A value assessment of mergers and acquisition in the South African mining industry

Abstract

The global mining industry has been experiencing an unprecedented period of change, driven by merger and acquisition activities which ran at record highs at all levels of the sector (Goldsmith, 2008). Metals became the new green on Wall Street, as mining displaced financial services to become the biggest source of mergers and acquisitions (Bloomberg, 12 June 2008). This was driven mainly by growing commodity demand from Asia which led to record commodity prices. Mining companies therefore positioned themselves to gain bigger economies of scale and diversification. The enactment of the Mineral and Petroleum Resources Development (MPRDA) Act, No. 28 of 2002, in South Africa also contributed to this trend. Mining mergers and acquisitions in South Africa have increased considerably, with all-time-high annual total deal values of about US$5.3 billion and US$5.7 billion in 2003 and 2006 respectively, according to deal information obtained from Dealogic. Despite this growing trend, various studies conducted indicate mixed outcomes as to whether mergers and acquisitions do create value. The bases for assessing value creation in mergers and acquisitions, however, often tend to differ and therefore require a comprehensive and holistic approach. This dissertation examines some of the key indicators that can be used to assess value creation in mergers and acquisitions holistically and comprehensively. Subsequently, a suitable and comprehensive value assessment model is developed and applied to some of the key mergers and acquisitions that occurred in the South African mining industry between 2003 and 2008.