The potential merger between Glencore and Xstrata

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2014



[Glencore and Xstrata Merger]

A report looking into various aspects of this potential merger between these two companies and about other relevant information.

ContentsPage

Introduction 2

Glencore International PLC summary 2

Xstrata PLC Summary 2

Business Rationale and Perspective of Both Companies 3

Discussion of Likely Long Term Success or Failure of the Merger 4

Examples of Mergers 4 & 5

Shareholder Wealth in the Merger 5

Conclusion 6

References & Bibliography 6

Introduction

A merger is a combining of two or more companies to become one larger company for potentially several reasons, to expansion as a company and in their market, sharpening their business focuses, increased output and even eliminating competition. This report will give you a brief summary of both companies (Glencore International plc and Xstrata plc) that are planning to merge then it will go into some detail of what the merger will entail and what might happen, it will also discuss the potential success or failure of the merger based on some previous studies.

Glencore International PLC summary

Glencore International PLC is a trading company that markets, sells and trades resources and commodities. These include a wide variety of resources in different industries such as the Natural Resources industry dealing with oil, coal and natural gasses. The Minerals and Metals industry selling zinc, copper, aluminium, nickel, iron ore and ferroalloys. Also In the Agricultural industry which deal with oil seeds, grains, sugar and cotton. Glencore Int PLC deals with customers worldwide in the food processing, power generation and even in the automotive industries. Having been known to be in business marketing with Xstrata PLC from the resources they produced.

Xstrata PLC Summary

Where Glencore Int PLC deals with the marketing side of the process Xstrata deals with the acquisition of the materials through the process of mining and extracting. Mining materials such as nickel, copper, coal, vanadium, zinc and it’s currently one of the world’s leading producers of ferrochrome. They have operations throughout North and South America, Europe, Asia and Africa.

Business Rationale and Perspective of Both Companies

Having been in marketing partnership for with each other for some time and that Glencore Int PLC owns 40% of Xstrata it seemed the logical decision to propose the partnership and in June 2012 the first proposals were introduced.

The combined value of the merged company would be $90 billion (US dollars). The proposed structure will still be almost 80% of the company will be Xstrata’s mining operations with the remaining 20% being the market aspect of what Glencore deals with even when the Glencore CEO, Ivan Glasenberg, will be the deputy CEO to the merged company while holding the biggest share of 9% of the company to Xstrata CEO, Mick Davis.

If the merger was to go through the company would be in a very strong standing to control the industry for better or worse. No one can speculate if the company are doing it for the growth and useful partnership having being customers to on and other or they could be doing it to potentially shut out rivals, to potentially offer resources so low priced that the competition are unable to make a profit from the sale and therefore shut down after a period of time.

For shareholders of Glencore Int PLC, who are mainly employees, will come out as the majority of the combined group, the Xstrata shareholders may get offered a premium of around 8% which is assets not cash. If the merger doesn’t go through because shareholders have voted against it the company is still 40% owned by Glencore which could put them in a very awkward position in which the Glencore could probably buyout more of the Xstrata shares until it gets the sufficient percentage of ownership to go through with the merger vote.

Discussion of Likely Long Term Success or Failure of the Merger

If the merger were to fail between Glencore Int plc and Xstrata would mean the companies remain competitors as they have always been but have used each other’s services in the process. With that being said set laws like the anti-trust law that both companies adhered to would have to be possibly scrapped or just revised.

In talks Glencore Int CEO Ivan Glasenberg has stated in an interview that the price of commodities (mainly coal) and the commodity market in general will be key to paving the way to a successful partnership between Glencore Int and Xstrata. No one can forecast the price of coal or other commodities in 3 years time but it would have to plummet to potentially deem the merger as unsuccessful and cause serious problem with the company. Glasenberg also states "Not one glass of Champagne will be opened, Talk to me in five years time. Maybe we will open a glass of Champagne “meaning that no one not even the CEO can predict what’s to come.

Examples of Mergers

There are only two ways the Glencore Xstrata can go successfully and unsuccessfully each having their well known cases.

