UK: Getting Back In The Water - Consolidation In The Global Steel Industry

Last Updated: 20 May 2009
Article by Deloitte Manufacturing Group

Most Read Contributor in UK, August 2017

EXECUTIVE SUMMARY

In 2008 steel industry consolidation—which had accelerated at a blistering pace over the past decade—hit a brick wall. With the advent of the global economic decline and, in particular, the freezing of credit markets, demand plummeted and the availability of financing to support transactions all but disappeared.

In fact, some companies are facing debt covenant violations, requiring them to consider share issuances and divestitures to maintain financing for their current operations. As a result, the number of completed deals in 2008 fell by 25 percent and deal value dropped by more than half, to US$31 billion.1

Yet, despite the current cool down in consolidation, mergers and acquisitions (M&A) remains a critically important business strategy to achieve synergies, expand the customer base, and enhance competitive position. Even in today's challenging business environment, steel companies need to master the ability to carefully evaluate potential targets and quickly execute acquisitions in order to be as wellplaced when the economy regains steam. In a recent study of global steel consolidation, Deloitte Touche Tohmatsu's (Deloitte) Global Manufacturing Industry Group sought out major players in the steel industry to learn more about their overall M&A business strategies, the impact of the credit crisis and economic downturn, and the challenges they face in planning and executing acquisitions. From 15 October 2008 to 6 April 2009, a global online survey and case study interviews were conducted, including 10 of the top 15 largest global steel producers. Sixty-nine percent of the executives who completed the survey were from companies with annual revenues of US$5 billion or more. Senior executives from ArcelorMittal, POSCO, Severstal, Tata Steel, and U.S. Steel participated in one-on-one interviews to gain further insight on how major players are addressing M&A and the new challenges presented by today's economy. Finally, the report draws on the extensive experience of Deloitte leaders in steel industry M&A.

In general, executives surveyed underscored the importance of developing and executing a successful acquisitions strategy by stating their intent to keep M&A squarely in view. And though most executives did cite the economic downturn as a significant factor in their short-term decisions regarding M&A activity, companies expected they will be making acquisitions over the next three years. Indeed, 69 percent of the executives surveyed are currently considering an acquisition. They also anticipated the climate for M&A to become increasingly competitive in the coming years.

But while M&A will continue to play a key role in steel companies' strategies going forward, many need to make progress in acquiring the key competencies required to effectively carry out an acquisition. Taking a new view of the overall processes used to evaluate an acquisition should be a top priority. That includes looking beyond financial factors and seeking a more holistic perspective of an acquisition. Focusing heavily on financial issues in due diligence, companies often fail to delve deeply into cultural issues or consider the potential integration challenges in deciding whether to proceed with a deal. Strikingly, less than half of the executives surveyed said their companies conducted a detailed analysis of corporate or cross-border cultural issues when considering an acquisition or that these issues were very important when deciding whether to proceed. This was despite the fact that 64 percent termed cultural issues as extremely or very challenging when managing an acquisition, making it the highest-rated challenge. The survey also found that companies had a high interest in future cross-border transactions—only heightening the importance of cultural considerations to the completion of a successful acquisition.

Beyond integration, companies should have an explicit plan to identify and capture the synergies that provide the rationale for an acquisition—and evaluate the potential nonfinancial obstacles that must be overcome to be successful. In general, M&A processes need to expand to include more than evaluating the recent financial performance or capacity of the target asset and take a broader view of the full range of challenges—and opportunities.

THE M&A IMPERATIVE

With the availability of easy credit, a commodities market that was on fire, and an everincreasing demand for raw materials from emerging markets, the past decade saw the ideal set of circumstances for the rapid consolidation of steel companies.

To expand market share, build synergies, and extend supply chains, merger and acquisition activity took off from 2000 to 2008.

