This term paper critically evaluated the merger process between Glencore international PLC and Xstrata, the merger between these two big wits has caused frenzy in the financial cycle since February this year, and based on reports its was due to ego playing a major part as well as major shareholder Qatar… holding out for more but at the time of writing this report the merger was still yet to be concluded but looked more likely to happen having crossed the most difficult hurdle of securing the shareholders vote. The most common motive for a merger is expansion as in the case of Glencore and Xstrata is no different. The process that is being applied to the merger and acquisition which boils down to them meeting the relevant state and antitrust laws between them and Sec documentation requirements, the voting decisions, and the firm structure after the merger will be considered as well, checking to ascertain if the valuated accepted ratio of 3.05 of every Xstrata share is a fair representation. All this will be discussed as it relates to the legal and other requirements as it relates to the merger. The term paper will be segmented into three parts, with the first part been the background knowledge on mergers and acquisition, and a highlights of both companies core business, operation and balance sheet figures. The second will basically be on the merger process and on key swinging decision proposal that were made to be voted on and the decision after the votes, the antitrust recommendation and consent as well as the valuation ratio proposed and its significance then lastly a review of The global merger and acquisition (M&A) trends from 2001 to date. In conclusion, I will be given an opinion as to the M&A that I feel is the best and the reason for my decision.
Merger is a combination of two corporations in which one survives and the merged goes out of existence, "while the motives for merger can variously be described as
Practical, psychological, or opportunistic but the overall objective of all related M&A is to achieve synergy or what is commonly referred to as the 2 + 2 = 5 effect" (Cartwright, 2006). Before we proceed to discuss the merger process for the Glen strata merger, I would like to give a brief on the individual company's background information and operations. Glencore International Plc. Glencore is a leading integrated producer and marketer of commodities, with worldwide activities in the marketing of metals and minerals, energy products, and agricultural products and the production, refinement, processing, storage and transport of these products. Industrial customers around the world rely upon Glencore's established global network of operations as a source of bulk commodities that they need. Glencore was founded in 1974. Headquartered in Baar, Switzerland, Glencore employs close to 3,000 people in its global marketing operations in some 50 offices in over 40 countries. In its industrial operations, Glencore employs over 58,000 people in 33 countries. Additionally, Glencore has interests in various publicly listed companies including 34.0% in Xstrata, 46.4% economic in Century Aluminium, 75.2% in Katanga Mining, 8.8% in UCR, 89% in Chemoil Energy and 32.2% in Recylex and 7.8% share in Nyrstar NV which it has agreed to relinquish for the sake of the merger and the EU antitrust concerns. Glencore became a public company in May 2011 with a primary listing on the London Stock Exchange and secondary listing on the Stock Exchange of Hong Kong. While Xstrata the company it intends to acquire are one of the world's largest mining and metals companies - a major producer of Alloys, Coal, Copper, Nickel, Zinc, Technology used in everything from constructing buildings and delivering electricity to developing jet engines and mobile phones and operate in more than 20 countries and employ more than 70,000 people globally and are Listed on the London Stock Exchange and Swiss Stock Exchange. The financial adviser for each party where; for Glencore were Citigroup Inc. and Morgan Stanley and that of Xstrata was Goldman Sachs group Inc., JP Morgan Chase & co, Deutsche Bank AG and Nomura Bank int'l PLC.
