Why ECGS turned down the Xstrata - Glencore merger?

Qatar Holdings, the second shareholder of the Swiss mining group with 10,4% du capital, in now asking for an increase of the exchange parity for Xstrata shareholders confirm the analysis of the ECGS-GIR analyst recommending shareholders to vote down the merger deal at the upcoming Xstrata EGM. The EGM was postponed, but the original case says a lot about the distortion of our financial markets.


Looking at such cases our ECGS voting principles and proxy research policy treats merger cases on the basis of their strategic merits their financial conditions and thirdly of their governance impact.


In this case, the proposed merger between the Glencore mega trading house and the mining group Xstrata, a company already 35% held by Glencore, did not offer ECGS a convincing positive strategic future for Xstrata shareholders. The strong but not dominating mining positions of this group in copper, thermal coal, coke coal and zinc offer strong resistance potential because of the scarcity of copper and the entrance barriers to the mining business, while an entry for Xstrata shareholders into the business of commodity trader Glencore was, in the ECGS opinion, not such a bonanza and appeared even far from guaranteeing the announced yearly 500M€ expected synergies: the loss of the benefit of isolated businesses might be higher than the additional business resulting from the merger and conflicts between the staff of both companies for the allocation of capital might kill the potential synergies.

Even including these 500M€ synergies the merger financial exchange terms offered a modest arithmetic 6.5% premium to Xstrata shareholders on the 2011 EPS.

In addition to these weaknesses the deal offered no progress at all in the governance of the resulting entity but a worrisome compensation scheme: it includes a $45 million three-year retention package for the Xstrata Chief Executive Mick Davis to seal this tie-up with Glencore, as if a merger failure was a serious possibility.

In 2011, Xstrata had already paid Davis€ 14 million in salary , bonuses plus long-term incentives promising millions if the company meets performance targets. The Xstrata board felt here obliged to pay Mick Davis if Xstrata merges with Glencore, an extra retention award including three equal cash tranches of £9,598,475 in cash plus some £ 6million in conditional Glencore shares nil-cost option, all-in a record high annual package to around € 31 million during the integration phase. Managing a company is certainly a training in itself for which the CEO is actually generously paid : as any company could certainly suffer when such a seasoned experienced CEO treats to leave, the task of any serious Board is certainly to preview ex ante this kind of situation and lock in its new CEO from the beginning under serious non-competition obligation.

Besides , for any well paid and loyal CEO whose contract already includes appropriate long term incentives the completing of a sound industrial merger should not deserve any special bonus.

The wide support of big banks for such questionable deal says a lot on the imbalances of the financial market and its strong bias for consolidation and fat cats.