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.
emotional topic… I suggest you guys agree to disagree on this one…
Indeed that is a great point. Vale has traditionally been the low cost producer. Its primary competitors are RTP and BHP- anglo/australian companies, paying developed economy wages. Vale mines primarily in EM countries; its wages are presumably substantially less than its competitors.
Canadian workers earn wages consistent with a developed economy’s wage structure.
As Brazil continues to develop and as Vale goes beyond em mines and em workers, does it lose its cost advantage?
Anyone know on what basis Vale is lowest cost producer? My experience is labor (wages) is the biggest component in COGS. That different in the mining industry?
Let’s call a time out. OK. And stop characterizing each other negatively or postively.
The last post by Halvorsen makes a very important point. Like the investors (myself included) who bought into the commodity boom in 2006 or so, Vale assumed that it was going to run forever. It didn’t. Vale almost certainly overpaid. Remember that the acquistion was the last move in a bidding frenzy over Inco and Falconbridge that had Inco trying to buy Falconbridge to bulk up so it wouldn’t wind up being acquired itself. In this kind of bidding war tghe winner alm ost always over pays. It’s a rare company that can walk away from a deal even when it knows the price is insane. Yara International’s refusal last week to up its bid for Terra is just about unheard of.
r.halvorsen – Good comments, keep posting.
sigli – What “stats”? As for your logic, I cannot identify any.
My point was to EdMcGon – Jim isn’t bashing unionization in this piece. Jim states: “investors [i.e., us] 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.” It seems that Vale didn’t know how to deal with the Canadian workers at this mine.
Ed, your assertion that Vale’s answer should be to fire the union workers is EXACTLY contrary to Jim’s point that management needs to understand workers’ needs and expectations in any foreign company they may acquire.
mason:
When Vale purchased Inco in 2006, nickle prices where about $10,000 US per ton and trending up. By 2007, prices hit a peak of about $22,000 US per ton, which undoubtedly made this mine very profitable. However, nickle prices then crashed, so that by early 2009, when this labor dispute really got started, nickle prices were about $5,000 US per ton — and the mine could easily have been unprofitable to operate with the current wages. In short, when Vale spent the $18 billion it was probably profitable and looking to get better; when the union dispute started it was probably unprofitable.
rolfer1:
Like many other things discussed here, both the government and the free market have played their role in screwing things up. The free markets gave us hordes of financial derivatives and financial companies effectively purchasing AAA ratings for junk. It also gave us individuals who managed to create financial transactions that separated the risk and the reward — the received the reward while the risk was dumped on others. Our government, has made things worse with the competition between states for corporate business (who can create the most lenient laws for corporate managers and provide companies the greatest incentives to move there at the public expense) and more recently the bailouts, in each case further separating risk from reward.
rolfer1,
Your stats are way off, but the point is the same regardless. However, I see it as nothing more than a wrongheaded excuse to attack free markets. We can easily make the opposite point that government dictation created this huge wealth divide (CEO and board protection laws, corporate charity, GSE debt instruments that have benefited the rich by inflating housing prices out of the reach of the poor and miring them in even deeper debt to the rich, etc.).
Government certainly is sustaining the wealth divide by interfering in the business cycle’s “free market” decision to re-equalize wealth. Government has bailed out the bank’s bondholders at 100 cents on the dollar. The free market has a way of bringing things back into harmony, including wealth distribution. We’re currently interfering in this by trying our damnedest to keep those in debt from defaulting on “the rich” and allowing them to start fresh. Instead, we’re stopping fresh start providing defaults and doubling the pain by piling government debt obligations on.
So is it the free market causing your wealth divide or is this our excuse for our poor government policies?
IMHO I believe that VALE need to hire more Transactional managers to deal with this kind of issues. BTW, many of us will benefit A LOT in reading Transactional analysis.
