The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders (19 page)

Both Glasenberg and Davis had met Klein during his Citi days in London, but he had never personally been hired by either one of them. Now Klein, a short, retiring advisor known for his self-deprecating jokes, was running his own eponymous firm in New York. If Davis trusted Klein—and Glasenberg suspected he would—perhaps the three of them could get a more fertile dialogue going.

That summer, Davis met one-on-one with Klein. They hit it off, and within months Davis and Glasenberg were talking terms. Naturally, price was important to both parties, especially given that Glencore would offer new shares of its own equity to existing investors in Xstrata. Arguing that its own stock was undervalued,
Glasenberg was initially only offering a price ratio of 2.6 of its shares for every single share of Xstrata, which would have included no premium for Davis’s investors. But since theirs was a world of big-boy toys, like mines and oil rigs near hot petroleum finds and dominance over hazardous global transportation routes, and since both men were incredibly wealthy already, the bigger point of contention between Glasenberg and Davis was over control of the combined companies.

Glencore and Xstrata had performed solidly as partner companies, and “both sides believed that their impact was individually quite critical,” says someone briefed on the discussions the two CEOs held. But as the autumn wore on it became clear that ultimately, it was Glasenberg’s inability to cede control that had flummoxed merger talks in the past. The only way to take the talks forward, the Glencore chief realized, was to call the deal a merger of equals.
It was a rare strike of humility for the aggressive South African coal trader, who in private circles made scant effort to conceal his feelings of superiority to Davis.

Despite his tireless work ethic and enviable empire-building skills, Glasenberg had after all inherited a powerful company from his predecessors, Marc Rich and Willy Strothotte. By contrast, Davis had created a cohesive and friendly corporate culture, almost from scratch, that had weathered numerous acquisitions and still remained intact. Moreover, he was willing to step down after two or three years, once a merged Glencore-Xstrata was on solid footing. Glasenberg for a time could make a powerful second-in-command, and, with his large personal stake in the company, he was guaranteed a strong voice—not that those who knew him would expect anything less.

Glasenberg was warming to the idea of being a temporary
number two, but was not without his doubts, and some of his friends in the industry warned against the demotion. For one, his old friend John Mack, whom he had met in the early 2000s, was against it.
Mack had left Morgan Stanley after failing to jell with Philip Purcell, the Dean Witter chief who had taken the top role after his brokerage had merged with Morgan. Years later, Mack returned after Purcell was ousted by some of the investment bank’s old-liners. “Once you’ve been a chief, it’s hard not to be a chief,” Mack now warned Glasenberg.

But Glasenberg was determined to make the Xstrata accord, and over dinner with Klein at London’s St. James Club in November 2011, they shook hands on a new, and costlier, deal. Investors would receive 2.8 shares of Glencore for every share they owned of Xstrata, and Davis would be CEO at the outset. Convinced the effort was a real one this time, the two signed additional nondisclosure agreements as they headed into the final, most detailed, discussions. Beyond the broad speculation that Glencore was keen to buy all of Xstrata, nothing had yet leaked.

That fall, Glasenberg was spending a lot of time in London, where he worked out of Glencore’s fifth-floor boardroom to avoid wasting money on a partially used office. His thriftiness was an oddity at the well-heeled commodity firm, which also skimped on things like telephone services in its Baar headquarters, where callers would occasionally encounter busy signals when the person they were calling was on the other line—an anachronism in a world where voice mail had been ubiquitous for years. Over coffee with a couple of Bank of America investment bankers in November at the Landmark Hotel, Glasenberg sounded far more confident than he had with Olsher a couple of months before.

“We’re going to get it done this time, because we’re both
public,” Glasenberg explained. But he couldn’t resist some tough talk. If the originally conceived deal didn’t work out, he told the bankers, he would find a way to outmaneuver Xstrata.
Glencore would go into the public market and buy more shares of Xstrata if that was what it took, Glasenberg added, to expand Glencore’s controlling stake. “By hook or by crook, he was going to get it done,” remembers a banker who was at the meeting.

The detailed talks proceeded, with the complex process of reorganizing the company and establishing financial packages for management now of foremost importance. Davis and Xstrata chief financial officer Trevor Reid felt strongly that their shareholders wanted consistent leadership, and that they should be paid well for the work of blending the companies. Pay packages and perks on par with those of other mining executives would therefore be required. Organizationally, Glasenberg wanted his traders—whom he considered peerless in the business—to be kept separate from the mining engineers and other senior workers at Xstrata, some of whom he considered to be easily replaceable. For its part, Xstrata had some pointed questions about Glencore’s trading operations, including why the margins in it appeared to be shrinking.

Things dragged a bit over the holidays, as Davis retreated to Cape Town for his customary winter vacation—a multiweek sojourn that Glasenberg, who often told investors they
wouldn’t catch him lying on a beach, found risible. But Davis was responsive throughout the holiday, and gradually the final details of the arrangement were put in place.

On
February 7, 2012, Glencore and Xstrata announced their plans to build a $90 billion corporation. It was a breathtaking deal that turned the combined entities into the fourth-biggest natural-resources company in the world, they boasted.

The pact created “a new powerhouse,” Glasenberg stated in a press release that day. To assist with the effort, a half-dozen investment banks were hired. Morgan Stanley and Citi would represent Glencore, and Goldman, Deutsche Bank, JPMorgan, and Nomura would represent Xstrata.

Some Xstrata investors immediately objected. “This is a
fabulous deal for Glencore, it’s probably a great deal for the Xstrata management, but it’s a poor deal for Xstrata’s majority shareholders,” said one key money manager at the time. Another prominent investor openly agreed.

