A relationship with history

Marius Kloppers has been asked to orchestrate one of the greatest corporate takeovers ever. A quick look over the history of BHP and Rio Tinto will make his job easier.

The biggest hurdle BHP CEO Marius Kloppers will have in securing control of Rio Tinto is that he has little understanding of the culture and background to the BHP-Rio Tinto relationship. That will make it difficult for him to get Rio Tinto to agree.

His biggest advantage is that he is going to shareholders of both companies directly (60 per cent of them hold both shares) and he will explain just how much extra iron ore and other metal production can be obtained as well as the enormous synergies involved. He will sell the case very powerfully and the pressure will increase in Rio directors.

Chairman Don Argus will be a huge advantage in the selling process. And there are two Australians on the Rio Tinto board -- Rod Eddington and Michael Fitzpatrick. This bid is potentially an enormous win for Australia and gives our stock market incredible extra depth. Also, if the deal goes ahead, one of the top five global companies will be based in Melbourne where the two Australian Rio directors reside. Full credit must go to Peter Costello who made BHP commit irrevocably to keeping its head office Australia at the time of the BHP Billiton deal.

The first clue that Kloppers does not understand the Rio Tinto culture came when he kept saying -- at a press conference in London on Monday November 12 -- that the possibility of merger between the companies had been mooted for 10 years. That was inaccurate. When Rio Tinto was in two parts – CRA in Australia and Rio Tinto in the UK -- CRA tried very hard to arrange merger with BHP. A strong proposal was made when BHP's control was in disarray after the Holmes a Court saga in 1987. The fact that the Rio group actually made the first move is part of the Rio culture -- as is the fact that in the past Rio's management have seen themselves as better managers of iron ore than BHP. And that has extended to other minerals.

They also believe that they have secured a wonderful asset in Alcan that is simply not understood by the market. My guess is that BHP will have to ear-mark some of the $30 billion allocated for a share buy-back to go to Rio shareholders. But given the attraction of the bid, it will be a small price to pay.