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Mittal & Son


By Stanley Reed COVER STORY PODCAST

Deep inside the Beaux Arts Palace in Luxembourg that serves as headquarters of steel giant Arcelor Mittal (MT), a half-dozen men in their forties and fifties listen intently as plant managers from around the world file in to make presentations. This is no bunch of lightweights: Almost everyone at the table has decades of experience in the steel industry. The lone exception is 31-year-old Aditya Mittal, the baby-faced chief financial officer and son of the founder and chief executive, Lakshmi N. Mittal. But in this room full of veterans, he's the one who's really calling the shots. When Louis Schorsch, who heads the company's operations in the Americas, brings up the delicate topic of personnel problems at one important plant, it's Aditya Mittal who responds. "Feel free," Mittal says impassively, "to change the management."

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Tough words, chilly delivery. This kid doesn't fool around. Aditya's father isn't at the meeting, yet everyone knows the trim, serious son has Lakshmi Mittal's full backing. That's nothing new. Despite Aditya's tender years, he has worked with his father for a decade and is his closest confidant. The pair is today the most powerful father-son duo on the global business stage. Together, the Mittals have come to dominate one of the oldest, most elemental businesses on earth. In the process, they've helped revive a flagging industry—and created staggering wealth. The Mittals' 45% stake in Arcelor Mittal is worth $33 billion, ranking them among the world's richest families.

You may well know Lakshmi Mittal. His company is responsible for 10% of world steel output. He lives in a 12-bedroom London mansion with butlers on call and a Picasso on the wall. And he famously dropped $55 million on his daughter's wedding, which included a party at Versailles. Few outside the steel industry, though, know much about Aditya and the outsize role he plays in his father's success. Where the 56-year-old Lakshmi is the steel industry visionary, Aditya is the financial dealmaker. The smooth, Wharton-educated son pushed for the $38 billion takeover of Arcelor, the giant European steel company, then helped hammer out every aspect of the deal that closed last June.

A RARE CASE

At the heart of their success is the Mittals' powerful bond. In many a family dynasty, sons and daughters are either desperately trying to win their father's approval or deviously plotting to overthrow the old man. But the Mittal team seems to be a rare case of inter-generational respect and shared power. Lakshmi has given his son the running room he needs to build and shape the company. Aditya, in turn, is smart enough and confident enough to learn from his dad at every turn. "A father and son in business is usually a pretty tricky, complex relationship," says Mittal board member Wilbur Ross, who sold his American company, International Steel Group, to the Mittals in 2004 and who has $250 million invested in Arcelor Mittal. "But in this case, it seems to work just fine."

One reason it does may be that the Mittals are in many ways very different. The son of a traveling salesman, Lakshmi lived in a poor and remote Indian village without running water until the age of five. His father later started a small steel mill, giving young Lakshmi a taste for the business. Lakshmi, in turn, went on to found his own steel company, developing the instincts of a from-the-gut manager. Aditya grew up as the cherished only son of a rising entrepreneur, then was dispatched by his father to the U.S. to acquire the financial skills that can only be had in the West.

Rough-hewn father, polished son: The two are part of a larger theme in India Inc., even though the Mittals now operate from London. One Indian family after another—the Ambanis of Reliance, the Premjis of Wipro—has strengthened itself by dispatching its children to Britain and the U.S. for schooling. Lakshmi is comfortable chatting up line workers and still knows how to operate the electric arc furnaces used to turn scrap into molten metal. Aditya feels more at home with a Wall Street crowd, enjoys scuba diving and skiing, and has become a master dealmaker.

They're also free of many of the social and cultural constraints that so often hamstring business in both Europe and India. The Mittals are Marwaris, a group from the Indian state of Rajasthan known for producing shrewd merchants. But Lakshmi built his business first from Indonesia and then from London and is seen as something of an outsider in his homeland. As a result, he has become a kind of world citizen without roots.

Both father and son can be equal parts cunning, tenacious, and tough—if not downright ruthless—pushing aside anyone in their way. They are legendary for their long meetings, fueled by little more than green tea and sandwiches. The Mittals have cajoled, sweet-talked, or outwitted legions of steel executives from every corner of the planet. When they decide they want something, they don't give up. "You can't say no to that man," one steel executive says of Lakshmi. The Mittals, for instance, negotiated through three years of shifting political winds before winning a steel plant in Romania.

