Mergers and Acquisitions: Glencore and Xstrata Company - Coursework Example

MERGERS AND ACQUISITIONS: GLENCORE AND XSTRATA COMPANY CASE STUDY Student’s Name Subject Professor University/Institution Location Date Executive summary A merger is a process whereby two firms which have relatively equal basis are combined through consolidation or absorption. On the other hand, acquisition is the process whereby one firm buys another firm wholly. Acquisition is also referred to as take-over. Whenever two companies combine and form an entirely new company; this is referred to as consolidation. Acquisition can further be classified as public or private depending on whether the firms are listed in the stock market or not. Depending on the arrangement of the acquisee or target company, the acquisition can be friendly or hostile. The two words are used interchangeably irrespective of the fact that the two words may have slightly different meaning (Harwood 2006, p.347-356). Mergers and acquisitions have been taking place since time immemorial. In fact since the year 2000 the value of mergers and acquisitions has been estimated at about $ 309.6 billion. This is actually a 69 % increase from the earlier decade (Harwood 2006, p.347-356). Introduction This paper’s focus is on mergers and acquisition of two companies namely Glencore International Plc and Xstrata Plc. In order to understand the concept of mergers and acquisition this paper will analyze both the companies in terms of financial activities and non- financial activities in order to come up with a comprehensive report. Background of the two companies Glencore International Plc was founded by Marc Rich in 1974 and its main focus, then, was on production of both the ferrous and non-ferrous metals. Glencore International Plc is one of the leading producer and marketer of consumer products in the world today which is headquartered in Baar. Glencore International Plc later shifted focus on crude oil. On acquisition of Dutch Grain Company it expanded its activities on agricultural products in the course of 1980s. Thus, it deals with various activities which include processing, refining, production and transporting metal, mineral resources and agricultural products in all parts across the globe. Since its formation, the company is perceived as having evolved from solely marketing products from third party to immediate diversification of its operations. Nowadays, the company has substantial shares in major companies listed in various stock exchange markets; such companies include Xstrata Plc, Century Aluminum, Katanga Mining, UC Rusal and Chemoil Energy. In May 2011, Glencore International transformed into a public limited company with over two stock market regimes. Primarily, in the London stock market and secondarily on Hong Kong stock exchange. In 2012, Glencore International Plc established a deal to buyout Xstrata Plc for a cost of $62 million (Kayakiran, Firat and Jesse 2012). The value per share of the company was expected to be $ 2.8 per share in Xstrata Plc. This was done on an equal basis therefore qualifying it for a merger which would result into a $209 million in value. Xstrata Plc is a mining Anglo-Swiss company based in Zug in Switzerland with several offices in United States, United Kingdom and Canada. Xstrata Plc is reputed as the world major exporter of thermal coal. However, it produces a number of minerals including copper, zinc and ferrochrome. Xstrata Plc was founded in 1926 and the main focus was on electricity and infrastructural developments for the people of Latin America. In the year 1990, a major shareholder by the name of Marc Rich was introduced to the company and diversified the company to focus on the mining and oil products (Ammann 2009). When Xstrata Plc was listed in London Stock exchange in 2002 officially, the company acquired the shares of Glencore International Plc. Xstrata Plc has been involved in major mergers and acquisitions which include such companies as WMC Resources, Falconbridge Limited and McArthur River zinc mine. This expansion and diversification has come along with enormous challenges especially with waste management (Keane 2011). Merger Updates: According to Glencore.Com (2012), there have been two updates provided. First, there is an update provided which is dated 24th February 2012 in which the news release confirms that there have been numerous constructive discussions with the EU in order to meet the requirements stipulated in the EU merger regulation act. It is also noted that the fundamental purpose of holding this meetings is for the purpose of avoiding possible interjections by national member state authorities. This will, in turn, prevent possible negative competition in the respective markets of each the two companies. In fact, it is established that the merger is meant to present customers with a variety of products as well as services so that improved security is enhanced as well as satisfaction of the customer’s demand is meet. Second, there is an update dated 13th April 2012 in which the news release provides that the two Companies were currently involved with promising discussions together with some of the regulatory