ArcelorMittal Steel Company
To: Director of Portfolio Risk Management (PRM)
From: Senior Risk Analyst, Pierre Group, New York.
Subject: Due Diligence Assessment for ArcelorMittal Steel Company
Date: February 23rd, 2018.
ArcelorMittal Steel Company
The ArcelorMittal Steel Company is the world’s largest steel manufacturing company. It is an international company, with headquarters in Luxembourg. The business was formed after the hostile takeover, and merger of Arcelor by Indian owned Mittal Steel in 2006. The ArcelorMittal S.A (ArcelorMittal), which was incorporated on June 21, 2001. The company and its subsidiaries own and operate steel manufacturing and mining plants in various locations in North and South America, Europe, Africa, and Asia (Reuters). The company also produces a wide range of finished and semi-finished steel products including sheets and plates, bars, rods, and structural shapes. The company has a global footprint and is located in approximately 20 countries. Additionally, it has over 50 integrated and mini-mill steel-making facilities. As of 2014, the company had an annual steel production of 98.1 million tons, which was almost 10% of the world’s steel consumption. The company’s chief executive officer and chairman are Lakshmi Mittal. He is also the owner and largest shareholder of the company (The Securities Exchange Commission).
Its utilization of action-oriented strategies strengthens the business fundamentals of ArcelorMittal Steel Company. Importantly, the company is continuously changing its strategies to enable it to cope with business dynamics. Firstly, the business ensures that it has appropriate operating licenses before it establishes any of its plants. Secondly, it provides that it has a strong balance sheet and stable financial position. Thirdly, the company ensures it has decentralized organization structure. Fourthly, it ensures it has an active portfolio management. Lastly, the company ensures that its human resource is skillful.
The strategy of ensuring that the business has appropriate operating licenses is essential for its sustainability. By nature, the mining industry has a significant impact on the environment. Therefore, the acquisition of appropriate licenses before making any significant investments ensures that the company’s operations are sustainable. The strategy of ensuring that the business has a strong balance sheet is essential for enabling the business to operate even when there a general decline in the global demand for steel, such as during the 2007-2008, financial depression. Additionally, it enables the company to implement its expansion strategies. The company achieves this strategy by selling loss-making or plants with excess capacity such as the sale of Skyline Steel and Astralloy in 2011 due to their excess capacity coupled with a decline in steel demand in Europe.
The strategy of decentralization of ArcelorMittal Steel Co. helps it to have a competitive advantage. In particular, it enables the company to avoid bureaucracies that lead to inefficiencies, to manage risks, and also to enhance accountability. The strategy of active portfolio management allows the business to grow and strengthen its position. Accordingly, ArcelorMittal always acquires well-performing companies and sells those that are underperforming. Finally, the company trains its employees so that they are competent and knowledgeable on ways of exploiting the available business opportunities for the company.
Assessment of Company Strategy
Some of the tools that can be used to assess ArcelorMittal strategies are a SWOT analysis and Porter five forces framework. A SWOT analysis is an acronym for strength, weakness, opportunity, and threat. Below is a chart with ArcelorMittal’s SWOT Analysis.
ArcelorMittal’s SWOT Analysis
|1. ArcelorMittal has a vast experience in steel industry.
2. The company has a large financial capital base.
3. ArcelorMittal has streamlined and efficient management.
4. ArcelorMittal has decentralized operations which make it access most markets.
|1. The company has damaged its reputation by been found guilty of illegal practices, such as price fixing (European Commission).
|1. The recent recovery of the global market from the 2007-2008 financial crisis has increased demand for steel.
2. There has been a recent increase in real estate and infrastructure development in developing economies, which need steel products.
3. There has been a growth in demand for vehicles and electronics, which use steel, in developing countries.
|1. ArcelorMittal is facing stiff competition from more efficient steel making companies.
2. The business is under constant threat from environmental regulators, due to pollution.
3. Changes in the global weather patterns are affecting the reliability in the supply of electricity, which is essential for running of steel industries.
ArcelorMittal’s Porter’s Five Forces Framework
Currently, ArcelorMittal is by far the largest steelmaker in the world. However, it only controls only about 10% of the entire market. Therefore, the company still faces significant competition from rival steelmakers.
The bargaining power of buyers
There are many small and large buyers of steel products in the world. Since there are many sellers of steel coupled with a high supply, buyers have significant bargaining power. Accordingly, ArcelorMittal is at times forced to reduce the prices of its products and only to make small margins.
The bargaining power of suppliers
Suppliers of iron ore and other products used in steel manufacturing have significant bargaining power. Given that there are many potential buyers of this product, ArcelorMittal is forced to accept the terms offered by suppliers.
The threat of new entrants
There is minimal threat of new entrants in ArcelorMittal business. This threat is mainly reduced by the high initial operating costs needed in this industry. Additionally, the margins are usually small and unpredictable, which reduces the chances of new players entering the market.
The threat of substitute offerings
The threat of substitute offering is minimal. Largely, most steel products such as steel cables, bars, and rods used in construction cannot be substituted by non-metal products. Furthermore, steel is one of the most affordable metal, making it hard to substitute with other metals.
Key Strategic Risks
The main strategy being undertaken by ArcelorMittal is an expansionist strategy. Although this strategy is right, it may make the company to experience various risks in its future performance due to the management over commitments. In particular, the company can be forced to make excessive borrowings to finance these expansionist activities. ArcelorMittal can accidentally purchase underperforming companies. Lastly, the company can be forced to incur substantial costs in laying off workers to avoid duplication of duties.