The question is whether the son is pushing the father too far. There's no doubt that Lakshmi Mittal embraces risk: He built his empire by taking over fading steel mills that no one else wanted. But with Aditya in charge of mergers and acquisitions, the Mittals have shifted their business away from snapping up rust-bucket plants on the cheap. Instead, they're now paying top dollar for some of the best mills in the industry. The Arcelor deal meant loading up the company with debt, now totaling about $20 billion. Any slump in demand combined with a surge of steel exports from China could make it hard to pay that off.

The Mittals argue that they have made their business more stable by increasing its geographical breadth. Despite a recent slump in U.S. prices, Arcelor Mittal is throwing off cash by the ton. It reported operating income of $11.8 billion on sales of $88.5 billion last year. And investors don't seem too worried about the debt load: The stock has surged from the low 30s to 54 since the two companies began working together in August.

Over the decades, the Mittal strategy has been nothing if not consistent. The story starts back in 1978, when Mittal opened his first mill in Surabaya, Indonesia. Although demand was slack in the U.S. and Europe, the industry was booming in Asia. Lakshmi came to believe that steel companies could churn out heavyweight profits if they grew big enough to negotiate on an equal footing with suppliers of iron ore and coal and with customers such as automakers. That has been Mittal's organizing principle straight through to the Arcelor deal. Now the Mittals have the power to ramp up or slow down production depending on local demand. In the long run Lakshmi's vision is an industry dominated by a handful of powerful companies, strong enough to cut output rather than prices in a downturn.

Aditya's dealmaking is helping turn his father's vision into reality as the pair play a key role in rehabilitating the steel business, not long ago the troubled stepchild of global industry. Hungry predators are now paying enormous prices for once-scorned companies such as Britain's Corus Group, which India's Tata Steel bought for $12 billion on Apr. 2. "The Mittals have made steel a more stable business that is accessible to investors," says Dalton G. Dwyer, managing director of Industry Corporate Finance Ltd., which specializes in industrial M&A.

While his father zips around the globe in his Gulfstream G550, dining with presidents and potentates, Aditya bears down on the nitty-gritty details. He's in charge of forging one company from the lean-and-mean Mittal Steel Co. and Arcelor, an amalgamation of three long-coddled European enterprises. His No. 1 job is squeezing a promised $5.3 billion in savings and revenue gains from the new company by 2008. Since August he has also been the board member overseeing most operations in the Americas: four plants in the U.S., as well as mills in Canada, Mexico, Chile, Argentina, and Brazil.

Although he's young—and looks even younger—Aditya is no newcomer to steel. He has been on the job since he was 21 and, in fact, got his start much earlier. Aditya was born in Kolkata in 1976 but while still an infant he moved with his family to Indonesia, where he attended the 110-student Surabaya International School. "It was a very simple life," he says. With little other amusement available, as a teenager he often tagged along on his father's troubleshooting missions at the plant, where he loved to watch the furnace swallow scrap metal with a roar like rolling thunder. "I used to spend Saturday nights at the melt shop," a cavernous space with giant ladles full of molten steel, he recalls.

The Mittals now have a rule, not always obeyed, of not talking about work at home. Yet when Aditya was growing up it was all business, all the time, allowing the son to soak up both his father's love of the industry and his acute sense of strategy and timing. "He would tell me about his travels, what companies he had bought," Aditya remembers. "I would go to his office, hang around, and talk to the people there."

As a result, Aditya has steel in his blood. Just about anyone in their empire can recount tales of visits from the Mittals, who often remember individual workers from tours even years earlier. They ask pointed questions about operations and inquire whether requested improvements were made. "They are in love with steel just like we are," says Gonzalo Urquijo, Arcelor's former CFO and now a member of the combined company's board. But they're also demanding. U.S. employees recall meeting a 90-day deadline for relining a blast furnace, despite losing more than two weeks to a mechanical problem. Lakshmi's reaction? "So next time you can do it in 72 days."

NUMBERS MAN

When Aditya set off for Wharton in 1993, he had no intention of immediately joining the family business, hoping instead to work in finance. There, he met his future bride, Megha, who for months refused to give Aditya the time of day. Yet again, his tenacity worked to his advantage. "I made sure I had a lot of opportunity to spend time with her," Aditya says. "Eventually all my hard work and persistence paid off." The two were wed in 1998, and last summer, just days after the Arcelor deal closed, the couple had a baby girl.

His time outside the family business was brief. After graduating magna cum laude, Aditya joined a training program at Credit Suisse First Boston (CS). But he stayed less than a year. He left to help his father create a public company called Ispat International from many of the steel assets Mittal had been buying. "I always believed [a stock offering] would open up more opportunities," Aditya says.

