Editorial: Xstrata’s overture

Mega-merger talk has kicked up again, with Xstrata unveiling on Sunday its desire for a “merger of equals” with Anglo American.

Remarkably, the current combined market cap of Xstrata and Anglo is only US$65 billion, still in fourth spot behind Rio Tinto at US$69 billion market, Vale at US$89 billion, and BHP at US$148 billion.

(The remaining big Western miners fall well behind the pack in market cap: Barrick, US$28 billion; Potash Corp. of Sask., US$26 billion; Freeport McMoRan, US$19 billion; Alcoa, US$10 billion; and Cameco, US$10 billion.)

These merger-of-equals proposals work best when one management team is frisky and ambitious, and the other is worn out or feels it’s peaked in terms of corporate accomplishments.

Then the physical assets can be combined on an equal footing with one intact management team coming to the fore, ideally incorporating the top people from the fading management team.

Not surprisingly then, given its still-lively executive team led by the dynamic American Cynthia Carroll, Anglo’s directors unanimously rejected Xstrata’s merger idea the next day, and said they wouldn’t even hold exploratory talks.

There’s probably an unconscious element of snobbery in the quick snub, too: why would such a storied and venerable entity as Anglo American want to hitch up with an upstart company that has a trendy “X” in its name and didn’t even exist a few years ago?

Meanwhile, the South African government is none too keen to see major job losses if Anglo and Xstrata’s many operations there are combined and rationalized.

A merger looks compelling on paper, with many seeing it as pairing Anglo’s superior assets with Xstrata’s superior managers.

The latter, led by M&A junkie Mick Davis, have never really failed in all their elaborate corporate maneuverings over the past few years, so this makes us think this is the opening move of a longer wooing attempt.

The wild card is Vale resuming its efforts to acquire Xstrata, though the Brazilian seems to have become less ambitious on the M&A side and has plenty of internal growth projects in the pipeline to keep it busy.