30 Aug Xstrata Glencore Merger: Where’s the accountability?
Earlier this week the Wall Street Journal and others reported on Xstrata Glencore’s post-merger writedown of $7.7bn, equivalent to over 10% of the combined annual turnover for the group, and over 13 times the targeted annual synergies of $500 million. More so than any other deal in recent M&A history, this deal was the result not of shareholder pressure or top team strategy, but rather the vision and determination of one man: Ivan Glasenberg, CEO of Glencore. As his new business enters stormy seas so soon after the merger, his perspective, direction and leadership will be more critical than ever.
So what are his views on the root causes of Glencore’s current troubles? While again reiterating his view that the merger was justified, and that “we still feel comfortable with the deal”, Mr. Glasenberg said that the losses were largely due to unanticipated changes in the value of the Xstrata mines since closing. Only back in April he was quoted as saying that commodity price would be at the heart of long-term deal success, commenting, “If commodity prices stay low, someone will say, he got it wrong.” (Read our comments from the time at https://btd.consulting/news/glencore-xstrata-merger-smart-gamble-or-safe-bet). Since then, Mr. Glasenberg has been critical of his former rival’s strategy, promising a new direction. So, it appears that the problems lie with Xstrata’s mines, Mick Davis’ strategy, and the market. Hmmm…
Over the course of this year, BTD have been investigating the role of internal business conditions to long-term M&A success. Of the several ‘human challenges’ we’ve identified, none is more important than that of accountability pre-close for that happens afterwards. Usually this relates to the need for those responsible for delivering deal benefits to be directly involved in assessing – and deciding upon – the suitability of the deal. However the current predicament facing Glencore – one that happens all too frequently – highlights another aspect: Predicating long-term deal success on external conditions, market, economic, political, or otherwise. One of our clients, a mid-market global manufacturing firm with a track-record of M&A success, has a nice way of discussing this at the Board and Executive level: inside factors we can control, and outside factors we can’t. The more a deal depends on those outside factors, the less likely they are to proceed, regardless of how attractive the deal appears on paper.
Glencore’s view on the issues isn’t necessarily wrong, but it does raise questions about what could have been done in advance to mitigate these risks. Acquirer’s must ensure there’s sufficient challenge to market assumptions when estimating synergies and value – an obvious and easy stone to throw perhaps, but no less valid as a result. In our experience this has little to do with the processes followed or density of spreadsheets created, but rather more to do with the dynamics of the top team. Why were the final numbers not based on a more conservative outlook? Was there sufficient internal debate? When everyone was saying “This deal will be done!”, who was saying, “Yes, but what if…?” Was anyone listening to them?
Lessons for others pursuing M&A in turbulent markets? When reaching the final heady stages of a deal, really ask yourself:
- How much control do we have over the things that will influence deal success?
- On a scale of 1-10, to what degree is this deal being forced through by a single powerful individual?
- Have we truly listened to the most negative views as well as the most positive ones?
- Do we have a plan in case our ‘worst case’ comes true?
So what next for Xstrata Glencore? Mr. Glasenberg will be providing an integration and synergy update on 10 September, which no doubt will demonstrate a robust, aggressive approach to accelerating delivery of the synergies promised earlier this year. A restatement of targets based on the ‘new reality’ of today’s commodity trends may also be required. None of these targets or plans will be of any use however if deal recovery continues to rely on someone, or something outside the direct control of Xstrata Glencore. Using a strong economy to grow your way out of a bad deal stopped working sometime around 2007, and has no place in M&A today. Let’s hope that their revised plans places stronger accountability where it belongs: within the combined entity, and those who lead it.