There Is Such a Thing as Too Much Publicity

Tuesday, March 16, 2010 Source: Money Show, Jubak's Picks

I always wonder what’s up when I see a normally quiet company begin tooting its own horn in ads. It’s almost never a good sign. Tuesday’s (March 16) Financial Times has a full-page ad from Vale (NYSE: VALE) headlined “Vale also transforms minerals into awards.” The text notes that Euromoney has just selected Vale as the best managed company in Brazil and then goes on to list other awards from Euromoney and the FT. The ad couldn’t have had anything to do with Vale’s decision to bring in strike breakers (AKA “replacement workers” or “scabs,” depending on which side of the labor/management divide you stand on) to resume production at its Canadian copper and nickel mines, could it? Workers at those mines, acquired when Vale bought Canada’s Inco in 2006 for $18 billion, have been on strike for eight months. Vale Inco workers rejected the company’s latest contract offer over the weekend. In January, Vale resumed nickel production at one smelter using already-mined inventories of nickel and non-striking workers and managers. But the company’s goal now is to resume full nickel production by the end of the second quarter. For their part, unionized workers aren’t likely to go quietly. “Vale can go and get stuffed,” Wayne Fraser, a United Steel Workers union representative, told the FT. “We are sick and tired of foreign capitalists coming in and undermining the Canadian way of life.” The strike is ostensibly about economic issues such as the company’s proposal to reduce a bonus tied to the price of nickel and a plan to exempt new hires from its defined-benefit pension plan. It hasn’t gotten any easier to sell those reductions when soaring iron ore prices have bulked up profits at Vale. But the strike is also about a clash of cultures and nationalities. Vale has created problems for itself by trying to impose a top-down management style that may have worked well in Brazil, but ran head on into a work force accustomed to a more consensual management approach. The acquisition was also part of a pitched battle over the fate of Canada’s two largest mining companies, Inco and Falconbridge, which saw both go to foreign bidders in 2006. To say that there’s lingering resentment (over the) foreign takeover of one of Canada’s key industries is a gross understatement. Vale’s troubles with what was (at the management level anyway) a friendly takeover should raise a red flag for investors looking at the rising tide of acquisitions of developed economy companies by emerging market corporations. The last six months of 2009, according to a March 15 KPMG survey, saw 102 deals in which emerging-economy companies acquired developed-economy corporations. That was a big increase from the 78 such deals in the first half of 2009. In contrast, the number of developed-economy companies acquiring emerging-market companies dropped to 216 in the second half of 2009—the fourth straight six-month period of decline in the number of such acquisitions—after having peaked at 463 in the second half of 2007. (Of course, it’s not just emerging-economy corporate managers who can destroy value for shareholders through an acquisition. For more on how acquisitions can destroy value, see this recent post.) But the Vale-Inco experience does suggest that investors looking at any company about to make such an acquisition should look for signs that the acquiring company knows how to deal with a foreign work force and management culture. A track record of a successful integration or two would be reassuring. That’s what we look for when a developed economy company does a deal in the other direction, isn’t it? The stock traded below $31 Tuesday afternoon. Full disclosure: I own shares of Vale in my personal portfolio.