European governments and a vigorous (some said racist) defence by the senior
management of Arcelor, the Luxembourg-based target company, he was named in August as CFO and head of
operations in the Americas for the combined Arcelor Mittal. With pro forma revenue of about €55 billion last year, that makes it easily the largest steel company in the world.
For most people, the victory over Arcelor would be a career defining
moment. But not for the man himself, who invariably is
dubbed “the crown prince” and heir to the steel empire his father
Lakshmi Mittal—the world’s fifth richest man, according to
Forbes magazine—has built over three decades. Mittal junior’s
defining moment came much earlier, when he had just turned
21, was less than a year out of university and was called to join
the family firm sooner than he had expected.
The occasion was the initial public offering in 1997 of Ispat
International, then the Mittal family’s main operating company.
(Ispat is Hindi for steel.) The financing was coming at a crucial
phase, just as the company was revving up its strategy to lead a
reluctant steel industry towards the global consolidation that it
badly needed. In an industry notorious for destroying value, it
was proving to be a tough story to sell to investors.
“I always knew I was going to join the family business, but it
came quicker than I thought because of the IPO,” Mittal recalls.
“The company wasn’t experienced at accessing the public markets
and here I had just spent seven months at Credit Suisse First Boston, I had my education and I knew just what our investor
base wanted.” Any hint of arrogance is quickly defused with an ironic smile. Indeed, Mittal had
graduated less than a year earlier from the University of Pennsylvania’s
Wharton Business School, with a BSc in economics, then went through investment bank
CSFB’s three-month training programme in the summer, followed by four months in mergers and
acquisitions—a little short of the qualifications usually required
to lead a tough-sell IPO of nearly $1 billion.
The truth, as Mittal explains, was that the IPO was unceremoniously
dumped on him. “The IPO was not going well at all. It was
close to being cancelled. Then there was a review with all of the
[Ispat operating unit] CEOs in New York. I remember very clearly
that meeting. The IPO came up as an agenda item and there was a
person who was senior to me in the team who suddenly said, ‘Aditya
will give the report on the IPO; he’s managing it.’ I was, like, ‘What?’
Needless to say, the report was very bad. I got up and said, ‘We’re
having all these difficulties, the market is very weak and hopefully
we’ll make the timeline.’ That was my report.”
He went back to his hotel in a daze. “I was, like, ‘Damn, now
I’m the leader of this thing and it’s going nowhere.’ I was very
depressed,” he says. There was even a notice waiting for him at
the hotel from the US Immigration and Naturalisation Service
warning that he’d overstayed his visa.
How to pull the deal out of the dumper? “It was a repackaging of
the company and our strategy, simplifying the organisation structure
and presenting a very credible story as to what we wanted
to do, the whole consolidation business, the whole globalisation
business.” Mittal, his team and the IPO bankers, led by former
colleagues at CSFB, as well as Donaldson Lufkin & Jenrette, took
the story on the road, holding face-to-face meetings with over
200 prospective investors across the US and Europe.
By the time the big IPO lunch presentation was held that
August, at the St Regis Hotel on New York’s Central Park East, it
was standing-room only in the ballroom and investors were clamouring
for a piece of Ispat. Barron’s, an investment magazine, quoted
one attendee at the time, Michael Gambardella of JP Morgan:
“Ispat is a compelling example of growth in a mature industry.” It
had generated the kind of buzz then reserved for technology
stocks. The shares were priced at $27 each, at the top of an indicated
range that was increased twice. The issue eventually raised
$776m, the largest ever IPO for a steel company.
Even after the Arcelor triumph this year, Mittal still talks with
evident pride about that IPO: “It was ten times oversubscribed—
that was incredible for a steel company—and was named ‘Equity
Deal of the Year’ by Institutional Investor magazine,” he beams.
Most important, the IPO process identified Ispat as the
steel industry’s “mould breaker” for investors, as CSFB industry
analyst Jeremy Fletcher put it.
That early baptism of fire for Aditya Mittal, especially the
lessons learned through endless direct communication with
investors, laid the groundwork for this year’s battle with Arcelor.
At the time, it also showed everyone within the Mittal organi-
sation that Lakshmi Mittal entrusted a great deal to, and expected
a lot from, his son. “When I started at the company, in some
sense I had an advantage because I was part of the family. In
some sense I had a disadvantage because everyone was focused
on what I would say, what I would do, whether I could live up
to the challenge. [The IPO] was very important.”
