London-based Ispat International (now Mittal Steel) and its founder Lakshmi Niwas Mittal

recently became the world's biggest steel maker, and has been named by Forbes magazine
as the world's third richest man.

How does Mittal transform poor performing steel mills into power-packed profit centers?

We bring to you an inside account written by written Gita Piramal and late Prof Sumantra
Ghoshal. Sumantra Ghoshal was a leading management guru. Gita Piramal is managing
editor, The Smart Manager. The two also co-authored a book: Managing Radical Change.

Acquisitions is one of the three major routes for business expansion, the other two being
organic growth and strategic alliances.

But why choose acquisition as a growth strategy? When is this strategy more appropriate?
And, if you have chosen this strategy, what are the main do's and don'ts for managing it well?

While not quite an Indian company -- incorporated in Holland and headquartered in London --
Ispat International N.V. (now called Mittal Steel) is Indian in both its spirit and management. In
less that a decade, Lakshmi Niwas Mittal has spectacularly expanded the company from a
wire rod manufacturer in Indonesia to the largest steel producer in the world, largely through
an acquisitive strategy.

 He can buy 44 lakh Maruti 800s!

In 1992, Mittal acquired a Mexican steel mill. From this case study, it is possible to distil some
simple lessons about how to manage acquisitive growth.
There are, of course, some variations depending on the nature of the industry, the history of
the acquiring company, and the specific circumstances of each individual acquisition case.
But, overall, there is a certain commonality in the pre- and the post-acquisition phases.
The story of Ispat Mexicana (Imexa)
Lakshmi Niwas Mittal's (widely referred to as 'LN' both inside and outside the company) faith
in DRI (direct reduced iron) technology governed his choice of acquisitions. He believed in its
future long before others.
"This has spelt success for so many of my plants," he says. Starting in Indonesia in 1976, he
bought mini steel mills using the DRI route in various countries and turned them around.
Eventually in January 1995 Mittal acquired Hamburg Stahlwerke, the originator of DRI
technology on which almost all LN's plants depend.
According to Peter F Marcus, director of Paine Webber: "Lakshmi Mittal championed the
practice of mini mills becoming integrated producers through the use of scrap alternatives."
This faith created 'the only true global steel company,' according to the Financial Times, and
Mittal's reputation as a doctor of sick steel mills. In 1991, this reputation brought the Mexican
government knocking at his door.
In the early 1980s, the Mexican government decided to build a new steel mill -- Sicartsa II --
adjacent to its existing Sicartsa facility located in Lazaro Cardenas.
They invested $2.2 billion in a state-of-the-art facility, which included a pelletizer plant to
produce iron pellets from ore, the first DRI plant in the world using the HyL III technology,
electric arc furnaces, casters to roll molten steel into flat slabs and a mill to convert these
slabs into plates to produce pipes for the then-booming oil industry.
Before the factory was completed, however, the end of the oil boom coincided with a faltering
economy which forced Mexico to devalue the peso. The government curtailed investment in
the planned pelletizer plant, which forced Sicartsa management to source high cost iron
pellets on the open market.
The government also abandoned the planned plate mill, forcing the plant to sell steel slabs --
an intermediate product -- rather than finished steel plates. Three years after opening, the

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plant operated well below its capacity of two million tons per year and incurred significant
operating losses.
Mexican government officials publicly blamed the management and employees of the factory
for the losses, and decided to privatize both Sicartsa factories in 1991. Based on Ispat's
reputation for turning around Iscoot, a steel mill in Trinidad, the Mexican government invited
Ispat to join two other steel companies in bidding for Sicartsa.
The pre-acquisition negotiation process
 The team: Mittal sent a due diligence team consisting of twenty managers
representing all line and staff functions chosen from Ispat's Trinidad and Indonesian
plants and instructed them to develop plans to turn around the plant.

Mittal also explained that some members of the due diligence team would have an
opportunity to remain in Mexico if Ispat acquired the facility. There were no merchant bankers.
The team was divided into sub-units to look at specific are as such as finance, marketing,
management and costs. Each team had to make specific recommendations.
"These had to be solid and do-able as the person making the recommendation could easily
be called upon to implement it," said one manager. "This eliminates consultants and their
ivory tower analyses. After this process, targets are fixed and LN largely steps out of the
picture."
Each team's report provided a valuable check on the other's to eliminate biases and
oversight.
The team's due diligence revealed a factory plagued by technical problems, running at 20% of
capacity, producing low quality slabs and manned by a dispirited workforce. The Ispat team
was impressed, however, by the recent vintage of the assets, a young workforce with an
average age of 27 years, and the supporting infrastructure.
The team recommended bidding for the plant, and developed a turn around plan.
 The bid: Ispat proposed acquiring all the Sicartsa II factory's assets and liabilities,
excluding contingent environmental liabilities.