This M&A furor hit a new peak in 2006 with the merger of industry giants Arcelor and Mittal to form the colossus ArcelorMittal—an enterprise with a 2008 steel production of approximately a 103 million tonnes.2 Another milestone was Tata Steel's 2007 acquisition of Corus Group—itself the result of a 1999 merger between British Steel and Koninklijke Hoogoven—which contributed to their ranking that year as the sixth-largest steel producer3 in the world and their current standing as the eighth largest.4 Indeed, metals industry M&A reached new heights in 2006 and 2007, both in terms of volume and value, with 200 deals taking place in 2007 at a total amount of US$73 billion.5

But then came the global economic meltdown—and the credit crisis that sent M&A fever into a deep freeze as cash preservation became the industry's business priority. The second half of 2008 saw a significant dip in M&A activity: only 52 deals completed as compared to 107 deals in the first half of 2008.6 And in the first quarter of 2009, only 14 deals were closed.7 With continuing tight credit markets and stagnant demand, most industry observers do not foresee a major pick-up in M&A activity until at least late in 2009.



Yet executives are clearly still considering acquisitions a key strategy to achieving business objectives. Two-thirds of the executives surveyed rated M&A as an extremely or very important business strategy, and roughly two-thirds of executives said their companies are currently considering a potential acquisition.

There are a variety of reasons why steel companies pursue acquisitions. According to executives surveyed, achieving economies of scale, increasing negotiating power with customers and vendors, and entering new geographies lead the list, with 75 percent rating these as extremely or very important (see figure 1). Take the leading Korean steel manufacturer POSCO. So far, this company has relied mostly on greenfields investment in the Korean market to expand. With merger frenzy in high gear over the past few years, greenfields construction proved more cost-efficient, costing US$1,000 per tonne compared to US$1,500 per tonne for M&A. However, POSCO has used acquisitions to defray rising raw materials costs, including the purchase of 10 percent of common stock of McArthur Coal Ltd. to ensure a fixed-cost supply of coal.8

Yet POSCO sees M&A as a key component to their future growth. Their 10-year plan lays out the goal of increasing annual production from 33 million to above 50 million tonnes. They are also planning to expand non-steel revenues, reconfiguring the balance from steel providing 90 percent of their revenues to a split of 70 percent steel revenues and 30 percent non-steel. This strategy relies heavily on acquisitions—and POSCO, with its strong capital position is now poised to execute.9 This recognition of the importance of M&A is borne out in practice. Survey results show roughly 60 percent of executives rated their past acquisitions as successful in achieving their business and integration objectives (see figure 2). This level of success in past transactions would seem to provide the confidence to bolster continued M&A activity in the future.

Russian steel manufacturer Severstal is also looking to M&A to help create value. They are seeking to diversify within markets as well as attain more size. This will allow them to increase the efficiency of production and achieve economies of scale. "We are always looking for ways to reinforce and strengthen our position in our current and potentially new markets," says Nicolas Vallorz, Head of Corporate Development at Severstal.10

POSCO's and Severstal's M&A business objectives reflect another goal embraced by most acquisition strategies—entering new markets. Of the roughly two-thirds of executives surveyed who expected their companies to make at least one acquisition over the next three years, most stated that these transactions were likely to take place outside their home country. In 2007 and 2008, close to 25 percent of the target companies for M&A were in the United States, compared to approximately 18 percent of bidding companies, indicating a number of non-U.S. companies investing in the country, according to Mergermarket.com. In the BRIC countries (Brazil, Russia, India, and China), 46 acquisitions were made by domestic companies compared to 24 targets in the region. Russia was particularly active in cross-border deals, with 12 companies acquiring compared to one seller from the region in 2008.11 Severstal made four acquisitions in the United States in 2008—in fact, all their acquisitions last year were outside of Russia.12

And with 81 percent of executives surveyed rating securing new customers as an extremely or very important business strategy, this cross-border trend should only increase over the coming years (see figure 3). One of Tata Steel's major business objectives is to expand beyond operations in India—a goal served by its acquisition of UK-based Corus Group in 2007 and before that of NatSteel, Singapore and Millennium Steel Thailand.13 The Corus acquisition allowed Tata to gain or increase their presence in the 22 countries in which Corus operates—including major production facilities in the United Kingdom and the Netherlands.

