Glencore Xstrata

April 24, 2014

IMS 3310.007
Group #3







Trevor Deupree, Brent Luckey, Soaiba Madani,
Sami Reme, Chelsea Rolland, Tayyaba Tariq,





University of Texas at Dallas 1
Table of Contents:

1. Abstract .. 2
2. Company Overview . 2
3. Problem Statement ... 3
4. Glencore International PLC . 3
5. Xstrata AG 4
6. The Acquisition 4
7. History of Unethical Behavior ..6
8. Tax Evasion ..7
9. Global Controversies 7
10. Integrating both companies 9
11. Improving Transparency Subsidiaries ... 9
12. Improving Foreign Communities...11
13. References .14

























University of Texas at Dallas 2
Abstract:

Glencore Xstrata is a multi-national corporation (MNC) involved in mining and trading
natural resources that formed from the merger of Glencore International PLC and Xstrata AG. In
this case study, we will discuss how these two companies can integrate with different ways of
doing business and how Glencore Xstrata can improve its reputation to stay competitive
internationally. Currently, the company has ongoing problems in some of the countries that they
operate in, such as Colombia and Congo. They must accept responsibility for any damages they
have caused in emerging economies in order to improve relations abroad and improve their
international image.
Company Overview:

Finalized in May, 2013, the acquisition between large commodities trader Glencore and
mining giant Xstrata has been one of the biggest mining takeovers in recent history. Both
companies had a history of working together for years, but finally decided to combine into a
single multinational mining company. Before the acquisition, Glencore International AG was
involved in producing, marketing, and distributing energy, agriculture, and metal commodities,
while Xstrata focused more on the production of base and platinum metals (Bell). Together,
Glencore Xstrata is one of the world's largest natural resources companies that produces and
supplies over 90 commodities (Charles Watenphul, 2012). Their diversified operations
comprise of over 150 mining and metallurgical sites, offshore oil production assets, farms, and
agricultural facilities" (SouthAfrica.info, 2013). The company has more than 190,000 employees
who work in three business segments: metals and minerals, energy products, and agricultural
products. Unfortunately, since the companies have merged, many internal and external issues
have arisen for Glencore and the community. Although the two companies share similar markets,
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the methods of doing business conflict due to differences in ideologies, ethics, and morals.
Problem Statement:
Combining big businesses and multinational corporations does not always work as well
as planned. After the recent merger between Glencore Xstrata, competing ideas on how the
business should be run has created various problems internally and for others in the international
community. For instance, there has been pollution in the rivers of Congo and displacement of
Colombian villages from mine operations. As a MNC, these companies require more responsive
behavior when operating in emerging economies. Glencore Xstrata needs to carefully plan and
communicate their messages to other countries if they wish to dominate emerging economies and
undeveloped territories. If they do not make a change, they risk not being able to succeed as a
successful alliance and will not be able to bring shareholders the returns they desire. In order to
ensure success, Glencore Xstrata will have to work out their differences regarding the two
different strategies they have adopted. Since Glencore Xstrata has merged, its important to
answer the questions, how can this MNC develop and/or change their company reputation to
stay competitive internationally? and how can these two companies integrate with different
ways of doing business to promote their business around the globe?
Glencore International PLC:
Glencore International PLC was originally founded in 1974 by Marc Rich and his
coworker Pincus Green in Switzerland. It began by the name of Marc Rich Co AG and was later
renamed Glencore International in 1994 after a management buyout. It started off as a marketing
company for minerals, metals, and crude oil, but later expanded operations to include the trading
of energy and agricultural products. Glencore International PLC has been a dominant player in
trading copper, coal, aluminum, nickel, iron ore, and zinc. In recent years, these products have
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been widely distributed and are used by international customers in automobiles, mobile phones,
and other popular consumer goods. Glencore International PLC prefers to operate a business
model with partially owned subsidiaries. However, in recent years, it has taken steps to increase
its direct mining operations to include the production process with the acquisition of Xstrata AG
(Glencore Xstrata, 2014).
Xstrata AG:
Xstrata AG was established in 1990 as an Anglo-Swiss multinational mining company.
Xstrata, like Glencore, primarily operated in the natural resource sector but focused more on
