Glencore Xstrata: merge of equals |
Mergers & Acquisitions |
Kirill Danilov IMBA April 2012 IE Business School |
1. Merger Rationale/Strategic Reasoning of the Transaction
A soon merger between world biggest commodity trader Glencore and global leading mining company Xstrata will create new vertically integrated company with business value $90 billion. This deal will allow to created natural resources giant to become a fourth biggest one in the industry and cover full range of activities (from exploration to sales) in a value chain. Such companies’ fusion will create a perfect opportunity for shareholders’ value creation. However, there is significant number of ...view middle of the document...
Xstrata employs over 70 000 people in more than 20 countries in different parts of the world (Africa, Australia, Europe, North America and South America). Significant part of the company’s business is providing technical and technological expertise to global mining market in order to improve production efficiency and decrease environmental impact from excavation and other mining activities. Similar to Glencore, Xstrata has its headquarters in Switzerland, city of Zug. It also listed in London Stock Exchange.
1.3. Rationale of Merger
As a result of merger between Glencore and Xstrata newly created integrated and diversified mining company will become strongest independent commodity world leader. New business model, which combines full range of activities and diversified portfolio of products in mining industry, will provide company with a strong opportunity to capture and increase shareholders’ value considerably. Current merger also provides sizable geographical presence of the company that plays significant role in mining business efficiency. To understand merger rationale properly, it is necessary to consider all reasons in details.
One possible reason for merger is capturing value through establishing vertical integration system. Traditional mining companies like Xstrata have undoubtful expertise in exploration, production, and refining. Meanwhile, traders such as Glencore have strengths in trading, marketing and logistics. Combination of different complementing expertise will give presence through the whole value chain and eventually great competitive advantage (Exhibit 2).
Increasing of geographical access to deposits and new, especially, emerging markets maintains sustainability of new company in present turbulent business environment. Natural resources consumption shifts to Asian region, where small and medium players with limited market abilities and infrastructure limitations will not be able to compete successfully with resources-unlimited Glencore Xstrata giant. Increased commodity portfolio of the company will strengthen market position (Exhibit 3) and provide stable diversified cash flow. According to Mick Davis (Xstrata CEO) promises EBITDA synergies will reach $500 million per year right after merger. To 2015 overall annual growth will achieve 11%, which is 4% higher than industry average.
Combined Group of companies is not restricted by operation synergies only. Financial benefits such as financial flexibility, increased leverage capabilities, lower cost of capital and tax advantages also take place. For example, despite that both companies Glencore and Xstrata registered in UK, they established head offices in Switzerland in order to avoid corporate tax paying. Such big companies with huge oversees operations and assets after merge will continue to pay virtually no UK corporation taxes.
Increasing shareholders’ value is not the only motive for Glencore Xstrata “mega merge”. Managerial reasons play “shadow” but...