authorities. It should be noted that this discussion is meant to have the merging exercise provide anti-trust fillings to be presented to the regulatory agencies in order to seal-off the responsibilities as well as accountabilities involved with the merger as well as the EU. The two companies are being supplied on a continual basis all of the needed relevant approval documents in order to effect the completion of the merger at the third quarter of 2012 (Glencore.Com 2012). The Five Steps Needed in the Merging and Acquisition Process; There are five key stages which are demonstrated in the course of merger and acquisition process. During each of the stage a number of substantial requirements which can be used to assist in shaping-up the process and the conditions of the merger and acquisition are depicted. The five stages are categorized as follows; corporate strategy development; organizing for acquisitions; deal structuring and negotiation; post-acquisition integration; and post-acquisition audit and organizational learning (Mulcaster 2009). Corporate strategy and developments is depicted as having relied on the assumption that many M&A are created in order to influence positively the potential shareholders capabilities. This relates to the fact that in the case that research is depicted to the aforementioned assumption that many M&A fail to achieve the company’s short term objectives but in the long run it is considered to achievable. M&A should put into context the fact that certain key aspects must be achieved in the actualization of the strategies and goals (Mulcaster 2009). These key concerns must answer such questions which relate to the immediate value that the company can create from the acquisitions it is considering to pursue and the rationale behind the company taking advantage of the prevailing market conditions in order to conduct M&A transactions. Also, it is considered to be fair that the company identify untapped potentials in developing markets in order to remain competitive. In the case of Glencore and Xstrata the shareholders and the board did spell-out that there were strategies which had been acquired and developed as well as the manner needed towards the development of the merging the two companies through identifying the key benefits of the M&A in the long run(Mulcaster 2009). Organizing for acquisition is the decision of the firms involved with the negotiations for the merger and acquisition to develop the platforms and core-principle which is considered to prevail throughout the process therein. In the case of Glencore and Xstrata, the re-organization of the management and board was necessary so that the stakeholders’ interest would be safe-guarded. In the course of the organization for the Merger &Acquisition, the process was hindered by the numerous disputes which were emanated from the disagreement and dissatisfaction of both companies’ board. This fundamental issue was later resolved through the process of voting for the general satisfaction (Mulcaster 2009). Once there is an all-inclusive agreement between the parties involved with M&A, fine- tuning of the basic requirements is later conducted through the process of negotiation and restructuring of the entire transaction. The deal is then refined to meet the existing economic conditions as well as assist in adding the value to the potential stakeholders of these companies. Taking a closer look into the decisions which are agreed upon, there is the need to incorporate and later integrate the different cultures of the two companies so that these companies can work together in harmonious environment. This is achieved through the process of post-acquisition integration. Post acquisition integration is necessary to the company so that any outstanding differences is put forth and resolved in order to avoid intensification on major issues that may persist afterwards (Mulcaster 2009). The final step of the M & A is referred as post-acquisition audit and organization learning. At this stage there is the need to approve the different checks and balances due to the fact the entire organization needs to be evaluated in terms of financial and non-financial aspects This stage of M&A takes into account the company’s relationship with other companies so that the new company formed from M&A can account for any benefits or losses which may be considered to arise from such associations (Mulcaster 2009). The Merger Process of Glencore and Xstrata: The process of merging of Glencore and Xstrata took a rather unique turn of events with decisions on the merger being influenced adversely by the board (Straub 2007). This is because of the fact that Glencore possess 34% stake on Xstrata but was not allowed to vote on the deal initially. There was a derailment on the issue of bonus pay-off to Xstrata directors which amounted to a figure of about £173 million. The other argument was on the price of each share which was initially 2.8 per and the deal proposal was for the shares to be sold at the price of 3.05 per share. In order to resolve the issue the board agreed to allow shareholders of both companies to vote for or against the preposition for the deal. For the purpose of