4.5 Assignment: ArcelorMittal Acquisition

By James Kanter, Heather Timmons and Anand Giridharadas

June 25, 2006

LUXEMBOURG — A new steel giant is to be created out of a bitter battle, after Arcelor formally agreed on Sunday to a €26.5 billion takeover by rival Mittal Steel.

The deal combines 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 the India-born Lakshmi Mittal, who built a fortune turning around sick steel plants in rapidly expanding markets from Trinidad to Kazakhstan.

The deal, valued at $33.1 billion, is the latest sign that shareholder activism is marching through the once staid and sleepy boardrooms of Europe. The agreement to pair with Mittal caps a wrenching turnaround for Arcelor's management, which once dismissed Mittal as a "company of Indians" but were forced to backtrack after shareholders threatened to revolt.

Politicians in Europe who once criticized Mittal have remained mum in recent days, and the merger brings hope that protectionist barriers against such deals may be eroding in Europe.

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Mittal is paying €40.37 a share for Arcelor, nearly double what the company was trading at when Mittal first made an offer in January. The new company will be named Arcelor-Mittal and will be headquartered in Luxembourg. Joseph Kinsch, chairman of Arcelor, will be chairman of the new company, and will be succeeded by Mittal when Kinsch retires next year.

It was unclear what role Guy Dollé, Arcelor's chief executive, will have. Mittal will be president until Kinsch's departure.

"It's been a long struggle," said Wilbur Ross Jr., a U.S. billionaire investor and Mittal board member. "Now that we have had an opportunity to be inside, with management, we believe there will be even more synergies than we thought."

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Kinsch, speaking in the courtyard of the Arcelor headquarters, said that the deal would create "global leadership in steel" not just by ton but by value.

Getting to this point has involved a bruising fight for both sides. Mittal first made an unexpected €18.6 billion offer for Arcelor in January, and was swiftly and harshly rebuked by Arcelor management and a chorus of European politicians who criticized everything from his grammar to his Indian origins to the quality of his company's steel. Arcelor's bare-knuckled defense strategy included refusing to meet with Mittal until a string of demands were met, and simultaneously orchestrating a €13 billion deal with Severstal of Russia to keep him away.

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Arcelor's choice of Severstal as a white knight was problematic from the beginning. An unconventional vote on the deal, which was scheduled for Friday, was immediately criticized by shareholders. It allowed the deal to be approved unless the meeting was attended by an unprecedented number of Arcelor shareholders and they voted it down.

After Arcelor executives and Severstal's chief executive, Aleksei Mordashov, appeared at a triumphant news conference to announce the deal, they were rarely seen together again. Instead, Mordashov embarked alone on a global tour to win Arcelor's investors to his side. He found shareholders were willing to listen to him, but angry with Arcelor's top executives, according to one of his advisers who spoke on the condition of anonymity.

"They had managed to alienate everyone," the adviser said. Management had "taken their shareholders for granted."

In fact, Arcelor's shareholders, including institutional investors and a growing number of hedge funds, were angry enough about the way the last- minute deal with Severstal was being pushed that they had started to talk about trying to oust Arcelor's management, and suing its board members.

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Such shareholder revolts have been successful in the past.Last year, for example, the chief executive of Deutsche Börse, Werner Siefert, was forced out after shareholders opposed his plans to buy the London Stock Exchange.

Support eroded for Arcelor's plans behind the scenes, too. Representatives from the Luxembourg government, which is one of Arcelor's largest and most influential shareholders, spoke out strongly against the Mittal deal at first. Luxembourg regulators approved the Severstal deal, even though it had a few quirks. But as shareholder wrath grew over the Severstal agreement, the government began to privately question it. One representative claimed that Arcelor management had tried to "bully" the government into writing a takeover law that shut Mittal out.

The real turning point, according to several people involved in the negotiations, came when Arcelor's board and management realized that a share buyback connected to the deal with Severstal might be voted down. The vote on the buyback, scheduled for last Wednesday, was canceled, in order to concentrate on negotiations with Mittal.