The Merging Game and Mixed Nash Equilibria
Glencore International has been working on merging with Xstrata, a mining giant, and recently unveiled its newest and apparently final offer to Xstrata share holders. The initial offer from Glencore was 2.8 shares to one and was quickly rejected by several large shareholders including Qatar Holding. The new offer is 3.05 shares to one and is currently being decided upon by the Xstrata board. The plan is still to be a merger even though in the original proposal on Friday it was thought to be a takeover. If the deal had bean structured as a takeover it would only require 50 percent of Xstrata’s investors to agree to the deal and since Glencore owns 34 percent of the company this move would have greatly reduced the influence of Qatar as seen (1).
In mega-mergers such as this not only are the stock options important, but also the management of the companies becomes a sensitive issue. Different proposals for the CEO included Glasenberg from Glencore and Davis from Xstrata have caused a significant amount of distress in the merger. This is due to the desire to remain in control from Glencore’s shareholders who wouldn’t accept paying the premium for the merger unless Xstrata was under their control. It seems that they have been pacified however by allowing Davis to take control of the combined company initially for six months and then step down to let Glencore’s chief executive Glasenberg to succeed him. All of this commotion around the merger has caused Xstrata’s stocks to go up over the past few days whereas Glencore’s stocks have fallen slightly.
As this merger takes place each company is choosing between strategies in the game. Both companies are competing for the best outcome for their shareholders and thus are arguing over who will be in control and how much stocks are going to be worth. In both of these situations a certain benefit can be ascribed to the shareholders of either company. If the CEO of your company maintains control that is a positive value to your shareholders. The share exchange also provides a certain benefit for each company because merging the companies is a straight benefit for Glencore and it is thus willing to offer share compensation to the owners of the Xstrata. Each company’s board while trying to maximize their value in the merger also has to be careful to avoid pushing to hard because then the merger might not go through. This would be a net loss for each company because of the time spent working on the merger and the inevitable awkward relationship between the companies because Glencore owns 34 percent of Xstrata.
Each company has certain strategic actions that they have to decide between during the merger. For example Glencore gave its supposed final offer to Xstrata, which was finally revised on Monday. This is a bold move by Glencore because if Xstrata rejects the offer than that leaves Glencore in a very weak place because it can either decide to send another offer or reject the merger. If the merger is rejected at this point it is net negative outcome for both companies. If Xstrata declines the offer and Glencore has to make another one then Xstrata can expect to get a larger payoff in the game while Glencore’s payoff will go down. Xstrata is now presented with the same option to play hardball and refuse the offer or to accept the offer. If they refuse they could end up increasing their payoff or they could be stuck with a penalty if Glencore then decides to pull out of the merger. On the other hand if Xstrata decides to accept the current proposal then they could be getting a smaller payoff than they desired. This results in a mixed Nash equilibrium between the two companies. Depending on the probabilities of each company to play the strong strategy or the weak strategy there should be a probability that depending on the payoffs each company is indifferent between each possible strategy. These probabilities would therefore be the mixed Nash Equilibrium. We will get to see how these companies decide to play the game as merger negotiations continue and, on September 24, Xstrata decides whether or not to put Glencore’s offer to the vote of its shareholders.
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(1) Scott, Mark. “Glencore Says Higher Bid for Xstrata is its Final Offer” September 10, 2012. http://dealbook.nytimes.com/2012/09/10/glencores-bid-for-xstrata-represents-final-offer/?ref=business
(2) Bartholomeusz, Stephen. “Glencore’s grab gets heavy-handed” September 10, 2012. http://www.businessspectator.com.au/bs.nsf/Article/Xstrata-Glencore-merger-offer-Glasenberg-CEO-share-pd20120910-XZ4DN?OpenDocument&src=sph