Mergers such as Walt Disney’s buyout of the animation studio Pixar for $7.4 billion in 2006 break the odds of being unsuccessful. Walt Disney, the company, founded by Walt Disney and his brother Roy O Disney in 1923 started by making animations and then moving on to films. Pixar started in 1986 being part of the computer division of Lucas Arts Studios, the studio that brought Star Wars and Indiana Jones, broke away from them and was funded by Steve Jobs. We know why it’s a success because they brought such great movies such as Toy Story 2, Cars, Up and Wall-E making on average $400 million on each film release and having an effective business structure secured their place as one of the greatest animation companies in film today.

Big named companies merging isn’t always successful many factors can cause it all to fall apart and land the parties involved in a bad situation dealing with considerable losses. A well-known merger between Daimler-Benz and Chrysler turned out to be unsuccessful when Daimler-Benz bought out Chrysler for $36 billion. Daimler-Benz is a German manufacturer of cars and engines who mainly deal in the production of Mercedes-Benz cars. Chrysler is an American car manufacturer that is a parent company to Fiat the Italian car manufacturer. In the end due to very different outlooks on business and management structures the company fell apart and Daimler-Benz ended up paying $650 million to separate the partnership between them both

Shareholder Wealth in the Merger

In relation to shareholder wealth in a merger, with two massive companies coming together like this can increase the market value of the combined entity would be the most important aims of a public company, is to increase profitability and shareholder wealth by and increase in stock prices. An increase in share price means an increase in shareholder wealth. (George Coontz (2004) Economic Impact of Corporate Mergers and Acquisitions on Acquiring Firm Shareholder Wealth [Online] http://digitalcommons.iwu.edu/cgi/viewcontent.cgi?article=1102&context=parkplace 25/03/14]) Both companies will be looking to see a growth in both the revenue and the markets aspect. Both Glencore and Xstrata will see a growth in revenue from each other’s respective industries also leading a greater market to offer to as Glencore deal worldwide and through Xstrata’s multi-continental projects. With the shareholders getting offered a share premium of 2.8 shares in the proposed combined entity, and the Xstrata share value would be priced at 1,290.10 pence per share. (UWS Moodle (2014) GLENCORE INTERNATIONAL PLC AND XSTRATA PLC NEWS RELEASE [Online] http://moodle.uws.ac.uk/pluginfile.php/444894/mod_resource/content/1/MergernewsreleaseXstrataGlencore2012.pdf 29/04/14)

Conclusion

In conclusion the information offered. The merging of Glencore Int plc and Xstrata plc can only bring good things for both companies in almost all fronts. Using each other’s services on many occasions would be cutting costs by combing and using each other as they have been doing. Glencore selling and trading the materials that are provided by Xstrata selling to customers that usually deal with Glencore and then dealing with Xstrata’s customers and their market can probably be selling the same products at a cheaper price. The combined entity will have a vast dominance of their markets with the power to reduce prices and eliminate most competition die to such low prices. But the structure proposed for business allow Xstrata to essentially continue being the company they are acquiring all their resources and Glencore continuing selling and trading those resources. If the merger wasn’t to go through or even start to fail after a period of time after merging both companies can be left in a position where they may have to pay a significant bill of services and costs to break up the company. With several delays in the merger process the merger may very well not go through die to shareholders not agreeing to premiums offered. The merger should go through the advantages outweigh the disadvantages as long as the economic demand for such resources like coal stay high.

References

http://digitalcommons.iwu.edu/cgi/viewcontent.cgi?article=1102&context=parkplace

http://moodle.uws.ac.uk/pluginfile.php/444894/mod_resource/content/1/MergernewsreleaseXstrataGlencore2012.pdf

Bibliography

http://www.slideshare.net/kapishkaushal/glencore-xstrata

http://www.euroinvestor.com/news/2013/05/03/glencore-xstrataaposs-success-will-depend-on-intergration-coalaposs-price-ceo/12320212

http://news.bbc.co.uk/1/hi/business/4642116.stm


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