However, domestic deals have recently dominated steel sector M&A in terms of volume and value, with approximately 60 percent of deals taking place within borders in 2008 and value close to double that of cross-border deals.14 This is supported by one of the top business objectives of the executives surveyed in the Deloitte survey—to expand sales to existing customers, rated extremely or very important by 69 percent. In recent years, European companies topped the list of domestic activity, both as targets and buyers. BRIC countries were also active acquirers of domestic steel assets: these four countries accounted for 24 percent (39 deals of 160 domestic deals globally) of total volume as acquirers in 2008. But there is no question that China will soon be the leader in domestic M&A activity, given the Chinese government's recent push for domestic consolidation.15

WEATHERING THE STORM

Although M&A is considered a critical part of overall business strategy, the economic downturn is having a major impact on acquisition plans, in some cases prompting a complete rethinking of short-term tactics to further business strategies.

In response to the credit crisis, 73 percent of executives surveyed said their companies were likely to assess the implications of decreased liquidity and the higher cost of capital. Sixty-seven percent expected to manage capital to free up cash, and 60 percent said they were setting new priorities for capital investment. This indicates an overall more cautious approach to acquisitions, at least until the credit markets thaw. Severstal, though it has a strong cash position, is, like other companies, now looking to conserve cash. The company will most likely be less active over the next year or so in cash deals.16

Conserving cash is clearly becoming a top priority for companies. Eighty-eight percent of executives surveyed stated that lowering costs was an extremely or very important part of their current business strategies. And, according to executives, cash and bank loans were the most common sources of financing for acquisitions. With bank loans nearly non-existent, using precious cash to finance an acquisition is now heavily scrutinized. This is especially true as expectations about the impact of an acquisition on the bottom line are relatively low: half of the executives surveyed expected revenue growth of less than 25 percent as a result of acquisitions over the next three years. Additionally, the volatility and uncertainty of the equity markets have made sharebased transactions problematic and made it more difficult to value assets.

And yet, many companies are seeing opportunity in this down market. M&A plans may have slowed in the current crisis—but deals are still happening. Cash-rich companies with low debt will most likely use the current crisis to acquire businesses deemed "non-core" by competitors or smaller companies weakened by the financial turmoil. For the weak companies, an acquisition by a strong competitor may be the only chance for their business to survive. Others will just "stay the course." Tata Steel still has aspirations to acquire raw material companies and continue its vertical integration process.17 And while the pace may slow for its acquisition of other steel companies and there will be less reliance on debt acquisitions, the company still believes it can raise debt for an acquisition supported by a strong business case. Tata Steel has also started to use more innovative structures to pursue a deal. For example, with their New Millennium acquisition, it acquired an option to purchase assets after the feasibility study had been completed.18

Similarly, POSCO CEO, Chung Joon-yang, says the company plans to forge ahead with their M&A plans—especially now that acquisition costs have dropped to around US$500 per tonne.19 "This isn't a time to remain skittish," he has pointed out, adding that the company will actively explore merger and acquisition opportunities overseas this year, citing falling asset values as a prime motivation.20 Even more important, he believes POSCO, with its conservative approach and strong capital position, has the ability to acquire companies at today's lower prices when it makes sense.21

The economic downturn hasn't led U.S. Steel to change its M&A strategy either, but they may delay pursuing acquisitions as they keep an eye on the economy and their cash position. And though values have declined—making potential targets more attractive—they are weighing the fact that credit has become less available and more expensive for any acquisition. The current economic uncertainty has also made it especially difficult: "A major challenge is determining the value [of a potential acquisition]," points out James Kutka, Senior Vice President, Strategic Planning and Business Development for U.S. Steel.22

Apart from the decline in overall activity, the significant difference in most transactions in the near-term will most likely be the size and form of the deal. Almost three-quarters of executives surveyed expected their largest acquisition over the next three years would be valued at less than US$500 million. This is most likely due in large part to a lack of credit as well as the overall lower valuations of companies. "The financial crisis has made it more difficult to execute deals since the availability of capital has shrunk and the cost has shot up," points out Sudhir Maheshwari, member of ArcelorMittal's Group Management Board, responsible for M&A and Business Development, and previously Managing Director, Business Development and Treasury at Mittal Steel. "Today, only the best companies and transactions can attract capital."23

But companies in a strong position right now may do well not to let M&A activity slip too much and seek out opportunities quickly. With many companies in a weak financial position and looking for relief—paired with the difficulty of getting financing—it is a buyer's market. And while only one-quarter of executives surveyed described the current climate for acquisitions as being very competitive, almost twothirds expect competition to increase over the next three years (see figure 4). The window for easy bargain shopping may slam shut sooner than companies think once credit markets begin to revive and economic volatility lessens. Now may be the time for steel companies to position themselves to lead when the economy and credit markets improve.

