Diversification and De-Merger Plans Laid out by BHP Billiton - Case Study Example

BHP Billiton Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 17th April, 2015. Introduction BHP Billiton is a multinational conglomerate in the mining industry with vast operations in all global regions. The company was formed during the merger of BHP and Billiton in the year 2001 leading to formation of a large mining company. As a result, the company continued with its growth by acquiring other mining concerns and consolidating its position within the different mining sector as a leader in mining. However, the company has in the recent suffered from increased cost and decreased commodity demand from regions such as China and Asia. As a result, the company has witnessed increased costs due to large portfolio of assets and properties the company had to manage. This analysis will look into the merger, diversification and de-merger plans laid out by BHP Billiton as it focuses to maintain market leadership position in the future. BHP Merger Analysis BHP Billiton’s 2001 merger created a company with big capitalization of $ 23 billion and this figure grew to $ 43 billion by the end of 2003. The company was able to leverage on its combined operations and asset base to reduce costs, increase capacity and distribution networks around the globe. Since the merger of the two companies, there had been able to reduce operational costs significantly and ensure it offers a range of products at reasonable prices. The synergy created through the merger created a lot of opportunities for the company as outlined; a) Cost leadership: the company was able to consolidate its operations and thus operating costs were greatly reduced. As a result, the company has been able to engage cost reduction strategy. For instance, in the year 2003 immediately after the merger, the company saved over $ 285m in cost savings. As a huge company, the company had the capability of merging some operations such as administration and management while other costs were greatly reduced. b) Larger Asset base: As a result of the merger the company had bigger revenues and assets which afforded the company extra revenues which could be utilized in acquisitions, consolidation and exploration for mineral rights within different categories and regions globally (Ehlers 2011, p. 76). c) Distribution network: BHP Billiton has been able to leverage on its huge size to ensure that the company can easily move and sell its products across the globe. Upon merger the company acquired several sales operations and networks straddled across different regions such as China, Europe and North America. d) Differentiation: BHP Billiton merger ensured the company has a wide diversified portfolio within the mining industry. As a result, the company was able to weather challenges such as commodity price fluctuations. Moreover, the company could reduce production within certain commodity sector in relation to global commodity prices (Coulter 2009, p. 63). Operational Analysis BHP Billiton operates in a competitive industry with a lot of companies that and challenges such as foreign exchange fluctuations and global commodity prices. Operational analysis intends to look into the company’s external, internal environments and strategies implemented by the company in ensuring remarkable growth and market leadership position. External Environment BHP Billiton operates in a highly competitive mining industry with several other mining companies which are market leaders within their segments. BHP Billiton operates mainly in the Australia and South Africa where the company operates a lot of mining assets. These two regions are also served with other large mining companies such as Rio Tinto, Fortescue Metals and Xstrata which are market leaders in their segments. For instance, in Australia the company has to compete with Fortescue Metals which is a market leader in the Iron ore sector in the country (Coulter 2009). The major external challenges that BHP Billiton will face in its global operations are; a) Industrial action or union problems in regions such as South Africa where the company has to collectively bargain with employees on several issues. The labour and staffing issues coupled with other legal actions could hamper operations of the company in several regions (Wilson 2009). b) Increased competition from other large corporations such as BP/Shell, Chevron or Exxon in the oil and petroleum sector since these companies are specialized producers in this sector (Shahid 2010, p. 47). c) Global commodity prices has negative or adverse effects on the company’s revenues especially in sectors such as oil & gas where there is increased competition and high fluctuations of the commodity prices. For instance, Chinese demand for Iron has been on the decrease due to decreased global economic activities (Gimber 2010). d) The increasing cost of goods and suppliers’ cost has a negative impact on the company since some of these suppliers can be gauged through quality importance, switching costs and price sensitivity. Increase in supplier costs such as energy, shipping, inflation and contract labour costs could increase operational costs (Runco 2012). e) Political threats in its major operational regions of Australia and South Africa since the company has received adverse rulings from these governments which could destabilize its operations (Alexander 2008). Internal Environment & Organizational Strategies BHP Billiton has undertaken several operational strategies that would ensure the company remains a market leader in the mining industry. These strategies are informed by the company’s internal environment and organizational strategies as outlined; a) The company has a diversified portfolio of products which are sold under the same brand name and utilizing the same distribution channel. From the year 2008 when the company appointed Jacques Nasser as its chairman, it ensured that its focus was on investing in large, long-life, low cost, expandable commodity and operating geography (Ehlers 2011). b) BHP Billiton holds an enhanced infrastructure with trained staff and the latest technologies which allow the offering of quality products to its buyers. c) The company’s value chain has been enhanced greatly due to the company adoption of bulk commodity pricing. This strategy has been implemented through selling of high commodities on short term pricing reference (Meredith 2011). d) The latest strategy by the company was the development of the blue ocean strategy and execution of brown field projects within the mining division. This strategy ensures that the company develops new segments that create new forms of demand and thus positioning the company as a market leader. For instance, by 2012 the company had over 19 high quality Brownfield projects which were highly profitable. The company sold all other projects which were non-profitable projects which were not part of the Brownfield projects such as