He quickly found his role. Aditya showed a mastery of numbers and had a nose for sniffing out targets, so in 2000 Lakshmi put him in charge of M&A. It was a tough time, though, for Aditya to cut his teeth. A brutal steel slump that led to a wave of bankruptcies had sent Ispat's shares plummeting from an IPO price of 27 in 1997 to just 1.50 in late 2001, and the company's $2 billion Mexican operation was teetering on the edge of default.

But the Mittals turned the crisis to their advantage. They snatched up plants in Eastern Europe and Algeria at rock-bottom prices. Capitalizing on the desire of many governments to shed money-losing assets, and backed by favorable financing from the World Bank and the European Bank for Reconstruction & Development, the Mittals doubled their annual production capacity to 30 million tons over just two years. "Everywhere there was something for sale," says Aditya.

The Mittals' double-or-nothing bet, though, didn't sit well with some Ispat shareholders. Some of the acquisitions were made privately by the Mittals despite assurances in the IPO prospectus that they would only buy steel plants through the listed company. That left investors complaining that the family was privately snapping up quality mills while leaving less attractive assets in the public company. The Mittals counter that purchases in emerging markets at a troubled time for the industry would have been too risky for public shareholders.

Then, in 2004, Aditya helped plug a hole in the portfolio with a big U.S. deal. The company agreed to acquire International Steel Group—which included assets of the old Bethlehem Steel—for $4.5 billion from Ross, turning the Mittals overnight into top players in the U.S. industry. They used the transaction to clean up their messy public-private structure. Ispat acquired their private company, LNM Holdings, for $13 billion to create Mittal Steel Co. Lakshmi paid himself a $2 billion dividend.

When Aditya first hit on the notion of going after Arcelor, his father was less than enthusiastic. Says Lakshmi: "I felt it was a far-fetched idea." While on a ski vacation at the family's house in Saint Moritz, Switzerland, in December, 2005, Aditya made his case. Arcelor was also buying up steel plants, and both companies had bid for a mill just two months earlier in Ukraine. Although Mittal had prevailed, Aditya figured Arcelor's challenge had pushed the price up by nearly 40%, to $4.8 billion. That helped convince his father. "They were bidding against us on every purchase," Lakshmi says.

The Mittals first tried a friendly approach. Aditya invited Arcelor CEO Guy Dollé to dinner in the London mansion. A large painting of a Mogul ruler cradling a falcon presided over the scene; the wine flowed. At one point, Dollé boasted how well Arcelor was doing, further whetting the Mittals' appetite. But after a three-hour meal, Dollé shrugged off any suggestions of a deal.

A CRACK IN THE DEFENSE

After Dollé ducked further meetings, Aditya took the gloves off. An investment banker hastily summoned to work on the bid said the deal was classic Mittal. Their own business was performing well, giving them the nerve to go after the biggest target around. Still, the team wasn't nearly as prepared as their bankers would have liked. For one thing, the regulatory climate of Luxembourg, where Arcelor was headquartered, was unknown territory. "No other corporate entity would have done this," the banker said.

A bitter five-month battle ensued. The Mittals thought they were cooked when at the end of May Arcelor accepted a rival offer. Dollé agreed to sell a 32% stake in the company to Russian oligarch Alexey Mordashov in exchange for a controlling interest in steelmaker Severstal. "We were all struggling to find a crack in the Arcelor defense," says Shahriar Tadjbakhsh, an investment banker from Goldman Sachs & Co. (GS) who worked on the deal. The opening appeared when members of Arcelor's board grew uncomfortable with what they saw as the company's extreme defense tactics and its general refusal to deal with the Mittals.

In June, against Goldman's advice, the Mittals sent a letter to Arcelor. That broke the ice, and Aditya began a series of quiet meetings, paving the way for a deal. Aditya "was the person who probably had the best mastery of key elements of the transactions," Tadjbakhsh says. Adds Jeremy Fletcher, a banker at Credit Suisse in London who also participated: "Arcelor was conceptually very much Aditya's deal."

Such clout is testimony to his father's confidence in Aditya. The two have an easy rapport, often finishing each other's sentences. When they're in London, the Mittals typically lunch together, with the meal delivered from Lakshmi's mansion. When in different cities, they're on the phone with one another at least twice a day. "There are very few things that we don't talk to each other about," says Aditya, who always refers to his father as "Mr. Mittal" in front of outsiders. That respect is returned. "I don't see him as young," says Lakshmi. "I admire him for his intellect and for his ideas, suggestions, and convictions."

