We saw a great quote from Mark Twain the other day.
‘Sometimes I wonder whether the world is being run by smart people who are putting us on, or by imbeciles who really mean it.’
It came to mind this morning after seeing all the headlines about BHP Billiton and Marius Kloppers.
When you’re running a company in the midst of a global credit boom, you look like a genius. So much money flows into the coffers that you don’t know what to do with it. So you buy assets like natural gas and potash. You conduct presentations showing an $80 billion investment pipeline and act like you’ve got it all under control.
You’re so caught up in the moment, believing the hype, that you can’t imagine what things might look like a few years down the track. Instead, you dream.
But when the flow of credit slows to a trickle and you have to start actually thinking and working for your money, you look a little more human. These guys can make and lose money better than anyone else. The difference between you and them is that a multi-billion dollar loss is all a part of the show.
Take Tom Albanese and the Rio Tinto board. These guys made one of the most insane deals in the history of insane resources deals. In 2007, Rio knew that BHP was circling. So it went and launched a largely debt-funded takeover of Canadian company Alcan as a ‘defensive’ play.
It moved in July 2007. That was before markets peaked but after the first signs of trouble in the credit markets had emerged. Rio trumped an earlier $US27 billion bid from Alcoa and offered $US38 billion for Alcan.
It was a disastrous acquisition and brought Rio to its knees. If we had orchestrated such a deal, we’d still be lying in the foetal position, feeding through a tube. At best we’d hand in our letter of resignation, which is exactly what Albanese should have done. Here’s what he might have said:
‘Dear shareholders. I had a shocker didn’t I? To be honest, the pressure got to me. BHP was trying to take us over and there was no way that was going to happen on my watch. How would that have made me look…the Rio boss who got taken down by his biggest rival? No way.
‘So I acted in haste and went out a bought an aluminium company. I know, aluminium, what was I thinking? Still, the board supported it and let me remind you that you did too. It was all ‘resources this and China that’…and, to be honest, I thought the boom was just starting. Bloody BHP.
‘Still, I need to take responsibility for my actions. That’s what I get the big money for. So today I resign and hand you over to someone less impetuous and more cautious. Someone with a lack of ego who will act for the benefit of all shareholders and not be influenced by what Warren Buffet calls the “institutional imperative”, which I clearly fell hook, line and sinker for. My understanding is that the board has engaged the services of a highly paid headhunting outfit to find such a person, but they are yet to locate anyone displaying those qualities.’
The global credit bust nearly brought Albanese undone. But in true corporate style, he hung on. Does this show tenacity or supreme hubris? Hmmm. China’s credit boom, along with a board that turns a blind eye, probably saved Albanese. But its ending is about to put pressure on Rio and BHP again.
This time Rio is in much better shape. It’s BHP, and Kloppers in particular, who are under pressure. That’s because Kloppers went on a bit of a spending spree over the past few years and made some big expansion promises.
As China’s credit boom recedes, the economics of those projects deteriorates. As a result, BHP has had to write-down the value of some of its investment and curtail expansion plans. Apparently, that is now what investors want. As today’s Australian Financial Review reports:
‘In an attempt to placate investors, Mr Kloppers last night emphasised BHP expected to approve no major projects anywhere in the globe this financial year as a result of lower cash flows than it would’ve expected a year ago.’
When you start to ‘placate’ investors, you go from being a leader to a follower. And if you’re a company leader, you earn millions from the use of foresight, not hindsight. But that rarely happens these days. Many corporate leaders these days do not lead. They hitch themselves to booms and take the credit and the wealth that it generates.
But when the boom ends and times get tough, they display their arrogance by refusing to accept bonuses, like they’re genuinely doing you a favour. That the system of remuneration still bestows bonuses on the upper echelons of management, almost regardless of what flows down to shareholders, is a relic of the boom years.
It’s a relic that won’t die easily though, as it’s not even the boards making these ‘no bonus’ decisions.
If you study the global economy, like we do, you’re no doubt aware the boom years have been over for some time. But in Australia the effects of the boom still resonate. Another article in today’s AFR caught our eye. It made us think the boom might well and truly be over.
‘Corporate Australia has capitulated and started basing investment decisions on a currency at parity with the US dollar in a shift that will threaten some projects and force up the jobless rate…’
When everyone thinks an investment can only go one way, or has plateaued at a permanently higher level, it’s time to start thinking the opposite. The Australian dollar is one of the best loved currencies in the world, with one of the highest purchasing powers of all major currencies.
Right now, we can see the virtues of the Aussie. It’s a port in a storm trade. But looking further out, we can also see plenty of vices. Now might be a good time to think about locking in that record purchasing power.
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From the Archives…
Staring Down the Barrel of Bad Debt
17-08-2012 – Greg Canavan
Taking Over From the US Dollar With Organic Finance
16-08-2012 – Greg Canavan
Australian Banks on the Run
15-08-2012 – Bill Bonner
The Secret Investment to Buy When GDP Falls
14-08-2012 – Nick Hubble
Will the Latest Data From China Cause a Rally in Aussie Stocks?
13-08-2012 – Dan Denning