Sat, Jul 15, 2006 - Page 9 News List

Should shareholders be allowed to make or break a company?

The initially hostile takeover of Arcelor Steel by Mittal highlights the dangers of the outdated legal concept of a company belonging only to its shareholders

By Michel Rocard

The story takes place in France, in Belgium and in Luxembourg. But it is really a pan-European story, and in economic terms it encompasses the entire world. Mittal, the biggest steelmaker in the world, has successfully gained control of Arcelor, the second biggest, through what initially was a hostile takeover bid.

This is no mere corporate takeover; it is a conflict between business and social models. Arcelor, originally French and Luxembourguese but now predominantly Belgian, has a strong base in Brazil and operates throughout much of the world. It specializes in high-quality, special steel products designed for the most complicated uses. These high-quality products are purchased on middle and long-term contracts, mainly by long-time customers. Arcelor, one of the oldest steel manufacturers in the world, depends very little on the highly speculative world market for raw steel, and its workforce is [on average] highly qualified and stable.

Mittal, by contrast, is a conglomerate that has come out of nowhere to become the world's leading steel company in a mere two decades. It did so by brilliantly consolidating and rationalizing steel plants throughout the world. Its president is Indian, but it has no factory in India. Mittal is mainly based in Eastern Europe, but also has a strong presence in Asia (South Korea) and Latin America.

Mittal is a strong but fragile company, for it is highly subject to the speculative waves of the global market for raw steel. It tightens costs, and outsources work as much as possible, so its workforce is paid less than Arcelor's employees and is less stable. Moreover, Arcelor represented a perfect takeover target: most of its capital belongs to diverse shareholders.

The opposite is true of Mittal, where the Lakshmi Mittal and his family own more than 60 percent of the shares. This explains why Mittal's shares are traded in Amsterdam, one of the few stock markets in the world that allows for the listing of companies with so little free-floating capital. Thus, there is no reciprocity: Mittal could bid for Arcelor, but Arcelor could not bid for Mittal.

The stakes are much clearer than they usually are in these types of battles. Mittal has an obvious interest in gaining control of Arcelor in order to improve its global geographic balance, boost its market share in high-end steel products and reduce its vulnerability to the speculative jolts that occur in the raw steel market.

Conversely, Arcelor has absolutely no interest in the success of this takeover. If it is led into a more adventurous strategy, its sustained policy of research and heavy investment in up-market steel products may be weakened. Its workforce stands to suffer, slowly but surely, from erosion of its relative advantages in terms of wages and job security. This explains why the management, most of the workers and the Unions of Arcelor refused Mittal's offer.

But the shareholders of Arcelor have made their choice. The immediate profit offered by Mittal was enough. Mittal won. So the shareholders chose to cash in on a temporary bonus, taking a risk on the progressive erosion of the firm and perhaps the end of its policy of focusing on high quality while treating its workers with respect.

There are very few fixed-term contracts or part-time contracts in Arcelor. This choice directly concerns more than 150,000 employees. Indirectly, it concerns all of us, for the choice made by Arcelor's shareholders is far from being an exception; on the contrary, it reveals the deep economic and social significance of corporate takeovers of this type.

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