The ultimate role of mining executives is to forecast the demand for minerals years in advance. Based on their expectations of demand, they will make corporate decisions, such as mine expansions, Greenfield developments or corporate actions (including takeovers). Eighteen months ago, when it solidified its plan to acquire Rio Tinto, BHP chiefs made certain assumptions. It appears that those assumptions have not exactly played out how BHP executives would have planned.
BHP would never have predicted the credit crunch would significantly reduce investors’ debt appetite, nor would it have forecast commodities prices returning to 2003 levels. While those incorrect assumptions have cost BHP shareholders US$450 million in third party costs associated with the Rio bid (not to mention alone the hundreds of millions of internal costs and management time spent on the bid), a large degree of credit must be given to CEO Marius Kloppers and the Office of the Executive for swallowing their pride and pulling what had become a terrible idea.
While BHP squandered a minimum US$450 million on the bid, its financial advisers would have been very hard hit by the withdrawal (investment banks receive most of their fee only when a transaction is successful). Further, many BHP executives have been restricted from trading in BHP shares while the bid has proceeded, only to watch the value of their equity instruments cut in half.
However, in the end, the synergies — which were publicly claimed to be US$3.7 billion annually but internally, believed to be far higher — and the lure of managing the world’s second largest company, were not enough to overcome Rio’s $42 billion debt load.
But one man’s wisdom is another’s folly. The Rio board, which undertook a debt-laden takeover of Alcan last November, look like a bunch of prize fools, not only for completely misjudging the commodity and debt cycle, but for refusing to truly engage their potential suitor. These are very highly paid, so-called experts, who have completely failed Rio shareholders.
Rio’s arrogant chairman, Paul Skinner, was paid $1.66 million last year – four times the fees received by most company chairs. Given his performance, he should be giving the money back. Another member of Rio’s too large, too highly paid and apparently too incompetent board is none other than Teflon Rod Eddington. Teflon, who by all accounts, is very well liked, has not performed well in the board room.
Eddington was one of three independent directors who approved Allco’s acquisition of Rubicon from insiders, David Coe and Gordon Fell. The Rubicon acquisition is cited as a large reason for Allco’s collapse. Eddington was also CEO of Ansett shortly before it collapsed and has been a member of News Corporation board as the company has dramatically shrunk in value. In the executive suite, Tom Albanese’s position as Rio CEO would also be under serious threat. You can’t undertake value-destroying deals like Alcan and scare off a suitor who was offering too much for your company and expect to continue in gainful employment.
BHP shareholders will be breathing a sigh of relief that the company has not undertaken another ill-considered boom-time acquisition, like its Magma Copper fiasco or appalling Billiton merger. As for the villains of the story, Rio executives and directors needn’t worry. Any Rio executive given his marching orders will be handsomely rewarded, while as Eddington could no doubt attest, non-executive director responsibility is not a concept that corporate Australia or Britain has embraced.