Key performance indicators from last year financials
Glencore
Xstrata
Founded
Chief executive
What it does
Revenue
Profits (2011)
HQ
Employees
1974
Ivan Glasenberg
Commodities trading
$144.9bn
$4.07bn
Switzerland
55,000
1926
Mick Davis
Mining
$33.9bn
$5.78bn
Switzerland
38,000
Source: Company reports
The merger process Glencore and Xstrata
Merger processes are usually made in the open glare of the general public providing that all the legal requirements which are the securities laws, state corporation laws, and antitrust laws which they have to be cleared form Europe, China and South Africa. The information about the merger is readily available with stern confidentiality warning placed about everything done and must be disseminated in an appropriate manner as both companies deem it necessary in the case it was done through the Xstrata website www.xstrata.com. The merger and acquisition is a vertical integration through stock financing ratio and the process applied is called the scheme of arrangement which is used to execute arbitrary changes in the structure of a business because the application to the court must be made by the company whose shares are being re-organised: the target (Xstrata). It does however have some advantages of the bidder (Glencore): for example, either the scheme will be agreed or not, so the bidder does not risk being left with a large stake (perhaps even a majority stake) but not 100% ownership. It of note to state that, Xstrata is a registered company in the UK and as such it is governed by UK laws and legislations. Under section 974 of the UK Companies Act 2006 ("CA 2006"); by means of a scheme of arrangement ("scheme") under part 26 CA 2006. Subject to the city code on takeovers and mergers ("the code"), (Boardman, 2012)
The merger was initiated by Glencore, although they have a vested interest already in Xstrata with 34% stake, on its lunch of the takeover bid, the decision lines solely on the other shareholder with only 75% voting majority approval after the vote for the bid be considered. The first thing that transcribes the intent is the preparation of a term sheet, this document is usually not bidding here the terms of the deal was spelt out which is then preceded by an official letter of intent (LOI) here a more concrete agreement and acceptance of knowledge in made known through the sign of the irrevocable commitments by the boards of both Glencore and Xstrata when they formally announced plans to merge was signed on the 7th February, 2012 from this period to when the shareholder vote to decide is called the prohibited period where an express agreement has been reach for the shareholders not to sell their share. On the 1st of October 2012, it was jointly announced that an agreement has been reached with the final revised terms been that an increased merger ratio of 3.05 New Glencore Shares for every Xstrata Share represents a 17.6% premium over the ratio of 2.59 implied by undisturbed closing share prices on 1 February 2012, and is 25.5% higher than the ratio of 2.80, being the average of the ratios implied by the middle market closing share prices of the two companies between 3 September 2012 and 6 September 2012, the latter being the last business day prior to the announcement by Xstrata of the revised proposal from Glencore. And that, the original board structure remains unchanged, except that Mick Davis will become CEO of the Combined Group for a period of six months from the Effective Date. Upon his departure, Ivan Glasenberg will become CEO of the Combined Group.
On the 20 on November, 2012, was the day that the xstrata shareholder made a decision on the takeover was decision through voting on three stage vote decision which was as follow
1st vote was on the merger and 230 million bonuses
2nd vote was on just on the merger alone and lastly
3rd vote was on retention package alone
Result of the vote and interpretations
On the 1st voting the Xstrata shareholder voted 67.85% in favour of the merger and the incentive payments but was short of the 75% legal requirement.
The 2nd poll which was just on the merger without incentives the Xstrata shareholder voted 78.88% in for the merger which above the 75% requirement and
Lastly the 3rd vote on incentive they voted 78.43% to reject the bonuses.
From the above voting result it show that, the Xstrata shareholder approved the merger without the incentive or bonuses been part of the deal. This was the key icebreaker as the shareholder weight was now fully behind the merger. As earlier stated this is key but not the only requirement, the securities laws which involving filing representations on the events unfolding in the companies to indicate and show the changes in details as they occur filling of forms 8K,S-4, and evidence of meeting the requirement on shareholder representation through proxies and as such the proxy statement must also be filled along with a schedule 14A, which is must also be given to security holders and they must all be filed ten (10) days before they are used. The last and major key decision lies on Antitrust legislation and laws in the case a decision or clearance has to be given by European Union Competition Commissioner, like that of the Chinese and South Africa to ensure competitiveness, and reducing the risk of monopolistic market situation and given consumer power to determine price and alternative and this cannot only be achieved with full disclosure. As the time of the report the EU commission on the 22nd November, 2012 cleared the merger under the EU merger regulation providing that Glencore has accepted to terminate a zinc-purchase agreement with Nyrstar and to sell its 7.8% stake on the largest producer of metal. This eliminated the antitrust concerns that the organisation would have been able to raise prices for zinc metal in a statement released by EU Competition Commissioner Joaquin Almunia on the approval said "The proposed remedy ensures that competition in European zinc metal market is preserved, so that European customers such as steel galvanizers and carmakers can continue to produce valuable consumer goods at low prices and good quality," What is left is the attainment of the remaining Antitrust clearance from the other countries and according to most analysts this less difficult to attain, as such the merger deal is most likely to happen. The final piece of this stage is on the valuation fairness of current valuation of 3.05 ratio of Xstrata share in the new company share. In my view the valuation is fair representation based on the market performance of their respective shares and more so a deal sweetener to ensure that they do not lose the support of the Qatar holding LLC and other key holders over a difference in valuation of 0.15 based on the initial 2.80 valuation, with the countries nations sovereign wealth fund and a 12% stake holder in Xstrata. From the chart below it can be seen that Xstrata has a very strong valuation on the stock market.
Source: Yahoo finance
The stock valuation ratio analysis = Xstrata GBp = 1035.00
Glencore GBp 345.20
Ratio = 2.98GBp
Even though this does not represent the true valuation of 2.98, a fair compensation should be considered to the shareholder for their willingness to accept the merger which is only fair. And the reduced movement on the share prices is a representation of the market's reaction to the turmoil that rocked throughout the merger process affecting both companies in July.
