10 JULY 2012
The story of a bitter battle
Harmony Gold Mining’s hostile bid for its much bigger competitor, Gold Fields Limited, made headlines round the world in the early 2000s. The battle was bitter, vicious and very public.

It is possible to pinpoint precisely when the fifth domino fell. It was in the evening of an early summer Saturday — October 16, 2004. Ian Cockerill was celebrating his mother-in-law’s 70th birthday with a braai in the garden when the phone rang.

The caller said: “Hullo Ian, it’s Bernard Swanepoel. I’m phoning as a courtesy to tell you that Harmony will launch a takeover bid for Gold Fields on Monday morning. I need to know, within 48 hours, where you stand.” The tone was cool and businesslike, not hostile.

“Oh, really? What are the terms?”

“We’re offering 1.275 Harmony shares for every GFL share.”

Cockerill kept his cool too. “Okay, fine. I will convey your proposal to the board. But I must tell you I think it highly unlikely that the directors will accept it.”

Swanepoel pressed on: “You should also be aware that I have got an irrevocable from the Russians for their 20%.”

“Fine,” said Cockerill, though his mind was racing. An “irrevocable” meant a firm undertaking from Norilsk that it would throw in its lot with Harmony. He knew one thing for certain: for him, the birthday braai was over. He handed the tongs to his son and excused himself from the family gathering.

“When you’ve worked in the gold mining industry, you’re used to all sorts of curved balls coming at you. You almost kick into a slow-down mode because, if you don’t, you can make some very hasty decisions that you might regret.”

The first thing to do was get hold of chairman Chris Thompson, who was racing his car somewhere in the US. They agreed: an urgent board meeting was necessary. He called the company secretary to put it together — for the next day, Sunday. There would be a conference call hook-up for those who couldn’t be there in person.

The directors had a fiduciary duty to consider any offer. There was ready agreement that Harmony’s offer was totally unacceptable. Derisory, really. Swanepoel had made it clear that he would proceed with his bid whatever the board said. Cockerill decided to take as much time as he needed to put in place the strongest defence possible.

To the public — and at least one member of the board — the initial silence smacked of indecision. How can you stay almost silent for nearly a fortnight after receiving a hostile takeover bid? And when GFL did at last respond — on October 30 — it was cursory and dismissive, describing the bid as “a coercive attempt to gain control of GFL via an early settlement offer rather than a single offer conducted in the normal way”.

It was not a response calculated to stir the blood. Nor did it reveal that GFL’s blood was boiling. But it was. It was preparing to fight for its life.

Swanepoel’s courtesy call was not a complete surprise. Thompson and Cockerill had met with Swanepoel a few weeks before when rumours were flying about Harmony’s intentions. Something was up — but what? Secrets are not easily kept in the tight-knit world of Johannesburg mining. The market — and mining circles — had been buzzing with rumours for days.

As Cockerill liked to say: “If you are the father of pretty daughters, you expect predators to come calling. Gold Fields was a very pretty daughter indeed.”

Swanepoel found himself under pressure from the media and from others and decided to make his bid public sooner than planned.

Hence the call to Cockerill; hence the press release announcing the takeover bid on Monday, October 18.

Being Swanepoel, he came out swinging.

First public reaction was a mixture of incredulity and grudging admiration. Harmony was a successful upstart; Gold Fields an established giant. He could not be serious could he — a shark attacking a whale? It was thoroughly cheeky, typically Swanepoel — and whatever the outcome, it should make for a riveting spectacle and a rare old battle.

And so the contestants went to war.

Back in 2004, Swanepoel did not much like the idea that Harmony was thought of by some as an upstart. The company warranted greater respect than that. He was riding the crest of a wave, the blueeyed boy of the industry. His peers regarded him as very bright and very self-assured; an assessment he no doubt shared, although his preferred style was more self-deprecating. It was an endearing trait.

In 1995, at the age of only 34, he became Harmony’s CEO. Over the next 12 years, he grew production from 650000 ounces to 3million ounces, turning the company into the fifth-largest gold producer in the world. Inevitably, the media called him the man with a Midas touch.

In 2004, he decided that fifth place in the gold hierarchy was not good enough for Harmony. It needed to make a great leap; something more than the step-by-step growth of before. He thought he saw a golden opportunity.

He decided that he would try to swallow Gold Fields. Cynical observers saw it as cheeky, but enjoyed the audacity. Swanepoel saw a bigger picture. Combined, the shark and the whale would become the world’s number one gold producer almost overnight.

GFL’s achilles heel was Norilsk. Could he suborn this 20% shareholder? He set out to try.

Swanepoel made his move. He asked his advisers at HSBC to make an appointment for him with Norilsk.

On Saturday, October 16, Swanepoel learnt that the Norilsk board had approved his strategy. It signed an agreement to support Harmony and made it irrevocable for six months. In a single move he had sewn up the holder of 20% of his prey’s capital.

He had always believed that time and momentum were critical in any business venture. That same day, he picked up the phone to Cockerill.

Harmony’s bid became South Africa’s most sensational takeover attempt. It made international headlines. It had all the elements of high drama: a Johnny-come-lately mining house trying to take over an established giant, to create the most powerful gold mining company in the world. It would command headlines from the world’s media. It would go on for seven exhausting months until an almost farcical court ruling put an end to the misery. By that time, both companies were bleeding and investors were saying: a plague on both your houses.

On the Monday of Harmony’s public announcement, Swanepoel set up an international conference call to tell the world of his plans. It was the first shot in the battle for the hearts and minds of investors and analysts, and Harmony’s man oozed confidence.

“Good afternoon ladies and gentlemen, or good morning to the people in North America,” he said.

“The offer that we put to Gold Fields shareholders today, as you are all aware, is 1.275 Harmony shares for every Gold Fields share. This offer values Gold Fields at just over 8-billion, and represents a premium of 29% to Gold Fields’s 30 business day volume weighted average price, up to and including the 14th. We just picked the 14th because obviously after that incorrect rumours were beginning to impact on share prices. The value proposition for Harmony shareholders sits in our proven track record of reducing costs. We back ourselves to achieve the 15% cost reduction on the three big South African mines in order to break even in terms of the premium we have offered.”

He explained that Harmony had made a rare two-tier bid. The first stage provided for early acceptances of the Harmony offer within 30 days. Acceptors would get their money sooner and avoid entanglement in a lengthy takeover battle — “if it comes to that”. After that there would be a compulsory follow-on offer on the same terms. Of course, all regulatory processes would have to be complied with. That was when Norilsk would throw its 20% into Harmony’s takeover pool.

Swanepoel was in for an “extreme surprise”. Before seven months were out, Gold Fields had spent R316-million in legal fees and Harmony had spent about R184-million.

Swanepoel recalls that there were something like 23 legal actions on the go at one stage. The figure may be exaggerated — but not by much.

Almost every statement by one party or the other was challenged in one forum or another, and counter-challenged thereafter. Shareholder disillusion reflected in the share price of both companies.

Cockerill calculates that both companies lost value amounting to about R2-billion in the protracted battle.

Yet neither side could escape the roundabout with honour before the fight was settled, and that did not happen until May 2005.

By that time, the public had become tired of the spectacle and the final judgment, when it came, was a massive anti-climax.

Or a farce, as some journalists called it.

This is an edited extract from Battlefields of Gold by Rex Gibson, published by Jonathan Ball Publishers this week at R250.

Source: The Sunday Times is South Africa's biggest-selling national newspaper. Includes Sunday Times Magazine, Lifestyle, Business Times and Metro sections. Visit our web-site at: http://www.sundaytimes.co.za.

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