Arcelor Outbids ThyssenKrupp for Canada's Dofasco Steelmaking Operations

question 94

Essay

Arcelor Outbids ThyssenKrupp for Canada's Dofasco Steelmaking Operations
Arcelor Steel of Luxembourg, the world's second largest steel maker, was eager to make an acquisition. Having been outbid by Mittal, the world's leading steel firm, in its efforts to buy Turkey's state-owned Erdemir and Ukraine's Kryvorizhstal, Guy Dolle, Arcelor's CEO, seemed determined not to let that happen again. Arcelor and Dofasco had been in talks for more than four months before Arcelor decided to initiate a tender offer on November 23, 2005, valued at $3.8 billion in cash. Dofasco, Canada's largest steel manufacturer, owned vast coal and iron ore reserves, possessed a nonunion workforce, and sold much of its steel to Honda assembly plants in the United States. The merger would enable Arcelor, whose revenues were concentrated primarily in Europe, to diversify into the United States. Contrary to their European operations, Arcelor found the flexibility offered by Dofasco's nonunion labor force highly attractive. Moreover, by increasing its share of global steel production, Arcelor's management reasoned that it would be able to exert additional pricing leverage with both customers and suppliers.

Serving the role of "white knight," Germany's ThyssenKrupp, the sixth largest steel firm in the world, offered to acquire Dofasco one week later for $4.1 billion in cash. Dofasco's board accepted the bid, which included a $187 million breakup fee should another firm acquire Dofasco. Investors soundly criticized Dofasco's board for not opening up the bidding to an auction. In its defense, the board expressed concern about stretching out the process in an auction over several weeks. In late December, Arcelor topped the ThyssenKrupp bid by offering $4.2 billion. Not to be outdone, ThyssenKrupp matched the Arcelor offer on January 4, 2006. The Dofasco board reaffirmed its preference for the ThyssenKrupp bid, due to the breakup fee and ThyssenKrupp's willingness (unlike Arcelor) to allow Dofasco to continue to operate under its own name and management.

In a bold attempt to put Dofasco out of reach of the already highly leveraged ThyssenKrupp, Arcelor raised its bid to $4.8 billion on January 16, 2006. This bid represented an approximate 80 percent premium over Dofasco's closing share price on the day Arcelor announced its original tender offer. The Arcelor bid was contingent on Dofasco withdrawing its support for the ThyssenKrupp bid. On January 24, 2006, ThyssenKrupp said it would not raise its bid. Events in the dynamically changing global steel market were not to end here. The Arcelor board and management barely had time to savor their successful takeover of Dofasco before Mittal initiated a hostile takeover of Arcelor. Ironically, Mittal succeeded in acquiring its archrival, Arcelor, just six months later in a bid to achieve further industry consolidation.
-Why do you believe that Dofasco's board was concerned about a lengthy auction process? discussion of the Mittal-Arcelor transaction.

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Definitions:

Return on Equity

A financial performance measure that demonstrates how effectively a company uses investor funds to generate profit.

Equity Multiplier

The equity multiplier is a financial ratio that measures the degree of a company's financing through debt compared to its owned equity, indicating leverage level.

Return on Assets

A financial ratio indicating the profitability of a company relative to its total assets.

Costs of Goods Sold

Costs directly related to the manufacture of products sold by a company.