In addition to lower valuations, there are distinct advantages to pursuing an M&A strategy in the current economic climate. When the M&A market was white-hot, targets had greater leverage in dealing with potential acquirers and limiting access to their organizations, making due diligence more difficult and often preventing a broader view of their culture and management structure. Now, however, an acquirer is in a position to demand more transparency from its target. This is critical to developing a clear, actionable integration strategy prior to closing an acquisition. And though deals may take longer to complete—as skittish buyers more closely scrutinize the merits of each potential deal and sellers provide more data and access—the chances of identifying problems early on improve, which could cause an increase in uncompleted transactions.

With today's lower valuations, however, also comes more reluctance to sell—especially among those companies with stronger balance sheets whose share prices have been battered by equity market volatility. These targets—who most likely will attract much M&A attention—may be unwilling to see their assets sold for much less than what they perceive as their true worth (unless they view the stock being offered by a prospective buyer as being equally battered by the market). So low stock valuations may prompt another shift in acquisitions strategy, that is, away from direct negotiations. Both of U.S. Steel's recent acquisitions—of Lone Star Technologies and Stelco—were acquired through direct negotiation, right now by far the most common type of acquisition transaction.24 Survey results support this trend with 77 percent of executives surveyed saying that privately negotiated purchases were used almost always or frequently. Hostile acquisitions, in contrast, accounted for only 7 percent—a number that may increase in response to fewer motivated sellers as well as the overall increased competition for attractive targets.

MAKING THE MOST OF M&A

According to Louis L. Schorsch, Executive Vice President and CEO, Flat Americas, ArcelorMittal, the steel industry continues to be a "fragmented industry—the consoldiation wave still has a long way to run."25

His observation of M&A in the steel industry aligns with the views of most executives surveyed. Interestingly, the top 15 global steel producers hold a market share similar to the cumulative share they held in 2006—about 35 to 38 percent, depending on the source.26 And with the current climate for acquisitions expected to become increasingly more competitive, mastering the ability to carefully evaluate potential targets and quickly execute acquisitions will be critical for companies to maintain competitive advantage as the economy recovers.

Pursuing an acquisition should enhance a company's market position, help achieve its business strategy, diversify risks, and support the overall growth of the organization. Yet, while almost 55 percent of executives surveyed considered their past acquisitions to be very successful in achieving business objectives, only 9 percent said they were extremely successful in doing so. Clearly, challenges remain. Steel companies need to improve their key competencies that would yield the most successful M&A transaction—mainly the ability to assess, plan, and integrate an acquisition quickly and effectively.

Set standard processes

Only slightly more than half of executives surveyed said their companies have standard procedures for acquisitions—with the rest leaving this process to develop on a case-by-case basis. Establishing a comprehensive M&A process for the company that clearly supports its business goals is vital to effectively managing each deal. Developing core criteria by which any potential acquisition can be evaluated will also save time, effort, and money. And while acquisition objectives will vary for each target, the high-level processes for evaluating and integrating an acquisition should be standardized and performed by team members who are savvy enough to know when to tailor new processes to the situation at hand. For example, by working within a business process with three-year rolling projections, U.S. Steel uses a set base case to assess all potential acquisitions. A dedicated strategic planning and business development group leads all M&A processes.27 Similarly, Tata Steel has established standard processes and criteria for both identifying and evaluating targets, with all M&A activities overseen by a dedicated M&A group.28 Severstal M&A goals are set by the executive committee, including the strategy department, which screens targets to see if they offer a strategic fit as well as synergies.29 And POSCO is in the process of developing its own acquisition processes.30

Take a broad view

When setting evaluation and integration processes, it is important that companies incorporate a wide range of triggers and benchmarks that will yield a broad view of the transaction. For example, with approximately 90 percent of executives surveyed citing financial reasons as the key factors in deciding whether to proceed with an acquisition (see figure 5), a positive assessment of a target's finances alone can keep a transaction moving forward. While this is obviously important, companies should build into their processes not only financial measures that will indicate if a deal should proceed, but also procedures to identify and address nonfinancial "deal breakers," or issues that would cause them to walk away.

