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There's no doubt that Freeport-McMoRan Copper & Gold's (NYSE: FCX) proposed acquisition of McMoRan Oil & Gas (NYSE: MMR) and Plains Exploration & Production (NYSE: PXP) will benefit many of the directors of the two companies: Six, who serve the boards of both Freeport and McMoRan, will have their cash registers rung to the total tune of more than $130 million. Imagine being asked to vote in good conscience on a proposed transaction that would stuff that level of lucre into your pockets.
But should Freeport's shareholders have been permitted to vote on the combination, and will the tie-up enhance Freeport's shareholder value?
To vote or not to vote
Before I respond, in the interest of full disclosure, I'll confess to being a holder of Freeport shares. In fact, until early this month, I was a relatively content part-owner of a very, very, very small part of the company.
Today, I'm frankly bothered by the clear conflict of interest that probably has so many directors laughing all the way to the bank, while the copper company's shareholders have endured a double-digit drop in the value of their holdings since the three-cornered deal's announcement. As to the wisdom of putting the trio together under one corporate roof, there appear to be two very different factors at work. More about that shortly.
Shakespeare in energy land
Regarding the need for a vote on the acquisitions by those who hold Freeport shares, an explanation of the letter of the applicable law was rendered last week by Ronald Barusch in The Wall Street Journal's edition of the Deal Journal. It's an explanation that summons up thoughts of the suggestion by a character in Shakespeare's Henry the Sixth that he and his cohorts "kill all the lawyers."
As Barush says, "A shareholder vote is generally required ... only if the public company is an actual party to the merger." But McMoRan and Plains will technically be purchased by subsidiaries of Freeport, which seems to me to constitute a distinction without a difference. Further, a vote would be necessitated by Freeport's having fewer shares authorized than were to be issued in the deals, which is hardly the case. Both of those exceptions result from the corporate laws of Delaware, where Freeport is domiciled.
Finally, a vote would be demanded by the New York Stock Exchange were Freeport to be issuing more than 20% of its shares in making the purchase. But there will be enough cash involved in the transaction that such won't be the case. So Freeport clearly skirts the letter of the law vis-a-vis the requirement of a vote by its holders. However, as to the spirit of a partnership between management and those holding the company's stock, all this legalese clearly obliterates that objective.
Some analysts and observers have contended that Freeport-McMoRan is lurching into a new area, the implication being that the company's leadership may take its eye off the metals ball as a result. To that concern, I'd only point out that Freeport and McMoRan were once one, and that both companies have continued to be run by Co-Chairmen James "Jim Bob" Moffett and Richard Adkerson. The latter is Freeport-McMoRan's CEO. Both have been at the helms of the companies for decades, so they're hardly venturing into uncharted waters.
Absolutely the worst
I've lauded mining giant BHP Billiton's (NYSE: BHP ) management for its steady movement into energy, including the purchase of Chesepeake Energy's (NYSE: CHK ) Fayetteville shale assets. However, a longtime friend and former colleague, whom I consider to be a top-notch seer of the oil and gas sector, termed Freeport's proposed purchases "the worst acquisitions in the history of mankind" when I solicited his opinion. And you probably won't be surprised to learn that the phrase "conflict of interest" was included prominently in his assessment.
He went on to elaborate, observing that troubled McMoRan probably "wouldn't have made it" without the infusion of capital that selling out will provide. He did, however, concur with the notion that Plains' assets are almost certainly of sufficient quality to save the deal for Moffett and Adkerson. Even if they don't, both men's fattened wallets will have them riding higher.
So, despite being a holder of Freeport, I'll remain content to watch the company and its new underlings for now. I suggest you take a similar approach. After all, to invoke Bill Shakespeare once again, we need a better handle on whether something's really rotten in the state of Denmark.
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