The more vocal institutions controlled less than 6 percent of Xstrata’s public shares. But it was a meaningful portion, considering that a
16 percent no-vote had the power to scuttle the whole merger (
the 34 percent Glencore owned couldn’t be voted, and neither could additional shares in Xstrata management’s hands). Meanwhile, behind the scenes, another powerful player was joining their number: Qatar Holding, the investment subsidiary of the Qatar Investment Authority, the sovereign-wealth fund that was run by Ahmad al-Sayed, the young lawyer Glasenberg had met—and disappointed—while marketing the Glencore IPO.

Noting the relatively cheap price and rumors of a potential combination with Glencore, Qatar Holding had been buying shares of Xstrata for several months, amassing a
3.6 percent stake by the middle of March. Separately, the sovereign-wealth fund was
talking to executives at Morgan Stanley about purchasing a minority stake in the bank’s commodities unit, which was by then a far less robust facsimile of the place where Jennifer Fan and Jean Bourlot had once traded. Despite the flight of talent, Morgan still had attractive physical and paper assets, however, and was primed to sell itself in case commodities trading became too unwieldy to
continue under the much-feared Volcker Rule, the aspect of the Dodd-Frank Act meant to rule out house trading at banks.

When Qatar’s position in Xstrata was first disclosed in February, Spiro Youakim, a senior mining banker at the investment advisor Lazard, spotted an opening. Despite what he considered a solid relationship with Xstrata, Youakim had not won one of the four banking spots advising the miner on its merger, so Lazard was free to work with a third party. Youakim began calling on the Qatari investment managers from London, eventually reaching al-Sayed directly. “You should buy more stock. It’s very cheap,” he told the investor. Al-Sayed heard him out, but was noncommittal.

Youakim, however, was encouraged. “I’m going to do some work on this,” he told colleagues. “Who’s with me?” One young female vice president volunteered.

In the months that followed, the two barraged Qatar Holding with research and phone calls on Xstrata, its sector, and how the combined companies might perform. There was an opportunity to demand a higher price from Glencore, Lazard’s bankers argued, that would benefit Xstrata investors greatly. Al-Sayed was intrigued, but if he were going to be more active as an Xstrata shareholder, he also wanted a traditional British banker. So Youakim, a Lebanese and a devout Catholic, brought in his colleague Nicholas Schott.

By early April, Qatar’s stake had risen to
5 percent of Xstrata’s public shares, making it the miner’s third-largest shareholder after Glencore and the U.S. money-management firm BlackRock, which owned just a fraction more than Qatar did. Keen to figure out what was going on, Davis and his lieutenants flew to Doha and presented their pitch for the merger at Qatar Holding’s offices. Would Qatar be supportive of the deal? they asked.

“We’re not trying to get in and out. We’ve built a big stake and we may go even further,” one of the fund’s officials said. The team indicated support not only for the merger, but also for the idea of Davis running the combined companies. They mentioned also that Glasenberg had come calling before his IPO—and signaled that their interest in a discounted stake had been rebuffed.

The Xstrata executives flew home relieved. Unbeknownst to them, Qatar had already hired Lazard to represent it.

But Xstrata soon had another nettlesome problem: the plummeting price of coal, of which it was the world’s biggest single producer. Plagued by
oversupply in Europe and general negativity in the market, which was expecting a fall in price, coal had dropped 9 percent from the day the Glencore-Xstrata merger was announced, and was now trading at a one-and-a-half-year low. The downturn raised questions among Glencore shareholders about whether 2.8 shares was too expensive a price tag.

And while investors were mulling that, they were hit with a bigger bombshell: the details of the sweetheart
retention packages that had been created for Davis and his top managers. On top of his usual salary, bonus, and other perquisites, Davis was slated for annual compensation totaling $15 million per year for three years, plus the use of a private jet. Overall, an astonishing total of seventy-three senior people at Xstrata were guaranteed “retention awards” that amounted to as much as or more than they were being paid already. Altogether, the pay packages would cost $260 million.

The disclosure occurred at an exceedingly awkward moment. Encouraged by British business secretary Vince Cable, who was
seizing on the public ire over high executive pay, some institutional investors in London’s financial center, known as the City, were fighting back more aggressively against hefty compensation deals.
The British bank Barclays and the
advertiser WPP had seen their compensation plans opposed by shareholders in annual votes, and the
chief of the insurer Aviva had even been forced to resign.

The movement, nicknamed the “shareholder spring,” seemed to embolden already leery Xstrata investors. The head of equities at Standard Life, for instance, used the popular BBC “Today” radio show to deliver a stern warning. The Glencore merger was “
in jeopardy” over the pay packages, he argued. A second Xstrata shareholder was even tougher: “
Xstrata should be under no delusions,” he told the London
Telegraph
. “It can run without Mick Davis at the helm.”

Davis and his colleagues were surprised. Of course, they were the ones who had insisted on the retention packages, and they could just as easily have agreed to stay on for less money. But they had built the company and felt they were worthy of the compensation packages; it was just the timing that was unfortunate.

They also began to suspect Glencore of encouraging the humiliating press reports. For one thing, the reporters who were calling the Xstrata media representatives were eerily well informed. “I can’t prove anything,” says one of the advisors who worked with Xstrata, but Glencore team members “were very effective in using something causing significant outrage”—namely, the national furor over corporate compensation levels—to escalate in a way that damaged Xstrata.

Thras Moraitis, the head of corporate strategy at Xstrata, was as upset as his superiors about the public beatings they were taking. Some of his press officers wanted to counter the publicity by
planting embarrassing stories on Glencore. Moraitis refused. “Our instinct is to fight this, but I’m not going to let you do it,” he told his group. “If we go out toe to toe,” he said, “this merger will collapse.”