Evaluation of Glencore-Xstrata Merger and the M&A since 2001 - Essay Example

Evaluation of Glencore-Xstrata Merger and the M&A Since 2001 Your name Subject Date Introduction Merging of companies means the act of combining two or more companies into one entity or organisation. Mergers have become popular in the recent times and one such merger is the Glencore – Xstrata merger that is in progress. When two limited companies join together to form one new overall organization, the shares of both companies must come under common ownership. One or more companies may merge with existing company or they may merge to form a new one. In the case of Glencoe and Xstrata, the merger would form a new company called Glencoe Xstrata PLC. There exist many reasons as to why companies merge. Briefly, mergers take place because of the enhanced competition, breaking of trading barriers, free flow of capital across countries and globalization of business as many economies has been regulated and integrated with other economies. Glencore and –Xstrata’s long anticipated merger delayed this summer 2012 as institutional investors on both sides became unhappy over the price. This paper will be looking at various aspects of Glencore – Xstrata merger, and will critically evaluate the Glencore and Xstrata merger process. In addition, the paper will examine the global M&A activity since 200. The Glencore and Xstrata Merger The long awaited merger between the two companies, Glencore and Xstrata Merger is a merger that was to happen for years. According to Neate (2012), the directors of the two companies reached an agreement earlier this year, on February 7, 2012. They both briefed the media on the $90bn merger deal, though according to the media, Xstrata first made the merging deal public. The merging deal was to oversee the value of the merged company become $90bn. In addition, the merger, which had been-shelved for a long time, and was long awaited by the corporate world, was to create a £49bn worth company with about 130,000 employees in more than 40 countries worldwide. Xstrata, a well-known global mining company has mining fields all over the world. On the other hand, Glencore is a commodity trading company that deals in various commodities ranging from, minerals, grains, oil and several other goods. The announcement of the initial merging of the two companies’ raised several interests and questions from shareholders of Xstrata. The shareholders opposed the deal arguing that the deal undervalued their shares. Among the opposing shareholders were the two shareholders, the Standard Life Investments and Schroders who owned a value of 3.6% of Xstrata Company and who vowed to vote against the merger as they said the merger undervalued the company and that they did not see any need for the company merge. They cited poor deal execution by the top management of the two companies. The new name of the company was to be Glencore Xstrata International PLC, which merged the two company’s name. The p management of the Glencore, chief executive Ivan Glasenberg quoted that the merger would give birth to a new powerhouse in the global commodities business. This was how the new deal would have evolved and which raised several deal execution questions; Xstrata chief executive Mick Davis would be the head of the Glencore Xstrata International PLC Mr Glasenberg, Glencore from would become deputy chief executive. Xstrata finance head would head the finance role in the Glencore Xstrata International PLC Xstrata argued that the new firm would need a 75% majority, which meant that shareholders holding at least 17% of Xstrata's shares would be able to block the deal. The merger process was later to undergo various problems, which made the two companies make deals and then re make them from time to time in an effort to ensure the merger process is sealed. Glencore Company, was seen as an orchestrated business that few people would understand and this was especially the politicians who judged if at all, the merger creates a monopolistic industry in the corporate world. This merging argument was-wholly based on the glencore offshore trading and paying little tax. However, both companies did put forward the following reasons as to why the merger was important. Food Food prices had skyrocketed in 2008 and both droughts and floods had brought food scarcity making the food prices to soar to great heights. As a grains trader, Glencore was to exploit the soaring food prices as it has grown over 20 years to be one the biggest food traders in the world. The company dominated wheat, maize, barley, edible oils and sugar trading. The food exploitation fact was declared by the head of Glencore food trading business as he said that, the chronic drought affecting the US midwest would be suitable for Glencore as it would be able to exploit the soaring prices. Glencore director of agricultural products also added that in terms of the outlook for the balance of the year, the environment is a good one for business. This was in terms of high prices, lots of volatility, a lot of dislocation, tightness, many arbitrage opportunities i.e. the purchase and sale of an asset in order to profit from price differences in different markets. Pay and Wealth Mick Davis, the Xstrata chief executive was best-paid boss in FTSE 100, taking home £18.5m in 2011. This made the banks to enjoy the salaries and bonuses commanded by mining company bosses. The most important point was that when the merger was still friendly, he was due to receive a £30m golden handcuff to keep him at his desk. However, Glencore boss, Ivan Glasenberg, who owned a £5bn stake in Glencore Company, performed an expected U-turn by upping his offer for Xstrata, which made Davis's exit a condition of the deal. However, Davis was likely to leave with £8m in cash and £38m in shares. Ivan Glasenberg had ceded his position to Mick Davis by saying that he was an experienced as having run a public company for 10 years. Corruption In the world all over, mining