BHP Billiton has failed in three major corporate thrusts. Each time it has made serious mistakes. The directors of every public company can learn from the BHP mistakes and BHP itself needs to take a hard look at why it failed so many times.
For BHP, and all companies, a good starting point is to listen or read the KGB interview with David Evans to be published later this morning. Evans did not tackle the BHP issue, but does point out that the capital markets have been transformed by the rise in self-managed superannuation funds. In turn this must change the corporate strategies that helped destroy BHP’s PotashCorp thrust, but I will come to that later.
BHP’s first ill-fated strategic move was to make a hostile bid for Rio Tinto. BHP believed that it could win a hostile bid and did not understand that it almost impossible to win a hostile bid where national interests are deeply involved, in today’s environment.
However, when BHP was bidding for Rio, the global financial crisis was deepening and, at the time, Rio Tinto came close to bankruptcy. Rio Tinto was about to embrace the bid as a lifeline. Had BHP had sufficient courage to continue, BHP would have probably won because of the Rio Tinto survival pressures that would have been placed on regulators and parliaments. But in the end BHP itself feared a disaster and stepped back.
With the benefit of hindsight, this was clearly a BHP mistake, but it was a very understandable mistake and I don’t think it warrants a bad mark. But BHP either did not realise the forces that were unleashed in China by that bid or, if it did realise them, BHP chose not to act.
China did not want BHP and Rio to merge and, moreover, the Chinese are deeply angered by the recent iron ore price rises. Incorrectly, BHP’s Rio bid caused BHP to be given an unfair share of the iron ore price-rise blame. After the bid I warned BHP that they needed to repair the China damage.
With the BHP bid withdrawn, a desperate Rio staggered into the hands of the Chinese state company Chinalco, which exploited its negotiation strength and made what was probably one of the worst proposals ever put to an Australian company.
Rio Tinto was so desperate that it recommended the Chinalco proposal, but 600 pages of side deals gave control of Rio Tinto to the Chinese even though they only had to subscribe for a stake of between 15% and 20%. As the global economy started to recover, shareholder pressure caused Rio Tinto to step back, but once again the Chinese blamed BHP — this time because of BHP’s lobbying against the bid.
In fact, because Chinalco breached Australian takeover laws and exploited Rio Tinto shareholders, it had little chance of success. It was unfair for the Chinese to blame BHP, but fairness is not important.
Rio Tinto realised that it needed to repair its relationship with the Chinese and went into African joint ventures with Chinalco and took other steps to restore the relationship. BHP did not do that.
Then BHP and Rio Tinto tried to joint-venture their iron ore production. The deep Chinese suspicion of BHP meant they campaigned against this joint venture in Europe, Japan and wherever there was someone to listen. The European regulators knocked the bid back. Europe needs China’s support and in particular may need China to bail out countries like Greece. BHP had little hope given its bad relationship with China.
Then it went off to bid for the Canadian PotashCorp. When I first saw the bid I immediately realised that it was low and BHP had to bid more (BHP will need to dig deep).
BHP along with most other Australian companies believes that when they make a major strategic acquisition it must be beneficial to shareholders in the short term as well as the medium and longer term. This is the message the institutional shareholders ram down the throats of all CEOs. It is an absolute nonsense. I well remember the BHP chief of the 1960s — the late Ian McLennan — paying far too much for Mount Newman, but he knew it was a longer term strategic asset.
Fortunately for Australian CEOs, self-managed superannuation funds who understand longer-term issues are becoming major forces on their share registries.
PotashCorp chief Bill Doyle is a Canadian hero and BHP had to lift its first bid to a level that he would support. These days in almost every democratic country major political parties are close. There is no way Canada could have approved the BHP bid if it was opposed both by Bill Doyle and his the board and also by one of Canada’s biggest trading partners — China.
To win in Canada, BHP had to listen to its self managed superannuation holders who understand that in a high growth situation like PotashCorp, short-term growth may need to be sacrificed for long-term gain.
When Ian McLennan did this, the institutions of the day understood the logic. Today they don’t, which is one reasons why self-managed funds now have one third of our superannuation industry and, according to David Evans, it is going to go much higher.
In a nationalistic growth situation such as PotashCorp, BHP had to ignore the institutional short-termism and bid high enough to win the support of its target company board.
Just as I could see that the BHP Potash bid did not take into account the long-term growth prospects of the company, so the Canadians took the same view. And so BHP received a well deserved rejection.
BHP has a list of other targets and it must learn from the mistakes it has made. The self-managed funds will accept a capital return if BHP has no more PotashCorps to bid for, or does not need its capital for expansion. The institutions just want the money.
More important than the capital return issue, BHP needs to repair its relationship with China and next time it makes a major controversial takeover bid that offers huge long-term growth, it must listen to its fastest growth shareholders and make the offer high enough to gain the support of the target company board. If that is too high, BHP should walk.
The BHP board will now be much wiser and will do much better next time.
*This first appeared on Business Spectator.