Ispat also bid for 50% equity stakes in several of the businesses that supported the Sicartsa II
plant, including PMT, a producer of welded pipes, Pena Colorada, which provided the factory
with iron pellets and Sersiin, which managed the deep water port facilities and distributed
electricity. It took eight months to sew up the contract.
Ispat proposed a total consideration of $220 million, consisting of $25 million in cash and $19
million n in ten year bonds (at 15% interest) issued by the Mexican government and secured
by a warrant for 49% of Imexsa (not Ispat) equity. Of the cash component, $5 million was a
loan from Trinidad and $20mn came from LN's personal resources.
Ispat's bid outlined the company's five-year plan for improving Sicartsa's operations, and
included a commitment to invest an additional $350mn, with a $50mn penalty if the company
failed to follow through on its promised capital spending.
Ispat's proposal also included a clause capping the number of employees it would lay off at
100 of the 1,050 workers. Impressed by the business plan, the Mexican government selected
Ispat's bid. Ten members of the due diligence team remained in Mexico to run various
departments, including Dr Johannes Sittard the former head of Iscoot, who served as the
managing director of Imexsa from 1991 to 1993.
The post-acquisition integration process
 Stopping the bleeding: Ispat took control of Imexsa on January 1st 1992 in the
midst of a global recession in the steel industry, and had to briefly shut down the
furnaces because there were no orders for the steel and no place to store the finished
slabs.

Despite the shut-down, Imexsa laid off only seventy people -- thirty fewer than the agreed-
upon limit -- and ultimately hired an additional 270 employees.
The $220 million consideration which Ispat had committed to more than halved almost
instantly. The plate mill which had been lying abandoned -- still packed in crates -- was
shipped to a Korean company.
"Our focus is slabs and we didn't need the plate mill," RR Mehta, Imexsa's executive director
told Business India. The deal brought in $135 million -- much of this went towards upgrading
facilities.

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Mittal recalled his first steps at Imexsa: "In Mexico we did what we do with every business . . .
we sat down with management of the acquired company to discuss various options for
improvement and we developed the business plan. We sat down with each of the
departments to understand their problems and viewpoints and gave our input based on
international experience and our due diligence."
"Together we set very aggressive targets because we don't benchmark companies based on
local standards, but on international standards. If the management of the acquired company
is willing to commit to these targets, they stay. If they have any problems following our
business plan and vision, they go. The Imexsa managers stayed," he added.
Production Planning Manager Oscar Vasquez recalled his first meeting with Mittal: "In our first
meeting, we presented two alternative production plans, one for 600,000 tons -- it was
conservative and based on our past experience -- and another plan for 1.2 million tons. Mr
Mittal saw both and said, 'forget the small plan, just let me know what you need to implement
the second plan.' We expressed concern that we might not find a market for the additional
slabs, but Mr Mittal said, 'You will have the volume because I'm going to take care of that for
you'."
Mittal used Ispat Indo's sales network to identify Asian customers for Imexsa's slabs,
including a contract for 400,000 tons per year with a Taiwanese steel manufacturer. Although
these orders provided low margins, they allowed Imexsa to increase capacity utilization while
improving quality to win more profitable business.
Imexsa also reduced costs by switching to suppliers willing to match the lowest costs
provided at Ispat's Trinidad and Indonesia plants.
The next step was to quickly develop cost-consciousness and discipline among the Imexsa
management team. Jai K Saraf, Ispat International's finance director, and Sittard instituted a
daily meeting of the heads of each department in the plant, which began after the day shift
ended at 5:00 p.m. and generally ran until 9:00 or 10:00 at night.
The team evaluated the previous day's cost, volume, productivity and quality performance,
discussed the current day's results, and agreed on detailed targets by department for the
following day.
Om Mandhana, purchase director, described the purpose of the daily meeting: "The idea of
the daily meeting was to cut red tape. You got together all of the people involved to talk
through any issues, and as a means of coordinating and resolving day to day problems. The
idea was to take a decision then and there rather than refer to committees."
Raul Torres, melt shop director, recalled his first impressions of the meetings: "Before Ispat
bought the plant, the boss just told us how we should do things, but the daily meetings were
nothing like that. Dr Sittard asked a lot of detailed technical questions to force us to think
through problems to their root causes."
"If we were consuming too much steel in the electric arc furnaces, for instance, Dr Sittard
would ask: 'Why are you consuming this amount of steel? Is there leakage? Why do you have
this amount of leakage? Are you losing steel in the slag? How do you plan to improve this? Is
that the cheapest way in the world? Who does this best in the world? Can we adopt their
technology?'"
"We had open and sometimes heated discussions, but once we agreed on the right thing to
do, it was easy to get Dr Sittard's approval and any resources you needed to make it happen.
But you had to commit to improvements -- how much you were going to achieve and by when,
and the entire team monitored how you did against the promised target."
"And Dr Sittard was always asking for higher targets -- he always kept the pressure on us to
increase volume and quality and cut costs."
Imexsa's existing cost accounting system reported only aggregate production costs on a
monthly basis, and was first available three weeks after the previous month ended. One of the
first things the new management team did was to implement Ispat's daily reporting system
which provided overall figures for each day's operations by the next morning.
Led by Saraf, Imexsa's accounting department began collecting detailed volume, cost, quality
and productivity data for each step in the production process on a daily basis.
Initially, Imexsa's accountants collected these data themselves every day, and analysed it by
hand. To monitor raw material usage, for example, the accountants asked warehouse
workers to track the volume of materials leaving the storeroom each day.
As the discipline steeped in, kudos flowed back. A JP Morgan report hailed Imexsa as the
lowest-cost slab producer in the world, while Credit Suisse First Boston reported, 'At Imexsa,
Ispat makes Nucor's cost position look almost amateurish.'