Hey folks, seems everyone has an opinion regarding unions and their value or lack thereof. As I recall, american unions arose out of exploitation of workers in the late industrial age – early 1900’s. The “free market” was supposed to have aleviated that by fostering competition in jobs and wages. However, jobs in smaller towns are not plentiful, thus opportunity is absent and wages can be depressed. I bet there’s little competition in the form of alternative available employment for those Canadians that seek to work those mining jobs being discussed and, thus, the history of, and need for, unionized workers.
BTW, Ed you missed the point of Jim’s post. It is NOT “about the union problems Vale was having in their Canadian mine? You might recognize THAT was the topic of this thread.”
I believe it was about exactly what’s transpiring in this discussion — the pitfalls faced by any foreign company desiring to operate in another country – incoming management better understand the local economy and customs if they want to succeed.
On final thought about unions: in the 1960’s, CEO’s made about 1000 times what the average worker in a given company earned. Now it’s something around 1 million times. Just another example of the unregulated “free market” and unrestrained capitalism at work.
Wow a bit of a slugfest. I am not a union guy, but seeing the improvements that have come for workers health and safety they have certainly made great strides. No doubt the unions have negotiated good wages for their workers, and with the conditions that existed in the acid plant and elsewhere that is the compensation for the health and safety risks of the job. I have an uncle who makes more on pension from Inco than I do working, but I don’t have a union and many times not much choice if I have to do something dangerous if I want to continue working.
The nickel ‘bonus’ that the workers receive is related to the market price of nickel and tonnage produced, I see it as an incentive to the workforce. I think this is one of the major sticking points in negotiations, it is a pretty big part of your pay when prices are high. Sadly many workes fail to realize it is a bonus and not a part of the regular pay.
Something else to consider in Canada, and perhaps other countries in the world, there are NO property rights here. Yeah zero, so like anyone elses property, Vale’s mine could be gone on a gov’t decision, and walk away with nothing.
Dear ALL,
Just a suggestion for comment(s) free articles, if you wish to read 100% Jim Jubak article just add:
/print/
to the headline of his article i.e.
https://jubakpicks.com/2010/03/16/how-vale-spent-18-billion-and-shot-itself-in-the-foot/print/
Ok, I get it. Unions are the lifeblood of our country (even though most workers in the U.S. are NOT unionized), and I’m an arrogant, hate-filled, right winger.
sigli,
My post to you was cut off, but there is one thing I want to add.
>Just a couple days back you let your know-it-all, self-aggrandizing, god complex get the best of you when you said I and those who think like me are “the problem with the world”.<
THAT is a lie, and I dare you to find such a quote from me.
Unbelievable – I don’t know wether to laugh or cry!
davcbr gives examples of good companies with unions- UPS, AT&T et al, and Ed you come back with ‘Everything Unions touch, dies’. So tell me when we can expect UPS and AT&T to be going out of business so that I can cash out of their stock.
One reason foreign car manufacturers in the US were not killed of is because they have management teams that actually know what kind of car their customers want, they built more quality fuel efficient cars that retained their resale value after many years.
How about cheap competition overseas of 50 cent an hour Asian workers that killed off the clothing workers. The companies would have been gone even if they had no union, unless you can find someone in the US that will work for 50 cents an hour.
sigli,
>You’re obviously extremely closed minded, clouded by your own anger, and not much of a thinker or capable of seeing the big picture.I can tell you think you’re right before the facts are ever presented.Just a couple days back you let your know-it-all, self-aggrandizing, god complex get the best of you when you said I and those who think like me are “the problem with the world”.Well, now the gloves are off, and it looks like I’m not the only one tired of your constant rhetoric and hate.The best often survive the worst, but you’ll blame it all on the unions anyway, won’t ya.<
Ah, so the U.S. car companies lost because they suck. The union factor was just a coincidence…
davcbr,
Ok. The kid gloves are off now.
Maybe you missed Jim’s post, but it was about the union problems Vale was having in their Canadian mine? You might recognize THAT was the topic of this thread.
