Glencore and Xstrata: a merger of egos
- 8 February 2012
- From the section Business
Everything about the merger of Glencore and Xstrata is big.
The market value of the combined mining and commodities group would be $90bn or almost £60bn.Their combined revenues for 2011 would have been $209bn (£132bn) and their profits before interest, depreciation and amortisation (Ebitda, a proxy for cash generated) would have been over £10bn ($16.2bn).
They would be number one in coal and zinc - and they expect to be the biggest independent producer of copper, so important to manufacturers, within four years.
Now it's clear why shareholders appear to like the deal - there will be extra profits in just the first year stemming directly from the merger of $500m or more than £300m.
The executives too will doubtless do pretty nicely. The chief executive of the enlarged business, Mick Davis, is already the best paid boss of a FTSE boss - taking home £18.5m last year - and the merger document talks about putting in place "appropriate remuneration arrangements" so that "key personnel" are "motivated to remain in position".
It seems doubtful Mick Davis's pay will be falling.
Also Ivan Glasenberg, the boss and de facto creator of Glencore, will see his £5bn stake in Glencore turned into a £5bn stake in a much larger business - which should both boost its value and make it easier to sell (as and when Mr Glasenberg is no longer in the business).
But what's good for shareholders and executives isn't necessarily good for customers - and manufacturers in China, who buy so much from Glencore and Xstrata, may fear their prices are going up.
Those higher prices would ultimately end up being paid by all of us - which is why the European Commission may well want to investigate this big deal on competition grounds.
Glencore and Xstrata point out that they would become the fourth biggest "global diversified natural resource company", and BHP Billiton is much bigger. So they would argue that there is little for the competition authorities to worry about.
It is moot whether the European Commission will be so sanguine about the impact on prices and customers.
And another thing. The management structure looks a bit clunky: here we have two executives, Mick Davis of Xstrata and Ivan Glasenberg of Glencore, who have been the supremos in their respective businesses for years, agreeing to work together, with Mr Glasenberg reporting to Mr Davis as his deputy.
They have each run their respective businesses in an entrepreneurial way: Xstrata has turned $500m of equity into $59bn since 2001; Glencore has transformed $1.2bn into $50bn over 18 years.
That kind of success usually requires a leader with drive and ego. So it may well be a challenge for the redoubtable Mr Davis and Mr Glasenberg to suppress the individualistic instincts that generated so much success in the past and work together as a team.
Now in theory they will continue to have discreet responsibilities: Mr Davis taking charge of the mining and extraction; Mr Glasenberg continuing to run the core of Glencore, its marketing operation.
But anyone who has met Mr Glasenberg, as I have, would probably regard it as a bit odd that he appears relaxed at the idea of becoming the number two, the lieutenant. We'll see how sustainable the new hierarchy turns out to be.