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Imexsa could land a slab in the middle of American at $35 a ton below Nucor's cash cost of
production of $210 a ton. And Nucor founder Kenneth Iverson acknowledged, "Ispat comes in
and runs the operations very well. They control costs very very closely."
In 1992 -- the first year under Ispat ownership -- Imexsa increased shipments from 528,000
tons to 929,000 tons, decreased the cash cost per ton produced from $253 to $178, and
earned a small profit.
From 1992 to 1998 Imexsa increased annual steel shipments from 929,000 tons to over 3mn
tons, and improved productivity from 2.62 to 0.97 man-hours per ton.
Antonio Gonzales, the Pelletizing Plant Supervisor observed, "There is no feeling of having
finished the turnaround . . . we keep resetting the targets, and now we are aiming for 4 million
tons per year -- that's double our rated capacity."
In 1997, MRR Nair joined Imexsa as managing director from the Steel Authority of India, the
seventh largest steel company in the world, where he had served as chairman and CEO and
had been awarded the Best CEO in India award.
Nair cited four mechanisms for maintaining constant improvement at Imexsa -- i.e. daily
meetings and reports, quality programmes, global integration and stretch goals.
 01. Daily meeting and daily report: The daily meeting, now held each morning for
one or two hours, continued to play a pivotal role at Imexsa. A typical meeting (in
March 1998) was attended by representatives from each of the departments, most of
whom wore the khaki Imexsa uniform.

A few of the managers however wore red Imexsa jackets awarded to recognize achievement
of ambitious goals, such as increasing one of the DRI facility's production nearly 50% above
its rated capacity.
On several occasions during the meeting, participants jokingly asked whether their targets
were ambitious enough to earn a jacket. Nair guided the meeting with a series of questions,
inquiring about the results of previous experiments to improve performance, asking what level
of performance was budgeted for the following month, and probing why targets were not
higher.
Nair left the room for extended periods on two occasions during the meeting, but the
discussion continued with the members of the different departments discussing targets and
experiments among themselves.
The participants frequently referred to the daily report which provided detailed data on cost,
productivity, volume and quality for each of the departments.
 02. Quality programmes: In 1998, Imexsa used standard quality tools, such as ISO
methods, to describe existing processes. Imexsa's quality efforts won numerous
international awards and earned it the British Standards Institute's prestigious
Company Wide Recognition, one of only two steel companies in the world so
honoured (Iscoot was the other).