But maybe you are right. Maybe I am the problem, because I see unions for what they are, and not what the unions would like me to believe.
>Politics is important in the market. But the market is NOT entwined with ideology, and that is your problem, and I am tiring of this.You are part of the discourse problem this country is having. And YES it is there, starting with YOU every time.I take it that this is your presentation of why it is capitalism just doesn’t work. There is no market force against unions. Your ideology keeps you from understanding just how ridiculous that statement is.Tell me, how does this compare to what [ahem] bankers have done to our investments?Perhaps if there was a union, say, let’s call it ‘the United States’, and say they made some effective laws that kept stuff like that from happening. Would you be in favor of that?Elsewhere you’ve stated that you would not invest in a company that had a union.Like our discussion about STO, you could not get beyond the tax to see a profitable investment.It’s worth discussing, but not with you because the only thing that will come out is tax = bad.<
So you don't think an 84% tax burden is "bad"? I'd love to hear you squeal if the IRS sent you a bill for that much!
As for my mistaken "I will end here" to Ben, don't blame me if other posters wouldn't drop the subject, and then misstated what I had said previously. I'll be happy to let anyone else have the last word, as long as they are stating facts or their own opinions. But I'm not letting anyone put words in my mouth, including you.
Ed,
You’re obviously extremely closed minded, clouded by your own anger, and not much of a thinker or capable of seeing the big picture. Why don’t you take a step or two back and think about what I wrote before jumping to your pre-conceived conclusion. I can tell you think you’re right before the facts are ever presented. You obviously don’t consider new material.
I wouldn’t get personal, but you’ve invited it on yourself by attacking others with your constant drone of caustic attacks. Just a couple days back you let your know-it-all, self-aggrandizing, god complex get the best of you when you said I and those who think like me are “the problem with the world”. Well, now the gloves are off, and it looks like I’m not the only one tired of your constant rhetoric and hate. You don’t know everything, and I suspect you’re the type that is too stupid to realize you usually don’t know what you’re talking about.
Now let me use your latest grasping at straws–
“If “easy money” killed GM and Chrysler, explain why it didn’t kill foreign car manufacturers with plants in the U.S.? The fact is the easy money was life support for an industry where the heart had already quit beating. Dare I point out that this is Chrysler’s SECOND bailout?”
Wow, what a nugget! The answer is simple. The best often survive the worst, but you’ll blame it all on the unions anyway, won’t ya.
sigli,
Do I need to point out the U.S. might have been able to export it’s over-capacity in steel if not for the wage cost burden placed on our steel industry? Last time I checked, the world still uses a lot of steel.
If “easy money” killed GM and Chrysler, explain why it didn’t kill foreign car manufacturers with plants in the U.S.? The fact is the easy money was life support for an industry where the heart had already quit beating. Dare I point out that this is Chrysler’s SECOND bailout?
Do you remember the old “Look for the union label” commercials? That was for unionized clothing workers in the U.S. So how is the clothing manufacturing industry doing in the U.S. now?
But if you think unions aren’t blood-sucking leaches, feel free to explain how the public sector unions in Greece are protesting and rioting as that country’s finances are in a shambles? How about California’s unions applying political pressure on the government to prevent it from cutting costs? And let’s not forget the bang-up job done by the U.S. education system (thank you teacher’s unions)!
Everything unions touch, dies.
Ed
“By the way, to those of you who say, “We want to talk about investing, not politics”, remember: elections have consequences, and some of those consequences will be felt in your investments.”
Months ago I observed as you started posting here and I occasionally made posts requesting that we not let this forum devolve away from the subject matter. And I’ve watched it get worse and worse. You see, Ed, it is NOT politics that is the problem here. It is your IDEOLOGY.
This whole thread got moved completely away from its subject when you made an extremist statement that brought out the extreme in other people. And away it went.
Politics is important in the market. But the market is NOT entwined with ideology, and that is your problem, and I am tiring of this.
