The merger of two large, complementary companies presented an unusual challenge: sustaining growth as well as focusing on integration and cost savings.
Few industrial mergers in recent years have captured the business world’s imagination quite like the combination of giants Arcelor and Mittal Steel. The two were brought together in June 2006 to form the world’s biggest steel company, ArcelorMittal. It now has 320,000 employees in more than 60 countries and is a global leader in all its major customer markets, including automotive, construction, household appliances, and packaging. In 2007, the company earned revenues of more than $105 billion, while its steel production accounts for roughly 10 percent of the world’s output.
Behind the headlines, the primary challenge of any industrial merger is to integrate the separate management teams, sales and product groups, operating assets, and procurement divisions. At ArcelorMittal, the responsibility for driving this effort fell to Bill Scotting and Jérôme Granboulan, two experienced steel men and veterans of earlier mergers at Mittal Steel and Arcelor, respectively. The London-based Scotting, an executive vice president responsible for strategy at the combined group, and Granboulan, CEO of ArcelorMittal’s tubular-products division headquartered in Rotterdam, recently met McKinsey associate principals Seraf De Smedt and Michel Van Hoey to analyze the lessons of the integration and to review the progress to date.
The Quarterly: In what ways did this merger differ from previous ones you have been involved with?
Jérôme Granboulan: Besides the huge size of ArcelorMittal—which was a new experience—a big difference this time was that we did not face the sort of difficult, sometimes terrible, problems that arise when capacity has to be rationalized. In this case, there was limited overlap between the two entities.
Two other key features have been the speed with which the integration has been achieved and the balance of the objectives. In many mergers the integration process seems so delicate that the sole objective set by senior management is to succeed in merging; the other issues are considered at a later stage. In our case, top management decided to set three clear objectives right from the outset: first, to achieve an efficient and rapid integration—aligning people, delivering synergies, creating the appropriate organization; second, to secure and manage the day-to-day business; and third, to drive continued growth. The first two are fairly common objectives in any merger, though generally with more emphasis on integration than on managing the business. The third one was more unusual.
Bill Scotting: The scale of what we were doing and the history of both companies gave us greater visibility than in most mergers. Many more people inside and outside the company were following our activities to see how things would progress. This was quite different from being involved in a local acquisition in a single national market.
As Jérôme has noted, the fact that the merger was strategically driven by growth rather than by restructuring objectives is particularly significant. The aim has been to combine two complementary businesses with a wide range of capabilities in order to create a more complete entity. In contrast, many of our earlier acquisitions at Mittal Steel were turnarounds focused on cost and productivity improvements.
The creation of ArcelorMittal was significant for several reasons, not least of which was the merger’s sheer scale. While unambiguously shaped and driven by the vision of President and CEO Lakshmi Mittal, the two parts were of roughly equal proportions, so in that sense the deal constituted a merger of equals. Both Mittal Steel and Arcelor were relatively young companies: the former resulted from a string of international acquisitions, while the latter was the product of three primarily European steel companies (Arbed, Aceralia, and Usinor). Unusually, the deal involved two corporations whose geographic and market strengths were remarkably complementary, though Mittal Steel’s vertically integrated business model (it owned iron ore mines around the globe) contrasted with Arcelor’s greater downstream concentration.
The Quarterly: Has the experience taught you things that would be useful in more conventional mergers, or is the approach always dictated by individual circumstance?
Bill Scotting: I believe we would always seek to integrate quickly, as we have here. It is also always critical to be aware of internal perceptions. In this merger, we conducted interviews and surveys with employees to gain a better understanding of their views about the two companies, a process that culminated in an entire rebranding exercise. We questioned people about the company’s strengths and weaknesses and what they thought ArcelorMittal should stand for. I had not done this sort of thing in the past, but based on our recent experience it is something I would definitely apply in the future to any type of merger. Having one’s antennae up with respect to what people are thinking is extremely useful.
The Quarterly: What were the main issues at the outset of the merger?
