Poison-pill defense strategy

Introdiction

In case of a hostile takeover bid, one of the first instincts of the management is to show how incompatible the companies would be in the event of a merger or a takeover. This is done to make the company incompatible to the company that has made the hostile bid. Arcelor’s CEO Guy Dolle, shared his management’s view that a merger between the two companies would be impossible due to cultural differences.

This does not merely mean the cultural differences that exist between European countries and Asian countries – though they are major in nature, it means the differences in environments in which the companies operate – Arcelor in high end devoping countries, and Mittal Steel in low-cost labor countries; and also the governing style of the two companies – Arcelor’s slow bureaucratic style and Mittal’s entrepreneurial and efficient style.

Combing these two styles was definitely a challenge, one which Dolle found and also vocally expressed as unsurmountable.

CEO Guy Dolle

Arcelor’s management led by its CEO Guy Dolle, openly criticized Mittal and his company’s management style.

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In fact Dolle openly compared Mittal to eau de cologne and his company to expensive perfume. He further added that Mittal is focused on making commercial-grade products while Arcelor was a very technical company geared more to producing a higher-value type of steel. Dolle also raised doubts about Mittal’s willingness and ability to maintain high safety standards for its employees.

He dramatically claimed that “whereas Arcelor’s accident rate had fallen by 75 percent in the past four years, the accident rate at a former Arcelor plant now owned by Mittal soared 10-fold”.

While mittal did successfully counter the points raised by Dolle, the icing on the cake was that many of the trade unions as well as members of the French media found his accusations baseless pointing out that the plants occupied by Mittal were objectively not worse than those plants belonging to the European communities (Lander, Nair, 2008, p.77-78).

Many would point this as a strategic mistake – one that closed many of the defensive strategies to Arcelor, as is seen in the section above. However, it is interesting to note that event the French government and media shared this viewpoint. In fact the politicians expressed concerns about industriak relations evene when trade unions themselves defended the record of the Indian company and in fact argued that Arcelor was less sensitive to its concerns (Sauvant, Mendoza, Irmak, 2008, p.187).

This shows the culturally-superior mindset in Continental Europe that even prevailed in purely business decisions, and acted as one of the takeover barriers in the region. Description of what constitutes a poison-pill strategy has been given in the section above. Arcelor management never actually agreed that it had employed a poison-pill strategy, however as there was no other possible explanation to why they took the particular decision, it cannot be anything else either.

Mittal Steel

Mittal Steel, as a part of its takeover strategy had analyzed the impact of its takeover on various countries, since the operations of Mittal as well as the potential Arcelor-Mittal were global. One possible problem would have arisen due to the acquisitions both Arcelor and Mittal had made in America recently. The first was the acquisition of US-based International Steel Group ISG in 2005 by Mittal in 2005. This was followed in January 2006, by the hostile takeover of Canada’s largest selling steel producer Dofasco by Arcelor who had topped a bid by Germany’s ThyssenKrupp.

The combination of Arcelor and Mittal would give rise to possible anti-trust issues which Mittal was keen to avoid. Hence, the main takeover bid for Arcelor was accompanied by a side deal that reversed the Dofasco takeover by giving it back to ThyssenKrupp. Though a side-deal, this was one of the crucial aspects of the merger which would be scrutinized by American regulatory authorities (Cagna, n. d. p. 4-6). Arcelor’s management decided to block Mittal’s bid by deciding that Dofasco could not be sold to any other company because of its technological significance.

The company vested the rights to the aforementioned technology to a Dutch foundation with independent control over decision to sell, as a means to prevent the company being sold. In case Mittal still agreed to go ahead with the deal, it would have to sell assets to overcome the anti-trust issues, since it would not be possible to sell Dofasco for at least a period of five years. In addition, the company had already committed to sell Dofasco to ThyssenKrupp, once the Arcelor-Mittal deal went through.

Conclusion

This poison-pill however had a complete reverse effect from what was intended, as it enraged the European and American shareholders of the company, who had expected the management to fight fairly and keeping the shareholder’s interests in view. In fact shareholders demanded an immediate meeting with the management to sort the issue, which was an unprecedented move. In addition, Mittal indicated that he was ready to swallow the poison-pill and was prepared even in case he was not able to sell Dofasco immediately (Warner, 2006; Tieman, 2006; Timmons and Austen, 2006)

Earlier, Arcelor did mull on using another lesser known clause as a poison-pill. This was a 2001 clause called Change of Control in an agreement that Arcelor had with Nippon Steel according to which the latter company had a right to withdraw the patents for any technology that it shared with Arcelor in case of a change of ownership of the company, which Nippon Steel considered as a threat. However, nothing ever came out of that clause (Lewis, 2006).