Getting bought out is typically a good outcome for investors. The buyer pays (or usually overpays, as studies have shown) a fat premium for your shares and sometimes you even have the option of hanging onto them and not getting hit with a big tax bill. That's the case with the impending mega-merger of commodities trader/producer Glencore (OTCPK:GLCNF) and mining outfit Xstrata (OTC:XSRAY). Yet some owners of the latter are howling and commodity buyers all over are unhappy with this deal. What gives and what does it mean for small investors?
The Glencore-Xstrata deal is a so-called "merger of equals" because the two companies have agreed to exchange shares of stock. In reality Glencore is paying an eight percent premium to Xstrata shareholders, who will get 2.8 shares of the new company. Glencore shareholders will get the 66% of Xstrata they doesn't already own. The combo would create a $90 billion company large enough to rival mining behemoths like BHP Billiton, pairing the world's largest commodity trader with the world's fourth-largest mining company.
Mergers tend not to please shareholders as much, at least in the hear-and-now, as outright purchases of one company by another. For one, their stock-for-stock complications often seem designed to fluff the huge egos of the dealmakers: in Xstrata's case, the top two slots at the combined company will be filled by the miner's CEO and finance chief, with Glencore's top dogs taking "deputy" positions. None of these guys are known for their humility. For another, shareholders like to know that someone is running the show. Both mergers and acquisitions have a pretty wretched financial track record at public companies: by some reckonings only a third of deals generate positive returns to the purchasing shareholders. A "merger of equals" sounds trickier to pull off than an already-longshot purchase in which the sellers get rich but also get pink slips.
So maybe it's unsurprising that some of Xstrata's largest investors have displayed wariness about the deal. According to one of Xstrata's largest owners, asset manager Schroders (OTC:SHNWY), the merger is great for Glencore and Xstrata's management, but not so much Xstrata's shareholders. Fidelity and Standard Life have also objected to the deal's terms, saying they want more for their shares than Glencore has offered. In most mergers a few sour faces wouldn't mean much but, due to the special terms of this particular deal, a small group of shareholders can actually block it.
There has also been a backlash regarding the implications for competition in commodities markets if a commodity behemoth emerges successfully. If approved, the new corporation, Glencore-Xstrata International, would be the world's largest exporter of coal for power plants, the largest ferrochrome, lead, and integrated zinc producer, the third largest copper producer and fourth largest nickel producer. Furthermore, the merged company is expected to control about 30% of the coal market for power stations. The new Glencore could exert significant sway over prices and supplies, say critics. In their view, the consolidation of the global commodities industry is hurting working people by allowing prices to be manipulated. The EU is taking a look at antitrust issues regarding the deal, another headache for the executives who want it to happen.
But happen it most likely will. Other huge miners born of mergers, such as Rio Tinto (NYSE:RIO), haven't been able to corner their respective markets nor have they done particularly well compared to smaller, nimbler peers. The same goes for oil giants, or chemical giants. On average, mergers tend to destroy value, not create it, whatever the industry. Commodities markets are fickle and driven by currencies, global economics and regional trade dynamics. For investors, the deal is a sign that consolidation in natural resources continues, but it remains controversial. Companies that produce basic materials desperately want to gain the international heft to compete with their peers, who in turn want to grow larger still. For owners of a company that gets scooped up, the trend can mean a windfall. For buyers, customers and competitors, it doesn't look as good.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.