HERE COMES THE SON
Aditya Mittal, CFO of arcelor Mittal, thinks he may finally have earned respect in the steel industry.
By Tony Mcauley

Aditya Mittal launched the largest merger in steel industry history late last January, a few days after his 30th birthday. Following a bruising eight-month battle, which featured protectionist rumblings from various European governments and a vigorous (some said racist) defense by the senior management of Arcelor, the Luxembourg-based target company, he was named in August as CFO and head of operations in the Americas for the combined Arcelor Mittal. With pro forma revenue of about €55 bn (US$70.6 bn) last year, that makes it easily the largest steel company in the world.

For most people, the victory over Arcelor would be a career-defining moment. But not for the man himself, who invariably is dubbed “the crown prince” and heir to the steel empire his father Lakshmi Mittal – the world’s fifth-richest man, according to Forbes magazine – has built over three decades. Mittal junior’s defining moment came much earlier, when he had just turned 21, was less than a year out of university and was called to join the family firm sooner than he had expected.

The occasion was the initial public offering in 1997 of Ispat International, then the Mittal family’s main operating company. (Ispat is Hindi for steel.) The financing was coming at a crucial phase, just as the company was revving up its strategy to lead a reluctant steel industry toward the global consolidation that it badly needed. In an industry notorious for destroying value, it was proving to be a tough story to sell to investors.

“I always knew I was going to join the family business, but it came quicker than I thought because of the IPO,” Mittal recalls. “The company wasn’t experienced at accessing the public markets and here I had just spent seven months at Credit Suisse First Boston, I had my education and I knew just what our investor base wanted.” Any hint of arrogance is quickly defused with an ironic smile. Indeed, Mittal had graduated less than a year earlier from the University of Pennsylvania’s Wharton Business School, with a BSc in economics, then went through investment bank CSFB’s three-month training program in the summer, followed by four months in mergers and acquisitions – a little short of the qualifications usually required to lead a tough-sell IPO of nearly US$1 bn.

The truth, as Mittal explains, was that the IPO was unceremoniously dumped on him. “The IPO was not going well at all. It was close to being cancelled. Then there was a review with all of the [Ispat operating unit] CEOs in New York. I remember very clearly that meeting. The IPO came up as an agenda item and there was a person who was senior to me in the team who suddenly said, ‘Aditya will give the report on the IPO; he’s managing it.’ I was, like, ‘What?’ Needless to say, the report was very bad. I got up and said, ‘We’re having all these difficulties, the market is very weak and hopefully we’ll make the timeline.’ That was my report.”
He went back to his hotel in a daze. “I was, like, ‘Damn, now I’m the leader of this thing and it’s going nowhere.’ I was very depressed,” he says. There was even a notice waiting for him at the hotel from the US Immigration and Naturalization Service warning that he’d overstayed his visa.

Face time

How to pull the deal out of the dumper? “It was a repackaging of the company and our strategy, simplifying the organization structure and presenting a very credible story as to what we wanted to do, the whole consolidation business, the whole globalization business.” Mittal, his team, and the IPO bankers, led by former colleagues at CSFB, as well as Donaldson Lufkin & Jenrette, took the story on the road, holding face-to-face meetings with over 200 prospective investors across the US and Europe.

By the time the big IPO lunch presentation was held that August, at the St Regis Hotel in New York’s Central Park East, it was standing-room only in the ballroom and investors were clamoring for a piece of Ispat. Barron’s, an investment magazine, quoted one attendee at the time, Michael Gambardella of JP Morgan: “Ispat is a compelling example of growth in a mature industry.” It had generated the kind of buzz then reserved for technology stocks. The shares were priced at US$27 each, at the top of an indicated range that was increased twice. The issue eventually raised US$776m, the largest-ever IPO for a steel company.

Even after the Arcelor triumph this year, Mittal still talks with evident pride about that IPO: “It was ten times oversubscribed – that was incredible for a steel company – and was named ‘Equity Deal of the Year’ by Institutional Investor magazine,” he beams.
Most important, the IPO process identified Ispat as the steel industry’s “mold breaker” for investors, as CSFB industry analyst Jeremy Fletcher put it.

That early baptism of fire for Aditya Mittal, especially the lessons learned through endless direct communication with investors, laid the groundwork for this year’s battle with Arcelor. At the time, it also showed everyone within the Mittal organization that Lakshmi Mittal entrusted a great deal to, and expected a lot from, his son. “When I started at the company, in some sense I had an advantage because I was part of the family. In some sense I had a disadvantage because everyone was focused on what I would say, what I would do, whether I could live up to the challenge. [The IPO] was very important.”

The road to Jakarta

Though he’d had a good grounding in finance at Wharton and CSFB, Aditya Mittal’s education in steel has been a life-long enterprise, and that proved to be another key factor in winning Arcelor.

