July 7, 2006


Posted in Current Affairs, Rant at 11:30 pm by falstaff

Will everyone please get over the Mittal Deal? Or at least explain to me what all the exuberance is about?

To begin with, I’m sick to the teeth of the press going to town about how this is somehow a victory for India. You expect idiocy like that from the imbeciles at the ToI, but last week’s India Today (which I had the misfortune of glancing through – forgive me, I was bored) has Anand Mahindra telling us how the merger “proves the tenacity of Indian entrepreneurs globally and will raise the aspiration levels.” And, of course, politicians like Chidambram and Kamal Nath rah-rahing about how they’re so proud. Huh? Will someone tell me in what way Mittal is representative of Indian entrepreneurs, or of the health of the Indian Economy? Is the money for the deal coming from India? Not as far as I know. Is Mittal Steel primarily an Indian company? Not unless the nationality of a company is decided by the origins of its founder, in which case the Vikings are probably the greatest entrepreneurs in the world, or, if you go back far enough, all companies are African. Are we likely to see a spate of other Indian entrepreneurs pulling off deals as large as Arcelor-Mittal? I can’t think of a single one. Then why is Mittal’s success reason for India to feel proud and celebrate?

More to the point, is it a success at all? Empirical research on M&A over decades now has generally found that returns to acquirers are marginal or negative. This is especially true when the acquisition is hostile and contested – the general argument is that competitive bidding tends to drive up the price of the target, until the price finally paid equals, if not exceeds, the value of the target to the acquirer. This is the familiar winner’s curse – the person who bids too much wins the auction, but gets no profit from his purchase. A number of researchers have suggested that escalation of commitment plays a large part in this – once acquirers are publicly committed to a deal and have invested time, money and reputation in it, they are reluctant to back out and may continue to bid even after it ceases to be profitable for them, especially if the initial context is uncertain (see, for instance, Haunschild, Davis-Blake and Fichman, Org. Science, 1994 and Puranam, Powell and Singh).

Could this apply to the Mittal-Arcelor deal? We know that the deal was hotly contested, with Severstal being brought in to resist the Mittal bid. The New York Times (June 26th) article about the deal says:

Arcelor’s foot-dragging led to other concessions from Mittal as well. The offer that was agreed to is nearly 40 percent higher than Mittal’s initial offer in January. That bid was 27 percent higher than Arcelor’s stock price at the time. The current offer also represents a hefty premium to Mittal’s last bid of about 36 euros a share, and to Arcelor’s last trading price of 35.02 euros a share.

The report also says that in getting the deal completed “Mittal made several concessions, including his family’s voting rights”.

None of that is conclusive, of course. I’m the last person to trust the NY Times’ take on business issues, and I certainly haven’t looked at the Arcelor-Mittal deal in any detail. It’s possible therefore that there are huge synergies to be had here that outweigh the premium Mittal is paying (what kind of value multiples would that imply I wonder? And how would they compare to multiples for other steel companies?). It’s possible, given Mittal’s considerable reputation for turnarounds that he can make Arcelor yield high enough profits to justify the valuation he’s put on it. Maybe this is, in fact, a good deal to have made. But prima facie at least, the evidence would suggest the opposite. Everything I read about the deal suggests to me that it’s actually the Arcelor shareholders who are the winners here – that Arcelor has successfully used a number of classic defensive tactics to negotiate itself an extremely sweet deal from Mittal. And while it’s possible that I’m wrong (I don’t claim to understand global steel) I think it would be interesting if we were to see a discussion of why exactly this deal is a real success for the Mittals, rather than empty tom-toming of the fact that the deal got made. Not all deals are worth making.

One last thought on Mittal as the great Indian success story. Assuming for a minute that in some bizarre way Mittal is actually representative of India, how much of a paragon is Mittal Steel really? How much should we aspire to emulate him? Research on corporate governance in family businesses has generally found that heir-controlled firms tend to destroy shareholder value (see, for instance, Amit and Villalonga) . In fact, Morck, Stangeland and Yeung have argued that a large proportion of a country’s wealth being tied up in the hands of billionaire heirs may actually slow GDP growth. The abstract to their article reads:

The basic finding of this paper is that countries in which billionaire heirs’ wealth is large relative to G.D.P. grow more slowly than other countries at similar levels of development, while countries in which selfmade entrepreneur billionaire wealth is large relative to G.D.P. grow more rapidly than other countries at similar levels of development. We consider several explanations for this finding. First, old wealth may entrench poor management and control pyramids may distort their incentives. Second, a sharply skewed wealth distribution may create market power in capital markets causing inefficiency. Third, entrenched billionaires have a vested interest in preserving the value of old capital and thus in slowing creative destruction. Fourth, old money becomes entrenched through control of the political system, and most especially by rearing barriers to capital mobility. In contrast, substantial self-made billionaires’ wealth is observed where such forces are ineffectual and creative destruction occurs.

Yet we’ve all seen the picture of LN Mittal and his son grinning away after the Arcelor deal, and the Economic Times informs me today that Mittal’s 25 year old daughter is on the board of directors. Again, I don’t know anything about the Mittal children. For all I know they may in fact be the most competent people for the roles they play within Mittal Steel. Still, given the empirical evidence on value destruction by heirs, it does make you wonder.