IntroductionMerging 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 MergerThe 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. FoodFood 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 WealthMick 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. CorruptionIn 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 governanceXstrata 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 mineralsA 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.