Jérôme Granboulan: One of the greatest challenges was to get line managers involved and to sell the merger to the operating teams. This was time consuming. Our initial communication efforts, including the launch of a top-management road show, were extremely successful. We established a Web site and introduced Web TV, which as far as I know represented the first large-scale application of this tool. Top executives recorded two- to three-minute interviews on various topics, and everyone with access to a PC was able to watch them onscreen.
The launch of our new brand and the employee convention at which we gathered the company’s top 500 executives, in spring 2007, provided a great boost and put an end to the formal integration process. So far as communication is concerned, the theory of integration and how it is managed does not interest people particularly. When cascading information throughout the organization, focus on concrete messages rather than general ones.
The Quarterly: Did the challenge lie with the line managers themselves, the employees at large, or merely the ability of the line managers to translate your vision?
Bill Scotting: It could have been a number of things. In the early days of the merger, inevitably everyone was wondering what impact this process would have on them, and the uncertainty level was quite high. Managers need to have a well-structured message about the significance of the merger and the direction the company is going in, and we learned that this should be done very clearly and as a matter of urgency. With relatively few operational overlaps, initially the merger only directly affected employees working in procurement, sales and marketing, and the corporate center—besides those operating managers involved in benchmarking and the integration task forces, of course. So a lot of time may have elapsed before it had a direct impact on the activities of many other employees. That time lag may have contributed to the uncertainty.
Agreeing on the medium-term value plan for the new group was also an intense effort. Fortunately, the budgeting cycle—the integration effort started in August 2006, and budgets for 2007 had to be finalized in November—worked in our favor and added impetus to the process.
The Quarterly: You’ve mentioned speed as a critical factor. How did you generate it?
Jérôme Granboulan: Our goal at the beginning was to complete the formal phase of integration within the first six months. It was therefore critical to agree quickly the role of the integration office; the essential characteristics of the integration process, including how decisions would be made; and what problem-solving mechanisms might be needed.
In large mergers such as this, progress is often reviewed on a monthly basis, but in our case the cycle was weekly. The group-management board,1 essentially the top-executive team, met every Monday, and the integration office, which Bill and I headed up, met every Wednesday.
This allowed us to review the progress of the 20 to 25 decentralized task forces in the middle of every week, identify roadblocks, and bring them to the management board meeting a few days later, where decisions could be made. This cycle continued throughout the integration effort.
I believe this was an extremely efficient way to maintain tension and momentum within the organization, and this fast-beating pulse was a key to the success of the integration.
It was also critical at the beginning to work in parallel, instead of in sequence. In many mergers, teams from the two merging entities are nominated. These teams then propose a draft organization to the management board. The profiles of the people who will occupy the senior positions are defined and committees established to select them. Once these senior managers are nominated, they build their own teams to identify the synergies and build action plans. In our case, all these different tasks were conducted in parallel. Teams were formed before the organization had been fully announced; the implementation of certain actions was started before the detailed plans had been developed.
The Quarterly: Can you say more about how you structured the new organization and the integration team?
Jérôme Granboulan: Everything was initially divided 50–50 between the two companies. There were 6 members on the new group-management board, for example—3 from each side. The integration office comprised 10 to 12 people, again evenly split. In many mergers this team is much larger, but I believe that 10 to 12 was an optimal size and contributed to the speed at which we moved. Typically, the larger the team, the more complicated the process becomes.
The role of the integration office is not to lead the company, nor is it a body located in a remote corporate office to manage processes. Although it’s an instrument of the management board, it must establish its credibility with the managers of the large units separately. The managers must feel that they can receive assistance and facilitation from the integration office.
Bill Scotting: It was clear from the first day that the CEO and the group-management board were effectively the integration board. They were the ones who laid out the expectations. They decided what actions should be taken, and at what speed. They also outlined the core principles and guidelines and the weekly cycle.
The small size of the integration team, which as Jérôme says was deliberate, raises a second key design element of the merger—in addition to speed—which we termed “integrating integration.” When we established the task forces, the people leading them came from the business units. Thus, commercial integration issues were handled by the commercial business units; technical-benchmarking issues were handled by the operations experts.
