LONDON -- It hardly surprised the market when Cynthia Carroll announced that she would step down as CEO of Anglo American (LSE: AAL.L ) last week. Investors have been voicing disquiet for several months, with chairman John Parker fighting a rearguard action to keep her in place.
Her departure was greeted by a 2% rise in the share price, on a day when the FTSE 100 fell. That suggests the market thinks her replacement, whenever he or she is appointed, can do better. But can a new CEO turn things around? And what are the options for Anglo American?
Anglo has underperformed the rest of the sector since Cynthia Carroll took the helm in March 2007. The shares have lost a third of their value, and return on equity has halved.
In fairness, she took on a sprawling conglomerate and succeeded in streamlining its structure and diversifying operations outside of South Africa. But three big problems have dragged down Anglo's financial performance.
Firstly, rising labor costs -- and recent violent labor unrest -- combined with rising energy costs and a dampened market have squeezed profits in its South African platinum operations. Arguably, some uneconomic mines should be closed, but the politics of doing that in South Africa are delicate.
Secondly, Anglo's big Brazilian Minas-Rio iron ore project has suffered repeated delays and cost escalation. That's an operational issue, compounded by difficulties in negotiating Brazil's bureaucracy.
Thirdly, Anglo was forced to sell 25% of its Chilean copper mine to the state-owned miner after spending billions developing it. Her detractors think Carroll could have handled the situation better.
Some shareholders want to see the company broken up, and are pushing for a CEO with deal-making expertise. Credit Suisse reckons that international investors' discomfort with Anglo's South African operations holds back the share price by some 17%.
A breakup would reverse the merger that originally created Anglo American. It would be politically difficult, and would involve selling assets at a less than ideal time. There might be some short-term gain, but long-term shareholders might well feel short-changed.
Others perceive that the company's depressed share price and strategic vacuum could herald an opportunistic bid.
It's not hard to find precedents. Twelve months ago, Cable and Wireless Worldwide's chief executive departed after a succession of profit warnings savaged the share price. Though it had largely eschewed large acquisitions, Vodafone moved quickly to pick up Cable & Wireless's valuable infrastructure assets and corporate relationships on the cheap.
A bid for Anglo is imaginable. Although Cynthia Carroll will remain until a successor is appointed, she has lost authority.
Anglo rebuffed an approach from Xstrata back in 2009, while Glencore's Ivan Glasenberg has made no secret of his interest in the company. If the merger of those two companies goes ahead, a bid for Anglo American might well suit the canny Glasenberg's knack of picking up cheap assets and provide a job for the much-remunerated Mick Davies.
The precedent of Glencore's lowball bid for Xstrata does not bode well for Anglo's shareholders in this scenario. Again, the short-term gain may be small compensation for long-term shareholders.
The third option is that the board appoints a CEO to turn around the company's operational performance. That implies investors are in for the long haul before they see bottom-line results. Indeed, in the short term the share price might suffer: new CEOs often get out all the bad news early on.
There are some precedents. The then-CEO of RSA Insurance was ousted in 2002 after overseeing an eightfold decline in the share price. When Andy Haste was appointed the market was initially underwhelmed, but he transformed the company over the ensuing eight years.
Cynthia Carroll's supporters argue that Anglo's problems were not of her making. Indeed, it could be that her successor reaps the rewards of her strategy. Her acquisition of an additional 40% stake in De Beers boosts Anglo's share of the diamond market at a time when the other majors are pulling out because they lack scale. Demand for both platinum and diamonds are driven more by consumption than infrastructure investment, so they could be beneficiaries of the changing profile of the Chinese economy.
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