sweetening the deal, Xstrata had to make a recommendation which advocated for the directors to be given £141 million instead of the initial £173 million. This new deal required that the presence of a 75% shareholding in-support of the merger, however, only 50% were expected to vote in favor of the deal. After a great effort of influence from a major investor in Glencore the deal was amended so that shareholders in Glencore were later allowed to vote as well. Paul Gait, an analyst at Sanford Bernstein, stipulated that it was riskier to split the voting procedure despite it being a calculated gamble. Whenever it was established that the now separate measures pass, Glencore should be free from the taint of railroading through provision of a compensation package against shareholder wishes (Collan, M and Kinnunen J. 2011). Nonetheless, after months of negotiations the merge was finally consummated following a tremendous shareholder vote in favor of the merge. Shareholders later gave the £56 billion Glencore merger the green light but without the golden handcuff bonuses for Xstrata directors. However, while 90% of eligible shareholders indicated they were willing to sell out to the commodities held by the giant, over 78% of shareholders voted against the £140 million Xstrata management incentive scheme despite the shareholders being persuaded by the directors to vote otherwise (Collan, M and Kinnunen J. 2011). In my opinion, this paper recognizes that the deal was fair in the sense that the merger was made to safeguard the interest of the shareholders. Considering the price of the merge, the company altogether will have a combined investment of £56 billion. This is a justifiable price that can sustain the companies’ interests and create a portfolio that would lead into a competition which reflects positive health in the stock markets. As the paper had asserted earlier on, this process deviated slightly from the normal Merging and acquisition process because the influence of the shareholders were the great determining force of the settlement of the deal. The board had limited control in the course of determining the case (Pidd, Glaister, Smith and Cobain 2011). Reasons and Benefit of Both Companies Participating in the Merger and Acquisition: Glencore is situated within the offshore and thus is paying little amount of taxes. Due to the aforementioned attributes the company orchestrates a business cycle that fewer people would understand, least of all politicians who must judge whether the merger creates a monopolistic industry. Exotic derivatives and super-fast computer systems are perceived as having been deployed to maximize on profits. Like the bankers, commodities’ traders argue that their respective sophisticated systems enhance the smooth working of market capitalism. For these reasons there a number of benefits that could be derived from the merger (Collan, M and Kinnunen J 2011). First of all, the bosses who once enjoyed heavy salaries and bonuses from the company’s operations would be mitigated. This is because the most paid boss according to FTSE 100 statistics is Mick Davis, the chief executive of Xstrata who took home £18.5 million in 2011. In order to curtail the boss from getting such heavy pay, the boss of Glencore; who also owns a £5bn stake in the company had a disagreement on this and therefore insisted that the issue be made part of the conditions of the deal (Collan and Kinnunen 2011). The deal was to make Davis exit from being the executive who takes a larger percentage of the company’s profit. This, in the long-run, should translate to shareholders getting increased levels of dividends as the company saves more on salaries and wages. Secondly, there have been adverse droughts and floods which have damaged this year's food harvest, leading to an overall rise in the foodstuff prices beyond levels exceeding the 20% mark. This has been brought about by the financial crisis of 2008 (Summers 11). The fact that Glencore has been in operations for over 20 years makes it one of the biggest food traders in areas concerned with production of wheat, maize, barley, sugar and edible oils thus, would mean that there would be a consolidation of substantial levels of benefits in the merger (Harwood 2006). In fact, according to head of Glencore’s food trading business, ‘chronic drought affecting the US mid-west would be good for Glencore because it would be able to exploit soaring prices’. In order to achieve a balance in expenditure, the merger would thus strike a balance in the diversification of its operation (Spain, W 2011). Thirdly, a merged company would be the number one producer of coal and zinc and the biggest independent producer of copper (King, Slotegraaf and Kesner 2008). This is based on the fact that the European Union is concerned with the company becoming powerful so that its trading policies may provide an influence on the price of basic metals. Xstrata possesses a substantial investment policy, with plans to open new mines from Peru to Namibia, which should increase production by 50%, though the global economic slowdown has forced the company to mothball iron ore mines in Australia (Summers, Greenspan, Levitt and