The world's two largest steel companies, Arcelor and Mittal Steel, have agreed on a merger deal valued at more than 26 billion euros, or about $32.5 billion, ending five months of bitter resistance from one of Europe's biggest industrial champions against the rising might — and cash flow — of emerging markets.
Guy Dollé, Arcelor's chief executive, is said to be in line for that job at Mittal.
The merger will combine Arcelor — a symbol of successful, pan-European cooperation and economic revival, with operations that span Luxembourg, Belgium, France and Spain — with a fast-growing conglomerate founded by an Indian, Lakshmi Mittal, who built a fortune turning around sick steel plants in rapidly expanding markets from Trinidad to Kazakhstan.
The Arcelor board was meeting in Luxembourg today to vote on the deal, but Arcelor's management has already agreed to accept Mittal's offer of just over 40 euros ($50), and the vote was expected to go through, according to several people involved in the negotiations. Mr. Mittal and Arcelor's chairman, Joseph Kinsch, met on Saturday to hammer out the final terms of the deal. The new company will be named Arcelor Mittal.
The factor that transformed the hostile bid into a friendly merger, analysts believe, is a realization by Arcelor's management and by European political leaders that Arcelor's real owners — its shareholders, including institutional investors and a growing number of hedge funds — saw more value in the Mittal deal and were angry enough about the way a last-minute "white knight" deal with Severstal of Russia was being forced through that they could try to oust Arcelor's management, sue its board members and criticize the politicians who supported the Severstal deal.
The Luxembourg government, which is one of Arcelor's largest shareholders, spoke out strongly against the Mittal deal at first, but doubted the wisdom of the Severstal deal as well.
But Arcelor's foot-dragging has also wrung expensive concessions from Mr. Mittal. The agreed offer is nearly 40 percent higher than his initial offer in January, which was 27 percent higher than Arcelor's stock price at the time. Mr. Mittal also was expected to concede some management control and family voting rights.
"There is a change of opinion, and it has to do with what the shareholders really want, and it has to do with Mittal revising his bid and making some adjustments," Paul Steinmetz, the Luxembourg ambassador to New Delhi, said today.
The turning point, according to several people involved in the negotiations, came when Arcelor's board and management realized that a stock buyback connected to the deal with Severstal might be voted down. The vote, scheduled for June 21, was cancelled, in order to concentrate on negotiations with Mittal Steel.
The sale price represents a hefty premium to Mittal's last offer of about 36 euros a share, and to Arcelor's last trading price of 35.02 euros a share.
An Arcelor spokesman, Luc Scheer, declined to comment on any deal while the board meeting was under way. Arcelor board members arrived at the cherubim-decked headquarters in Luxembourg today, many in chauffeur-driven cars. Prince Guillaume of Luxembourg, who is also an Arcelor director, drove his own car, a blue Volkswagen Passat. Luxembourg's economy minister, Jeannot Krecke, drove past the headquarters today and confirmed to reporters standing outside that there would be a deal.
An agreement with Mittal would mark an about-face for Arcelor, which had pointedly rebuffed Mittal's previous overtures. Instead, Arcelor had agreed to sell about a third of the company to the Russian billionaire Aleksei Mordashov in exchange for his steel assets in Severstal.
Since then, however, Arcelor shareholders had become increasingly agitated, concerned that Mr. Mordashov would be gaining too much control of the company and that his assets were overvalued. An unconventional vote on the Severstal deal, scheduled for Friday, would allow it to pass unless the meeting is attended by an unprecedented number of Arcelor shareholders and they vote it down.
It may be too early to rule Mr. Mordashov out completely. He recently lined up a bank loan of three billion euros ($3.8 billion) and still has a contractual deal with Arcelor, even if the board votes to approve the deal with Mittal Steel. At the very least, Arcelor will be forced to pay 140 million euros ($175 million) in a breakup fee to Mr. Mordashov.
Mr. Mordashov was also in Luxembourg over the weekend, though he declined to comment about what he might do next. Asked why he was in the grand duchy, the 40-year-old billionaire told Bloomberg News: "I love Luxembourg." Mr. Krecke said he had met with Mr. Mordashov on Saturday, and executives from Mittal and Arcelor.
