No excuse for Glencore Xstrata writedown; Argument claiming ‘accounting construct’ fails to convince

Last updated: August 23, 2013 1:52 pm

No excuse for Glencore Xstrata writedown

By Paul Murphy

Argument claiming ‘accounting construct’ fails to convince

When large companies announce big asset impairment charges after a controversial takeover, as Glencore Xstrata did this week, two things happen. First, the financial press bang the multibillion-dollar figure into a headline or two; then, almost immediately, ranks of investment banking analysts step up to explain, in condescending tones, that this is just an accounting exercise and really doesn’t matter since no cash was involved. If the acquisition under debate involved the predator paying solely or largely in shares, as Glencore did in acquiring Xstrata, then those ignorant newspaper headlines are treated with complete disdain.Step forward, then, Dominic O’Kane of JPMorgan Cazenove in London. As he told his clients on Wednesday: “$10.1bn of impairments/significant expenses, including a total of $8.8bn on XTA, were seized on by the press and sections of the market as evidence of the latest and perhaps most egregious example of capital misallocation in a sector with a poor recent track record. We would argue this misrepresents the true situation.”

He went on to point out that the impairments largely reflect the collapse in sector valuations between the deal closing (May 2) and the balance sheet date for the interim figures (June 30), with the FTSE 100 All Share Mining Index having fallen by about a fifth during that period – so it is “entirely [an] accounting construct”.

Mr O’Kane also noted that many of the writedowns we have seen elsewhere in the sector reflect wrong-headed takeovers and hasty projects that ate up hard cash, the implication being that the unified Glencore Xstrata, created purely by swapping shares, is no worse off.

Which is where this ‘accounting construct’ argument goes off the rails. Asset writedowns are invariably priced in by markets in advance, meaning the value destruction has happened in a very real sense – directly affecting investors, rather than management. (It should be noted in passing here that Ivan Glasenberg is Glencore’s largest shareholder as well as its chief executive.)

More to the point, fund managers tend to feel conned when big companies execute large share-funded acquisitions at points that turn out to be the peak of the cycle.

Just ask Sir Christopher Gent, the man who led the celebrated and aggressively fought takeover of Germany’s Mannesmann by Vodafone at the top of the tech boom, 13 years ago.

The London market never quite forgave him for that.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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