producing minerals such as coal, copper, and nickel. Xstrata, before being acquired by Glencore
International, had resource mining facilities in Africa, Asia, Australia, Europe, North America
and South America. Unlike Glencores business model, Xstrata focused more on managing the
production of natural resources while Glencore concentrated more on marketing and distributing
materials to consumers.
The Acquisition:
The merger of Glencore and Xstrata brought tremendous value to both companies.
Combining Glencores trading capabilities with Xstratas mining expertise created the worlds
fourth largest mining and natural resource company with a total market value of $41.21 billion
(Google Finance, 2014). Together they employ over 130,000 employees in 40 countries across
the world. This merger gave the company significant influence and political power around the
globe. In fact, some say they have abused this power. Many communities living near the
companys foreign facilities have claimed that Glencore Xstrata and its subsidiaries bribed public
officials in order to secure new deals. This way of doing business has negatively impacted
Glencore Xstratas reputation and contributed to the unpopular opinions that people have against
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this company (BBC News Business, 2013).
Even though the merger was profitable for shareholders, Glencore Xstrata has recently
reported to investors a $7.4 billion net loss for 2013, which increases the risks this MNC will
face in the future (Macdonald, 2014). Before the acquisition, Glencore wanted to expand its
control over multiple steps of the supply chain and specifically assert more control over the
production process. Adding Xstratas mining assets to Glencores trading expertise led Ivan
Glassenberg and other executives at Glencore Xstrata to believe that they could increase
efficiency by acquiring a firm that operates in the same industry.
Although the merger sounded good at first, the two companies have struggled to achieve
their goal as an industry leader because the trading and marketing expertise of Glencore doesnt
reflect the mining expertise of Xstrata. The differences in competing business strategies between
Glencore and Xstrata shows how difficult it has been to make the integration successful no
matter how similar the other company may be. Glencore believed acquiring Xstrata would
benefit both sides and lead to exponential growth. However, Glencore Xstrata has had a hard
time integrating because of the cultural and ethical differences between the two entities. This has
translated into executives and employees focusing more on competing against each other rather
than outside firms. According to an interview from Financial Times, former Xstrata CEO, Mick
Davis, expressed his doubts by stating that the two companies have a fundamental difference in
culture (Nisen, 2013). Davis goes on to say that this acquisition was no longer an alliance, but a
takeover (Nisen, 2013).
A History of Unethical Behavior:
Questionable ethics have plagued Glencore for years. Glencore Xstratas founder, Marc
Rich, has a long history of evading authorities and hiding company secrets. During the 1980s,
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Marc Rich was accused of tax evasion and fraud in the United States, and at one point he was
named one of the FBIs most wanted white-collar criminals. Glencore Xstrata has also been
accused of smuggling aluminum and other key elements to Irans nuclear program, despite an
international embargo against trading with Iran.
Glencore Xstrata, despite its newly acquired mining facilities (via Xstrata), prefers to
operate a model with partially owned subsidiaries. Many times these subsidiaries are located in
some of the most rural areas in the world. Although Glencore Xstrata usually has 50-90% equity
in these subsidiaries, it prefers to take a hands-off approach in managing these firms to help
guard its reputation from the negative side effects. This allows Glencore Xstrata the freedom to
deny involvement in unethical behavior such as using child labor for profits, providing inhumane
working conditions, and polluting the environment in remote areas of the world. Although
Glencore Xstrata holds majority ownership in many of its subsidiaries, they fail to make these
companies adhere to their same corporate standards.
After investigating Glencore Xstratas fundamental principles and what they value as a
company, it is clear that while the rhetoric might sound good to shareholders, they operate in
denial when it comes to doing business abroad. According to the Glencore Xstrata Corporate
Sustainability Report in 2013, they mention that respecting the cultures and countries that they
operate is their number one priority. They state that they are active in improving the areas around
their operations and even include a formal grievance system to acknowledge complaints. It is
impossible to verify the claims made by this MNC with the general information provided in the
Sustainability Report. They fail to offer any statistics to how they improve the areas they operate
in and neglect to show how their money is put to use.

