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Mergers and Acquisition

Executive Summary

The report summarizes the board structure of the Arcelor and Mitta steels. According to the case study given, the post-merger board structure of the company is discussed. The board structure that is followed in the company is of independent directors. There are various benefits of the structure that includes, objective judgments, better management, etc. In the same manner even if the Mittal family retails 43.5% of the voting equity institutional investor can invest and influence the governance of the company. While pre-merger Mittal steel followed a family group governance after the merger independent directors governance happened which was better than pre-merger.

Table of Contents

1.0 Introduction

2.0 Post-merger board structure and pros and cons

3.0 Governance of the company

4.0 Positive and negative impacts on Mittal steel board

5.0 Conclusion

6.0 References

1.0 Introduction

Arcelor and Mittal merged in the year 2006 and produced the largest steel company in the world. The employees working within the company were in huge numbers. The total of the employees includes 330000. The earnings that were forecasted stands at $15.6 billion. Arcelor fought a major defensive battle against the takeover that was hostile valuing at $35 billion. The incorporation of Arcelor took place in Luxembourg and European governance architecture was adopted by the company. It included a supervisory board, a board of management and employee representatives.

The Mittal family owned 43.5% of the voting equity. The family is known for its growth through acquisitions and was criticized by the Arcelor for having inadequate controls. The company has 18 members on the board and included nine independent directors and employee and nominee directors who reflect the interest of the significant shareholders. In the report post-merger structure of the board will be discussed and also the impact that can be created by the family of Mittal in the governance of the company. Also, the analysis of positive and negative impacts of pre and post-merger effectiveness will be done.

2.0 Post-Merger Board Structure and Pros and Cons

Post-merger board structure of the company included 18 members. Joseph Kinsch was kept as the chairman who was working for Arcelor. Lakshmi Mittal became the president and 9 other directors were involved in the board. Also, there was a director of an employee representative and a director for the nominee. These two were representing the interest of the significant shareholders. The management board was chaired by CEO Lakshmi Mittal. Also, the son of Lakshmi Mittal was accompanying the CEO. CFO position was holed by Aditya Mittal.

The post-merger board structure showed that the company had a maximum number of independent members on the board. Six were nominated by Mittal Steel while 6 were selected by Arcelor board of directors. The board has 17 non-executive board of directors while 1 executive director. Also the board is assisted by the management committee that has 18 senior executives (ArcelorMittal annual report, 2007). Thus, the company had a majority of independent members.

Pros of having an independent structure of the board

  • Impartial: an independent director is tied closely not as closely with the company in respect of executives and also the member of the investor board. This helps the directors to remain impartial and see the functioning of the company objectively. Independent directors will be beholding the objective of the shareholders and the company first (Garcia-Ramos et. al. 2017). The primary objective of the board will be to take care of the company and the interest of the shareholders and hence have an objective and impartial view.

  • Depth and perspective: If there are only investors on the board of directors then the attention will be split between various boards of companies. Various factors will affect their efficiency while the independent director or the board member will be more focused and can bring in-depth and perspective with regards to the company and also the industry in which the company is functioning.

  • Independent directors bring expertise for growth: An independent directorship provides an area for growth. Director can have expertise in the area and bringing them on board will help the company in taking advantage of the opportunities of growth while avoiding the mistakes that are costly (Leyer, Stumpf and Kronsbein 2017). Also, there are chances that an independent director has the experience that will be helpful for the CEO. It was a benefit in Arcelor and Mittal merger as the board had enough experience that helped Mr. Lakshmi Mittal as CEO to sail through.

  • Key for conflict resolution: An independent board plays an important role in resolving the discrepancies between the shareholders and the team of management. If the independent directors take a side than the agreement could be reached at a faster pace as they are considered as impartial people.

Cons of Independent director

  • Less information: The independent board is usually less informed about the activities of the company rather than the team of management or the directors who are working full time (Balsmeier et. al. 2017).

  • Un-interested: There are chances that independent directors do not get involved deeply in the functionality of the company. The might lack interest and focus on their benefit only. This will create a mismanagement in the functioning of the company as the board will approve only those policies that are in their benefit.

3.0 Governance of The Company

Institutional investors refer to the entities that pool money and purchase securities of other investment assets. They invest in the company and exercise the voting rights of the company. Mittal group occupies 43.5% of the equity. They hold most of the shares of the company, yet they do not hold the majority of the shares. Institutional investors can invest and attain more than 50% of the shares. The voting rights will be provided to the investors.

Governance refers to the system of rules, processes, and practices through which a firm is directed or controlled. It helps in balancing the interest of the company and also the community, shareholders, government, etc. It helps in providing a framework for achieving the objective of the company. Every sphere of management is controlled by the governance rule be it internal or measures for the performance of disclosure by the company (Dixon 2019).

Once institutional investors hold shares that are more than the ownership of the Mittal group they can easily influence the governance of the company. Any plans and policies that are formed in the company starts from the board. The approval is required. Set standards and the procedures are followed by the company as per the rules set by the board. A report for the governance is created by the board. Institutional investors can dominate that if they hold more than half of the firm's equity. In the case of the Mittal group they can hold more than half of the shares.

