Undermined

Did Glencore pay $8 billion more than it should have for Xstrata?

August 20, 2013
August 20, 2013

Well, yes, Glencore Xstrata announced a large write-down today in its first earnings report since Glencore, the commodities trader, merged with mining company Xstrata in May. But maybe that’s too simplistic a view?

On the one hand: Terrible timing

Today’s write-off of $7.7 billion in so-called goodwill assets—the extra margin between the book value of the acquired company and the amount the acquirer paid for it—shows that Xstrata’s investors drove a hard bargain. Getting the deal done as commodities prices really started to drop was a classic sell-high maneuver, and this after a year that had already seen massive write-downs in the mining business—over $50 billion worth in 2012. Earnings in the commodity trading business actually rose 14%, offsetting most of the mining losses—but had Glencore’s investors just stuck to that business and not taken on Xstrata and its mines, they’d be in much better shape. CEO Ivan Glasenberg (pictured above) said expected savings from the merger will be larger than the $500 million that were originally promised, but that hardly matches the loss.

On the other hand: Time will tell

It’s not like Glencore Xstrata is alone in its troubles—it seems like every commodities company is taking a hit right now. And it’s not like this is a cash loss, either. The goodwill write-down is just an artifact of a drawn-out merger process. The two companies agreed to swap 3.05 shares of Glencore for each share of Xstrata more than six months before the deal closed, and the close came when Glencore’s stock was on a bit of surge in the markets. Many analysts think Glencore overpaid—perhaps as the price for stacking the management with its people—but had the deal closed a month earlier or later, when the stock was lower, the write-off today would have been a lot smaller. And, while accounting rules require the company to book the goodwill loss now, Glasenberg notes that the two companies have been integrated for only a few months, and that it will take several years to ascertain just how valuable—or destructive—the merger was to shareholder value.

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