Lastly we will now focus on the global M&A activities since 2001, historically only a handful merger could be termed as successful as most are usually unsuccessful that often leads to the entities separating or liquidating. Since the 1987 there have been many interesting trends in the M&A which the movement of M&A activities for the US to the rest of the world and the mark of a six periods of high merger activities referred to as the merger waves. The periods are characterised by high levels of mergers followed by periods of low deals. But we will only a period from 2001 in which most analyst refer to as the sixth merger wave. Most mergers throughout the period have most times being outright avoidable or had let to huge loses by the acquirement. In the wave, most merger a believed to be overvalued or undervalued mostly because of poor integration and the fear of losing jobs by the respective employee a "Successful M&A according to outcomes are linked closely to the extent to which management are able to integrate members of organizations and their cultures, and sensitively address and minimize individuals' concerns. Because they represent sudden and major change, mergers generate considerable uncertainty and feelings of powerlessness. This can lead to reduced morale, job and career dissatisfaction, and employee stress. Rather than increased profitability, mergers have become associated with a range of negative behavioural outcomes such as:
• Acts of sabotage and petty theft;
• Increased staff turnover, with rates as high as 60% reported;
• Increased sickness and absenteeism.
Ironically, this occurs at the very time when organizations need and expect greater employee loyalty, flexibility, cooperation, and productivity" (Cartwright, 1996). The affected most M&A as most top level - middle level management are usually not back of the integration process or are seen a synergy saving cost mechanism and they leave with their experience and knowledge about the workings of the organisation acquired. A particular factor alone cannot b
From the chart above it can be seen that, the period when the global M&A trends where low where during time of economic crises like the dot-com burst from 2001-2, then after that recovery it picked with a relatively high volumes of merger holding trends and the financial market operating at it optimal pick because this period witnessed a centred attention like never before on financials securities and the growth of relatively world integrated financial cycles. It enjoyed a large span form 2004 down to 2008/9 when the world was hit with global recession from the crash of the financial system. Although this has spiralled more mergers in recent times, the global merger trend has been relatively very low. The global merger trend for 2012 has been very low with the major anticipated merger of £56 billion ($90billion) yet to be concluded. Although throughout we have witnessed so many failed M&A's, some have been able to perform than anticipated but the cardinal issue of over/undervaluation is still a major issue as regards all mergers. The biggest merger deal absolutely the merger between AOL & TIME WARNER to become AOL TIME WARNER in a report $162-4 billion merger but collapsed in December 2009 and was likewise tagged by PBS as "one of the biggest failures in merger history". Below are highlight of other major deals for 2001 to date
Other Top Global M&A deals by value (in mil. USD) from 2001 to date
Year
Purchaser
Purchased
Transaction value (in mil. USD)
2004
Royal Dutch Petroleum Company
Shell Transport & Trading Co.
74,559
2006
AT&T Inc.
BellSouth Corporation
72,671
2001
Comcast Corporation
AT&T Broadband
72,041
2009
Pfizer Inc.
Wyeth
68,000
2002
Pfizer Inc.
Pharmacia Corporation
59,515
2004
JPMorgan Chase & Co.
Bank One Corporation
58,761
2008
InBev Inc.
Anheuser-Busch Companies, Inc.
52,000
In conclusion, the trends in mergers deals shows that they are usually anchored towards the CEO fantasies rather equitable and profitable decisions which leads to either the over/undervaluation which has led to huge loses and those that we done for strategic business opportunities have been able to withstand the test of time have been relatively very successful. Even though the biggest in this period is still the AOL TIME WANER deal which failed in 2009, I see the M&A between DISNEY and PIXAR in 2006 in $7.4 billion deal as the most successful deal in my view. They have always been involved in animated movie productions, revenues generation growth coupled with effective strategic synergies, has led to reduction in production and distribution costs and made them the most dominate force in the market. Below is a detailed project carried out since their merger and the revenue and cost implication to date.
Released ↓
Movie Name
1st Weekend
US Gross
Worldwide Gross
Budget
6/9/2006
Cars
$60,119,509
$244,082,982
$461,923,762
$70,000,000
6/29/2007
Ratatouille
$47,027,395
$206,445,654
$620,495,432
$150,000,000
6/27/2008
WALL-E
$63,087,526
$223,808,164
$532,743,103
$180,000,000
5/29/2009
Up
$68,108,790
$293,004,164
$731,304,609
$175,000,000
10/2/2009
Toy Story 3D Double Feature
$12,491,789
$30,702,446
$35,868,069
-
6/18/2010
Toy Story 3
$110,307,189
$415,004,880
$1,064,404,880
$200,000,000
6/24/2011
Cars 2
$66,135,507
$191,450,875
$559,850,875
$200,000,000
Source: the-numbers
