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The Globe and Mail

Xstrata deal offers case study on boards without backbone

A logo of the Swiss mining company Xstrata is shown at the headquarters in Zug.

© Michael Buholzer / Reuters

Reaching an acceptable deal with Glencore won't exonerate Xstrata's independent directors from the charge they were spineless in defending shareholders in the $33-billion (U.S.) mining takeover. They clearly failed to push Glencore boss Ivan Glasenberg to the pain barrier when they recommended his lower offer from back in February. And that probably stems from the same weakness that sanctioned excess pay for Xstrata chief executive officer Mick Davis for years.

Sure, the shareholders who have been kicking up the biggest fuss, including activist investor Knight Vinke, have an incentive to make a noise and get noticed. But they have a point. The revised offer endorsed by Xstrata this week sees Glencore paying double the premium the commodity trader offered originally. The proposal also skips the egregious $45-million retention bonus initially contemplated for Mr. Davis, who will step down after six months rather than run the combined group.

However messy the process, Xstrata's independent directors can claim they extracted full value from Glencore in the end, and that justifies what went on before. Glencore's original offer might have offered only marginal value creation for Xstrata shareholders, but its structure – as a scheme of arrangement requiring 75-per-cent shareholder approval – meant that once a bidder was on the line, the market would do the work to get the price up.

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At the current exchange ratio of 3.05 Glencore shares for every Xstrata share, up from an original 2.8, Breakingviews calculations suggest Xstrata shareholders are capturing all the deal synergies.

Mr. Davis's big payout made him hopelessly conflicted on the deal. A more assertive board might have avoided eight months of aggravation by driving a harder bargain for shareholders from the outset: either a higher price for a full takeover, or a "merger of equals" that skipped the retention payments.

The weakness at the heart of the recent hubbub has long been apparent. Mr. Davis's pay was already a shareholder bugbear even before the Glencore transaction popped up, but the board has done little to address it. Apart from David Rough, a former buy-side heavyweight, the Xstrata board is unusually light on well-known personalities. If chairman John Bond wants to repair relations with investors who feel ill-served by the board's handling of the merger, refreshing the ranks of Glencore-Xstrata's independent directors would be a good way to start.

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