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.
Today’s (March 16) Financial Times has a full page ad from Vale (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 Financial Times.
The ad couldn’t have anything to do with Vale’s decision to bring in strikebreakers (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. 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 Financial Times. “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 as the comments from union representative Fraser make clear, 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 after the acquisition that may have worked well in Brazil but that ran head on into a workforce 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 companies go to foreign bidders in 2006. (Falconbridge was acquired by Switzerland’s Xstrata (XSRAY). To say that’s there’s lingering resentment at a 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 KPMG survey published on March 15, 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. That marked the four straight six-month period of decline in the number of developed economy companies acquiring emerging economy companies. The number of deals involving the acquisition of emerging economy companies by developed economy companies 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. (Vale’s stock has been doing fine without Inco’s nickel production but still investors never want to see an $18 billion acquisition stuck in limbo like this. And fallout from the deal has to pressure on Vale from Brazil’s government for the company to put more money to work in Brazil. ) For more on how acquisitions can destroy value see my post https://jubakpicks.com/2010/02/26/can-ceos-destroy-shareholder-value-in-an-acquisition-just-watch-them/ .
But the Vale-Inco experience does suggest that investors looking at any emerging economy company about to acquire a developed economy counterpart should look for signs that the acquiring company knows how to deal with a foreign workforce 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?
Full disclosure: I own shares of Vale in my personal portfolio.
Bravo Mason, your comments are right on the money and they weren’t either political or personal which doesn’t belong here. Let’s all take a breathe…and get back to the purpose of this blog, comments on Jim’s articles and how we can benefit from the exchange of info. and ideas in the investing world.
The bottom line is who owns the inventory? If Vale owns thel and or lifetime mining rights then this is just extension of the mine life with some extra infrastructure costs. However if there is a lease with time constraints then Vale could have a problem. I do think that Vale needs to adjust their outlook on labor to at least standards that match the local society. I would not underestimate Vale’s need for nickel to make stainless steel. As for their business sense they not only produce the most iron ore in the world, they produce it for less money than anyone in the world.
Did anyone think that maybe the real source of the problem is that Vale was
a) mis-advised about the appropriateness of the purchase
b) was blindly looking to expand
and finally
c) OVERPAID
Hence to justify their stupidity, they are desperately trying to show a profit. No easier way then squeeze the labor.
R.halvorsen, I’m just a little curious. Would you spend 18 billion dollars for an unprofitable subsidary?
While we’ve had an exuberant discussion of the evils of management versus unions, I think we’ve missed one of the key issues here. There is no question that Vale is a very profitable company, but are the Canadian operations profitable? I think most of us would agree that the Canadian workers are entitled to a “fair” wage (while we might disagree about what is “fair”). However, are Vale’s actions designed to just increase their profit in Canada or are they necessary to turn the Canadian operation from money losing (i.e., subsidized by the workers in Brazil and other countries) into a profitable operation? Any answers?
Ed,
The laws you refer to that protect workers from inhumane working conditions do nothing to address real wages stagnating while corporate profits soar (as in 2006).
I know of at least 2 people who have not had a raise in over 8 years, there is no law against that nor should there be, however the use of collective bargaining should be an available tool, i.e, – unions. The old argument of personal responsibility (quit and go somewhere else where the pay is higher) doesn’t always work or is not as simple as some would suggest.
I must say that the contracts that GM signed with their wokers locked them in to paying benefits when times were tough for the corporation so I would favor a more pliable/flexible contract for such boom/bust scenarios.
Hey Jim, how about throwing these guys a towel and have them hop in a cold shower!C’mon cut the crap! We are all trying to learn something or we wouldn’t be reading and commenting on Jim’s column. If you can’t keep on topic–discussing only the content of the article and how it involves strategy/s on investing–then don’t comment. Personal/political attacks are not helping us to better understand what were here for. Take them outside this room, that is, if you want to waste your time. Quit wasteing ours.
kowloon dave,
My views are not so much anti-worker as they are anti-union. With our current laws protecting workers, unions are obsolete.
To give you an example, I used to work at a steel mill part time when I was younger. As a part time worker, I didn’t have to belong to the union there. However, one of the workers there showed me his paycheck once. A THIRD of his paycheck was taken every week for union dues. He was making $2/hour more than me after union dues, and I was only part time.
That company went out of business several years later. Do you think that worker was better off because of the union?
I’ve worked a lot of jobs over the years. I avoid unions because of my experience there, and because of similar stories I’ve heard elsewhere.
bsdgv,
Thank you for correcting me. Silly me! I thought Canada protected it’s workers! But thanks to you, I now know that the workers are only protected by the unions there. Glad to know someone is looking out for them…
As for the 19th century, I believe it was ME who brought up that comparison. Exactly when did I say the 19th century was some kind of utopia for workers? If you’d like to read my comments a little closer, I said:
“Feel free to explain to me how, in an age of class action suits and workmen’s compensation, that worker’s rights are still no better off than they were in the 19th century?”