The Mittal Steel story has already achieved the status of business-school lore. Aditya’s father had a brainwave on a business trip to Jakarta in 1976, when he was 26 and Aditya had just been born. He convinced his father, Mohan Lal Mittal, a successful Calcutta steel trader, to help him buy a small 30,000-tonne steel mill in Indonesia for US$100,000 with a view to undercutting Japanese imports. A dozen years later, having personally survived at times on US$250 a month, Lakshmi Mittal had grown the plant tenfold and looked to expand abroad, first by doubling production with the acquisition of the Iron & Steel Company of Trinidad and Tobago in 1989.

During these early years, Aditya was at the Jakarta International School. Often referred to as “the American high school”, it had 2,500 students, half of whom were American expatriates, as were most of the teachers. “A phenomenal school,” says Aditya Mittal, “very American – baseball, basketball, varsity jackets, burgers, hot dogs, Sadie Hawkins! (Where girls ask guys to a dance.) That was my favorite.” The transition to Wharton at 16 was, therefore, smooth.

All the while, the steel industry was never far from his mind. “I had continuous interaction with my father when I was getting educated,” Mittal says. “I would visit the steel facility often in Jakarta. When I was at Wharton, one spring break my father heard I was going to Cancún. I had to spend the first five days at our facility in Mexico, then just three days with my friends.” He winces at the memory.

Modern model

The vision that Lakshmi Mittal had in the early 1990s – one that few in the industry shared – was that the steel industry needed to go from a largely government-owned, production-driven, failing enterprise to a business led by global demand and run according to modern management practices. By the mid-1990s, Lakshmi decided to take the lead on consolidation, following his Jakarta model by acquiring flagging operations – mainly privatizing assets in developing countries like Mexico and Kazakhstan, but also plants in Canada and Germany – and turning them around.

After the Ispat IPO, the next big move came with the purchase in 1998 of Inland Steel, the fourth-largest producer in the US, for US$1.4 bn. Aditya was formally appointed the following year as head of the two-man M&A team. Over the next few years, he led the effort to scoop up steel plants from government privatizations in more than a dozen countries, including Poland, the Czech Republic, Romania, Bosnia Herzegovina, Algeria, and South Africa.

This global approach allowed several things: the transfer of knowledge (“Our Romanian plant has taught our US plants better melting practices,” Mittal says); ever greater economies of scale in purchasing, including those achieved through vertical integration by acquiring nearby iron mines as well as downstream distribution; and, perhaps most important, an ability to respond to demand on a global basis.

The process also meant that Mittal was honing his acquisition and integration skills, so that acquisitions largely became self-funding. “In 1993, it would take us two to three years to fully integrate an acquisition,” Mittal says. “By 2000, we were doing it in six months.” This, in turn, gave the company the confidence to double its size through acquisition in 2001 (buying Sidex in Romania and an initial one-third stake in Isco in South Africa), even while the industry was in a slump. It doubled in size again in 2004 when it became the dominant player in the US steel industry – with a 40% market share – by merging Ispat with LNM Holdings, consolidating the family holding vehicles into one public company and paying about US$4.5 bn for ISG, a private equity vehicle that had rolled up several bankrupt American steel operations. The new company was named Mittal Steel.

Mittalgate

The path has not always been smooth and Mittal Steel has faced the kind of controversy that a company consolidating an employee-heavy industry might expect. It also has had to deal with the kind of flak that comes with being controlled via a murky holding structure centered in the Dutch Antilles tax haven, with corporate headquarters in London – though the company has negligible assets in the UK – and an operating company headquarters in the Netherlands.

The first big taste of unwelcome publicity came in 2002, with what became known in the British media as “The Lakshmi Mittal affair”, or “Mittalgate”. The controversy originated from a combination of facts that gave the impression of “cash-for-political-favors”, though there was never a direct accusation of lawbreaking. The facts: in 2001, Mittal bought Sidex from the Romanian government – it was the only bidder for the steel works, which accounted for 4% of the country’s industrial production but was losing US$1m a day; Lakshmi Mittal donated £125,000 (US$237,650) to the British Labour Party; and Labour Prime Minister Tony Blair sent a form letter, via Britain’s ambassador in Romania, in support of Mittal after the deal had closed.

The affair prompted a BBC investigative report into “the previously obscure Mr Mittal” entitled The Steel Maharajah. The TV program failed to substantiate allegations of bribery – former Ispat COO Johannes Sittard (who, according to some accounts, was edged out of the company at the end of 2000 by Aditya) demurred when he was asked if the company had paid a US$100m “commission” to a go-between for Kazakhstan’s president Nursultan Nazarbayev to acquire the Karmat facility in 1995. Sittard has since become chairman of the Eurasian Natural Resources Group, which is owned by the Kazakh businessmen who helped negotiate the Karmat deal and were paid, Sittard admitted to the BBC, “a substantial amount.”

Some attacks were more personal. After the ISG takeover, there was plenty of the kind of coverage that appeared under the Chicago Sun-Times headline, “Foreign takeover of US steel firms should raise alarms,” which complained of “an Indian family, based in London, with corporate headquarters in Rotterdam” taking over the loss-making plants.

Though Mittal inherited controversy with the ISG acquisition, it added two US heavyweights to its board who further forged its reputation with investors – Wilbur Ross, a former Rothschild banker and founder of ISG, and Lewis Kaden, a top M&A lawyer and member of Citigroup’s board. Part of Ross’s success with ISG was getting the US government to take on billions of dollars of legacy pension and healthcare obligations for steel employees.