The Road To Jakarta
Though he’d had a good grounding in finance at Wharton and
CSFB, Aditya Mittal’s education in steel has been a life-long enterprise,
and that proved to be another key factor in winning Arcelor.
The Mittal Steel story has already achieved the status of business-
school lore. Aditya’s father had a brainwave on a business trip
to Jakarta in 1976, when he was 26 and Aditya had just been born.
He convinced his father, Mohan Lal Mittal, a successful Calcutta
steel trader, to help him buy a small 30,000-tonne steel mill in
Indonesia for $100,000 with a view to undercutting Japanese
imports. A dozen years later, having personally survived at times
on $250 a month, Lakshmi Mittal had grown the plant tenfold
and looked to expand abroad, first by doubling production
with the acquisition of the Iron & Steel
Company of Trinidad and Tobago in 1989.
During these early years, Aditya was at the
Jakarta International School. Often referred to
as “the American high school,” it had 2,500
students, half of whom were American expatriates,
as were most of the teachers. “A phenomenal
school,” says Aditya Mittal, “very
American—baseball, basketball, varsity jackets,
burgers, hot dogs, Sadie Hawkins! [Where girls ask
guys to a dance.] That was my favourite.” The transition to
Wharton at 16 was, therefore, smooth.
All the while, the steel industry was never far from his mind.
“I had continuous interaction with my father when I was getting
educated,” Mittal says. “I would visit the steel facility often in
Jakarta. When I was at Wharton, one spring break my father
heard I was going to Cancún. I had to spend the first five days at
our facility in Mexico, then just three days with my friends.” He
winces at the memory.
The vision that Lakshmi Mittal had in the early 1990s—one that
few in the industry shared—was that the steel industry needed to
go from a largely government-owned, production-driven, failing
enterprise to a business led by global demand and run according to
modern management practices. By the mid-1990s, Lakshmi decided
to take the lead on consolidation, following his Jakarta model
by acquiring flagging operations—mainly privatising assets in
developing countries like Mexico and Kazakhstan, but also plants
in Canada and Germany—and turning them around.
After the Ispat IPO, the next big move came with the purchase
in 1998 of Inland Steel, the fourth-largest producer in the US, for
$1.4 billion. Aditya was formally appointed the following year as
head of the two-man M&A team. Over the next few years, he led
the effort to scoop up steel plants from government privatisations
in more than a dozen countries, including Poland, the Czech
Republic, Romania, Bosnia Herzegovina, Algeria and South Africa.
This global approach allowed several things: the transfer of
knowledge (“Our Romanian plant has taught our US plants better
melting practices,” Mittal says); ever greater economies of
scale in purchasing, including those achieved through vertical
integration by acquiring nearby iron mines as well as downstream
distribution; and, perhaps most important, an ability to
respond to demand on a global basis.
The process also meant that Mittal was honing his acquisition
and integration skills, so that acquisitions largely became selffunding.
“In 1993, it would take us two to three years to fully integrate
an acquisition,” Mittal says. “By 2000, we were doing it in six
months.” This, in turn, gave the company the confidence to double
its size through acquisition in 2001 (buying Sidex in Romania
and an initial one-third stake in Isco in South Africa), even while
the industry was in a slump. It doubled in size again in 2004 when
it became the dominant player in the US steel industry—with a
40% market share—by merging Ispat with LNM Holdings, consolidating
the family holding vehicles into one public
company and paying about $4.5 billion for ISG, a
private equity vehicle that had rolled up several
bankrupt American steel operations. The new
company was named Mittal Steel.
The path has not always been smooth and
Mittal Steel has faced the kind of controversy
that a company consolidating an employee-heavy industry might
expect. It also has had to deal with the kind of flak that comes
with being controlled via a murky holding structure centred in
the Dutch Antilles tax haven, with corporate headquarters in
London—though the company has negligible assets in the UK—
and an operating company headquarters in the Netherlands.
The first big taste of unwelcome publicity came in 2002,
with what became known in the British media as “The Lakshmi
Mittal affair,” or “Mittalgate.” The controversy originated from
a combination of facts that gave the impression of “cash-for-political-
favours,” though there was never a direct accusation
of lawbreaking. The facts: in 2001, Mittal bought Sidex from
the Romanian government—it was the only bidder for the
steel works, which accounted for 4% of the country’s industri-al production but was losing $1m a day; Lakshmi Mittal
donated £125,000 (€184,000) to the British Labour Party; and
Labour Prime Minister Tony Blair sent a form letter, via
Britain’s ambassador in Romania, in support of Mittal after the
deal had closed.
