If Mittal Steel had succeeded in acquiring Arcelor as per the terms of its original bid announced in January, it would have been the end of Arcelor and its management. It would have created one giant Mittal Steel, double its original size, and LN Mittal would have remained the lord and master of a global steel empire.

The deal as it is finally negotiated and recommended by the Arcelor board is vastly different. The price being offered by Mittal now is nearly 90 per cent higher than his original price, which means the Mittal family's stake in the merged entity would be just 43 per cent. Besides, Mittal Steel seems to be doing almost everything possible to meet Arcelor's demands.

The Arcelor chairman becomes the chairman of the merged entity and its CEO remains on the management board despite his known hostility to Mittal. Arcelor would nominate a majority of the directors and even the CEO is likely to be an Arcelor nominee.

The Mittal family would also have to go by the board decisions and vote accordingly for a period of three years, unless LN Mittal uses his veto powers. The family cannot increase its stake beyond 45 per cent for a period of five years.

Worse still, the merged company would be registered and based in Luxembourg and would be called, not Mittal Steel and not even Mittal-Arcelor, but Arcelor-Mittal. So, who is acquiring who?

Why did Mittal bend over backwards and give in to all of Arcelor's demands? Wouldn't he have been better off building new plants in emerging markets like India while looking for smaller acquisition opportunities? Why was he so eager to acquire Arcelor?

Merger rationale - industry perspective
Despite all the consolidation, steel companies remain vulnerable to price cycles. Revival in steel prices over the last few years was driven mostly by Chinese import demand. But China has become a net exporter now as domestic capacity has gone up substantially. There are fears that China would flood the markets with cheap steel in the near future.

But China does not have enough iron ore reserves and relies on imports, which would continue to rise as long as Chinese domestic steel demand remains firm. Besides, large iron ore suppliers like Rio Tinto, CVRD and BHP Billiton control around 60-70 per cent of global supplies and hence have better pricing power.

Large consumers of steel like automobiles and white goods have also seen considerable consolidation over the last many years. This has given large companies in these consuming industries much higher bargaining power with steel producers.

Steel manufacturers would face cost pressures from rising iron ore prices in future while at the same time see their own pricing power eroding. This would squeeze their margins and many steel manufacturers would struggle if demand growth slows down.

To manage the growing pressure on margins, the steel industry needs to consolidate further and have a few very large manufacturers who can bargain better with iron ore suppliers and steel consumers. Interestingly, both L N Mittal and Arcelor CEO Guy Dolle subscribe to this view. It is speculated that some of the Japanese and Korean manufacturers are also exploring mergers between themselves.

Merger rationale - Mittal Steel perspective
L N Mittal has expanded his steel empire and enlarged his manufacturing capacity more than 10 times to 70 million tonnes over the last 10 years mostly by acquiring state-run steel mills in privatisation programmes across the globe. These assets were acquired at throwaway prices as the steel price cycle had hit rock bottom during those years.

He revived the plants through heavy cost cutting including massive layoffs. He did not face much opposition to such heavy restructuring as the companies were in pathetic shape and would have been anyway shut down if such measures had not been adopted.

To bridge the final gap with the top steel companies and emerge as the single-largest steel producer, Mittal courted an American, Wilbur Ross, who employed the same strategy as Mittal to build a steel empire in the US. The merger between Mittal Steel and Ross's International Steel Group created the top steel producer in the world.

But the gap between Mittal Steel and large competitors like Arcelor and Nippon Steel was not substantial. Arcelor was bigger in terms of total revenues and many others were more profitable as they produced more value added products.

Privatisation opportunities have dried up and even if one does arise in the future, the up trend in steel prices has pushed up the cost of acquiring manufacturing assets. Hence further inorganic growth acquisition of state owned companies has become less feasible.

Building new plants takes time. Mittal Steel has made not much progress after announcing a 10-million tonnes per annum steel plant in India last year. Even if the company finalise the agreement for mining lease this year, the plant would not be able to commence commercial production before 2010.

Mittal Steel had acquired a minority stake in a Chinese steel company. But a majority acquisition needs the blessings of the Chinese government, which may be difficult to come by. China has built up a huge domestic steel capacity, in excess of 350-million tonnes per annum, and hence setting up a new plant may not be attractive.

Mergers between any of the other top 5 steel producers would have toppled Mittal Steel from its perch as the top producer. Therefore in order to protect and secure its turf as the single most influential steel producer in the world, Mittal was forced to acquire a large competitor. Arcelor was the best fit in terms of geographical presence and product mix. Besides, Arcelor had a widely distributed shareholding structure which made an acquisition easier.

The future
Even though Mittal was forced to concede a lot of ground to Arcelor, he still emerged as the single-largest shareholder in the merged entity. Arcelor-Mittal cannot be toppled from its position as the top producer in the foreseeable future, unless China decides to consolidate its steel industry under a couple of companies.

The Arcelor-Mittal merger may trigger more consolidations in the steel industry much to the benefit of all steel producers. Cost savings would hopefully improve the cash flows of the merged entity and this would make Arcelor-Mittal financially stronger as well.

The big task before Arcelor-Mittal is the process of integrating the two companies with diverse strategies and culture. Many high profile mergers have failed to deliver the anticipated results because of the inability to achieve smooth integration between the merging companies. L N Mittal has already stated that he would be spending the next few years to ensure that the merger goes ahead smoothly.

L N Mittal would become chairman of Arcelor-Mittal after Joseph Kinsch retires. The Mittal family can increase its stake beyond 45 per cent after five years and it wil not take much of an effort to take the stake above 50 per cent. His son Aditya has reportedly refused to take up a senior management position in the merged entity at this juncture, though it is only a matter of time before he takes over from the professional managers from Arcelor.

When the next downturn in steel price cycle arrives, some of the steel producers are sure to face financial difficulties. Arcelor-Mittal, with stronger finances, can be expected to go out prowling for more acquisitions and, it is possible, that this time Aditya Mittal would be spearheading those buyouts.