Overheard in the Boardroom

"We took a non-core operation
And spun it off, free of taxation.
In time it so grew,
We repurchased it, too,
In the interest of world domination."

Glencore, the giant international commodities company, has been in the news lately with its offer to merge with Xstrata, the giant international mining company. Xstrata was created ten years ago as a spin-off of Glencore's then-small coal-mining operations, with Glencore retaining a 34% stake. In the intervening time, through a series of acquisitions, Xstrata has grown to a market capitalization of £28 billion ($45 billion), 20% greater than that of its "mother".

I have to admit that M&A is not my forte, and I wondered why a company would spin off a division, only to buy it back ten years later. One answer may lie in the fact that the spin-off, or IPO of a division, comprised a means for Glencore to realize the the division's value without actually selling it directly to another party, which would have incurred a tax liability. Having created publicly traded shares in a tax-free transaction, the new mining company had a currency with which to effect acquisitions. It could then grow to a size at which it could form a world-beating competitor as part of Glencore once again. Neat trick, provided one has the patience to wait ten years.