The affair prompted a BBC investigative report into “the previously
obscure Mr Mittal” entitled The Steel Maharajah. The TV
programme failed to substantiate allegations of bribery—former
Ispat COO Johannes Sittard (who, according to some accounts,
was edged out of the company
at the end of 2000 by Aditya)
demurred when he was asked if
the company had paid a $100m
“commission” to a go-between for
Kazakhstan’s president Nursultan
Nazarbayev to acquire the Karmat
facility in 1995. Sittard has since
become chairman of the Eurasian
Natural Resources Group, which is
owned by the Kazakh businessmen
who helped negotiate the
Karmat deal and were paid, Sittard
admitted to the BBC, “a substantial amount.”
Some attacks were more personal. After the ISG takeover, there
was plenty of the kind of coverage that appeared under the Chicago
Sun-Times headline “Foreign takeover of US steel firms should
raise alarms,” which complained of “an Indian family, based in
London, with corporate headquarters in Rotterdam” taking over
the loss-making plants.
Though Mittal inherited controversy with the ISG acquisition,
it added two US heavyweights to its board who further forged its
reputation with investors—Wilbur Ross, a former Rothschild
banker and founder of ISG, and Lewis Kaden, a top M&A lawyer
and member of Citigroup’s board. Part of Ross’s success with ISG
was getting the US government to take on billions of dollars of legacy
pension and healthcare obligations for steel employees.
The Credibility Card
The reorganisation of Mittal Steel at the end of 2004 included
moving Aditya into the CFO role (he was already on the board),
where he undertook “massive centralisation.” The central finance
headcount went from a handful to about 50 as it took over treasury
functions such as risk management, cash sweeps and fund
raising. “In the last 18 months we’ve raised $15 billion (€11.6 billion)
at Libor plus 40 basis points and maintained our investment
grade through the Arcelor process,” Mittal says.
The control function was also strengthened, especially in forecasting,
which is traditionally difficult for the steel industry. Mittal’s
finance has launched an effort to help the company become
more transparent and improve the quality of its accounts, producing
a comprehensive fact-book, moving early to IFRS and giving
more detailed breakdowns by product and region. In addition,
Mittal hired Julien Onillon from HSBC, where he was head
of global steel research, as director of investor relations.
Mittal talks proudly of the first investor poll conducted by Onillon,
which found vast improvements in the perception of the company
in terms of transparency and governance. By September of
last year, the number of analysts covering Mittal Steel had risen
from a handful to a dozen.
Credibility was clearly seen as crucial from an early stage. “I
remember right after the ISG deal, we announced earnings
before the rest of the steel industry and I came on the conference
call and told them, ‘You know, the steel industry is not
going to look happy for the next six months.’ It dragged the whole
steel industry down; everyone was very upset with me,” Mittal
recalls. Other industry players painted a rosier picture but had
to post profit warnings in summer 2005 when steel prices
slumped. “Since then, the credibility we have with the investor
base is phenomenal,” Mittal says.
Last year also underlined the logic of Lakshmi Mittal’s globalisation
and consolidation project. When steel prices began to slide,
Mittal Steel cut production. Arcelor followed suit and prices began
to stabilise far sooner than they had in past downturns.
By the time Mittal Steel bid for Arcelor on January 27th, a
move that Aditya had persuaded the board to make, the company
already was firmly in investors’ good graces, especially the
“activist investors” who hold sway these days.
The reaction from Arcelor’s management and officials in its
constituent European countries was predictable. Luxembourg
Prime Minister Jean-Claude Junker called for “a hostile
response,” and French Finance Minister Thierry Breton protested.
According to one report in Le Monde, an influential French
newspaper, the French government’s “economic intelligence
services” had let Arcelor’s management know as early as November
2005 about share activity and their conclusion that, “Mittal
is preparing a large-scale action.”
As the battle commenced, Arcelor took defensive action,
such as ring-fencing its Dofasco operations in Canada for sale in
the event of a change of ownership. It planned to give €5 billion
back to shareholders.