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Tax Evasion:
By having so many partners and subsidiaries around the globe, Glencore has the ability to
transfer and move profits around easily without much detection from authorities. They can
conceal how much money is coming out of one subsidiary by transferring either product or cash
to another subsidiary. Since the transfer of cash is mostly internal and they operate in areas that
lack formal regulatory systems, Glencore is rarely held responsible. However, the negative
effects of tax evasion on emerging communities is clear. Developing economies, especially in
Africa, are some of the poorest in the world and Glencore does everything to ensure that their
profits flow back to them directly. By hiding the amount of product they are mining from the
foreign authorities or by selling their products below market value to other partially owned
subsidiaries provides very little to improve the way of life in the host countries.
Global Controversies:
Glencore Xstrata owns many mines that are located in a number of host countries. In
order to create mines, land needs to be bought and cleared for construction of the facilities to
refine the natural resources into usable materials. However, in the countries of Colombia and the
Republic of Congo, the land needed to build these mines are/were currently inhabited by local
tribal villages who have resided on the land for hundreds of years. In order for the mines to
begin the initial crack of the ground, they have to somehow move the villagers from the land.
Unfortunately, there is no normal or standard ethical way to do this.
In Colombia, Glencore Xstrata partly owns a subsidiary named, Cerrejon Coal, whom is
an operator of the large Cerrejon coal facility. They are in last-ditch negotiations with families
in the village of Old Roche, aimed at relocating families so that the mine can expand (Solly,
2014). The families, from the village of Old Roche, are asking the coal giant to give them a
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lateral transition to new farmland where they can continue their way of life. They also seek
compensation for the effects of pollution from the movement of mine production.
In the Republic of Congo, Glencore Xstrata (with partner Zanaga Iron Ore Co.) acquired
a vast iron mine. Once again, in order to obtain the land to build these mines, they displaced
Congo villages. Also, when they built the mines, they contaminated villages all along the Luilu
River with pollution from the waste released from the Glencore Xstrata iron refinery. When
processing these materials, Glencore Xstrata combines the ore minerals with acid to free up the
copper. Due to unstable regulations, Glencore Xstrata pumps the heavily acidic waste into the
Luilu River. One local resident complained: "Fish can't survive the acid. Glencore lacks any
respect for people. No one would do that to another human being" (Sweeny, 2012). The pollution
was so toxic that, a Swiss NGO tested the acidity of the wastewater and found a pH value of 1.9,
where 1 is pure acid and 7 neutral (Sweeny, 2012).
Glencore Xstrata is a dominant player in the mining industry and has developed a
negative reputation through their foreign practices. The displacement of rural villages with lack
of compensation and pollution of natural resources has contributed to a poor international image,
which will affect future mining projects and potential profits. The cultural and ethical difficulties
surrounding the recent acquisition of Glencore and Xstrata have shown the importance of sharing
the same organizational structure and values. The merging of two companies in the same
industry does not always imply that they will work well together.
Integrating both companies:
Most corporate acquisitions that are unsuccessful can be traced back to cultural
differences. After a merger, the size of the company increases, there are often two different
languages, and a different medium of communication exists. We recommend that Glencore
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Xstrata encourage a smooth collaboration between the employees from both companies. A newly
developed shared culture should be established and promoted. To make collaboration smoother,
we suggest that employees from both organizations focus on creating a new work environment
that seeks to improve their reputation and efficiency rather than competing internally for how the
business should be run. This step would help employees bond together and would increase the
likelihood of a successful acquisition. Before the acquisition, there was a need to define the
development of a new culture that shows the vision of the organization. After defining a culture,
it is important to identify the gaps between the employees and the actions required to eliminate
the gaps. This becomes a gain some, lose some situation where if the company wants to gain
something, they have to sacrifice something. They need to take all cultural and business
differences into account and develop a comprehensive plan that will help achieve desired
success. Although many factors impact the success and failure of a business, internal problems
should be the easiest to control but can also cause the most trouble.
Improving Transparency with Subsidiaries:
As discussed earlier, Glencore Xstrata prefers to operate a business model with partially
owned subsidiaries in which they fail to recognize that their partners are affiliated with Glencore.
After reviewing their Sustainability Report, this MNC needs to improve their transparency with
these documents if they wish to begin cleaning up their reputation. The report is very long and
detailed but offers no statistics or facts that can be independently verified. The first step to
improving transparency is to agree to voluntary international inspections.
We propose that Glencore Xstrata allow independent organizations to inspect their
operations to help improve public perception. The first organization is the Initiative for
Transparency in Extractive Industries (ITEI). This initiative is for companies in the natural
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resource sector that will voluntarily reveal how much money they give to governments in the
areas they work. Among the industry leaders in natural resources, many of the top companies
encourage incorporating voluntary dialogue with stakeholders to help give back to the areas they
have effected from their operations. Joining ITEI will enhance Glencore Xstratas image and