the South African Metalloys Silico-Manganese plant (Robbins 2013). e) The company has decided to focus on socio-Environmental development since governments and other mining stakeholders have been worried about pollution and other factors that slow growth in the mining industry. As a result the company intends to build strong socio-economic relations through prudent mining techniques and environmental protection (Hitt 2014). De-Merger The proposed de-merger of BHP Billiton operations so as to enable the formation of a new company would ensure the company becomes a world leader in different segments. Te de-merger would lead to the formation of a new company that would take over some of BHP Billiton’s assets and mines located within different global regions (Scott 2011, p. 73-76). The de-merger of the company has been informed by the need for the company to focus on its core operations while ceding some premium assets to the new company and therefore creating value for the new company (Heather 2015). BHP Billiton has been for a long time trying to increase its valuation and market leadership through increasing value as witnessed by the company’s failed takeover bid for its rival Rio Tinto in the year 2008. The de-merger of BHP Billiton was informed by several reasons has outlined; a) The need to manage cost and generate higher revenues from high performing assets such as energy based coal, Iron ore, copper, petroleum and potash. These assets and products allow the new company to focus on these high return products. b) Simplification of the company since BHP Billiton would remain with fewer assets and thus allowing it to focus on upstream operations. c) BHP Billiton needed to separate assets with higher returns and operations costs from other assets. For instance, after the de-merger BHP Billiton would remain with Manganese, Metallurgical coal, Aluminium, Nickel and Silver. While the new company, South 32 would have other assets and operate within 2 regions namely; South Africa and Australia as shown by Figure 1 in the appendix section. BHP Billiton’s 2014 financial results outlines that the proposed de-merger would unlock greater potential value for the company. For instance, the company assumed $ 674 million of debt from BHP while the company could contribute close to $ 100 million in cost savings to the group at the end of 2016. This is because the new outfit South32 will have assets with lowest cost of production in massive scale allowing higher revenues and sales volumes as outlined by Figure 2 in the appendix section. South32 is expected to have revolving debt facility of $ 1.5 billion thus allowing the company to extend its operations and acquire other major companies (Megen 2012, p. 49-51). Consequently, by end of 2015 the company’s EBITDA would be expected to reach $ 1.78 billion valuing the company at $ 13.5 billion (Heather 2015). Thus, the proposed de-merger would ensure greater value and costs savings for BHP Billiton as it moves into retaining its position as the market leader in the mining industry (Bill 2009, p. 92-95). Recommendations BHP Billiton is a huge company that has transformed the mining industry and has set new heights for a company that has a transformational agenda. The future of the mining industry will be based on the development of several strategies aimed at tackling high operational costs, industry challenges and commodity prices while leveraging on organizational strength in growing value for stakeholders. BHP Billiton should adopt certain strategies to ensure it remains competitive in the mining sector as outlined; a) Socio-Economic engagement: Political situations in operational regions such as South Africa and Australia do not favour BHP Billiton’s growth strategy as witnessed by recent events. The company should adopt a strategy that ensures the company works closely with governments and community within it operational regions to ensure issues of licensing, taxation, environmental protection and other issues are tackled with haste (Petkova 2013, p. 59-63). The company should develop a public engagement department within the company to deal with public sector issues (Hamp-Lyons 2012). b) Technology: BHP Billiton is ahead of its rivals since it utilizes the best technology within the mining sector and thus the company should continue with its strategy of leveraging on technology in ensuring that it delivers low cost products and lowers its operational costs. The company currently utilizes world class technology in its shale mining operations within different regions (Hitt 2014). c) Trading Unit: Fluctuations in the global commodity prices could affect the revenues and growth path for BHP Billiton and its new operating unit (South32) and therefore, the company needs to form a new commodity trading unit similar to Glencore which will cater for sales and revenue generation as the company intends to diversify and grow its revenues into the future. A trading unit will be able to bargain with buyers, hold commodity for fair pricing or advice the mining units on issues concerning production and revenues (Smith 2013, p. 24-27). d) Spin off Non-Core Assets: BHP Billiton’s consolidation of its mining operations should involve the spinning off of its non-core assets and operations as a strategy of reducing operational costs and increasing revenue for the unit. As at the end of 2014 the company was selling its non-core assets and raising revenue by spinning off some of its loss making assets at it positioned itself for consolidation and de-merger (Williams 2015, p. 48-53). e) Partnerships: BHP Billiton should also develop partnerships with other companies and producers within different operational regions so as to tackle issues related to infrastructure development, labour relations and supplier dominance. For instance, in Australia the company should partner with Fortescue Metals in infrastructure sharing so that both companies can access mining assets with ease through a low cost model (Mohebbi 2012, p. 63-66). Conclusion BHP Billiton is the largest company in the world and it intends to achieve better growth rates in the future as it consolidates its operations and increases value of its outfit. The company has been in a strategic restructuring that involved share buy backs, cost cutting, internal re-organization and de-merger of the company. The recent intended de-merger is expected to increase the company’s value while at the same time consolidate its assets and operations. The de-merger had been informed by stagnating growth and the need to grow its shareholders value as it seeks to tame future challenges in the mining sector. The company’s strategic changes and growth plan will ensure the company retains its market leadership position as it grows into the future. 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Appendix Figure 1: showing the structure of the new De-merged units Figure 2: Showing the cost/Production for new formed company South32 Read More