In early 2012 it was announced that Glencore and Xstrata would merge if given clearance by Xstrata share holders and various monopoly commission regulators.
Their combined market value will be around $90 Billion (£60 Billion).
The combined profits for the two companies before interest, depreciation and amortisation (EBITDA) amounts to $16.2 Billion.
This merger will make them number 1 in coal and zinc production and they expect to be the biggest independant producer of copper within four years.
So what are the costs involved?
1...Debt
Mergers are not just about two company executives who shake hands and begin to work together with a common goal. Instead, it always results in masses of debt being added to the combined companies by banks.
With respect to this particular deal;
Glencore has signed a $6 Billion 'merger loan'. This has been arranged by an investment bank.
Glencore has also raised another $11 Billion loan by a syndicate of investors. This loan has been underwritten by Citigroup (Bailed out U.S. Investment bank) and Morgan Stanley. This loan is apparently required to show regulators that Glencore has enough working capital to fund the merger.
Glencore is also extending two existing loans. One of $8.34 billion which is a three year loan to be extended by one year. A $3.53 billion 364 day loan to be extended by another year.
In 2011 Glencore made a profit of just 2.29% on turnover.
Xstrata has also asked its bank for a waiver to allow $6 billion of its loans to stay in place as it waits for approval of its merger with Glencore.
All in all it seems to be a lot of added and probably unnecessary debt to what will become one of the leaders in a number of industries. These two companies have been linked for a number years, first because where Xstrata has been mining, Glencore has been buying and selling the commodities Xstrata produced for some years. Secondly because Glencore has owned just over one third of Xstrata for some years. Therefore on the surface, the relationship between these two companies is more likely to continue as it previously did.
So why then is it necessary to add billions of dollars of debt to these two businesses?
Well one reason is obviously because it gives Glencore control of a company which has been performing far more successfully than Glencore has been recently. The deal should in theory stabilize Glencore... Or will the new debt combined with the debt held currently by the two companies put the merged companies at risk?
2....The world Economy
One of the reasons for this merger taking place is clearly for Glencore to take full control of a company it currently trades the commodities of. There will be scope for price increases of the Xstrata mined products of which industrial China is a major buyer. Also the accesss to borrowings which has already been explained become easier to access and this can improve remuneration for the executives. ( Chief executive receives $15million a year which is set to increase after the merger) The extra domination whch comes from two major companies joining will no doubt improve over all share prices atleast until the debt shows sign of becoming a problem.
One of the reasons that major banks and and other investors want to get involved in this deal is because these two companies combined will have improved control of the market in which they will operate. This means prices of the materials produced are likely to rise. The products sold are vitally important to Chinas's industry. And China's products are exported to the world. The fact is that China is going to be paying higher costs for its industry as a result of mergers like this one. Europe, the U.S. and everyone else who buys from China will pay increased prices for China's products.
Im not quite sure how dependant China is on Glencore & Xstrata as the 'financials' like to hype up the publicity of these companies leading up to big take overs and mergers as it increases activity in the stock markets. The reality probably is that China will probably make other arrangements should prices from the new Glencore-Xstrata rise after the merger if it gets the go ahead. I think there is a possibility that we will find Glencore -Xstrata is more dependant on China than vice versa. This would certainly put all the debt and the new company at risk.
In the current economic climate, where credit is still limited, customers buying China's products may find they will have to do without due to their increased prices. This will cause a loss of jobs throughout industry which buys commodities supplied by Glencore Xstrata and the conglomerates the likes of Glencore Xstrata. For these reasons, the merger of Glencore and Xstrata should not be allowed to happen by the various regulators who must authorise it before it can go ahead.
The problem is that banks and stock markets seem to have an influence on these deals taking place even though it is at the expense of the world economy. Although it may appear that all this is about is a company wanting to take control of another company, it may be that the bigger picture is that the banks need these types of deals. Bankers will make fortunes from lending of leverage for merger and buyouts and need them to happen. And as long as they continue to have control of money which is entrusted to them by people saving for their first home or for retirement, banks will cotinue to lend money not to improve coal or copper mining, but for undermining the world economy.
Clearly, Citigroup who were bailed out during the financial crisis have not learnt how to invest money in a sustainable way. The money that will be leant by investment banks if this merger succeeds could instead be leant to buy or build homes. And may be to invest a percentage in providing money for projects indeveloping nations. This would have all kinds of positive effects on the world economy. There is nothing to stop Glencore and Xstrata working together as partners which to some degree has already been happening. The Billions handed over to the business by the banks will be beneficial for for the few at the top in Glencore and Xstrata, but from any other angle it could be a completely pointless and avoidable blind capitalism disaster.