The role of the integration team was to coordinate all these efforts. Each integration coordinator was responsible for three or four task forces and maintained contact with them on a daily basis.
The Quarterly: Did these task forces achieve the targets they had identified?
Bill Scotting: At the outset there was a high-level, top-down target of $1.6 billion of synergies, based on earlier acquisitions—for example, ISG2 in the United States—knowledge sharing, and the use of benchmarks. The role of the task forces was first to validate this number from the bottom up and then to tell us how the synergies could be achieved. As the merger progressed, it was necessary to get the business units to assume ownership of the process and to formulate the action plans for delivering the synergies. We pushed hard to obtain the plans, details of the initiatives, timetables, and, where possible, key performance indicators that we could use to track the delivery of objectives. We were able to obtain this information for some areas, but not all. In some cases we discovered the scope for savings was larger than we thought, in others smaller. Overall, we managed to validate our target of $1.6 billion to be achieved by mid-2009. The realization of these synergies, incidentally, is well ahead of schedule, with more than $1.4 billion of annualized savings captured by the end of the fourth quarter 2007.
Jérôme Granboulan: Within a month we had refined the $1.6 billion savings target, which is an annualized figure, divided it into four main chapters—purchasing, sales, operations, and miscellaneous—and assigned parts of it to the business units and task forces. Each task force had about five weeks to confirm that the figures seemed correct and to present their action plan. As Bill mentioned, the timing worked in our favor, as the integration objectives could be incorporated into our 2007 budget plans, which were being finalized at the time. Without this, people might have tried to suggest that the environment had changed.
Some of the task forces were named after large business entities, such as Flat Carbon Europe (FCE) operations and Long Carbon Europe operations. Others, such as purchasing or sales, were functional. However, all were staffed by people from the business and deeply rooted in the business. The key point is that the task forces did not operate independently of the business operations.
The Quarterly: What was your approach to stakeholders such as customers, communities, and suppliers?
Bill Scotting: The external communication was conducted in several ways. In the early days, members of the group-management board traveled to all the major cities and sites of operations—the road show we referred to earlier—talking to local management and employees in these environments. Typically, media interviews were also conducted around these visits, providing an opportunity to convey our message to local communities through the press.
Because of the size of the merger, it has generated ongoing interest from the financial and business press. We organized a media day in Brussels in March 2007, offering presentations on the status of the merger and the results and inviting journalists to go to the different businesses and review the progress themselves.
Jérôme Granboulan: With respect to investors and other stakeholders, I believe the fact that group-management board members came from both companies was significant.
A key objective of the commercial task force during the integration phase was to create, and quickly, a single face to the market, rather than two separate propositions. Besides the synergies this task force was asked to deliver, it was instructed to set up the appropriate organization for communicating with customers in this way—something that was achieved by the end of the first three months. Customers were informed about the advantages of the merger for them, such as enhanced R&D capabilities and wider global coverage.
The Quarterly: What characteristics or key skills are required to run an integration office?
Bill Scotting: The leader of an integration office must be collaborative—in the ArcelorMittal case, the office played a facilitating role—and at the same time possess a degree of process orientation: for instance, to manage the weekly cycle and obtain all the mandates.
In addition, I believe the role requires a thorough understanding of the business. For example, we held some intense debates on the changes that could, or could not, be made in the value plans. The leader must possess an understanding of such matters.
Jérôme Granboulan: I would also say that key qualities are cultural openness, the capacity to understand people, and the ability to see how they can fit together. However, it’s also important not to accept any diversions and to adhere to the schedule and the key objectives of the organization.
The integration leader should also be able to form a close, trusting relationship with the senior management of the group. The integration office’s credibility and authority, which are essential for the tougher aspects of a merger, rely on the support of the CEO and senior management.
The Quarterly: From your perspectives, what is the appropriate role of the CEO in a merger?