William 1999). Another benefit is on corporate governance; Xstrata is based in Zug, Switzerland, for tax purposes while keeping a corporate office in London. In this case Xstrata has an advantage of hedge fund optimization and the 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. This means that the merger would lead to a reduction in the amount paid as corporate- taxes (Ford 2011). Finally, the merger would be in a position to combat elements of corruption. This is because mining has been labeled as one of the most corrupt industry (Pagnamenta 2007). The board of the new merger declared that the merger would work together with the different government to deal with the cases of corruption that were involved in Congo (Pagnamenta 2007). My Opinion on the Implication of the Merger: In my opinion, this paper asserts that the merger had a positive implication on both the shareholders and the company as well. To the shareholders, it meant that there were to be an increment in the amount of dividends payable because later, the company was expected to make a consolidated income statement which means that the level of dividends was to be determined by the resultant consolidated income. On the other hand, the company will benefit in the sense that there is diversification of investment and consolidation of different cultures. This aspect will reinforce the interdependence of both the companies considering that the two companies offer different products and services. Global Mergers and Acquisition since 2001:  The above graph showcases the global mergers and acquisition trends since 1985 to 2012 and a slight prediction of the future trends. For the purpose of this report the focus will be based on the period between 2001 and 2012. The Y-axis shows the volume of the merger whereas the X-axis indicates the corresponding years. At the dawn of this decade there was an increase in the volume of mergers as compared to the late 1990s. This may be attributed to the rise in GDP during this period. However, the volume of transaction reduced drastically between 2003 and 2005. This is as a result of market forces of demand and supply within the period. The value of mergers and acquisitions hit optimum-levels during 2006. However, during 2007 there was a drastic fall brought about by the financial crisis of 2007. Since then the levels of mergers have never hit the highs as before. Nonetheless, there is perceived increase of value in recent years with a prediction that the future is quite promising (Pidd, Glaister, Smith and Cobain 2011). Successful and Worst Mergers since 2001: A merger between Glencore International Plc and Xstrata Plc has a major financial significance. Due to the extensive negotiations which have been incorporated, there would be no chance of collapse for either of the companies as a result of the merger. Practically speaking, there is no magic to a perfect merger; however, the two companies can reap the benefits by proper reorganization and restructuring. That is the key rationale behind the best and worst mergers which are outlined as follows: Disney and Pixar is the best example of merger which resulted in to the production of movies and a perfect merger for marketing the movies as well. This merger resulted into a $7.4 billion deal (money.cnn.com). This is the best merger and acquisition in my opinion because only 2.3 of the shares are sold out to the public at the price of $59.79 per share. The worst merger of all time is Sirius and XM Radio. This merger was estimated to be a deal of $180 million with the price of shares being $12.87. Since the announcement of the merger and acquisition of these two companies there has been persistent disputes and that is the rationale behind the ongoing legal case against XM Radio. This is because the merger resulted to swallowing of Sirius and later leading to the aforementioned company pulling-out of the deal thus, collapsing in the end. Nonetheless, mergers depend on the scope of understanding. Mergers can be expensive as a result of the value addition that is associated with the merger. The merger between Glencore International Plc and Xstrata is justifiable because these two companies are operating at optimum formidable level. Conclusion: To sum up, it is fair to stipulate that the process concerned with merging and acquisition involves quite an extensive approach which is meant to cover most of the required facets so that the overall objective of the newer entity is attained altogether. First, there is the step concerned with the process of merging two companies which stipulates a step-by-step projection of the whole activity. There are also regulations bodies involved with talks about the merger process. In this case, the EU commission is sought to allow the smooth operation of the project in order to avoid possible chaos in terms of customer perception as well as improved demand security for the products. The paper has also taken to expounding on the different benefits which the merger is to attain so that precisely. These include among others lesser expenditures as well as increased customer base for their products and services. 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