My point is that the original need for unions, which the worker’s conditions in the 19th century created, has become obsolete. There are plenty of laws in place to protect workers from the inhuman working conditions of the past. Yet people still hold up unions as some kind of “protection” for workers, when in fact unions are nothing more than a leach on worker’s pay, supporting nothing more than their own existence.
I would kindly ask you not to twist my words to mean something I never said, nor intended.
To BenWobbles, I apologize. I wasn’t going to say anything else, but I will not have my words misconstrued.
Ed,
I don’t know what you did for most of your working life, but it wouldn’t surprise me if you were some kind of manager or owner. Your view of labor (i.e., human beings) as expendable doesn’t sit right with me. This kind of extreme capitalism–unlimited greed & profit at any human cost–lead to the Financial Collapse & is now giving US capitalism (maybe Brazilian capitalism too) a bad name. Yeah, I’m an investor just like you. But I’m willing to give up some of my profits to promote human values like liveable wages & benefits. It seems odd, but I lately have the feeling that Anglo-American capitalism is reverting back to the excesses of the Dickens era.
I’ve already said this a few times before but I’ll try again. Some of you are getting way too personal in your attacks. Just as no one is being forced to work in these Canadian mines no one here is being forced to read every comment. If you don’t like a particular poster than simply ignore him/her. Demanding that someone leave the room because of their viewpoints only illustrates your own insistence on being right and demanding that others agree with you.
As to separating economics and politics, everything in life stems from economics. Our relationships are always based upon need and what we can exchange with others. Politics is part of insuring that you get what you want and, as such, cannot be ignored.
EdMcGon,
> Canada is no third world country where miners get no protection from job hazards.
Canadian miners have protections not because mine companies voluntarily provided these protections to their workers but they fought for it through strikes and other means! They did not say “oh ok, we don’t have protections, let’s go work in another mine.” Why? First, it was hard to go. 2nd, there was no such other mine. They all sucked!
As for slavery in capitalism. Capitalists in 19th century chained children to their workbenches!
http://www.123helpme.com/search.asp?text=Child+Labor
Actually, after the Civil War, Southerners made fun of the Northerners saying that “we were at least providing food and shelters to our slaves. You are treating your workers like stray dogs.”
You know the other day you were criticizing Krugman for being biased. What about you, my friend? Your kind of capitalism is not even Libertarian.
I see a lot of people posting recently only to complain about this or that person. Given the level of government involvement in business I find it hard to completely separate the two. Thus, I like to hear other peoples view points in this space. Obivously others may not, in which case you have every right to skip it and move on to the next one. Is it really that hard? If you don’t like Ed or DJ or whoever, just skip their comments when you see them. Please don’t try to deprive the rest of us for your own selfish reasons.
shafferp,
THAT is my point! They are talking about these miners as if they are some kind of slave labor, when the truth is far from that. Canada is no third world country where miners have to live on bare subsistence wages. Canada is no third world country where miners get no protection from job hazards.
Ben,
Per your request, I shall end here.
this is an investing blog, please stop littering the comments with politics.
Are you serious Ed?
“worker’s rights are still no better off than they were in the 19th century?”
Have you heard of OSHA?
Also, the average wage for a man in Ohio in 1895 was $1.70, and the average workload for the same man was 84 hours per week.
Instead of posting your political comments on each and every Jubak Pick article, why don’t you post them on your own website (which you have also posted a link to on Jubak’s Picks comments before) where you can praise the virtues of the Ronald Reagan/Larry Kudlow Union bashing mantra.
I for one can do without them.
Friends,
Notwithstanding the spirited discussion re politics/business, I take from Jim’s insightful article the message that in business – as in all walks of life – cultural differences are hugely important. Look at the Bejing – Bay Area cage match involving Google. It boils down to significant differences in philosophy and cultures of leadership. No criticisms implied. A few years ago I was very interested in Bombardier’s new jets and their other heavy industrial operations. I eventually didn’t invest because of the culture of Canadian labor relative to that available for building planes at ERJ. Again, no criticism implied. But if the Canadian labor leaders could go down and shake-it at carnival and bake a little on Ipanema beach, and meanwhile the Brazilians came up and shoveled snow for a week or two, I think the situation might resolve a little more easily! …that is, IF the Canadians ever came back… 😉
Sudbury (the city not mentioned in the article) has been specializing in mining since the haydays… Unfortanetely, when the government has no regelations regarding who can buy your local mining corporation… often that means, quite extreme policies and standards will have to be integrated when the new guy comes in. Now my question is can we justify selling a company internationally so that the new corporation/shareholders can make a quick buck,… or should the government create stricter polices that help protect local work that can sustain itself. These issues are very similar to the automotive problems in Canada, where all the trade`s work is shipped overseas for a cheaper deal.
preface… this all depends on the specific details of their defined benefit/pension program, which I doubt any of us know.