Their combined market value will be around $90 Billion (£60 Billion).
The combined profits for the two companies before interest, depreciation and amortisation (EBITDA) amounts to $16.2 Billion.
This merger will make them number 1 in coal and zinc production and they expect to be the biggest independant producer of copper within four years.So what are the costs involved?
1...Debt
Mergers are not just about two company executives who shake hands and begin to work together with a common goal. Instead, it always results in masses of debt being added to the combined companies by banks.
With respect to this particular deal;
Glencore has signed a $6 Billion 'merger loan'. This has been arranged by an investment bank.
Glencore has also raised another $11 Billion loan by a syndicate of investors. This loan has been underwritten by Citigroup (Bailed out U.S. Investment bank) and Morgan Stanley. This loan is apparently required to show regulators that Glencore has enough working capital to fund the merger.
Glencore is also extending two existing loans. One of $8.34 billion which is a three year loan to be extended by one year. A $3.53 billion 364 day loan to be extended by another year.
In 2011 Glencore made a profit of just 2.29% on turnover.
Xstrata has also asked its bank for a waiver to allow $6 billion of its loans to stay in place as it waits for approval of its merger with Glencore.
All in all it seems to be a lot of added and probably unnecessary debt to what will become one of the leaders in a number of industries. These two companies have been linked for a number years, first because where Xstrata has been mining, Glencore has been buying and selling the commodities Xstrata produced for some years. Secondly because Glencore has owned just over one third of Xstrata for some years. Therefore on the surface, the relationship between these two companies is more likely to continue as it previously did.
So why then is it necessary to add billions of dollars of debt to these two businesses?
Well one reason is obviously because it gives Glencore control of a company which has been performing far more successfully than Glencore has been recently. The deal should in theory stabilize Glencore... Or will the new debt combined with the debt held currently by the two companies put the merged companies at risk?
2....The world Economy
One of the reasons for this merger taking place is clearly for Glencore to take full control of a company it currently trades the commodities of. There will be scope for price increases of the Xstrata mined products of which industrial China is a major buyer. Also the accesss to borrowings which has already been explained become easier to access and this can improve remuneration for the executives. ( Chief executive receives $15million a year which is set to increase after the merger) The extra domination whch comes from two major companies joining will no doubt improve over all share prices atleast until the debt shows sign of becoming a problem.
One of the reasons that major banks and and other investors want to get involved in this deal is because these two companies combined will have improved control of the market in which they will operate. This means prices of the materials produced are likely to rise. The products sold are vitally important to Chinas's industry. And China's products are exported to the world. The fact is that China is going to be paying higher costs for its industry as a result of mergers like this one. Europe, the U.S. and everyone else who buys from China will pay increased prices for China's products.
Im not quite sure how dependant China is on Glencore & Xstrata as the 'financials' like to hype up the publicity of these companies leading up to big take overs and mergers as it increases activity in the stock markets. The reality probably is that China will probably make other arrangements should prices from the new Glencore-Xstrata rise after the merger if it gets the go ahead. I think there is a possibility that we will find Glencore -Xstrata is more dependant on China than vice versa. This would certainly put all the debt and the new company at risk.
In the current economic climate, where credit is still limited, customers buying China's products may find they will have to do without due to their increased prices. This will cause a loss of jobs throughout industry which buys commodities supplied by Glencore Xstrata and the conglomerates the likes of Glencore Xstrata. For these reasons, the merger of Glencore and Xstrata should not be allowed to happen by the various regulators who must authorise it before it can go ahead.
The problem is that banks and stock markets seem to have an influence on these deals taking place even though it is at the expense of the world economy. Although it may appear that all this is about is a company wanting to take control of another company, it may be that the bigger picture is that the banks need these types of deals. Bankers will make fortunes from lending of leverage for merger and buyouts and need them to happen. And as long as they continue to have control of money which is entrusted to them by people saving for their first home or for retirement, banks will cotinue to lend money not to improve coal or copper mining, but for undermining the world economy.
Clearly, Citigroup who were bailed out during the financial crisis have not learnt how to invest money in a sustainable way. The money that will be leant by investment banks if this merger succeeds could instead be leant to buy or build homes. And may be to invest a percentage in providing money for projects indeveloping nations. This would have all kinds of positive effects on the world economy. There is nothing to stop Glencore and Xstrata working together as partners which to some degree has already been happening. The Billions handed over to the business by the banks will be beneficial for for the few at the top in Glencore and Xstrata, but from any other angle it could be a completely pointless and avoidable blind capitalism disaster.
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