09/10/2007 - 22:00

'Do nothing' plan a winner

09/10/2007 - 22:00

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'Do nothing' plan a winner

There’s a new kid on the business block, and he’s doing very well thanks to a secret management technique called ‘do nothing’.

While not found in any textbooks, ‘do nothing’ is a management method that Briefcase finds rather attractive, and worries that it might change.

Marius Kloppers is the new boy doing nothing since officially putting his feet under the chief executive’s desk at BHP Billiton last week; but really having been the man in charge since his appointment was announced on May 31.

In the four months since Mr Kloppers was named as Australia’s most powerful businessman (and easily the most important person in Western Australian business, even though he lives in Melbourne) the share price of BHP Billiton has soared.

It might even be argued that the increase from $31.53 on May 31 to recent trades around $45 can be attributed to the arrival of the 44-year-old South African whiz-kid.

Following that line of thought, friends of Mr Kloppers are entitled to claim that he is the $45 billion man, that being how much a share price rise of $13.47 adds to the market capitalisation of BHP Billiton.

Mr Kloppers’ impact is, of course, much less than that, but Briefcase has always found a little exaggeration does wonders in spinning a tale.

In this case it actually serves a purpose, because to put the $45 billion increase in market capitalisation into perspective you have a number that is bigger than the value of all but nine other companies on the Australian Securities Exchange.

In other words, BHP Billiton has risen in value by more than the total value of Woolworths, or Woodside Petroleum, or Macquarie Bank, or AMP – as each of those companies is valued at less than $45 billion.

The question that has to be asked is, why? Has there been an event in the life of BHP Billiton other than Mr Kloppers replacing Chip Goodyear?

No, is the correct answer. As far as Briefcase can see, there have been no other major developments recently inside the company. Profits are exceptional, but we knew that. A decision on expanding Olympic Dam, the biggest single future development in the company’s pipeline of projects is yet to be made. Some commodity prices have risen (iron ore and oil), some have fallen (nickel and zinc), and some are exactly where they were the day Mr Kloppers was anointed as the new boss (copper).

The lack of major corporate or commodity market events since May 31 leads to the conclusion that: (a) investors have suddenly decided that this really is a super-cycle of ever-rising commodity prices; or (b) Mr Kloppers is the man to deliver a great new period of expansion for the company.

•••

The first point about renewed commodity price optimism is possible. Every boom has its late arrivals.

The second point is the one that has some BHP Billiton watchers a bit nervous because the new boy might actually believe that he has to do something to justify his $US1.85 million base salary, and more after incentive bonuses are added.

It’s the bonus structure as much as anything else which compounds the concern about Mr Kloppers being an activist manager, making himself busy buying things, and changing things, to impress the board, and justify his bonus.

But the truth about BHP Billiton is that it always performs best when management doesn’t try too hard, and concentrates on the basics of running a resources business – such as keeping costs down, and banking the cheques from selling minerals and fuel to Asia.

Creating value when you are nothing more than a price taker is when the trouble starts.

A decade ago, BHP (in its pre-Billiton days) inherited an activist management team that did all sorts of curious things, such as investing in a value adding hot briqueted iron (HBI) plant at Port Hedland, only to find its was a “value destroying” decision, costing shareholders about $3 billion.

The company also embarked on a worldwide process of aggressive expansion buying copper mines in the US (failed), platinum mines in Zimbabwe (failed), and titanium minerals mines in WA (failed).

Mr Kloppers, who was a young man in another country (South Africa) when BHP ran off the rails, has not had first-hand experience of any of these disasters, which were all done in the name of value-adding.

That means that on one hand he’s innocent.

On the other it means he has little concept of what happens when management inside a business changes tack from a somewhat boring, steady-as-she-goes approach to an active growth policy.

Right now, Mr Kloppers is probably sitting in his office, peering out over Melbourne’s skyline, wondering what he can do to add value to the company. In reality, all he has to do is expand cautiously, take the prices on offer (and peel off a bit more where possible), and enjoy the ride; much like Mr Goodyear did over his last few years in the top job.

•••

The problem is that the stock market, driven by people even younger than Mr Kloppers, are egging him on.

By pushing the share price up by more than $13 since his appointment was announced there is a new, and dramatically higher hurdle for Mr Kloppers to clear, which is the challenge of delivering the earnings to justify the share price.

How will he achieve this miracle of generating a few extra billion dollars in profit to underpin the share price thrust upon him by investors who have suddenly discovered the commodities super-cycle?

As far as Briefcase can see, Mr Kloppers can achieve this in a couple of ways. He could (a) keep a cool hand and steadily expand the business utilising the pipeline of existing projects (the preferred route), or (b) aggressively seek out takeover and other expansion opportunities not on the company’s books (the non-preferred route).

The reason the steady-as-she-goes approach is best is that not only are commodity prices close to all-time highs, but so are asset values. So, whatever you buy today will require an awful lot of profit to justify its purchase – and that assumes commodity prices will rise even further.

Set that commonsense observation against a 44-year-old keen to make his mark by delivering a prize to his masters on the BHP Billiton board.

The last time a chief executive at BHP Billiton tried to do that was when Brian Gilbertson suggested a takeover bid for arch-rival, Rio Tinto. The board said no, and Mr Gilbertson quit.

Both Messrs Gilbertson and Kloppers come from South Africa, as does an even more aggressive acquirer of assets, Mick Davis at Xstrata.

Briefcase hopes that this common South African connection, plus the enthusiasm of the market for Mr Kloppers to do a deal quickly, and the raw enthusiasm of a young man in charge of a big company doesn’t produce an outcome such as we saw in the 1990s.

•••

“Youth loves honour and victory more than money.” Aristotle (and nothing’s changed in more than 2,300 years)

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