How Vale spent $18 billion and shot itself in the foot

03/16/2010 12:28 pm EST


Jim Jubak

Founder and Editor,

I always wonder what’s up when I see a normally quiet company begin tooting its own horn in ads. It’s almost never a good sign.

Today’s (March 16) Financial Times has a full page ad from Vale (VALE) headlined “Vale also transforms minerals into awards.” The text notes that Euromoney has just selected Vale as the best managed company in Brazil and then goes on to list other awards from Euromoney and The Financial Times.

The ad couldn’t have anything to do with Vale’s decision to bring in strikebreakers (AKA “replacement workers” or “scabs” depending on which side of the labor/management divide you stand on) to resume production at its Canadian copper and nickel mines. Workers at those mines, acquired when Vale bought Canada’s Inco in 2006 for $18 billion, have been on strike for eight months.

Vale Inco workers rejected the company’s latest contract offer over the weekend.

In January Vale resumed nickel production at one smelter using already-mined inventories of nickel and non-striking workers and managers. But the company’s goal now is to resume full nickel production by the end of the second quarter.

For their part unionized workers aren’t likely to go quietly. “Vale can go and get stuffed,” Wayne Fraser, a United Steel Workers union representative told the Financial Times. “We are sick and tired of foreign capitalists coming in and undermining the Canadian way of life.”

The strike is ostensibly about economic issues such as the company’s proposal to reduce a bonus tied to the price of nickel and a plan to exempt new hires from its defined-benefit pension plan. It hasn’t gotten any easier to sell those reductions when soaring iron ore prices have bulked up profits at Vale.

But as the comments from union representative Fraser make clear, the strike is also about a clash of cultures and nationalities.

Vale has created problems for itself by trying to impose a top-down management style after the acquisition that may have worked well in Brazil but that ran head on into a workforce accustomed to a more consensual management approach.

The acquisition was also part of a pitched battle over the fate of Canada’s two largest mining companies, Inco and Falconbridge, which saw both companies go to foreign bidders in 2006. (Falconbridge was acquired by Switzerland’s Xstrata (XSRAY). To say that’s there’s lingering resentment at a foreign takeover of one of Canada’s key industries is a gross understatement.

Vale’s troubles with what was, at the management level anyway, a friendly takeover should raise a red flag for investors looking at the rising tide of acquisitions of developed economy companies by emerging market corporations. The last six months of 2009, according to a KPMG survey published on March 15, saw 102 deals in which emerging economy companies acquired developed economy corporations. That was a big increase from the 78 such deals in the first half of 2009.

In contrast the number of developed economy companies acquiring emerging market companies dropped to 216 in the second half of 2009. That marked the four straight six-month period of decline in the number of developed economy companies acquiring emerging economy companies. The number of deals involving the acquisition of emerging economy companies by developed economy companies peaked at 463 in the second half of 2007.

Of course, it’s not just emerging economy corporate managers who can destroy value for shareholders through an acquisition. (Vale’s stock has been doing fine without Inco’s nickel production but still investors never want to see an $18 billion acquisition stuck in limbo like this. And fallout from the deal has to pressure on Vale from Brazil's government for the company to put more money to work in Brazil. )  For more on how acquisitions can destroy value see my post .

But the Vale-Inco experience does suggest that investors looking at any emerging economy company about to acquire a developed economy counterpart should look for signs that the acquiring company knows how to deal with a foreign workforce and management culture. A track record of a successful integration or two would be reassuring.

That’s what we look for when a developed economy company does a deal in the other direction, isn’t it?

Full disclosure: I own shares of Vale in my personal portfolio.
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