help define more details about how and where their money is put to use. Also, the company must
build trust by filing accurate financial statements that can be verified by the public.
Our second recommendation is to formally recognize the Convention of the International
Labor Organization. This international organization is one of the worlds most widely recognized
labor and environmental standards. Even though Glencore claims to have accepted the
Convention of the International Organization policies, they offer no direct statistics to confirm
these practices. This MNC does claim to have policies and management systems in place that are
stronger than the international norm, but offers no evidence to support these programs. In order
to improve company culture and ethics, Glencore Xstrata will need to do more than the bare
minimum. They must reveal information that shows why their company is safer and how they
help others more than their competition. By allowing independent organizations to inspect
foreign operations and upholding standards better than the international norm, this company has
the ability to attract new customers and give future host countries more confidence in Glencore
Xstrata.
Improving Foreign Communities:
In order to help improve this MNCs reputation, Glencore Xstrata should invest in facilities
that hire local villages and use their land to create renewable resources with their crops. This
would show that the company is stepping up proactively and that it cares about the living
conditions of the local communities. Being proactive means to actively take steps in accepting
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responsibility and going above and beyond the normal call of action. With the establishment of
these community-based facilities for local indigenous tribes, Glencore Xstrata has the ability to
form mutual partnerships with the people, in which everyone benefits. By allowing the native
people to live at these facilities and continue farming their preferred crops, Glencore Xstrata
could potentially benefit by entering into new markets with the commodities they produce. In
return, local citizens would have access to food, shelter, and electricity. Glencore Xstrata should
pursue renewable energy resources with the new crops such as ethanol, electricity and petroleum
to help enter into new markets. By entering into new markets, Glencore Xstrata will gain a
seemingly new clean energy reputation that will revamp their tarnished reputation.
Considering the development of the facilities for the local villages, Glencore Xstrata will be
able to negotiate the use of the locals crops for non-subsistence use. The facilities will not only
be the site for mining coal, copper, cobalt, and iron, but rather a site to bring turning crops into
renewable resources. Also, with these facilities (depending on their locations), Glencore Xstrata
can also begin to utilize solar energy. For example, since Colombia is located near the equator,
they receive more sunlight than other countries it operates in. Combined with a constant
temperate climate, sustained solar power is possible. In these same areas, wind renewable energy
also has a strong potential of being utilized.
With these facilities, there is strong need for research and development (R&D). Since
Glencore Xstrata works mainly on a subsidiary model, they could create a new subsidiary model
that is focused in new renewable energies and R&D in the future. This company will need
innovative engineers, scientists, and managers to expand and generate future products that can
develop better methods for crop production. With this, Glencore Xstrata can also help foreign
countries grow their citizens human capital and national economy (such actions have been
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avoided by Glencore Xstrata in the past.) Finding the initial group of engineers, scientists, and
managers should not be hard to find, since Glencore Xstrata is based in Switzerland; home of
some of the worlds most sought after employees in these fields.
By entering into these new markets, we propose that Glencore use 5% of new potential
profits gained through these facilities to give back to the people they have hurt while doing
business. With the entry into new markets, this company has the ability to gain market share and
increase future profits and investments. The new strategy of business can benefit both local
villagers and Glencore Xstrata.
Currently, Glencore Xstrata claims to have an estimated 28% of profits from foreign
operations from Africa invested into African communities. However, it is hard to independently
verify that these claims are correct because Glencore Xstrata does not provide the proof of where
their money is invested (Glencore Xstrata, 2013). With the establishment of these new facilities
located in or near the communities they work, Glencore could take full control of their reputation
by showing potential shareholders that they are being proactive in trying to establish a mutual
relationship between local villagers and this MNC. There are many investment firms and
individuals that only invest in ethical businesses and ones that promote honest practice. By trying
to be more proactive with its partners in showing they are a more ethical company, this MNC
could improve on their negative public image and attract new investors.
Although Glencore Xstrata has made no effort in the past to compensate the villagers for the
harm they have caused, it would be beneficial for them to own up to their mistakes and provide
compensation for their damages. By putting in place environmental measures and health and
safety programs, Glencore Xstrata has a unique opportunity to deliver meaningful social and
economic value to all of the communities it serves. They have the possibility to establish
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sustainable health for those populations by providing food and water supplies that will make a
lasting impact on the capabilities and skills of workers. As the world moves closer to being fully
globalized, it will be critical to be more transparent in their corporate policies and practices. The
business world is becoming increasingly more competitive. Those firms that are careless and do
not own up to their mistakes will continue to decline. However, the firms that treat their
customers and business partners fairly will prosper in the future.

















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