Editorial: Clash of the Titans

Canadians trying to make sense of what’s going on in the upper echelons of the newly merged Glencore Xstrata are getting a feel of what it must have been like to be an ancient Greek peasant looking up at his distant panoply of far-from-perfect gods, with all their petty battles, betrayals and all-too-human schemes, and with Mount Olympus as a proto-version of a head office in Switzerland.

Initially pitched as a merger of equals, Glencore’s takeover of Xstrata was completed on May 2 after 15 months and five delays. A pivotal moment was the demand last June by Xstrata shareholders, led by Qatar’s sovereign wealth fund, for a higher acquisition price.

In a judo-like move of redirecting an attacker’s energy against himself, Glencore used that monetary concession to win greater management control over the merged entity, culminating in a November shareholder vote that quashed lavish retention bonuses totalling £140 million that were to have been paid to 70 remaining Xstrata personnel, and forced Xstrata chairman John Bond’s dramatic resignation.

The final deal stands as the largest takeover or merger in mining history and the fifth-largest ever in the broader resources sector, after the megamergers in the oil patch in the 1990s and early 2000s that saw the coming together of Exxon and Mobil, BP and Amoco, Chevron and Texaco, and Total and Elf.

Glencore Xstrata has a US$70-billion market capitalization and employs some 190,000 people in 50 countries. It’s already among the top-10 largest constituents of the FTSE 100 Index.

By early May the stranglehold had tightened: Glencore International, rather than Xstrata senior executives, occupied 15 of the top 17 positions in the enlarged company.

Glencore was founded by Marc Rich, who was indicted by the U.S. government on charges of tax evasion and illegally making oil deals with the Iranian government during the Iran hostage crisis, and later pardoned.

The trading company had been headed up since 2002 by the hard-driving South African trader Ivan Glasenberg, who is now firmly in control as Glencore Xtrata’s chief executive and 8% shareholder. Glasenberg and his closest colleagues own about a third of the company.

In a recent interview with The Wall Street Journal, Glasenberg defended the company’s Darwinian culture, where “underlings ‘attack’ their superiors if they perceive them to be slacking off,” and he reportedly saw “no difference between politically volatile nations that might seize assets and stable democracies that raise taxes.”

This company culture of internal turmoil continued right through May, with Gary Fegel, Glencore’s aluminum business leader since 2006, heading for the exit with his 1.17% shareholding worth about US$819 million, along with Glencore’s head of cobalt trading, Robert Franco. Both are following the trail of Steven Blumgart, former co-head of Glencore’s aluminum business, who left last year.

On the other side, Xstrata’s top managers who are not part of the new team include Ian Pearce, Charles Sartain, Trevor Reid, Loutije Smit, Benny Levene and Thras Moraitis. After the recent AGM in Switzerland, five directors from the Xstrata side of the business – Bond, Ian Strachan, Con Fauconnier; Peter Hooley and Steve Robson – are no longer Glencore Xstrata directors, having either lost re-election or resigned.

Independent director Tony Hayward, BP’s former chief executive who was scorned worldwide for going yachting and stating “I’d like my life back” during the Macondo oil disaster in the Gulf of Mexico, has stepped in as interim Glencore Xstrata chairman until a replacement for Bond is found.

The new chairman will have to pull off the perhaps impossible feat of working harmoniously with a demanding Glasenberg, and reconciling the inherent contradictions of this merger, which is attempting to fuse a trader’s short-term, amoral, zero-sum-game ethic with a mining company’s much longer time horizons and ever-increasing requirements to be a good corporate citizen in its host countries.

Former Xstrata chief executive Mick Davis — who drove Xstrata’s acquisition-fuelled growth from a US$500-million company at the time of its public offering in 2002, to a market cap exceeding US$50 billion — has taken up the lease on Xstrata’s London offices and hired Goldman Sachs to help create a new resource fund.

Presumably Davis, who leaves with some US$113 million in shares, severance payments and stock options, will be in a prime position to pick up assets sold off by majors like Glencore Xstrata to improve their balance sheets during the current commodities downturn.

So it goes.