Severstal looks at a variety of financial and nonfinancial factors when reviewing a deal, including quality of management and facilities, whether the target has sufficient capacity, and the nature of their raw materials supply. And they have decided not to proceed because they found such problems as poor management or facilities or issues with long-term raw materials contracts. They also look beyond financials by identifying early on key stakeholders and their concerns—and then engaging them with strong communications. When acquiring Esmark in 2008, Severstal was in competition with another company. Yet they were able to acquire the target at the same price, in part because they had obtained the support of the unions, which knew Severstal from their other U.S. companies.31

To broaden the view of the transaction, company's acquisition processes should also draw on the expertise of a wide range of business functions. Though many companies have a "single owner" for each transaction, to avoid deal breakers and other critical issues from slipping through the cracks, a "deal team" that comprises internal and external functional experts to provide a comprehensive view of the target often yields the best results. For each potential acquisition, U.S. Steel forms a team with the appropriate executives from across the company to evaluate the target. For example, if the target is a raw materials supplier, then the company's raw materials group will be involved to assess the company's future needs.32 Assembling teams comprising the core competencies that are required to assess the opportunity is one of the best ways to ensure a holistic view of the target is obtained.

Develop an integration plan

Taking a broader view of a transaction will also help when planning the integration and synergy capture process once a transaction is concluded. While critical to the success of an acquisition, integration remains problematic for many companies: 50 percent of executives surveyed named integrating acquisitions as one of their top three challenges facing their companies over the next 12 months. And 58 percent of executives cited integrating management processes as extremely or very challenging when conducting acquisitions. Part of the problem may be determining an integration strategy—and then executing on it. Although almost 60 percent of executives surveyed said the goal of their companies was to fully integrate acquisitions, roughly 40 percent said they only somewhat integrated them or left them largely independent.

Though employing markedly different approaches, both U.S. Steel and Tata's goals in terms of integration are welldefined and supported. For U.S. Steel, it is important to integrate an acquisition quickly. To that end, the company develops a "first-day plan," laying out precisely what will happen on the day the acquisition is completed. Postmerger integration is led by the heads of the business units with the involvement of functional areas such as human resources and information technology. The team identifies the synergies to be achieved and creates a business plan to guide the process and track progress. "After an acquisition," says Kutka, "Our goal is to disseminate best practices—both of U.S. Steel and of the acquired firm—across our company." 33

In contrast, Tata Steel chooses not to fully integrate its acquisitions—using what it terms a "one enterprise, two entities" approach. That is, acquisitions continue to operate as separate companies with management left in place to manage day-to-day operations independently but within Tata's overall financial and business objectives. The company then uses a strategy and integration committee (SIC) to integrate corporate and other functions where appropriate, for example, technology. Tata has registered significant gains by sharing best practices using SIC as a forum. This reflects Tata Steel's philosophy to seek the good will of the target and the community: "In acquisitions, we follow a collaborative, non-disruptive approach," says N.K. Misra, Vice President and Head of M&A at Tata Steel.34

In ArcelorMittal's case, companies that are acquired operate fairly autonomously in executing their business plan. Integrating business processes and technology is not an immediate priority, due to the costs and risks. "When it comes to processes and systems it can not be changed overnight just because it is different to what the group is following. If it has been working for a company for years, you have to be very careful about changing it. Overtime, people tend to come together towards developing a common system. it's an interative process." What is a top priority, however, is leadership involvement in the integration—a lesson learned from the original merger of Arcelor and Mittal. "Leadership from the top is the most critical aspect," says Maheshwari. "After the ArcelorMittal merger, the CEO of Mittal spent hundreds of hours with the top 200 executives at Arcelor to share his vision and learn what they do. Arcelor had many misconceptions about Mittal, but they found there were many similarities between the two companies. The personal involvement of the CEO changed the views of the top executives overnight."35

Though Severstal's approach is on a case-by-case basis, they also generally look to keep local management intact. And with their acquisitions all cross-border in 2008, it was even more important to keep management in place, rather than sending executives from their headquarters in Russia. "We may sometimes try to integrate regionally," says Vallorz, "such as in the United States, where to achieve efficiencies we put in place centralized reporting, financial management, and sales forces. But mostly we try to leave companies autonomy in day-to-day operations."36

In terms of synergy capture, a "One Mill" model of decision making is also a reliable approach. This entails considering all the choices a steel company has to make—about products, supply chain, production, and logistics—with a view of the business as if it were a single operation. This holistic view can expose many different types of post-closing synergies and can help further define the integration process.

