30 Sep Glencore Woes: The perils of betting the house
As the saying goes, what goes around comes around. A little over two years ago Glencore completed their highly-touted ‘merger’ with Xstrata, leading to what was anticipated to become one of the largest mining conglomerates in the world with combined sales at the time of $209bn and an equity value of $65bn. But rather than deal success being founded on underlying capabilities, a killer strategy, or his top team, Ivan Glasenberg freely commented that it would all come down to commodity market strength: “If prices stay low, someone will say, he got it wrong.” Being even more specific, he spotlighted coal as key: “To really screw this up, the coal price has got to really tank.” At the time, I questioned whether this was a sensible rationale and strategy for M&A (Glencore Xstrata Merger: Smart Gamble or Safe Bet?; May 2013), and as problems began to emerge within months of the deal, discussed the long-term future for Glencore given the lack of internal accountability being demonstrated (Xstrata Glencore Merger: Where’s the accountability?; August 2013.).
And here we are 26 months later – coal prices (among many others) have indeed tanked, and Glencore is struggling for its very life: divestments required to repay loans, a share price that has dropped 80% – yes, 80% – since the merger, and statements forced from the company to reassure investors of its short-term solvency. Having originally offered to buy the remaining 66% of Xstrata they did not already own for approximately $30bn, the total combined group was valued yesterday at less than $20bn. All just as Mr. Glasenberg predicted.
The lessons are clear, and remain just as true today as in 2013: If you’re going to buy big, no amount of homework, commitment or bravado will make a fundamentally risky deal safe. And safety comes from deal assumptions that you can manage, or at least influence. And, especially in commodity sectors, never let the market – something over which even Glencore has no control – be the primary assumption behind deal success. Just like your own business, your acquisitions have to be able to survive the worst of times as well as the best – they’ll both turn up eventually. If you’re not prepared to consider that possibility, then walk away from the table before it’s too late.