ranks as one of the most corrupt industries. This is according to corruption watchdog Transparency International. Most minerals are found in developing world countries and poverty tends to influence the demands of local politicians and offal’s for bribes to gain planning permission an export licenses. However Glencore was charged €500000 for accessing classified by a Belgian court earlier this summer after a European commission official was found providing confidential information on agriculture markets to the company. It is also alleged that questionable trade in minerals from DRC has Glencore entangled in and this merger would bring some leverage in the matter. In October, two of Xstrata’s most outspoken shareholders did attack the board for agreeing to 'extraordinary executive payments' tied up with Glencore, the deal which had been revised to a £49bn mega-merger between commodities trader glencore and mining group Xstrata did hit the rocks again, hours after the Anglo-Swiss miner gave its blessing to the deal. Two of Xstrata's large shareholders, Knight Vinke Asset Management and Thread needle Investments did attack the company's board for agreeing to the deal, which they said gives away the miner's future profits "on the cheap" and gives bosses "extraordinary executive payments". A new deal was- made which required 75% of shareholders to support the merger, but only 50% need to vote in favor of the retention package that had been reduced to £144m. Glencore, which is Xstrata's biggest shareholder with a 34% stake, cannot vote. The Xstrata shareholders were not interested with the deal they had been offered and Glencore was forced to sweeten the offer in order to win the backing of Xstrata's shareholders. In September, Glencore increased its offer for Xstrata to 3.05 for Glencore shares for each of the mining firms, after Qatar's sovereign wealth fund, Xstrata's second-largest investor, threatened to block the deal. Glencore had previously offered 2.8 shares. The terms came after Tony Blair was drafted in to broker an 11th-hour deal, earning himself a reported $1m (£620,000) for three hours of late negotiations in Claridge's hotel in London. According to The Guardian, Xstrata confirmed that its chief executive, Mick Davis, would leave the combined group, which will be-led by his Glencore counterpart, Ivan Glasenberg. The share price was finally fixed at £ 345.05, in my opinion the share price was fair as it has since traded in the range of its first offer plus about £1. The greatest merger in my opinion is this case, the Glencore and Xstrata merger, the two companies are going to complement each other in the value chain, upward the supply chain, and the extracting side would have a complementary global logistics and trading side that completes its target to control the market. Corporate governance Xstrata is based in Zug, Switzerland, for tax purposes while keeping a corporate office in London. It's the "best of both worlds" favored by hedge funds and a growing number of global businesses. Glencore follows a similar model, keeping most of its business in Switzerland's Baar canton, while being registered in Jersey with some 50 offices in 40 countries. Glencore was a 400-strong partnership until it became a stock market listed firm a couple of years ago. Metals and minerals A merged company would be the No 1 producer of coal and zinc and the biggest independent producer of copper within four years. Xstrata has a huge investment policy, with plans to open new mines from Peru to Namibia, increasing production by 50%, though the global economic slowdown has forced the company to mothball iron ore mines in Australia. Evaluation of Glencore and Xstrata Merger process Mergers take different forms, which are vertical, conglomerate and the horizon merger. Vertical merger is a combination of two or more companies involved in different stages of production or distribution. Usually, vertical mergers may take the form of forward or backward merger. Conglomerate merger is where merging companies are engaged in unrelated line of business activity and thirdly, horizon merger, which is a combination of two or more companies in similar type of production, distribution or area of business. Glencore - Xstrata is one such form of horizon intended merger. According to the directors of Glencore and Xstrata, the merger would have created a new integrated major natural resources group, with increased scale, earnings from a diverse portfolio of natural resources' operations, logistics and marketing activities and an improved platform for further growth and value creation. Broadly, the aim of the merger is to reshape the natural resources sector by combining Xstrata's production of copper, coal, zinc and nickel with Glencore's marketing machine (Elich, 2012). Usually, the process of merger is lengthy and complex. Different countries have different regulations that govern merger processes. Further, the challenges involved in merger processes are variably enormous. In corporate world, there exists a myriad of motives and benefits of mergers. On 7 February 2012, the Glencore directors and the independent Xstrata directors reached agreement on the terms of a recommended all-share merger of equals under the terms - 2.8 Glencore shares for every Xstrata share. The Independent Xstrata Directors, on advice by each of the Xstrata Financial Advisers, considered the terms of the Merger to be fair and reasonable. This announcement has since received stiff opposition from many quarters. Various challenges are there in the merging process between companies and the merger between Glencore and Xstrata was not exceptional. In the merging process of the two companies, there has been a lot of pushing and shoving with so many twists to what has now been referred to us Glencore/Xstrata saga. Other commentators have described it as Glencore-Xstrata's epic drama ...a seemingly never-ending saga. Some economic experts have argued that, the merger process for the two companies, has