I work for a state with a pension plan, and if I left and was rehired even a year later I would not fret over losing it. (Even during furloughs I would trade the pension for a defined personal account if it came up in contract negotiations.) Most pension plans are large ponsi schemes IMO, and I would MUCH rather have a separate account anyways. (That way I can do what I want with it!) But maybe thats just me… I would rather live meagerly, in retirement, off what my family had saved than be a burden on tens, or hundreds, of other workers for 15-20 years.
southof8,
Last time I checked, no one is forced to work a mine for a living, at least not in Canada. So don’t try and sell me on the “poor poor pitiful miners” bit. They wouldn’t do it if it wasn’t the best paying job they could get.
My “knee jerk reaction” is that modern day unions elevate wages beyond what the market would normally pay for the skill sets involved in the work. If the miners aren’t being paid enough to live on, why would they stay in those jobs? Wouldn’t they already be dead, or at least in poor health from their deplorable working conditions?
Cry me a river. The fact is they’re a bunch of pampered looters trying to milk Vale for all it’s worth, because they know they have Vale over an $18 billion barrel.
This is where the fine line of politics and investment cross. Feel free to explain to me how, in an age of class action suits and workmen’s compensation, that worker’s rights are still no better off than they were in the 19th century?
Ed,
I reject out of hand your binary equation- kill the workers or kill the company.
As Georic pointed out, you’re talking about people. You think canadian miners are getting rich off digging nickel? What’s the return on their investment? Black Lung?
What makes you think Vale’s management does not have a long history of worker exploitation as a path to profits? You’re talking about a country with historically deplorable working conditions, a country that has created 60 million middle class consumers in just the past decade accoriding to a recent FT piece. You think management somehow has a short memory? Third world laborers have been so routinely exploited that it is easy to believe Vale’s management thought the same thing would fly in Canada- wasn’t that the point of the post- that cultural differences can be hard on the bottom line?
Do you have any idea what the issues the miners and Vale management disagreed on?
But your knee-jerk reaction is management should “rid themselves of the union headache” without having any idea what is being proposed by whom.
You want to blog politics, find a political blog to do so.
Amazing to me how every fat cat white collar pension loving coupon clipping “investor” elevates the return of a buck over the basic human dignity in work.
As I look at this post it reminds me how little I know about foreign countries work policy and such, and I suspect that a good percentage of company management is in the same boat. Not too encouraging if I want to invest in such companies.
I would have hoped that Vale had understood the company it bought better. If you buy into a company/industry/country that is highly unionized and then tell them you are want new employees not to get a defined-benefit pension plan, well you are asking for trouble.
But this is where my lack of knowledge shows, because I don’t even know if defined-benefit pension plans are becoming a thing of the past in Canada, like in the USA or not. If this is changing in Canada I could see how Vale might attempt it.
georic,
Which is more important: minimum wage laws or collective bargaining(unionization)? Do you want the government to protect your rights as a worker, or a private group of paid thugs?
And last time I checked, no one is being forced to work those mines, so your slavery comment is a bit exaggerated, n’est pas?
The fact is, Vale is being mugged by the union, which is trying to get above-market pay for their workers.
I was surprised to hear the union rep’s name was Fraser. It could just as easily have been “Gotti”…
southof8,
I mentioned that as a worst case scenario. But exactly how long do YOU hold onto a company where the workers won’t work? 8 months? A year? 5 years?
At some point, you have to cut your losses.
Some people obviously fail to see that workers are also human beings, even if they hardly make a living, and slavery should be a thing of the past. That a company should reduce its costs when times are hard is as it should be. But when you are making fortunes from rising prices, it is not a time to suppress bonuses or reduce already low salaries. I am sad to see that our values, human, christian, are gone. All the more sad that it is poor management to ruin, not to say undermine, a company’s worker’s morale.
Slight correction:
(May buy some Vale stocks….once the strike is over ?!!)
Hi Jim,
Being Canadian long-time reader of your blogs, a modest investor, and a small business owner IMO:
1. Vale is simply trying to make this mine profitable (as an independent business-activity-center) to stand on its own…..(and not to be financed from the other worldwide Vale operations). I do understand+agree fully at this point..
2. The unions are fighting..as if they are public union employees…Adding to it the high unemployment rates Canada is going through and (still) the difficult business environment in the country…I am not sure if their requests are sound/reasonable enough…
Kindly check Mike “Mish” Shedlock insight on this topic..he really nails it…
http://globaleconomicanalysis.blogspot.com/2010/02/canadian-mining-union-stubborn-to-point.html
(My buy some Vale stocks….once the strike is over ?!!)
PS/Off-Topic: Jim, will u ever come to Toronto ?
Glad did not buy it.
Ed,
Brilliant Advice. Fire all the workers, destroy the company, sell off the carcass for a fraction of what you paid.
Sounds like you should run an American financial company with a sage approach like that.
Maybe it’s just me, but if I spent $18 billion on something, I’d expect to see a return for my money. I have to give Vale’s management credit for patience, but at some point, they need to rid themselves of the union headache. If that means firing all the workers and liquidating the company, so be it. At least they’d have some money to show for their troubles.