The credibility card

The reorganization of Mittal Steel at the end of 2004 included moving Aditya into the CFO role (he was already on the board), where he undertook “massive centralization”. The central finance headcount went from a handful to about 50 as it took over treasury functions such as risk management, cash sweeps, and fundraising. “In the last 18 months we’ve raised US$15 bn at Libor plus 40 basis points and maintained our investment grade through the Arcelor process,” Mittal says.

The control function was also strengthened, especially in forecasting, which is traditionally difficult for the steel industry. Mittal’s finance has launched an effort to help the company become more transparent and improve the quality of its accounts, producing a comprehensive fact-book, moving early to IFRS and giving more detailed breakdowns by product and region. In addition, Mittal hired Julien Onillon from HSBC, where he was head of global steel research, as director of investor relations.

Aditya Mittal talks proudly of the first investor poll conducted by Onillon, which found vast improvements in the perception of the company in terms of transparency and governance. By September of last year, the number of analysts covering Mittal Steel had risen from a handful to a dozen.

Credibility was clearly seen as crucial from an early stage. “I remember right after the ISG deal, we announced earnings before the rest of the steel industry and I came on the conference call and told them, ‘You know, the steel industry is not going to look happy for the next six months.’ It dragged the whole steel industry down; everyone was very upset with me,” Mittal recalls. Other industry players painted a rosier picture but had to post profit warnings in summer 2005 when steel prices slumped. “Since then, the credibility we have with the investor base is phenomenal,” Mittal says.

Last year also underlined the logic of Lakshmi Mittal’s globalization and consolidation project. When steel prices began to slide, Mittal Steel cut production. Arcelor followed suit and prices began to stabilize far sooner than they had in past downturns.

By the time Mittal Steel bid for Arcelor on January 27, a move that Aditya had persuaded the board to make, the company already was firmly in investors’ good graces, especially the “activist investors” who hold sway these days.

The reaction from Arcelor’s management and officials in its constituent European countries was predictable. Luxembourg Prime Minister Jean-Claude Junker called for “a hostile response”, and French Finance Minister Thierry Breton protested. According to one report in Le Monde, an influential French newspaper, the French government’s “economic intelligence services” had let Arcelor’s management know as early as November 2005 about share activity and their conclusion that: “Mittal is preparing a large-scale action.”

As the battle commenced, Arcelor took defensive action, such as ring-fencing its Dofasco operations in Canada for sale in the event of a change of ownership. It planned to give €5 bn back to shareholders.

Most controversially, Arcelor’s CEO, Guy Dollé, made comments that were widely interpreted as insulting, even racist. He talked about Mittal being run by “a bunch of Indians” while Arcelor – the result of a merger of Spanish, Luxembourg, and Belgian companies – was a company “with European cultural values”. He referred to Mittal’s monnaie de singe, a common French expression meaning “Monopoly money”, though many thought Dollé well aware that the literal “monkey money” had racist overtones. There was also his comment, at an early press conference after introducing fellow managers, about his son not being on Arcelor’s board.

Then in May Arcelor brought in a “white knight” in the shape of Severstal and its chairman and chief shareholder Alexei Mordashov, who had gained control of Russia’s largest steel maker at the age of 30 during the Russian “privatizations” of the 1990s. At this point, many investors had turned against Arcelor and a petition signed by shareholders accounting for 30% of the company demanded a vote on the Severstal deal.

Also, on June 2, Lakshmi Mittal wrote to Arcelor’s chairman, Joseph Kinsch, offering a similar management and ownership structure to the one agreed with Severstal. This forced Arcelor to hold talks. Aditya Mittal led a three-man team, while Arcelor was represented by CFO Gonzalo Urquijo, deputy CEO Michel Wurth (Urquijo’s predecessor as CFO) and senior executive vice president Roland Junck, in meetings held on “neutral ground” at hotels near Brussels airport.

Urquijo says of Aditya: “He was able to bring us closer to his company and the logic of the transaction. He is extremely knowledgeable about the sector. We felt we were in front of steel people, not just finance people. Aditya is very impressive.”

Was it shareholder pressure or these three weeks of face-to-face meetings that turned the tide? “We will never know the answer,” says Mittal. The meetings that his father held with the Belgian and Luxembourg presidents and other government officials played their part. The letter offering “a merger of equals … provided Arcelor management with a real choice,” says Mittal. “But along with that, the shareholder base was getting galvanized and [Arcelor management] began to realize there was a lot of shareholder pressure.”

A day before the official announcement of the new board, Aditya Mittal exudes the quiet confidence of someone holding all the cards. Asked about Dollé, he says in a gentle, somewhat chilling, voice: “He is no longer with the company.” If the comments about his age and experience have bothered him, he laughs it off. “You know, at the first press conference in January, everybody asked, ‘Why are you the CFO of this business? Do you have the experience and the capability?’ At the last press conference in July they said, ‘Why don’t you become CEO of the new company?’ So, I guess I made some progress.”