Mittal Steel in 2006

Mittal Steal in 2006 Changing the Global leaf blade Game Industry Analysis Although steel was a highly demanded good, the perseverance as a whole was largely un gainful. One reason for this was that the pains remained highly fragmented in contrast to their suppliers and even some of their buyers, who were intimately more consolidated. Aside from the increased competition that fragmentation contributed to, it also luxuriant the steal industrys bargaining power to raw fabric suppliers and in some cases, such as the auto industry, the buyers.The resulting high am stamp out greets, volatile raw material prices, and intense price competition fuel unstable profitability. Adding to the fragmentation issues was a lack of differentiation in the market. For the longish time there were really only two production possibilities. One, cosmos vertically structured and producing higher-grade steel at a higher salute of operation, or two, de-verticalize and focus on unkept cost, low-grade steel production. Depending on the production selected, the resulting narkible customer set up was limited.This lack of differentiation further fueled the limited bargaining power of steel manufacturers. As verbalise above, steel was highly demanded. The problem was that the growth of that demand remained quite tick over for around 20 years. It wasnt until the explosion of growth in the Chinese construction industry, attributing to 25% of total steel consumption, that the steel industry sawing machine any profitability. In an industry where customers demand a low cost and a consistent product, being able to maintain a certain supply while being as cost efficient as come-at-able was key to a firms victor.Though there was a interlace in Chinese demand, only those strategically military postureed could access the true value of the Chinese market. This was because the steel industry operated primarily on an intra-regional basis. Many factors attributed to this, but a firms dependence on raw material access, and exhausting to avoid high transportation and tariff costs, as well as delivery lags, were the primary reasons for high regional trade. In order to access the benefits of regional trade, firms had to expand their operations done and by means of high FDI in the hit of M&As.This gained them access to highly profitable regions and it allowed firms to spread their endangerment over a larger ara, reducing the impact of demand fluctuations in one particular region. The reason many of these M&A opportunities existed was because of a major shit from government owned steel full treatments to privatization. through privatization, FDI opportunities became possible in many countries, thus make intra-regional trade more neighborly and attractive. Consolidation & Integration Recognizing that the dynamics of the market were changing, LNM was quick to take advantage.He was undeviating in his belief that they only way to create sustained success was th rough consolidation and integration. With increased privatization opportunities available, LNM began a series of M&As that would gain him access to regions that were highly profitable, had lower labor costs, and would order him to extradite higher bargaining power with suppliers. LNM made the first moves in the industry toward consolidation, and was this strategic initiative that has since driven the evolution of the industry to where it is today.A major root of value creation was derived from their technological lead in DRI. LNM trenchant early on to focus their operations around integrated minimills, which was nontraditional at the time. Through this structure he was able to capture the uttermost value of his operation, using scrap in the minimills, then reverse consolidation into DRI. Once unreliable, DRI technology had advanced so much that its outturn was now comparable to the quality of integrated steel plants.This technology fastness nominated them better quality st eel at a cheaper cost of production, providing them with a huge competitive advantage. Additionally, It was this technology, aided by a proven hit team and protocol, which supported their ability to transform underperforming government owned plants to profitable ones in a short period. LMNs initial approach was to enhance distressed government owed plants then breath new life into them through technology sharing and smart practices.He soon sought larger targets that would provide him non only economies of scale, but also provide competitive advantages through geographic scope. Starting with Karmet, he began to shift his targeting toward plants that were either highly integrated, sop up significant mineral rights, or supplied a strategic geographic advantage. Through designing their activity architecture in this way, Mittal steel became the introductions largest and most integrated steelmaker providing self-coloured positions in North America, atomic number 63, Asia, and Afric a.The result of their strategic positioning, pick out with their focus of coordination through KIP and KMP, made Mittal the first firm in the industry to operate as a transnational organization. Each plant provided its own uniqueness, providing different capabilities and skills that could be harnessed for the good of the whole organization. in that respect was also a heavy flow of people, materials and finances between the mutualist plants, but at the center of it all was the Mittal Steel directing crocked coordination and a shared strategic decision making process. On a regional level, they operated through regional hubs.This allows Mittals positioning of adjacent plants to source from the same suppliers, increasing their bargaining power and reliability of supply, while not jeopardizing cannibalism of sales as each plants customer base was unique to their location. Mittals vertical integration in mining and low cost position helps support profitability and helps toreduce grav id uptake needs. They are the most diversified steelcompany in the world in terms of assetlocation and market presence. They also have a diverse product range, including both flat and long steel.As such, Mittal is not overly dependent on any singleregion, product, or end market. These benefits are somewhat mitigated however by the risks associated with Mittals quick expansion through eruditenesss. These include such things as institutional risks associated with emerging markets and uncertainties regarding the integration of newly acquired assets, although Mittalsintegration cutting record has been successful to date. Arcelor science In light of the above information, I believe that Mittal should pursue the Arcelor skill aggressively.Mittal Steel & Arcelor complement each opposite in terms of geographic coverage and product mix, as there is no significant overlap. Mittal has strong positions in the U. S. market low-cost operations in Central andeasterly Europe, Asia and Afric a and vertical raw-material integration. Arcelor is the leader in higher value-added products with strongholds in Western Europe and Brazil, as well as a focus on Russia, India, and China. I believe that the positioning of Arcelors plants and resource capabilities would integrate nicely to Mittals activity architecture.There would be very minimal duplications of effort, and many of the regions that Arcelor operates are in prime locations to source raw materials. The addition result only change Mittals integrated transnational value chain. Through acquisition, Mittal would produce nearly 110 million tonnes of steel per year, making them three times as large than their next competitor. Although this can lead to diseconomies of scale, in Mittals case, as the largest player in the steel industry both globally and in the key markets, the combined group would enjoy significant bargaining power.Additionally, through shared expertise, the combined entity would be in a better position to d evelop the high growth region of China and South easternmost Asia. Arcelors alliance with Nippon and Mittals acquisition of Karmet and stake in Valin willing provide access to critical Asian markets. Regardless of the synergies the acquisition will create, caution still needs to be exercised by Mittal. There are evident signs that the acquisition will not be welcomed by Arcelor, presumptuous that Mr. Dolles canceled meeting and unreturned phone call was an indication to his temperature on the proposal.If the acquisition turned hostile there is a good chance Mittal would have to overpay for Arcelor, which could have adverse affects to it investment ratings. At the current volunteer price Mittal would already have to leverage 5 one million million million and would be in debt by 11. 5 one thousand thousand. Although they have a good track record of ROI and the industry as a whole has seen a spike in ROIC, they do not want to spend more than they have to. Despite the favorable his tory and perceived synergies, Mittal should pay at a maximum 27. 1 billion for the deal. They should obviously try to pay as close to the current bid as possible, but at 27. billion they are still in a position where they could access the capital needed given their successful history. Also, at the mark of 27. 1 billion their debt would raise to 20 billion, but with an EBITDA of over 5. 5 billion annually, not to mention the added revenues from the acquisition, the debt could be confidently paid off in a reasonable timeframe. If the bidding exceeds the mark of 27. 1 billion, the negotiations should be ceased and Mittal should pursue other opportunities to continue their global footprint expansion.