THE CULTURE DISCONNECT

One of the most striking findings of the Deloitte survey is the critical role culture plays in acquisitions. Even the most-detailed integration and synergy capture plans will not be effective if companies fail to address culture—both corporate and cross-border.

Almost two-thirds of executives surveyed agreed in principle, rating managing corporate cultures as an extremely or very challenging issue in acquisitions—the highest-rated issue (see figure 6). Yet, less than half of the executives said their companies conducted a detailed analysis of cultural issues when considering a potential acquisition (see figure 7). And only 42 percent deemed corporate culture as extremely or very important when deciding whether to proceed with an acquisition (see figure 5).

Corporate culture can be understood as the shared beliefs and attitudes that underlie the companies' leadership style, its responses to change, its employees' decision-making approach, its cooperative work ethic, and its beliefs about personal success. Assessing cultural issues can be difficult, especially prior to the deal closing when access to a target may be limited. However, corporate cultures that do not complement each other, or worse yet, stand at odds with each other, can make it extremely difficult for companies to make decisions quickly and operate effectively at the critical time period just following a merger or acquisition. "Steel has been a fragmented industry, with each company having its own processes and practices," points out Maheshwari. "Not all targets are best-in-class, but it is often hard for employees to change their practices."37

To overcome obstacles that differences in these cultural areas can pose, a rigorous program to effectively harness culture and address cultural integration needs to be employed. This can be done by linking merger and acquisition cultural programs to measurable business results. Above all, Maheshwari recommends a collaborative and inclusive approach. "Be transparent and open," he advises. "Don't just tell the acquired company what to do; have them meet with other divisions to see how it is done. Use peer learning and understand that every company has something to teach other companies. It's not a one-way street." Executives in the target, he notes, are more receptive to changing practices if their own practices are duly recognized as having merit.38

Given the challenges of integrating and managing cultures, mechanisms to evaluate cultural compatibility must be built into the due diligence process. In spite of the human impact on achieving success, cultural issues, as demonstrated in the survey, are considered by many the least important aspect to investigate during the diligence process. However, Tata Steel understands the importance of the link between business culture and business success and focuses on culture even before due diligence has begun. "When assessing a potential acquisition," says Misra, "we ask if there is a cultural fit, and only consider targets that are compatible with the Tata culture."39

And both U.S. Steel and POSCO consider recognizing and managing cultural differences a key challenge, but critical to executing an effective merger. "You have to realize there are cultural differences when integrating two established organizations," says Kutka, "and also that there is value to each culture."40

This challenge to link culture to business value will only intensify as steel companies increasingly expand across borders. Fifty-seven percent of executives surveyed that are expecting to make an acquisition in the next three years believed it will take place outside their home country. Considering both domestic and foreign expected acquisitions, the most frequently named market was China, at 60 percent— nearly double the next most-named location, the United States (see figure 8). Language, management philosophy, and a business environment heavily influenced by the state are just some of the potential challenges of entering the Chinese market. And yet only a mere 27 percent of executives surveyed undertook detailed analyses of cross-border cultural issues as part of their due diligence.

Addressing cultural issues will have to take on greater consideration as M&A increasingly goes global. Take Severstal and their expanding non-domestic portfolio. They use their presence in a market to help inform their handling of cultural issues with other acquisitions. For instance, as they already own several U.S. companies, they leverage their experience with other targets in the country.41

Those companies that are successful in cross-border acquisitions—which could be, by default, those that are successful at all going forward—are those who incorporate cultural reviews into their overall M&A strategy and processes. This is readily acknowledged by POSCO: "One of our biggest challenges is gaining the ability to manage the culture aspects of acquisitions outside Korea," remarks Young-Hoon Lee, Senior Vice President, Corporate Strategic Planning Development at POSCO.42

BOUNCING BACK

While the feverish pace of acquisitions seen over the last decade may not be seen again for many years to come, consolidation is expected to continue within the steel industry. But what will be the indicators that will let players know it is safe to get back in the water?

