Foreign Direct Investment

In 2007 a controversial merger between Mittal Steel and
Arcelor closed, creating ArcelorMittal. The merger was
the brain child of Mittal CEO, Lakshmi Mittal and his
son, Aditya. Under Lakshmi�s leadership, the family-
owned Mittal Steel had grown from obscure origins in
India to become the largest steel company in the world.
The story dates back to the early 1970s. At that time,
the family-owned company was facing limited growth
opportunities in India. Regulations constrained expan-
sion opportunities, and Mittal was facing competition
both from a state-owned rival, SAIL, and a private na-
tional champion, Tata Steel. So Lakshmi�s farther fi-
nanced his son, helping him to set up a steel-making
plant from scratch in Indonesia in 1975.
To reduce costs in his Indonesian plant, Lakshmi did
not smelt iron ore, but instead directly purchased re-
duced iron pellets. His supplier of these pellets was a
struggling state-owned steel firm in Trinidad. Impressed
by Lakshmi�s success in Indonesia, in 1975 the Trinida-
dians asked him to turn their firm around under a con-
tract. Mittal set up another company to run the Trinidad
plant. In 1989, after a successful turnaround, Mittal pur-
chased the Trinidadian plant in its entirety.
Now the company that had been born in India had
two major foreign operations, but that was just the be-
ginning. The global steel industry had been in a slump
for a quarter of a century due to excess capacity and slow
demand growth as substitute materials replaced steel in a
number of applications, but Lakshmi saw opportunity in
purchasing the assets of distressed companies on the
cheap. His belief was that the global steel industry was
about to turn a corner, driven in large part not only by
sustained economic growth in developed nations, but
also by growing demand in newly industrializing nations
including China and his own native India. He saw all
sorts of opportunities for buying poorly run companies as
they came up for sale, injecting them with capital, im-
proving their efficiency by getting them to adopt mod-
ern production technology, and taking advantage of the
coming boom in steel demand. He also saw the opportu-
nity to use the purchasing power of a global steel com-
pany to drive down the price it would have to pay for
raw material inputs.
In 1992 Lakshmi made his next move, buying Sibalsa
of Mexico, a state-owned steel company that was be-
ing privatized. This was followed in 1994 by the pur-
chase of the fourth-largest Canadian steel maker from
the government of Quebec. Then in 1995 there was the purchase of a midsized German steel maker and
Kazakhstan�s largest steel maker, which was at the time
in disarray as the country transitioned from a socialist
system to a more market-based economy. By this time,
Lakshmi was hungry for more international growth,
but his company was capital constrained. So he de-
cided to take it public, but not in his native India or
Indonesia, where the liquidity of the capital markets
was limited. Instead, in 1997 he moved the company�s
headquarters to Rotterdam, and then offered stock in
Mittal Steel for sale to the public through both the
Amsterdam and New York stock exchanges, raising
$776 million in the process.
With capital from the IPO, Mittal purchased two
more German steel makers in 1997. This was followed
in 1998 by the acquisition of Inland Steel Company, a
U.S. steel maker. Over the next few years, more acqui-
sitions followed in France, Algeria, and Poland among
other nations. In 2005, Mittal purchased International
Steel, a company formed from the integration of trou-
bled U.S. steel makers that had been in bankruptcy. By
this time Lakshmi�s prediction had come true; global
demand for steel was booming again for the first time
in a generation, driven in large part by demand in
China, and steel prices were hitting record highs. The
industry�s rebound prompted Mittal, now the world�s
largest steel maker, to offer $32 billion in a hostile
takeover bid for Arcelor, a European firm formed from
the merger of steel makers from Luxembourg, France,
and Spain. The acquisition was bitterly contested, with
the management of Arcelor and no small number of
European politicians opposing the acquisition of a
European company by an Indian enterprise (although
ironically, Mittal Steel was now legally a Dutch com-
pany). Arcelor�s shareholders, however, saw value in
the deal, and ultimately approved it in late 2006. In
2007 the new firm, now headquartered in Luxembourg,
generated sales of $110 billion and net income of
$10.2 billion, making it by far the world�s largest steel
company.

�What forces drove Mittal Steel to start expanding across national borders?

�Mittal Steel expanded into different national through mergers and acquisitions, as opposed to Greenfield investments. Why?

�What benefits does Mittal Steel bring to the countries that it enters? Are there any drawbacks to a nation when Mittal Steel invests there?

�What are the benefits to Mittal Steel from entering different nations?

�The acquisition of Arcelor was very acrimonious, with many politicians objecting to it. Why do you think they objected? Where their objections reasonable?