More importantly, Imexsa's quality initiatives helped the company upgrade its products to
serve more demanding customers.
Imexsa enhanced its product mix from 97% low grade steel sold into construction applications
in 1992 to 47% of slabs sold for demanding automotive and coated plate applications in 1997.
Despite Imexsa's success, Quality Director Rafael Mendoza wanted more:
"Traditional quality programmes such as ISO 9000 provide excellent statistical tools for
documenting your current processes, but they are not as useful in accelerating continuous
improvement. For this we introduced benchmarking, Top 10s and internal agreements."
In benchmarking operating processes, quality team members looked at best practices within
the Ispat network, the steel industry as a whole and also identified and studied related
processes at global leaders such as Ericsson and General Electric.
When Imexsa management wanted to improve cafeteria service during the busy lunch hour,
for example, a quality team studied the restaurant in a busy soccer stadium renowned for
serving large quantities of excellent food quickly during half time.
Imexsa would only work with customers and technology suppliers who agreed to openly share
information on new technological developments and applications, and in turn agreed to open
their plants for benchmarking.
Mendoza was not worried that Imexsa would surrender competitive advantage by allowing
other companies to benchmark the plant:

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"In the steel industry these days, all companies have access to good ideas through
customers, suppliers and consultants. The difference is who can implement them
successfully."
In the Top 10 programme, each department identified projects to either cut costs or improve
quality, quantified each project's financial impact (in US dollars per year), and rank ordered
the projects from one to ten based on their bottomline impact.
Each project was assigned to a project owner charged with selecting a multi-disciplinary team
to quantify the benefits of the project, develop an action plan and monitor progress against
agreed process milestones.
In Mendoza's view, the Top 10 programme introduced a consistent discipline in translating
proposed projects into financial results and allowed each department to prioritize its own
projects for improvement.
In 1996 Imexsa initiated a systematic program for making internal service agreements
between Imexsa's departments and monitoring service delivery levels against these
agreements.
The head of the department receiving a service would meet once a year with each internal
supplier to articulate their key requirements and agree on targets and concrete measures of
service delivery. Before agreeing to target service levels, a service provider could request any
prerequisites necessary to guarantee delivery.
The maintenance department might agree to provide preventive maintenance on time, for
instance, provided that they were notified at least one week in advance of the scheduled
downtime.
The head of the department providing the service was responsible for monitoring performance
on a daily basis and reporting to the head of the internal customer on a monthly basis, who
would sign off on the performance evaluation.
If a service provider repeatedly failed to meet goals, the failure would be elevated for
discussion in the daily meeting, but this had occurred only once in the programme's first two
years.
In 1998 Imexsa had 140 internal service agreements across 28 production and service
departments and sub-departments in the plant. 70% of the agreements fulfilled 100% of the
requirements, 11% of the agreements met between 95% and 99%, with the remainder
fulfilling less than 95%. These internal agreements yielded significant improvements in
operations.
 03. Knowledge integration programme: The Knowledge Integration Program (KIP)
was an Ispat corporate initiative designed by Mittal to "keep stirring the whole
organisation."

A few representatives from each operating and staff function (twelve in total) at each Ispat
plant would meet twice each year. These KIP meetings lasted two to four days, and rotated
among the plants in the Ispat network.
Prior to the meeting, the department heads would send their suggestions for discussion topics
to Ispat group headquarters in London, where the agenda would be set and then distributed
to each of the participants in advance.
During the meeting, the participants would review their performance against targets, including
major accomplishments and disappointments, discuss common technical problems, update
each other on developments in their plant and commit to future targets. The participants also
communicated between KIP meetings, as Torres described:
"If I have a question, I don't have to wait until the next KIP meeting. I can make a phone call
or send an email to Canada or Trinidad. I probably exchange at least one email every week
with them."
 04. Stretch goals: Each department in Imexsa committed to annual targets for
production volume, productivity and costs, and presented their plan for achieving
these goals. The process was based on a firm philosophy of Ispat.

As described by Nair, "Senior managers should ask the departments what they plan to do,
rather than telling them what to do."
At the same time, however, it was not a laissez fair. Nair and his team asked a lot of
questions on the plans that were presented. "You achieved this level last year, why can't you
do it again? They can achieve the level at another factory, what prevents you from doing the
same? What can we do to help you achieve more?"

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At the end of such discussions, while the targets were very demanding, they were owned by
the departments instead of being perceived as coerced from above.
As Raul Torres described: "I feel the need to constantly improve performance every day, but
its not forced on me by management. I'm not fighting against somebody else's budgets -- I
agreed to the goal, and the best way to reach a goal is not with a big gun to your head. I set
stretch goals because I want Imexsa to win."
"At first, I wanted Imexsa to be the best steel plant in Lazaro Cardenas, then the best steel
plant in Mexico, but now I ask 'why can't we be the best steel plant in the world?' We always
wanted to be the best, but we couldn't because the old management put up too many
limitations."
Design: Rahil Shaikh