BHP Billiton has decided to abandon its plans to buy Rio Tinto. Aside from the antitrust concerns of customers and regulators around the world, a major reason for BHP’s decision involves another acquisition:
A big factor in the decision was the size of Rio’s debt, which blew out to about $US42 billion ($65.8 billion) after the ill-timed acquisition of Canadian aluminium group Alcan last year. BHP carries only $US6 billion in debt. “It is just not the right time to be taking on the debt that is on Rio’s balance sheet,” Mr Kloppers said.
Chinese steel mills, which were concerned that a BHP-Rio combination would be able to control prices for iron ore and other raw materials, were also pleased the offer was dead.
If you’re a BHP or Rio Tinto shareholder (and if you have superannuation, you are, as am I), in the short term it’s good news for BHP shares and bad news for Rio Tinto shares, according to what’s happened on the British markets overnight. For the long-term sake of one’s super, however, we may well all be better off that the merger didn’t go ahead, regardless of the horrible shape of the financial market that were the immediate reasons for this deal to fall apart.
Why? Because most corporate merges fail; the merged company ends up being worth less than what the original parts were. No matter how well two companies would seem to fit together, the process of putting them together tends to be beyond the capabilities of most management.
Given every ambitious young suit-wearer with an MBA knows this, the question arises why there are so many corporate mergers. One explanation is that it gives CEO’s something to do; another is that there are (or, more to the point, were until a couple of months ago) large fleets of merchant bankers whose livelihood depends on convincing CEOs that mergers are a good idea.
In any case, the organizational behaviours that cause corporate mergers to fail undoubtedly operate throughout the government sector as well. But politicians seem to like reorganizing departments even more than corporate management do, and there are arguments that the costs are similar. Crikey recently had a piece about the New South Wales health system making a similar argument:
If you think the health system is a bird, a complex system with a mind of its own, it needs to be fed, nurtured, and developed. So which are you, and what signs does your favourite policymaker, minister or bureaucrat exhibit for preferring one or the other? Assuming you have a favourite, of course.
The evidence that restructuring does any good, by the way, just to confirm everyone’s actual experience, is plain and simple — it doesn’t. Studies have shown that if you keep on restructuring complex organizations like teaching hospitals they become less not more efficient and reorganizing area health boundaries (NHS Trusts in England) put people back about eighteen months.
I work in higher education, an area in which we are promised “revolution” by the Rudd government at some point. I wonder how much unnecessary reorganization that revolution will involve.
Anybody who has worked in a large organisation knows all this. But the problem is that what is in the organisation’s interests and what is in the managers’ (be they CEOs or Cabinet ministers) interests are different things.
Certainly in you hold shares in company that makes a takeover bid of any significance then take it as a sell signal. And you hold shares in a firm subject to a takeover bid only vote for it if payment is in hard cash, not scrip.
Many years ago, the section I worked for in government announced it was going to outsource and gave a list of reasons why it needed to happen. They did this at a meeting with all staff and asked for questions at the end. It ended very quickly when one bright spark noted that, of the 10 reasons given (e.g. inability to retain staff, unable to keep up with changes in technology, etc) ALL of them were basically saying the same thing:
Yet, as he rightly pointed out, all the management heads (who were “incapable of managing” us) were all keeping their jobs.
Since RIO shares dropped forty percent on the announcement, wonder who did and didn’t make a killing.
GT: the 10 reasons notwithstanding, and youse being forgiven for predicting that outsourcing couldn’t possibly deliver a worse result, did it in fact turn out that you would have been better with the devil you, that the outsourcing was to no net good purpose except enriching the insourcers?
It’s happened that way before, ad nauseum.
Possibly this merger would have gone ahead Robert at a different time – the “mergers mostly fail line” is somewhat undercut by the fact that um, BHP and Billiton were only merged into BHPB – only how years ago, and they only finished swallowing up WMC – what 3/4 years ago? And the number of takeovers in the mining sector has been quite substantial – hasn’t Swiss miner Xstrata “merged” with quite a few small Oz miners in past 4/5 years etc. And the Rio takeover of Alcan last year etc. etc. All of this was occurring at the beginning and during a mega boom for resource companies of course.
Maybe this merger/takeover will live to fight another day as they just ain’t making any more of it – land that is – and what Rio have – I’m sure BHPB want and maybe besides all the implications of the global economic crisis, they also may be waiting to see what Obama is going to do with climate change.
Like you, I’m hoping, almost praying that the US comes on board in a big way, as only then can a global climate change framework finally get underway, and these changes will effect resource companies including their acquisition and all other plans.
Jo: And there’s evidence to suggest that the shareholders of BHP would have been better of if they’d never bought Billiton. They did get lucky with WMC, though.
Booms cover up a lot of management sins.
I’d say this boom didn’t just cover up – it wrapped them in gold and silver and tin and nickel plated paper with diamond encrusted ribbons and a big titanium thank you card
However, I take your point and more so in respect of the public service where corporate managerial practices took hold for no good reason. Depts. have been utterly stuffed by outsourcing, ongoing restructuring and reforms etc – all of which imo, have and continue to hamper and weaken what were often straight forward service providers in the the good old days.
Robert, I think it is very useful to highlight this well-established pattern which is almost invariably reflected in the share price movements as soon as a takeover is announced, often mysteriously before. Some stocks thought to be prone to takeover even have a “takeover premium” built into their price although no takeover is mooted.
Nevertheless the research you quote indicates that some mergers and takeovers succeed, so you still have to assess each case on its merits.
jo, Xstrata’s big move a few years ago was to take over MIM (Mt Isa Mines). My impression was that they got it at bargain prices because MIM’s management was good at digging stuff up but not all that good at running a business. There was a time when MIM was bigger than BHP.
On government reorganisation, I understand the worst way is the ‘salami slice’ approach because there is maximum demoralisation for minimum savings. Yet this is the approach used annually in the so-called ‘efficiency dividend’ typically exacted by governments annually.