TCS Daily


The New Face of Globalization...

By Evgeny Morozov - June 29, 2006 12:00 AM

Lakshmi Mittal, the richest Indian in the world, brought his country an unexpected victory in globalization's World Cup. When on June 25 it was announced that Arcelor's board had accepted the new offer from Mittal Steel, essentially clearing the way for the long-anticipated merger between the two companies, millions of fans of India's global capitalism sighed with relief.

Emerging as a winner in the bidding war with Severstal, the Russian company that was touted as the partner of choice by Arcelor, the Indian magnate entrenched his image of a cheerleader for the new face of globalization -- one with Asian rather than European or American features. And it is not only the media and bloggers that have taken special pride in Mittal's victory; senior politicians and business leaders have also extolled India's growing clout in the global economy, with Commerce and Industry Minister Kamal Nath stating that Mittal's bid demonstrated the "intellectual ability" of Indians.

But what about the "intellectual ability" of Europeans, as evidenced in their handling of Mittal's bid? Here the views diverge. Some analysts believe Arcelor's management did an excellent job of forcing Mittal to raise his initial offer by more than a half by threatening to merge with Severstal instead. Others portray Arcelor as a bunch of old-fashioned European managers, who could not realize the immediate benefits of a merger with Mittal, and only worsened the EU's relations with India and Russia with their untimely and sometimes openly racist remarks.

Both of those accounts carry some truth. Yet an overarching conclusion to be drawn from this steel battle is that, despite the acerbically protectionist pesticides spread by the national governments, globalization has taken strong root on the European continent. If the European Commission can push its liberalization agenda through the capitals, the EU might yet rise from its nationalistic ashes and enjoy globalization.

What else but globalization can we thank for the fact that Mittal got the upper hand in its competition with Severstal? Spiritually, the latter is a much more fitting soulmate for Arcelor. Thanks to its founder's proximity to Russian President Vladimir Putin, Severstal exemplifies the Russian version of economic patriotism, the favorite hobbyhorse of the European political and business elites at the moment. Headquartered in the northern Russian city of Cherepovets (population 310,000), it makes a good match for Arcelor, headquartered in Luxembourg (population 465,000). Severstal is hardly a global company; it is claustrophobic, introverted, and badly managed. Can there be a better match for a sluggish European company?

Compare it with Mittal Steel, the Indian poster child of globalization. Headquartered in Rotterdam, managed from London, owning facilities all over the world, and rapidly growing its presence in Asia, Mittal is everything that most of the European companies, stuck in the past, aren't. Mittal is dynamic, forward-thinking, agile, and not mired in EU's bureaucratic web of labor unions and exorbitant welfare costs. Its biggest offense to the EU is that it is run by a representative of a nation that will soon relegate the EU to a secondary role. Although Lakshmi Mittal's $127 million home in London outshines that of most of the now defunct European aristocracy, he is still a largely self-made parvenu, not an énarque. And Europe hates self-made parvenus, who remind it of America.

Paradoxically, Mittal Steel represents a possibly bright future for the EU while Arcelor is only a reminder of its depressive and excessively regulated past. Most of Mittal's European operations are located in countries like Ukraine, Czech Republic, and Poland -- the New Europe, so the company feels at ease with the current logistical and geopolitical set-up of the EU. Arcelor (not to mention Severstal), with its permanent problems with the trade unions, poor presence in the emerging markets, and paternalistic management structure, is extremely ill-prepared to embrace the new opportunities this New Europe offers.

Due to the inconsistent policies of the Arcelor's managers and EU leaders, the peace with Mittal came at a price of disrupting the relationship with Russia and offending the business elites in India by labeling them as second-class partners. However, the EU could have avoided the nasty standoff over Arcelor, thus saving itself from unnecessary foreign policy complications. The Mittal story illustrated how badly the EU needs a uniform set of rules for dealing with cross-border takeovers, which would regulate the use of "poison pills", "crown jewels" and other "shark repellents", fancy corporate finance lingo for special legal provisions aimed at frustrating hostile takeovers (Arcelor tried to use one of those by buying and then transferring the Canadian company Dafasco to a special trust in the Netherlands).

The EU takeover directive, drafted in the mid-1990s and adopted in 2004, was supposed to provide the ideal framework for cross-border M&A. Needless to say, a decade of debate killed most of the useful provisions contained in the original proposal. Unfortunately, the Commission's latest benign intentions expressed in the watered down version of the directive failed to rein in the protectionist attitudes of the national capitals.

First of all, EU member states were allowed to opt out of the most important articles of the directive. Thus, according to a recent survey carried out by the European Group for Investor Protection (EGIP), 21 out of 25 countries decided to opt out of Article 11, which stipulates that takeover defenses included in a company's articles of association or in agreements with shareholders are invalid vis a vis a new bid. Article 9, which calls for shareholder approval for new poison pills once a bid has been made, has been shunned by Germany, Denmark, Luxembourg, Poland, and the Netherlands.

Secondly, the directive has taken an extremely long time to adopt -- and it is still pending adoption in many of the EU countries (although the deadline set for adoption expired on 20 May, 2006). According to the EGIP study, as time passes, more and more countries prefer to adopt a wait-and-see strategy to observe the directive's effect on their neighbors. As a result, almost nobody ends up adopting the directive in full.

Thirdly, due to the lengthy adoption period the national capitals have found ways to circumvent and exploit some of the loopholes and inconsistencies in the wording of the directive. This allowed them to come up with even more defensive ways to counter a potential takeover without consulting the shareholders.

Unfortunately, the usual suspects that are least prepared for globalization (with Germany and France at the front) have done everything to kill legislation that is addressed to alleviate their burden, be it the takeover or the services directives. But as evidenced by the Arcelor/Mittal/Severstal story, their protectionist stance only adds chaos to business and geopolitics, and, in the long run, hurts nobody but EU.

It is time for the national governments to recognize that they should not meddle in cross-border M&A activities, especially when they have no direct stake in the companies. Otherwise they are fighting not just globalization but common sense, putting themselves in a position to justify why the murky Severstal is better than the global Mittal and why yogurt production is of a strategic interest to the French state.

The virulent rhetoric of economic nationalism that still prevails in the boardrooms and national parliaments has to be purged. As the ownership of the European companies becomes more dispersed—with their shareholders based in Australia, US, or Brazil -- it will be next to impossible for the European politicians and managers to defend their xenophobic stances.

The most important lesson the EU should draw from Mittal is that globalization is not a one-way street: if Europeans expect to be doing business in Asia, Latin America, or Russia, they should be prepared to let Asian, Latin American, or Russian companies do business in the EU. The sooner the Europeans realize these new rules of the globalization game, the sooner they will be able to win it. Otherwise, they should immediately unplug from the global economy and head towards turning into one big museum of the past. With people like Mittal at the helm of globalization, they will hardly be missed.

The author is a TCS contributing writer. He blogs at www.sharpandsound.com

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1 Comment

old euro face
It just shows what hypocrits and racists those old eurolanders are. They're more interested in proctectionism than globalization. I've just read that they won't even let Toyota join some euro car organization They've always been afraid of competing with Americans and nowadays they are even more fearful of real competitors like the Mittal situation when they're from places like India. Shame on them. Or wait a minute, maybe they're really taking the States as a role model from the rejection on the Dubai ports proposal; that was just as bad.

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