Most industry observers agree that it will be a loosening of the credit markets and the recovery of the economy—with the short-term outlook not encouraging.

Yet the economic downturn presents enormous opportunities for the steel industry. Many industry observers believe that the consolidation that the industry has experienced over the past decade has improved the ability to manage or idle excess capacity until steel markets rebound. The ability to extend up and down the supply chain by picking up bargain assets or to "fix" the cost of raw materials may allow many companies to emerge from this crisis in a stronger position than ever. Regionally, the playing field seems to be shifting as well. BRIC market players are increasingly targeting companies in the developed markets, with distressed U.S. producers at the top of the list.

But even when credit markets rebound and equities calm down, there remains the question of global demand. This economic crisis may yield permanent changes in the pattern of consumer consumption—particularly for the products and services that use steel. While problematic for the overall steel industry, the changes could make the case for consolidation even more compelling.

There's no way to know for sure how the steel industry will look in the years to come. But the playing field is sure to hold fewer players, as consolidation regains its pace. And with this reality comes the imperative to develop the capabilities that will allow a company to make the most of their acquisitions. Those who don't master M&A may disappear from the field altogether—while those who do, emerge as the next industry leaders.

About the study

Deloitte Touche Tohmatsu's (Deloitte) Global Manufacturing Industry Group global steel consolidation study sought the perspectives of major players in the steel industry to learn more about their overall M&A business strategies, the impact of the credit crisis and economic downturn, and the challenges they face in planning and executing acquisitions. A global online survey and case study interviews were conducted, including 10 of the top 15 largest global steel producers. The online survey was conducted from 15 October to 24 November 2008 and completed by 16 executives, with a significant representation of major companies: 14 companies with annual revenues of US$1 billion or more and 9 companies with annual revenues of US$5 billion or more. To gain further insight on how major players are addressing M&A and the new challenges presented by today's economy, the survey was complemented by one-on-one interviews with senior executives from ArcelorMittal, POSCO, Severstal, Tata Steel, and U.S. Steel, from 11 November 2008 to 6 April 2009. Finally, the report draws on the extensive experience of Deloitte leaders in steel industry M&A.

DELOITTE TOUCHE TOHMATSU GLOBAL MANUFACTURING INDUSTRY GROUP

The Deloitte Touche Tohmatsu (Deloitte) Global Manufacturing Industry Group in over 45 countries. The group's deep industry knowledge, service line expertise, and best professionals and instill a set of shared values centered on integrity, value to clients, professional services to more than 81 percent of the manufacturing companies in the Fortune Global 500®. For more information about the Deloitte Global Manufacturing Industry Group, please visit www.deloitte.com/manufacturing.

Footnotes

1 Mergermarket.com historic deals database, accessed 25 March 2009.

2 ArcelorMittal profile, ArcelorMittal.com, 2008 production volume, accessed 3 April 2009.

3 "Top steel producers 2007". World Steel Association. www.worldsteel.org ., accessed 6 April 2009.

4 "Global steel slowly consolidating - but still fragmented," Iron and Steel Statistics Bureau, www.issb.co.uk.

5 Mergermarket.com historic deals database, accessed 25 March 2009.

6 Ibid.

7 Ibid.

8 Deloitte interview with Mr. Young-Hoon Lee, Senior Vice President, Finance and formerly Senior Vice President, Corporate Strategic and Planning Development, POSCO,

11 November 2008.

9 Ibid.

10 Deloitte interview with Mr. Nicolas Vallorz, Head of Corporate Development,

Severstal, 6 April 2009.

11 Mergermarket.com historic deals database, accessed 25 March 2009.

12 Deloitte interview with Mr. Nicolas Vallorz, Head of Corporate Development,

Severstal, 6 April 2009.

