Steel Executives Open to Mergers and Acquisitions Despite Slowdown

According to the latest report issued by the Deloitte Touche Tomhatsu Global Manufacturing Industry Group (New York, New York), about 69 percent of the executives interviewed from the steel manufacturing industry are still considering merger and acquisition strategies, despite the global economic downturn. According to research by Industrial Info Resources (Sugar Land, TX), the report, titled "Getting Back in the Water: Consolidation in the Global Steel Industry" was prepared based on online surveys, case study interviews and one-on-one interviews with senior executives from most of the world's largest steel producers between October 2008 and April 2009.

During the past decade, consolidations within the global steel industry increased dramatically. However, steel demand fell with the onset of the global economic crisis, in large part because of a lack of available credit for many companies. In 2008, the number of completed merger and acquisition deals fell by 28 percent year over year, and the value of these deals fell by more than 50 percent to $31 billion in the same period.

Despite this sudden halt, a majority of the executives questioned are still of the belief that developing and maintaining an acquisitions strategy is important. Many expect to make acquisitions during the next three years, and about 63 percent of the participants expect the climate for acquisitions to grow more competitive during this period.

The main objectives of acquisitions are achieving economies of scale, opening new markets and increasing negotiating power. These three objectives were rated as "extremely important" or "very important" by 75 percent of those surveyed. Acquiring increased capacity in lower cost locations was also ranked as "extremely important" or "very important" by almost 60 percent of the respondents.

As a direct consequence of the hunt for lower cost locations, one consideration that is becoming increasingly important in mergers and acquisition activity is that of potential cultural conflicts following an acquisition. More than 60 percent of the executives surveyed rated managing corporate cultures as the most important issue. However, only 46 percent of the responders rated a detailed analysis of corporate culture as a "highly important" consideration in an acquisition, placing financial performance and growth prospects as the most important aspects warranting detailed analyses.

International cultural differences will become increasingly important if the responses by participants in the survey are to be used as a guideline. Of the respondents who expect to make an acquisition within the next three years, 57 percent are of the opinion that such an acquisition will involve a country outside of their home country. While China, singled out by 60 percent of the respondents, was the favored target country for acquisitions, India and the U.S. shared second place, with 30 percent of the respondents naming these two countries as the most likely targets.

However, 38 percent of the participants were from companies based in China, 19 percent were from U.S. firms, and only 6 percent were based in India, suggesting that India is a very likely target for acquisitions. Companies that can understand and incorporate cultural differences in their strategy are likely to be those that are most successful with acquisitions.

As is the case with the steel industry in the rest of the world, many see the Indian steel market as a candidate for acquisitions on account of its fragmented structure. However, the Indian steel sector is considered immature when compared with that of the rest of the world, with many companies opting for greenfield investments or having recently undergone acquisitions.