And if you question that I say ideology, read a few of your latest:
“But exactly how long do YOU hold onto a company where the workers won’t work? 8 months? A year? 5 years?”
Nothing wrong with that, except that it could easily be stated as
“But exactly how long do YOU hold onto a company that cannot manage its workers? 8 months? A year? 5 years?” Every dammed thing you say is colored this way, and unless people challenge it, immediately, the ideology gets accepted into the background as if there was a reason for it. You are part of the discourse problem this country is having. And YES it is there, starting with YOU every time.
Here’s one:
‘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.’
I take it that this is your presentation of why it is capitalism just doesn’t work. There is no market force against unions. Your ideology keeps you from understanding just how ridiculous that statement is.
“They’ve done so much for GM and Chrysler, haven’t they? By the way, you have a little bit less investment money now, since you are having to subsidize the UAW’s inflated wages. But keep singing the praises of unions…” Tell me, how does this compare to what [ahem] bankers have done to our investments? Perhaps if there was a union, say, let’s call it ‘the United States’, and say they made some effective laws that kept stuff like that from happening. Would you be in favor of that?
Elsewhere you’ve stated that you would not invest in a company that had a union. So, by Ed’s advice, UPS, AT&T, COKE, and GE off the top of my head don’t make the grade. Black and white thinking will not make you money Ed. Like our discussion about STO, you could not get beyond the tax to see a profitable investment. I am certain that it is a factor, but so what? It’s worth discussing, but not with you because the only thing that will come out is tax = bad.
Finally,
“Ben,
Per your request, I shall end here.”
And, of course, you couldn’t. Ease up. I’m not saying that you shouldn’t have an opinion, but express it and not worry so compulsively that you also have the last word.
^^ change from “that either side isn’t wrong” to that both sides aren’t wrong.
Ed,
I’ve heard your type of generic union-bashing blaming forever, it seems. I’m not a union guy myself, but I think many of your comments are grossly misinformed.
(Disclaimer: I grew up and live in a steel industry community. My grandfather retired from this steel mill, which went bankrupt and is now gone).
You blame the unions for busting that steel mill. The unions blamed Ronold Reagan. Considering the huge post-industrial economic pressure on the US steel industry, I have a hard time buying that either side isn’t wrong. America used to consume well over 100 million tons of steel per year. We’ve cut back to about 50. What is completely obvious here? About one half of the old steel mills are no longer needed. So who really killed the steel industry? Was it Reagan or the unions? Or was it economics pure and simple.
And to your GM/Chrysler comment–Easy money did more to killed the car industry than the unions ever could. Easy money put them in a cold war arms race against each other, then Bernanke pulled the plug. What do you think happens to industries with huge excess production capacities? That’s right, just like the steel mills, somebody’s gonna go bankrupt.
By the way, to those of you who say, “We want to talk about investing, not politics”, remember: elections have consequences, and some of those consequences will be felt in your investments.
Ok folks, here is my view as it relates to investing: Avoid companies that have to deal with unions. One of the reasons why union membership has gone down over the years is they keep killing the golden goose, aka the company they work for, with unreasonable demands above the going wages for the work they do.
They’ve done so much for GM and Chrysler, haven’t they? By the way, you have a little bit less investment money now, since you are having to subsidize the UAW’s inflated wages. But keep singing the praises of unions…
As a former owner/manager, I find that allowing a strike to go on for more than 8 months is sufficient proof that local management is not up to the task. That would also apply to general management for tolerating it.
I agree 100% with Mason and Marsdon1201! There is something inherently wrong when one person can post 7 or 8 times after one of Jim’s articles, with the posts primarily consisting of his personal political and social views. As I understand it, the purpose of this blog is to comment on Jim’s views and to share related INVESTING ideas. After all, this is Jim’s site. Come on, Jim, can’t you set up, or suggest, a different forum for off-topic commentary?