13 Deloitte interview with Mr. N. K. Misra, Vice President and Head of M&A, Tata Steel Group, 23 December 2008.

14 Mergermarket.com historic deals database, accessed 25 March 2009.

15 Ibid.

16 Deloitte interview with Mr. Nicolas Vallorz, Head of Corporate Development, Severstal, 6 April 2009.

17 Deloitte interview with Mr. N. K. Misra, Vice President and Head of M&A, Tata Steel Group, 23 December 2008.

18 Ibid.

19 Deloitte interview with Mr. Young-Hoon Lee, Senior Vice President, Finance and formerly Senior Vice President, Corporate Strategic and Planning Development, POSCO, 11 November 2008.

20 "POSCO's new CEO aims at expansion," The Korea Times, 27 February 2009.

21 Deloitte interview with Mr. Young-Hoon Lee, Senior Vice President, Finance and formerly Senior Vice President, Corporate Strategic and Planning Development, POSCO, 11 November 2008.

22 Deloitte interview with Mr. James Kutka, who recently retired and held the role as Senior Vice President, Strategic Planning and Business Development, U.S. Steel Corporation, 12 November 2008.

23 Deloitte interview with Mr. Sudhir Maheshwari, member of ArcelorMittal's Group Management Board, responsible for M&A and Business Development, and previously Managing Director, Business Development and Treasury at Mittal Steel, 2 April 2009.

24 Deloitte interview with Mr. James Kutka, who recently retired and held the role as Senior Vice President, Strategic Planning and Business Development, U.S. Steel Corporation, 12 November2008.

25 "More steel consolidation near: execs say," American Metal Market, 8 October 2008; Euromoney.com, October 2008.

26 Iron and Steel Statistics Bureau, http://www.issb.co.uk .

27 Deloitte interview with Mr. James Kutka, who recently retired and held the role as Senior Vice President, Strategic Planning and Business Development, U.S. Steel Corporation, 12 November 2008.

28 Deloitte interview with Mr. N.K. Misra, Vice President and Head of M&A, Tata Steel Group, 23 December 2008.

29 Deloitte interview with Mr. Nicolas Vallorz, Head of Corporate Development, Severstal, 6 April 2009.

30 Deloitte interview with Mr. Young-Hoon Lee, Senior Vice President, Finance and formerly Senior Vice President, Corporate Strategic and Planning Development, POSCO, 11 November 2008.

31 Deloitte interview with Mr. Nicolas Vallorz, Head of Corporate Development, Severstal, 6 April 2009.

32 Deloitte interview with Mr. James Kutka, who recently retired and held the role as Senior Vice President, Strategic Planning and Business Development, U.S. Steel Corporation, 12 November 2008.

33 Ibid.

34 Deloitte interview with Mr. N.K. Misra, Vice President and Head of M&A. Tata Steel Group, 23 December 2008.

35 Deloitte interview with Mr. Sudhir Maheshwari, member of ArcelorMittal's Group Management Board, responsible for M&A and Business Development, and previously Managing Director, Business Development and Treasury at Mittal Steel, 2 April 2009.

36 Deloitte interview with Mr. Nicolas Vallorz, Head of Corporate Development, Severstal, 6 April 2009.

37 Deloitte interview with Mr. Sudhir Maheshwari, member of ArcelorMittal's Group Management Board, responsible for M&A and Business Development, and previously Managing Director, Business Development and Treasury at Mittal Steel, 2 April 2009.

38 Ibid.

39 Deloitte interview with Mr. N.K. Misra, Vice President and Head of M&A, Tata Steel Group, 23 December 2008.

40 Deloitte interview with Mr. James Kutka, who recently retired and held the role as Senior Vice President, Strategic Planning and Business Development, U.S. Steel Corporation, 12 November 2008, and Deloitte interview with Mr. Young-Hoon Lee, Senior Vice President, Finance and formerly Senior Vice President, Corporate Strategic and Planning Development, POSCO, 11 November 2008.

41 Deloitte interview with Mr. Nicolas Vallorz, Head of Corporate Development, Severstal, 6 April 2009.

42 Deloitte interview with Mr. Young-Hoon Lee, Senior Vice President, Finance and formerly Senior Vice President, Corporate Strategic and Planning Development, POSCO, 11 November 2008.

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