Global steel majors keep acquisitions in sight, says Deloitte

29 April 2009 - Despite the current slowdown in consolidation within the global steel industry, mergers and acquisitions (M&A) remain a critically important business strategy for companies, according to a new report , Getting back in the water: Consolidation in the global steel industry, by Deloitte Touche Tohmatsu’s (DTT) Global Manufacturing Industry Group. While the economic downturn is a significant factor in short-term decisions regarding M&A activity, steel companies are expecting that they will be making acquisitions over the next three years.

“Some of the major steel players are not just standing on the shoreline looking to see if it is safe to get back in the water—they are diving in and exploring deal opportunities today,” says Nicholas Sowar, global steel leader with DTT’s Global Manufacturing Industry Group. “In fact, 69 percent of the executives surveyed are currently considering an acquisition.”

The downturn, however, is having an impact. In response to the credit crisis, 73 percent of executives surveyed by DTT’s Global Manufacturing Industry Group 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.

“There is generally a more cautious approach to acquisitions right now,” says Dan Schweller, global metals M&A leader for DTT’s Global Manufacturing Industry Group. “This is largely due to the economic downturn’s impact on financial results and the credit markets, making it more difficult to price and finance deals.” 

But companies may not want to wait too long to move: while only one-quarter of executives surveyed described the current climate for acquisitions as being very competitive today, almost two-thirds expect competition to increase over the next three years. To help companies position themselves for when the economy recovers, the report outlines M&A challenges and leading practices for the steel industry and highlights the need for companies to improve their capabilities to make the most of their acquisitions.

According to the report, managing corporate cultures, integrating management processes, and managing change were cited as the top three challenges in conducting acquisitions. But 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 or not 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.

“Most companies tend to focus heavily on financial issues during the due diligence phase and overlook the cultural issues and potential human capital integration challenges while deciding whether to proceed with a deal,” explains Schweller. “But with continued interest expected in cross-border transactions, cultural considerations will be critical to making a successful acquisition.” 

Other highlights of the report:

• Scale, negotiating power, and new markets top objectives for acquisitions. Seventy-five percent of executives surveyed said that achieving economies of scale, increasing negotiating power with customers and vendors, and entering new geographies were important objectives when making an acquisition.
• Financial factors often decide whether a deal proceeds.  More than 90 percent of executives surveyed indicated growth prospects, financial performance, and financial strength as important factors determining if a potential acquisition proceeds.
• Integrating acquisitions remains problematic. 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.

DTT is a sponsor and will be presenting key points from the report at the Far East Steel Conference in Beijing, China from 28 to 29 April 2009. For a copy of Getting back in the water: Consolidation in the global steel industry, please visit www.deloitte.co.uk/manufacturing. 

Notes for the editor:

About the study
Deloitte Touche Tohmatsu’s (DTT) 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 2008and 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 member firm leaders in steel industry M&A.

Nicholas J. Sowar is a member of DTT’s Global Manufacturing Industry Group executive team with specific responsibility as the Global Steel Leader and also manufacturing leader for the assurance and enterprise risk (AERS) function.

Daniel (Dan) T. Schweller is the global metals M&A leader with DTT’s Global Manufacturing Industry Group. He has extensive experience in M&A, due diligence, structuring, and accounting assistance in the metals industry.

Deloitte Touche Tohmatsu Global Manufacturing Industry Group
The Deloitte Touche Tohmatsu (DTT) Global Manufacturing Industry Group comprises more than 750 member firm partners and 12,000 industry professionals in over 45 countries. The group’s deep industry knowledge, service line expertise, and thought leadership allows it to solve complex business issues with member firm clients in every corner of the globe. Deloitte member firms attract, develop, and retain the very best professionals and instill a set of shared values centered on integrity, value to clients, commitment to each other, and strength from diversity. Deloitte member firms provide professional services to more than 81 percent of the manufacturing companies in the Fortune Global 500®. For more information about the DTT Global Manufacturing Industry Group, please visit www.deloitte.com/manufacturing.

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