Thursday, February 02, 2006
The New World taking over the Old?
The story broke about a week ago, and made the headlines everyday since. Mittal Steel, owned by the 3rd wealthiest individual on the planet, launched a hostile bid for Arcelor, the European steel manufacturer. We all know the story - the steel industry is highly fragmented, which means the combined group, should the bid succeed would become market leader with a market share of about 10%.
Arcelor, created from the merger of Luxembourg's, France's and Spain's steel producers in 2002, is now headquartered in Luxembourg - the state of Luxembourg is Arcelor's single largest shareholder (with about 5% of the shares).
Given the hostile nature of the bid which took Arcelor's Board by surprise, the fact that the bid is un-welcomed does not come as a surprise. Arcelor's CEO and other Board members have unanimously rejected the approach, criticised the approach used (as one would expect) and who knows what will happen next. A war of words involving not only usual suspects -CEOs and members of the Board- but also politicians, secretary of States, prime Ministers, Heads of State, the European Commission -even Peter Mandelson had to get involved, although he unsurprisingly did not support the views of the Old Guard...
Arcelor is still looking for a defense strategy -a friendly take-over by Nippon Steel looks unlikely. Meanwhile, convincing individual shareholders and pension funds (who own 86% of the capital) not to sell their shares to Mittal and convincing whoever wants to listen that Mittal does not have an industrial project for Arcelor is high of the agenda. Hence a nice set of powerpoint slides created overnight by Arcelor to make the case against the bidcan be found here. Meanwhile, Mittal toured Europeand Heads of States and the medias. His arguments in favour of his approach can be found there.
Let's see what happens, but there are already a number of interesting issues here.
First, the story was reported as an Indian company taking over a European one; the "new world" taking over the "old world"... as the "new economy" was supposed to take over the "old economy" at the height of the telecom/internet bubble in the late 1990s. We know what happened with the latter -the hype created more hype which eventually ended in a dramatic way.
I am not saying the same will apply to India. India is an emerging power. True, india made fantastic progress over the past decade. True too, there is a lot of hype about India. The fact is India's success story has -mostly- been confined to the IT industry -which accounts for less than 10% of India's GDP-, and to a lesser extent to the services industry. The agriculture sector still accounts for a large share of India's GDP. India's second largest sector is the services industries, unlike China where manufacturing accounts for the bulk of China's GDP - making China the "factory of the world".
The very story of Mittal attempting to bid for Arcelor raises the issue of what makes an Indian firm. What makes BT a British firm? And is Vodafone, which operates in 25 countries a British firm? What makes Mittal Steel an Indian firm? True, Mittal is what you could call an Indian family-owned firm: owned by Lakshmi Mittal, of Indian origin, and his family -they own about 90% of the shares. Lakshmi's son is Mittal Steel's CFO, and so on. They built an empire by taking over their competitors. But the firm is headquartered and managed from London. Is Mittal Steel an Indian company? A global company? This is subject to debate. How's the firm managed? What management style prevails in Mittal's daily dealings with its subsidiaries worldwide? These questions can seriously under-play the "the new economy taking over the old one"-kind of argument.
The French were quick to teach Mittal a lesson or two -"this is not the way we do business over here", referring to the act of mounting a takeover bid without consulting/informing the Board of the target firm. Thierry Bretton, ex-CEO of France Telecom and France's Finance Secretary was happy touring the medias on Tuesday night, denouncing Mittal's lack of industrial vision and consideration of cultural dimensions (i.e. an Asian firm that has no plan to work out cultural issues involved in taking over a firm whose workforce is mainly European).
These arguments are probably complete rubbish. Arcelor's CEO is trying to save his job by arguying for the superiority of his own vision, and French politicians are merely trying to reassure the workforce -we'll stand up for your rights, Mittal will lay you off as he did in Eastern Europe, etc. 28% of Arcelor's workforce is located in France - a total of 30,000 people.
All this reminds me of the French government's attitude that followed rumours circulating on the stock market back in October allegedly involving Pepsi secretely mounting a (hostile) takeover bid for Danone, arguably a French success story on the global stage. What did the French government do? They announced the creation of a list of "strategic sectors" that would be closed to foreign ownership! We'll save your jobs, but because we are pretty bad at dealing with unemployment let's go for old-style protectionism! The rumours remained rumours - but the workforce was happy: the government stood up for their rights. The riots in the French suburbs diverted attention away from Danone, the stock market and the french government's promise to draw that list. Nevertheless, the list of "strategic" sectors was made public, quietly, very quietly, on New Year's Eve. It did not include Danone...
Any comment?
Copyright Nicolas Forsans - James E. Lynch India & South Asia Business Centre (ISABC), Centre for International Business, Unlversity of Leeds (CIBUL), Maurice Keyworth Building, Leeds LS2 9JT, England