Thus, institutional investors can play a significant role as they can govern the policies and also lay down new policies for the company. If the institutional investor found that certain policy is not in the well-being of the company or the stakeholders, they can oppose it and since they hold majority shareholder's that policy will be removed. Voting happens when any rules are laid down for the company. There they can also have the benefit. They can bring down rules that are beneficial for all and also have a positive impact on the company and its shareholders. Rules that help the employees and other entities who are attached to the organization can be passed.

Thus, in this manner institutional investors can have an impact on the company. They can hold shares more than The Mittal Group holds and get the voting rights over the group. This will give them the right to lay down policies and rules and thus affect the governance of the company. So, even if the Mittal family owns 43% of the voting rights, institutional investors can invest and affect the governance of the company with a majority of voting rights in their favor.

4.0 Positive and Negative Impacts on Mittal Steel Board

The pre-merger board of the Mittal steel board was family-owned. They had a two-tier structure of voting where the family owns 67.2 percent of A-shares. These shares contain 1 voting right for each share. While the B shares will have 10 votes. So, summing it all post-merger Mittal steel owned 98.3% of the voting shares of the company. This is a family model of governance.

Pros of this model:

  • Stability: In this type of model there is stability. It is determined that who will be running the business and who will be staying at the position for long. The leader in this model of governance stays at their position for long. Like in Mittal Steel, Mr. Lakshmi Mittal will be the one who will run the business for long. This provides a stable image of the leader for the years to come and a company starts getting recognized by the member of the family or its family name.

  • Commitment: Since the business is held mostly by the company, they hold a greater stake and are more committed to the company. The family of Mr. Mittaal holds 98% of the shares. The stakes are high. If there is any loss in the company than it will be dealt with by the family. This creates a sense of responsibility and accountability for the members of the family. Also, the business is known by the name of the family members (Rubina, Tenuta and Cambrea 2017). The reputation is also at stake. This situation makes the majority of stakeholders or the family more committed to the business. Also, since the business is their own, some benefits will be drawn by them. Thus, helping them in committing more towards the organization.

  • Long-term goals: since the owners or the stakeholders are the members of the family or the business is owned them, they always have long term plans for the business. Non-family stakeholders would like to pursue the goals that are beneficial in the present while family governance would like to bring rules that will benefit the company in the long run.

Cons of the model:

  • Unstructured governance: Due to family being the majority stakeholders, there is a hierarchy internally. The rules can be made as per the convenience of the members of the family. Also, they can be passed easily as the majority of voting rights are in the hands of the family members. There is no governance and the rules are flexible for the members.

  • Nepotism: In Mittal steel, the son and the daughter holds the next majority shares of the company. They have the shares because of the practice of nepotism in the family governance. This won’t provide a chance of better policy or the rule or the governance in the company to pass or hold a better position than them.

These are certain pros and cons of family governance that was being followed by the Mittal steel before the merger. After the merger, the shareholding of the family went down to 43.5%. The pattern of governance changed for the post-merger company. There were around 18 independent directors that were hired for the board and to support them there was a management team including both the companies' members. The overall functioning of the company changed and accordingly the governance from the family went to independent governance where whole control was not in the hands of the Mittal family.

Various pros were involved in this type of governance. It includes free suggestions and better involvement of all rather than focusing on one family. Also, independent directors can bring in better expertise and growth for the company. Unbiased decisions and rules can prevail. Since the majority of stakes are not in the hand of one family, there are also chances of disputes in decisions and in this case fair voting can be done.

This shows that better governances of the structure was formed after the merger of the company as it distributed the power rather than concentrating it within a family.

5.0 Conclusion

Mittal Steel took over Arcelor steel in a hostile takeover in the year 2006. After the merger the board structure of the company changed. An independent board was created with the benefit of better management, more appropriate suggestions, etc. While the cons might happen if the boards do not take an interest in the company's functioning. Even if the Mittal family retains 43.5% of the equity shares, an institutional investor can invest and influence the government as the majority of the shareholders will be held by them. The Pro-merger board structure of the company will be better than the other as it diversifies the control of the company.

6.0 References

Annual Report. 2007. Arcelor Mittal. [Online]. Available at: https://storagearcelormittaluat.blob.core.windows.net/media/aixjm1da/638-0-0-arcelormittalannualreport2007.pdf. [Accessed on: 20th May 2020]

Balsmeier, B., Fleming, L., and Manso, G. 2017. Independent boards and innovation. Journal of Financial Economics, 123(3), pp.536-557.

Dixon, R., 2019. Indigenous governance. Company Director, 35(8), p.75.

García-Ramos, R., Díaz-Díaz, B. and García-Olalla, M. 2017. Independent directors, large shareholders, and firm performance: the generational stage of family businesses and the socioemotional wealth approach. Review of Managerial Science, 11(1), pp.119-156.

Leyer, M., Stumpf-Wollersheim, J. and Kronsbein, D. 2017. Stains on the bright side of process-oriented organizational designs: an empirical investigation of advantages and disadvantages. Schmalenbach Business Review, 18(1), pp.29-47.

Rubino, F.E., Tenuta, P. and Cambrea, D.R. 2017. Board characteristics effects on performance in family and non-family business: a multi-theoretical approach. Journal of Management & Governance, 21(3), pp.623-658.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Corporate Governance Assignment Help

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