Jeremy Warner's Outlook: In its desperation to escape Mittal, Arcelor runs instead into arms of the Russian bear

Ken Lay gets his just desserts over Enron; Boiling frogs and dead cat bounces
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The Independent Online

Is it cos I's brown? The Arcelor board appears so appaled at the prospect of takeover by the Indian-born steel magnate, Lakshmi Mittal, that it will do almost anything to avoid his clutches - right down to surrendering control to the Kremlin. Okay, so I'm exaggerating to make the point, but only a little.

If yesterday's takeover of the Russian steel maker, Severstal, goes ahead, its controlling shareholder, Alexey "the tank" Mordashov, ends up with a 32 per cent stake in the combined operation, rising to nearly 40 per cent after the promised €5bn (£3.4bn) Arcelor buyback is enacted.

Despite Arcelor's protestations that the Mittal offer is without logic, the rationale for the alternative Russian deal is almost exactly the same, combining, as it would, low cost, commodity production of steel with Arcelor's more value-added output and access to developed markets.

The primary difference between the two is that with Severstal, the Arcelor board remains in the driving seat, whereas with Mr Mittal, they'd be history. Yet even with Severstal, Arcelor surrenders more control than it cares to admit. All key decisions are to approved by a new "strategic committee" consisting of two representatives from Severstal and two independent directors. Mr Mordashov, a close ally of President Vladimir Putin, is in practice able to call all the shots.

Is it entirely wise for Arcelor to be jumping into bed with another 40-something Russian oligarch? You can bet your bottom dollar it wouldn't be embracing the Russian bear with such passion but for Mr Mittal. The Arcelor board seems to think it better to sell its soul to the devil than sup with Mittal.

As ever, the Arcelor presentation was a masterpiece of disingenuity. According to the board, the deal values Arcelor at €44 a share, never mind that this is in fact the implicit value that Mr Mordashov has decided to accept for his company. As a reliable valuation for Arcelor, it is completely bogus, an opinion backed by the markets, where Arcelor shares fell to €33 yesterday.

Arcelor cites concerns over corporate governance as one of its primary reasons for rejecting Mr Mittal. Yet to block the Russian transaction, the board has decreed that more than a half of the company's entire share capital needs to vote against.

Since typically rather less than 80 per cent of the capital is voted in such circumstances, opponents would have to win perhaps as much as 75 per cent of the vote to block the transaction. Talk about the pot calling the kettle black. Both on corporate governance and valuation Arcelor is hoisted on its own petard. In no British, publicly quoted company would management be allowed such cavalier disregard for the wishes of shareholders or the rights of the market to determine how a company is valued.

You almost begin to feel sorry for Mr Mittal. What have these people got against him that they are willing virtually to burn the place to the ground rather than let him have the keys to the citadel? Mr Mittal's offer is a good and credible one, though he may need to go a little bit higher still to be sure of success. Yet whatever doubts investors might have had about Mr Mittal, nothing could be worse than the collective hysteria which seems to have seized the Arcelor board. In striking this deal with Mr Mordashov, directors seem fair to have taken leave of their senses.

Ken Lay gets his just desserts over Enron

I've got every sympathy for the victims of the ludicrously one-sided extradition treaty the UK Home Office has seen fit to sign with the US. Agreed in the name of fighting terrorism, the treaty has in fact been used primarily to extradite those accused of white collar crime. Many of these applications are on the basis of evidence that would never pass muster in any UK court.

Yet I am also a big admirer of the way the US deals with its white collar crime. In the US, there is no one rule for the rich, and another for the poor, as there frequently still is in Europe, where even today middle class fraudsters can rely on comparatively lenient treatment. In the US, miscreant corporate executives are treated just the same as a common thief, and in many cases more harshly still. This is exactly as it should be in any society which holds the principles of unfettered capitalism dear.

Ken Lay and Jeffrey Skilling, the latest one-time corporate stars from the boom times of the late 1990s to be convicted of fraud, have yet to be sentenced, but they will be under no illusions about the likely severity of the punishment. Both of them can expect to spend the rest of their lives behind bars.

For these two otherwise law abiding citizens, this is no doubt a personal tragedy of epic proportions. Yet if free markets are to enjoy continued support, the courts must be seen to be as merciless with the senior executive caught fiddling the system as they are with the social security cheat.

With its lynch mob justice, the US seems to understand this principle better than most. In metaphorically stringing up the former Enron bosses from the nearest tree, America in some way gains closure on this unedifying period of corporate excess.

I'm not sure the principle is practiced quite as vigorously on these shores, where the authorities still struggle to secure unambiguous conviction, with punishment to match, for complex fraud.

The great bulk of those who had their fingers in the till during the last boom got away with it. Would Ken Lay have been treated as harshly in Britain? I doubt it, which is one of the reasons business is still so poorly regarded in many sections of the population. The constituency which regards all business as theft is only further bolstered by failure adequately to crack down on the real thing.

Boiling frogs and dead cat bounces

To declare the stock market correction over on the basis of the recovery that has taken place in the last two trading days would be naive. All too frequently in such circumstances, the reprieve turns out to be only temporary, what in stock market parlance is sometimes called a "dead cat bounce". This refers to the widely appreciated fact that even a dead cat dropped from a height has a tendency to bounce when it hits the ground. This should not be mistaken for signs of life.

Even so, it may be that the worst of the correction is already over. The original cause was a curiously innocuous one - US inflation figures which were just a little bit higher than expected. This none the less evoked reference to the "boiling frog story", another stock market favourite of questionable veracity. The story states that if a frog is placed in boiling water it will hop out, whereas if it placed in cold water that is slowly heated, it can be boiled alive. The moral of the story is not to be complacent of gradual change, which can be a harbinger of catastrophic loss to come.

The gradual change that's been taking place over the past year is the end of the era of cheap money. Most of the world's central bankers are now in tightening mode after a prolonged period of exceptionally strong global growth. Investors, it was said, had grown oblivious to these changes, and had plain forgotten that there is still such a thing as the business cycle.

Time to hop out, before the water gets too hot? Inflation is certainly rising, while at the same time growth is also slowing. But just as it seems unlikely that inflation is about to launch itself into orbit, nor does growth look destined to fall off a cliff. Both of them are moving in the wrong direction, but not yet by enough to warrant a full-scale bear market. What's more, though some equities show signs of overheating, valuations as a whole are still below their long-run average.

Few foresee the sort of squeeze on corporate earnings that would be necessary to justify a further downward lurch in valuations. I may yet have to eat my words, but I still don't see the turmoil of the last two weeks as anything more than a mid-cycle correction.

j.warner@independent.co.uk

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