Most controversially, Arcelor’s CEO, Guy Dollé, made comments
that were widely interpreted as insulting, even racist. He
talked about Mittal being run by “a bunch of Indians” while
Arcelor—the result of a merger of Spanish, Luxembourg and
Belgian companies—was a company “with European cultural
values.” He referred to Mittal’s monnaie de singe, a common
French expression meaning “Monopoly money,” though many
thought Dollé well aware that the literal “monkey money” had
racist overtones. There was also his comment, at an early press
conference after introducing fellow managers, about his son not
being on Arcelor’s board.
Then in May Arcelor brought in a “white knight” in the
shape of Severstal and its chairman and chief shareholder Alexei
Mordashov, who had gained control of Russia’s largest steel
maker at the age of 30 during the Russian “privatisations” of
the 1990s. At this point, many investors had turned against
Arcelor and a petition signed by shareholders accounting for
30% of the company demanded a vote on the Severstal deal.
Also, on June 2nd, Lakshmi Mittal wrote to Arcelor’s chairman,
Joseph Kinsch, offering a similar management and ownership
structure to the one agreed with Severstal. This forced
Arcelor to hold talks. Aditya Mittal led a three-man team, while
Arcelor was represented by CFO Gonzalo Urquijo, deputy
CEO Michel Wurth (Urquijo’s predecessor as CFO) and senior
executive vice president Roland Junck, in meetings held on
“neutral ground” at hotels near Brussels airport.
Urquijo says of Aditya, “He was able to bring us closer to his
company and the logic of the transaction. He is extremely knowledgeable
about the sector. We felt we were in front of steel people
not just finance people. Aditya is very impressive.”
Was it shareholder pressure or these three weeks of faceto-face meetings that turned the tide? “We will never know the
answer,” says Mittal. The meetings that his father held with the
Belgian and Luxembourg presidents and other government
officials played their part. The letter offering “a merger of
equals….provided Arcelor management with a real choice,”
says Mittal. “But along with that, the shareholder base was getting
galvanised and [Arcelor management] began to realise
there was a lot of shareholder pressure.”
A day before the official announcement of the new board,
Aditya Mittal exudes the quiet confidence of someone holding
all the cards. Asked about Dollé, he says in a gentle, somewhat
chilling, voice, “He is no longer with the company.” If the comments
about his age and experience have bothered him, he
laughs it off: “You know, at the first press conference in January
everybody asked, ‘Why are you the CFO of this business?
Do you have the experience and the capability?’ At the last
press conference in July they said, ‘Why don’t you become CEO
of the new company?’ So, I guess I made some progress.”
China On My Mind
Arcelor Mittal has been careful
to point out that, while it’s the
world’s largest steel company it
still accounts for just 10% of global
capacity. (See “Pairing Up”)
Nonetheless, it is already bumping up against anti-trust concerns
in the US, Europe and South Africa. In the US, it must sell one
plant, either Weirton or Sparrows Point; in Europe, two “long
products” facilities must be sold; and in South Africa, Mittal’s
dominance means it already is subject to price controls.
Nonetheless, the company has said that it plans to double production
by 2015, from about 120m tonnes this year. “Clearly, we can’t
double ourselves in Europe and the US, but there is no question
there are areas where we can grow dramatically,” says CFO Aditya
Mittal. “China and the rest of Asia account for half the global steel
industry today and our presence there is negligible.”
Mittal Steel became the first foreign company allowed a
minority stake in a Chinese steel producer when it bought 37%
of Valin Steel in 2005 for $338m (€262.5m). Earlier this year,
Arcelor clinched a deal to acquire a 38.4% stake in Laiwu Steel
While foreign companies are restricted from taking majority
stakes, the Chinese government has been encouraging the
domestic industry to consolidate. In August, it approved the
merger of Laiwu and Jinan Steel (at the time of writing, it hadn’t
yet approved Arcelor’s stake in the combined group). But
the Chinese steel lobby has called for additional restrictions on
foreign ownership, and domestic consolidation is expected to
be led by large local producers, such as Baosteel and Wuhan
Iron & Steel.
Mittal, however, believes the government will allow foreign
expansion. “It is a process with the government,” he says. “We’re
the first experiment. We have to demonstrate that we bring value
to Valin Steel and to the Chinese steel industry. If they can see
that over the next three to four years, I do believe they will allow
us to take full control over the company.”