The knock-down fight for Arcelor put to rest any doubts others might have had about Aditya. He took a beating when Dollé made an issue of nepotism. And Dollé still questions the wisdom of the deal. "Before judging any merger, you have to wait a long time—four or five years," he says. But Aditya sure looks like a winner for now. He tells of touring, like a conqueror, the city of Luxembourg, taking in the opera house and other landmarks. His guide: None other than the Prime Minister. And to seal the deal, the Mittals had promised that an Arcelor executive would hold the CEO post at the combined company, naming Arcelor executive vice-president Roland Junck to the job. But three months later, Junck stepped aside. Lakshmi is now CEO, and Aditya is overseeing the integration. His younger sister, Vanisha, also works in the company and serves on the board. Arcelor Mittal's headquarters may be in Luxembourg, Aditya says, but the "power is in London."

The Mittals, like most billionaires, live differently from the rest of us. Lakshmi is chauffeured around in a Maybach limousine and logs countless hours on his Gulfstream. Aditya, too, can use the jet at will, often arriving at the airport by helicopter. Yet, for all their gilt edges, the Mittals are surprisingly down-to-earth. Sure, they may splurge on a big family event like the wedding, but they're more formal than flashy. And they are intensely private, focusing what little downtime they have on the family's inner circle.

Mostly, though, their lives are about work. As part of a broad shakeup in the U.S., Aditya has brought in new management to run a huge mill in Burns Harbor, Ind., on the southern shore of Lake Michigan. He wants the new team to crank up production by 25%, which would make it the most profitable plant in the U.S. That's where Arcelor comes in. Unlike the rattle-trap facilities in developing markets that Lakshmi made his fortune buying, Arcelor isn't a collection of dinosaurs. While the two companies were roughly the same size, Arcelor annually spent more than 10 times what Mittal did on research and development. The best Arcelor plants outperform Mittal mills in efficiency, reliability, and quality of steel.

To tap into that expertise, Burns Harbor recently dispatched a team of engineers to Sidmar, Arcelor's crown jewel, in Ghent, Belgium. The idea was to figure out why, with the exact same inputs, the Europeans were able to squeeze about 7% more steel out of their mills than the U.S. plants could. The Americans relished the candlelight dinners in the old quarter of Ghent, but they were even more wowed by the advanced technology and shop-floor know-how they saw in Belgium. Now, they're gearing up to use a Sidmar device called a bomb that can be plunged into molten steel to sample its chemical properties and detect imperfections early on. The Mittals are pushing for just that sort of knowledge exchange across the company's global network, from Brazil to Kazakhstan. The many cultures now under the Arcelor Mittal flag provide "an inexhaustible source of competitive advantage," says Greg Ludkovsky, the company's chief technology officer for the Americas.

STRETCHED THIN

There's still a huge amount of work to do integrating Arcelor, which is not as sharp commercially as it is on technology. Competitors say Mittal had its hands full even before the megadeal, and the company's U.S. executives acknowledge they're stretched. They have yet to install common computer systems, for instance. That loss of focus has enabled others to grab business, says Daniel R. DiMicco, CEO of Charlotte (N.C.)-based Nucor Corp. (NUE) "We've probably gained customers" since the Mittals bought ISG in 2004, he says.

The Mittals, though, are already looking ahead to the next deal. They just bought another Mexico plant, they're building a new steel pipe plant in Saudi Arabia, and they may next go after Vallourec, a big French maker of pipes for the oil industry. The big hole is Asia, where state-owned steel plants and national champions have made it tough to buy assets. Some even think the Mittals could make a run at South Korea's giant Posco (PKX). They already own 33% of Hunan Valin, a Chinese producer, and they have also agreed to build a $9 billion plant in the Indian state of Orissa. "If they had Asia exposure, they would have the world sewn up," says Michael Shillaker, an analyst at Credit Suisse in London.

The Mittals have time on their side. Aditya still has many years ahead of him, and so, too, does his father. Will the two always be together? Aditya isn't so sure. "I don't know if I am going to be here for the long run," he says. "It depends on the opportunities and the requirements of the company."

Most give the Mittal father-son act at least another decade. It's when fathers hit their 70s and sons their 40s that such unions start to unravel, as the younger generation itches to take control, says Randel S. Carlock, a professor at the INSEAD business school's Singapore campus. But for now, at least, the Mittal team looks rock-solid. "The father is an entrepreneurial icon, one of the great business leaders of the 21st century. The son is obviously a very capable young man," says Carlock. "That's the best situation you can have."

By Stanley Reed, with Michael Arndt in Chicago, Nandini Lakshman in Mumbai, and Geri Smith in Mexico City


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