been more skeptical because of the media reporting, while the actual problem between these two companies is something more than what the corporate worlds know. In order to understand the real issues in this merger process, one should first understand the dynamics involved in Mergers and Acquisitions acts and why the sudden interest in two prospering companies that produce totally different commodities sudden decision to merge. History has shown that mergers often create winners and losers at both the corporate and individual staff levels. One culture unseats another. One employee outweighs another. Power struggles prevail. The bonds of contention in the case of Glencore-Xstrata merger are the initial offer of 2.8 ratios, the proposed management structure and the retention awards for senior Xstrata managers amongst other small issues. Amongst the interested parties that opposed the merger, were sovereign wealth funds of Qatar who demanded for a 3.25 ratio, Knight Vinke Asset Management and Threadneedle Investments who attacked the company's board for agreeing to a deal that they claimed gave away the miner's future profit cheaply giving the bosses extraordinary executive payments. In addition, Norges Bank, Standard Life, Schroders and Knight Vinke among other Xstrata shareholders opposed the deal (Helen, 2012). Too much pressure and intervention by the former British Prime Minister has seen Glencore CEO Ivan Glasenberg upping the offer a 3.05 ration and critically, he insisted on being chief executive, ripping up the original arrangement with Xstrata that Davis would be the boss. Clearly, what seemed to be a friendly "merger of equals", has threatened to turn the transaction into a takeover. The Glencore-Xstrata merger is probably one of the most interesting, controversial mergers in the business world. These two giant companies are a classical example of what lengths companies can go in order to take control of the other. In the Glencore and Xstrata merger, the share price was at £ 345.05. In my opinion, the share price was fair, as it has since traded in the range of its first offer. It is the opinion of the author of this paper that the Glencore and Xstrata's relative positions within these proposals are justified and that the price offered so far is fair. The merger's review process is still ongoing in the European Union, China and South Africa, Glencore and Xstrata continue to expect to receive all relevant merger control approvals to enable completion of the Merger in the fourth quarter of 2012. Global M&A Activity since 2001 The merger between Glencore and Xstrata is a typical example of mergers taking place globally. Looking at the global merger and acquisition (M&A) since 2001, the M&A market has grown tremendously. Specifically, in the M&A market closed out 2006 with its best performance with the media trumpeting the new M&A boom - The Economist called it a "deal-making bonanza" while The New York Times declared 2006 to be "the year that made deal makers giddy. Over the past decade, mergers and acquisitions have reached unprecedented levels as companies use corporate financing strategies to maximize shareholder value and competitive advantage (Neat 2012). Top 10 M&A deals worldwide by value (in mil. USD) from 2000 to 2010 Rank Year Purchaser Purchased Transaction value (in USD) 1 2004 Royal Dutch Petroleum Company "Shell" Transport & Trading Co. 74,559,000,000 2 2006 AT&T Inc BellSouth Corporation 72,671,000,000 3 2001 Comcast Corporation AT&T Broadband 72,041,000,000 4 2009 Pfizer Inc. Wyeth 68,000,000,000 5 2000 Spin-off: Nortel Networks Corporation 59,974,000,000 6 2002 Pfizer Inc. Pharmacia Corporation 59,515,000,000 7 2004 JPMorgan Chase & Co Bank One Corporation 58,761,000,000 8 2008 InBev Inc. Anheuser-Busch Companies, Inc. 52,000,000,000 9 2009 Uk Government Royal Bank of Scotland Group 41,827,300 10 2012 Table 1: Top 10 M&A deals worldwide by value (in mil. USD) from 2000 to 2010 According to Bain & Company, a number of factors have fueled the M&A surge over the last decade. Some of these factors include: • Companies are hungry for growth and finding it difficult to achieve it organically; • Activist investors are putting pressure on companies to make wholesale changes; • Cyclically high corporate earnings have added tons of cash to corporate balance sheets; • Fueled by bulging coffers, private equity firms have been bidding aggressively; • Benign debt markets have supplied plenty of low-cost financing; • The clout of buyers has grown tremendously, while sellers have become increasingly eager to do deals too; and • Receptive financial markets are rewarding sensible deals. Royal Dutch Petroleum Company and "Shell" Transport & Trading Co. in 2004, was the most successful merger as the merger generated very large gain for the year 2005/2006. Conclusion In conclusion, Glencore and Xstrata merger is a typical merger dealing that depict clear agency conflict. In a case where both the companies will agree on their terms of merging, the two companies are going to complement each other in the value chain, and upward the supply chain. The extracting side would have a complementary global logistics and trading side that completes its target to control the market. The two companies should embrace a collaborative process with corporate leadership and appropriate stakeholders to align to the needs and timing of the organization. Organizations wanting to merger should understand that there are no magical solutions or silver bullets. The merger processes should be continuously and co-designed in order to achieve Merger Excellence. References Elich, 2012. Glencore International plc. [Online] Available at: http//www.glencore.com/documents/rule_2.10_Announcement_11.10.2012.pdf [Accessed 25th October 2012]. Helen T, 2012. The Financial Times Ltd. [Online] Available at: http://www.ft.com [Accessed 25 October 2012]. Neate, R., 2012. The Guardian. [Online] Available at: http://www.guardian.co.uk [Accessed 25 October 2012]. Read More