Mittal's initially hostile bid in January provoked bitter — sometimes ethnically tinged — rebuffs from Arcelor's management and even parts of the European political establishment. The Arcelor chief executive, Guy Dollé, described Mittal Steel as a "company of Indians" whose steel was "eau de cologne" to Arcelor's "perfume." When Mittal persisted, Arcelor's management brought in a Kremlin-backed Russian bidder as a white knight, whom Arcelor's chairman described as a "true European."
As the drama unfolded, it evolved into a clash between two major forces shaping the world economy: the ascendancy of India and China as founts, not only of low-cost labor, but of new business models and ambitious new firms; and a rising tide of protectionism in the West, fueled by anxiety that new competition will erode a cherished way of life.
"These are all tremors of the fact that the world system, which has been maintained by the United States and Europe, has suddenly got to adjust to the rise of China and India, and it ain't going to be easy," said Kishore Mahbubani, a former Singaporean ambassador to the United Nations.
Business leaders have watched the deal closely as a bellwether for emerging-market firms seeking to acquire their slower-growing Western counterparts. Once completed, analysts expect a surge of acquisitions attempts by multinationals rooted in the developing world.
"The emerging markets are running the big surpluses, they are accumulating capital and they will be spending abroad," said Daniel Gros, director of the Center for European Policy Studies in Brussels.
The situation also spotlighted changing standards of corporate governance in Europe, where boards and management are being forced to pay attention to a growing number of activist shareholders, after decades of running companies as they pleased. The deal will "make a very powerful statement that no matter what the games, shenanigans and interventions at the end of the day if you're determined enough, the best price will prevail," said Wilbur Ross, a Mittal board member. "That is a message that has not always been clear" in European deal-making, he said.
The merger marks a milestone in the consolidation of the global steel industry, creating a behemoth with three times the capacity of its nearest rival, Nippon Steel, and 10 percent of global market share. With 320,000 employees and an estimated $70 billion in revenue, the merged company will be the first steel maker with more than 100 million tons of annual capacity — enough for twice as many automobiles as the world makes every year.
It could be just the beginning of a round of deal-making. "The industry needs much more consolidation going forward," said Jutta Rosenbaum, an analyst with Commerzbank. The Chinese and Russian governments are urging their own steel producers to merge and companies in the west will need to do deals if they want to "maintain a balance of power," she said.
Months of acrimony during the takeover battle has raised concerns that Arcelor and Mittal Steel will have difficulty integrating their operations. "The differences of mentality, plus all the energy which has been put into the fight over the last several months, would make it very difficult for the current people to work together," said Patrick du Bois, a former executive vice president of Arcelor who left the company late in 2005, just before the Mittal bid was announced.
"If I was on the current board," he added, "I would probably put new C.E.O.'s and managers in the new group, because otherwise you will still have remnant battles inside." Both Mr. Kinsch and Mr. Dolle are scheduled to retire next year, and Mr. Dolle's contract has a "change of control" clause that allows him to retire immediately if the company is taken over.
For Mr. Mittal, the Indian-born steel magnate, the deal caps a decades-long effort to rise from the shadows to build a global steel conglomerate. Born in a village lacking electricity in the Rajasthan State of India to the desert-dwelling Marwari merchant clan, Mr. Mittal became something of a symbol of globalization, for its supporters and critics alike. To the former, he is a new-age, borderless businessman shaking up the genteel, antiquated ways of "Old Europe."
Now the world's fifth-richest person, according to Forbes magazine, Mr. Mittal began his career by buying a dilapidated Indonesian steel plant with his father's money and then turning it around. As others scoffed at his love of ailing plants and his vision of a global steel giant replacing national champions, Mr. Mittal acquired factories in Trinidad, Mexico, Kazakhstan, the United States and beyond, standardizing operations. He and his managers spend hours each week on a global conference call, with a manager in Mexico, say, offering advice on kiln temperature to a counterpart in Romania.