As the value of BHP Billiton continues to break records, it is worth revisiting what has quietly become Australia’s greatest corporate blunder.

While business commentators are justifiably criticising the decision by the Coles board to reject KKR’s $15.25 cash offer last year, that decision (which may end up costing Coles shareholders around $3 billion based on Coles’ share price) pales in comparison to BHP’s 2001 merger with South African-London based miner, Billiton.

The merger was vociferously backed by current BHP chairman, Don Argus, and former CEO (now director), Paul Anderson. Fearing that BHP’s assets lacked growth potential, and that the company required greater management depth (even though future BHP CFO, the brilliant Chip Goodyear was already at BHP), the former banker and American convinced shareholders that a merger with Billiton was best.

Alan Kohler visited the issue in September last year and determined that the merger ended up costing BHP shareholders $26.6 billion (based on the fact that the assets brought to the table by Billiton contributed only 23% of BHP Billiton’s profit last year but Billiton shareholders owned 42% of the merged entity).

The bizarre situation is that the more BHP’s market capitalisation increases, the worse the deal looks for the former BHP shareholders. Had the merger been on terms in line with last year’s profit contribution as calculated by Kohler, BHP shareholders would own 77% of the $212.7 billion company. However, due to Brian Gilbertson’s shrewd negotiating, BHP shareholders only received 58% of the merged entity – that is equivalent to $123.4 billion worth of ‘today’s’ BHP. (The situation will probably be even worse later this year when BHP announces its results, as the assets contributed by BHP continue to out-perform those contributed by Billiton).

That means so far, the merger with Billiton has cost BHP shareholders $40.3 billion – almost 14 times worse than Coles’ $3 billion blunder.

At the time of the merger, Don Argus claimed that “shareholders put their faith in the directors and management to make that fair judgment, hoping that they will get value further down the track with the growth initiative.”

As it turns out, that faith was very badly misplaced.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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