Impacts of Risks Associated with the Company’s Strategy
The main risks with pursing of ArcelorMittal strategy of expansion wrongly are excessive borrowing, purchase of underperforming companies, and engaging in costly acquisition.
Excessive borrowing: ArcelorMittal can fall into the trap of excessive borrowing, which may result in it paying massive interests to banks. The company liquidity position can be negatively affected, which can affect its day-to-day operations.
Acquisition of an underperforming company: ArcelorMittal can wrongly purchase an underperforming company, which can make it incur a loss. In some cases, the business can fail to transform an underperforming company to profitability, which may make it incur a lot of avoidable costs.
Costly acquisition: ArcelorMittal can have a highly expensive purchase that it had initially planned. These costs may include the laying off of workers, the development of infrastructure, and training of employees. These costs can increase ArcelorMittal acquisition risks and time needed for it to break even.
Categorization of Risks
ArcelorMittal can either avoid, mitigate, transfer, or accept the risks associated with its activities. The company can use either of the strategies depending on the current performance of the business being acquired. If the company that is being acquired has a strong current financial performance and their market indicators show there will be an increase in global demand for steel products, ArcelorMittal should accept the risk. If the business is underperforming and the global indicators show there will be a decline in Steel demand, ArcelorMittal should avoid the purchase. ArcelorMittal can also mitigate its risk by diversifying its portfolio. In this case, the company can acquire companies with diverse interests, or that are in different specialties in steel making. For example, it can acquire some that are in mining and some that are in steel pressing. Finally, the company can use derivatives when acquiring companies. Since most of the acquired companies’ trade in stock markets, ArcelorMittal can use a put option, which can enable it to sell its shareholding in the acquired company at a high price, when the business fails to become profitable.
Ways of Mitigating Risk
Risk Transfer Using Derivatives
One of the major risk that the business should mitigate against is the collapse of business just after its acquisition. Despite conducting due diligence on its business performance, ArcelorMittal can still have the risk of having a decline in the performance of an acquired business just after being acquired. Accordingly, the company should prevent this risk by purchasing an option. Usually, when a business underperforms, its share value price falls. However, an option enables an investor to sell his/her stock at the initial high price of the purchased option, making him/her to avoid losses associated with the decline in share price.
Due diligence entails an investor analyzing the current and historical performance of a business before making an acquisition. This tendency will help him/her to identify any issues that may cause the acquired before to collapse or underperform before he/she invests. Therefore, the carrying out of due diligence on all possible acquisitions will help the company to mitigate against losses.
ArcelorMittal can also establish a credit policy to regulate the amount that the management can access through borrowing. The establishment of this policy by shareholders will minimize the amount of cash that the management can access through loans. Accordingly, this policy will prevent the financial risks associated with excessive borrowings. Noteworthy, borrowings can be used to make business acquisitions.
Controls to Manage Risks
I would establish policies that require shareholders to make specific approvals before the management makes risky investments. Additionally, I would require the business to maintain specific credit ratios and balance sheet performance. Finally, I would require an audited report and a feasibility study report of any possible acquisition, before it is undertaken. These policies will reduce the risk exposure of the company.
The requirement for shareholders’ approval would reduce the cases of hasty and risky acquisitions. Normally, holding a shareholders meeting requires much planning. Therefore, the management would only make acquisitions that have been authorized and properly examined by shareholders.
The requirement for the business to maintain specific credit ratios and balance sheet performance would reduce the cases of undertaking careless and risky investments. Further, it will ensure that even when the business makes an acquisition it is still able to reduce its risk exposure.
The requirement of audited statements and feasibility study report of the business being acquired would increase the likelihood of the investment becoming profitable. Additionally, it would ensure that the company has undertaken appropriate due diligence, which would reduce its risks.
Execution of the ArcelorMittal Strategy
ArcelorMittal Steel Inc.’s expansion strategy through acquisition can be successfully executed. The most important thing is for the company to assess all investments carefully before making an acquisition. In this case, the company should carry out at least a due diligence study of all possible acquisitions. It can then minimize its risk exposures using derivatives, such as options, and also through the establishment of policies on credit limit.
The main advantage of acquisition is that it enables a company to avoid the many establishment costs. Additionally, it enables ArcelorMittal to get ready customers, since acquisition also entails the purchase of customers and existing contracts. Nonetheless, it is important to note that the company cannot grow by only acquiring existing businesses since this strategy is costly. Moreover, this method can make ArcelorMittal monopolize the industry, which can expose it to anti-monopoly laws.
Pierre Group’s Acquisition
Pierre’s Groups should acquire ArcelorMittal Steel Inc. Currently; the company controls a large market of the steel industry. Additionally, the demand for steel has started to increase following the recovery of many economies that were affected by the 2007-2008 financial recession. The increased demand only means that the company will continue to make more incomes in the future. Furthermore, the diversification of the company into many markets reduces the company’s risk exposure and enables it to exploit various opportunities that may arise in different parts of the world. Finally, the company has an experienced and professional management, which is efficient and thus able to increase the company’s profits.
European Commission. Corrected Antitrust: Commission Fines Prestressing Steel Producers 269 Million For Two Decades Long Price-Fixing And Market-Sharing Cartel. 2011. Accessed 23 February, 2018. europa.eu/rapid/press-release_IP-11-403_en.htm?locale=en
Reuters. ArcelorMittal SA (MT), 2017. Accessed 23 February, 2018. www.reuters.com/finance/stocks/company-profile/MT
The Securities Exchange Commission. ArcelorMittal, Form 20-F. 2017. Accessed 23 February, 2018. corporate.arcelormittal.com/~/media/Files/A/ArcelorMittal/investors/20-f/2017/20F-2017.pdf