Jérôme Granboulan: Clearly, the CEO sets the tone, the speed, the direction, the key principles, and the requirements. In this case, he insisted that the business units should be fully involved and take the reins as soon as possible. The CEO also plays a critical role with respect to communication and developing the personality of the new company. A merger is like a river flowing into the sea. When the tide is changing, the boats do not know exactly how to align. Then, progressively, they manage to do so. The role of the CEO is quickly to set everybody on the same axis and to reassure people. At the same time, though, he is responsible for what in French we call exigence—that is to say, being demanding.
Bill Scotting: I’d stress that the river needs to be flowing; it cannot be a stretch of still water. There is also the accountability aspect. CEOs should not merely announce that the merger is important; they should demonstrate its importance by ensuring that it is placed on the agenda every week. The CEO plays an extremely important role in communication, both internal and external, but in our model it is vital that the whole top-executive team should be visible, cohesive, and that it should provide leadership. We could not afford its members to be pulling in different directions. It is the CEO’s role to ensure that the top team is aligned and speaking with a single voice.
The Quarterly: Some people talk about merging or combining cultures, while others seek to create a new culture that is separate from those of the legacy companies. What was your approach?
Jérôme Granboulan: We are not in the position of groups that have existed for, say, 50 years, and therefore it may be more useful to speak of company cultures. Our approach has been to take the best genes of the two groups, in order to create the DNA of the new entity, but that process takes time. The formal integration was completed when the new organization, the brand, the “one face to the customer” requirement, and the synergies were finalized, two and a half quarters after the start. But it will take more time to fully integrate—including all the cultural aspects—two entities such as Arcelor and Mittal Steel.
The passion in the industry is remarkable, and there is always an immediate common ground when steelmakers meet. The first time we got the senior management from the two sides together some may have had apprehensions, but they were discussing steel and exchanging ideas after a few minutes.
We are progressively building a common culture combining the best of both entities. We are combining the speed and vision that characterized the genes of Mittal Steel with the steady, long-term, step-by-step approach that characterized the genes of some of the ex-Arcelor entities. In areas like health and safety, quality, and performance, we are conveying the message that this group has high standards and that if some parts of the group do not meet these standards it is possible for them to obtain help from other parts.
I’d particularly single out our health and safety day, which was a highly effective way of aligning people during the integration phase. It did not merely convey a direct message, in this case relating to health and safety. By involving all operations in the same activities, it subliminally reinforced the notion that ArcelorMittal is now a worldwide organization.
Bill Scotting: I would say that the cultural differences within the two legacy groups are more significant, as a result of their history. In effect, neither company was overly homogenous, at least from a cultural perspective. One of the beauties of mergers is that the less homogenous the two merging entities, the greater the opportunity to learn new ideas, combine existing ones, and gain fresh perspectives.
The Quarterly: What’s the next big challenge?
Bill Scotting: In mid 2007, we held a strategic seminar and subsequently published an addendum to our growth plan, extending it beyond 2012 and focusing on internal opportunities. We used the same approach to develop this plan as we did to formulate the initial strategy. The main agenda and direction were set at the top, and many internal opportunities were identified. Then, a bottom-up process conducted at the business unit level led to the development of specific growth initiatives. Meeting these objectives is one of our priorities going forward.
Beyond this we have the challenge of fulfilling our aspirations and truly achieving the potential from the merger. It has created a clear leader in the industry in terms of scale and scope. Such a position brings responsibilities and an opportunity to shape the development of the steel industry and make it truly sustainable.
To accomplish this goal, we must continue to expand, particularly in the faster-growing emerging markets. In addition to looking for further consolidation opportunities, we have the new challenge of managing greenfield expansion in these geographies—for example, in India and West Africa. Innovation will be important to make our steelmaking processes more energy efficient and environmentally sound and to improve our product capabilities: lighter, stronger steels can meet the evolving needs of our customers, for example. Success in these areas will help make steel a material of choice in many applications. We also face the organizational challenge of managing this large, diverse group: capitalizing on the benefits of our scale and scope, such as product and market capabilities, technical knowledge, and so forth, while at the same time meeting the needs of local customers and local communities.
The merger and the integration process unleashed a lot of goodwill and energy. It’s always important to look for new ways to maintain energy levels.