Inco Case Study: The End of Monopoly: A New World for Inco (Part 1 of 3)

Canadian Business History – Professor Joe Martin

This case was prepared by Anne-Mette de Place Filippini and Professor Joe Martin as the basis for class discussion rather than to illustrate either effective or ineffective handling of a managerial situation. All charts, photos, questions and exhibits omitted.

What a Difference a Year Makes

In October 2005, Inco announced that it had reached a merger agreement with its long-time Canadian rival, Falconbridge. If approved, the $12.5 billion sales entity would have been a diversified mining giant and the world leader in nickel production. It would also have been third in zinc and eighth and rising in copper. The new company would also enjoy a more diversified revenue stream, with about half of its pro forma revenues from nickel, a third from copper, 10% from aluminum and the balance from zinc, precious metals and cobalt.

The combined entity would become the world’s largest producer of nickel with a 25% share, ahead of Russian-based Norilsk, which boasted a market share of 18% at the time. Some observers saw the proposed merger as a way for Inco to fend off the attentions of Xstrata,(1) the Swiss company that bought 20% of Falconbridge in August, 2005.

In a conference call following the merger announcement, Inco CEO Scott Hand said:

“Inco’s enterprise value will leapfrog all but a handful of metals and mining companies to about $24 billion. Its estimated earnings before interest, taxes, depreciation and amortization will be $4 billion – fifth highest among metals and mining companies. The new Inco will be stronger, larger and more diversified; with perhaps the best operations, the best estimated reserves and the best growth projects, as well as a great global marketing position. We’ll be a major presence in North and South America, Asia, the South Pacific and Europe.”

Hand reiterated those views on November 10, 2005 when he addressed MBA students in the Rotman School of Management who were attending the inaugural offering of a course on Canadian Business History.

Between October 2005 and October 2006, Inco’s fate took a dramatic turn. A number of unpredicted events transpired, and these developments affected some of the biggest players in the global mining industries. A massive bidding war took place which first saw Inco attempting to acquire Falconbridge. Then, Vancouver based Teck Cominco launched a hostile bid for Inco; followed by a bid by the Swiss-based Xstrata for the remainder of Falconbridge.

Subsequently, Inco and Falconbridge announced a three-way tie-up deal with American copper producer Phelps Dodge. Finally, Brazilian based Companhia do Rio Doce [CVRD], which had been on the hunt for a major base metals acquisition, made a bid for Inco alone, and Xstrata was able to acquire Falconbridge. In September 2006, the Inco board put its support behind the CVRD offer – the third company to make a bid for Inco – a total of six bids since the spring.

In one year, the Canadian dream of harbouring the world’s number one nickel mining company evaporated. It appears, as this case goes to press, that the two oldest and largest Canadian nickel mining companies will disappear into foreign hands.(2) These changes are also indicative of a major shift in the worldwide mining industry whereby companies which used to specialize in one or two metals take on a greater range of minerals.(3) What is the historical background to this extraordinary turn of events? Were there any clues from Inco’s past which would indicate that the only Canadian firm ever to be a Dow 30 member would be absorbed into a Latin American company?

The View from New York Plaza

In 1972 the headquarters of International Nickel Company of Canada were located in New York City’s prestigious New York Plaza.The office enjoyed magnificent views of the Statue of Liberty, Staten Island and the New York harbour. As a former executive describes it, “you felt as if you could reach out and touch the Statue of Liberty, and, back then, Governors Island was still an exclusive army property.”

Changes were looming at Inco’s plush offices. Edward Grubb stood by the window of his office, looking down at the traffic below. Recently named President and CEO, Grubb was the new man at the top of the world’s largest nickel-producing company. Something had to be done to stop Inco’s deteriorating performance, and Grubb had a plan.

Edward Grubb enjoyed a reputation as a man of action and a no-nonsense cost cutter during his years in England. There he had served as head International Nickel Limited, the U.K. subsidiary of Inco, and Managing Director of its subsidiary, Henry Wiggin & Company Limited. Wiggin had head offices in London and rolling mills in Hereford in western England. Grubb had restored profitability to the rolling mills organization. Before moving to England, Grubb had been with Inco in the U.S., working his way up the ladder to increasingly responsible positions.

A former executive recalls that Grubb complained when he first arrived at Inco U.K. that there were more tea breaks than working hours. The executive also remarked that Grubb was not reluctant to fire employees who were not performing. The CEO cleaned house so well that, according to company lore, the Chairman regularly handed out “DCM Badges” – short for “Don’t Come Monday.” Employees reportedly came to fear being called into Grubb’s office to receive their “badge.”

Like many others, Grubb followed his father, William Henry Grubb, to Inco. Grubb senior had worked in the accounts department and became Comptroller in the late 1920s, continuing to serve there through the difficult early 1930s. Subsequently, Edward Grubb joined Inco in 1934 fresh out of college – he was one of the company’s few employees with a college degree.

Edward Grubb’s personality appeared to some people to be at odds with his reputation. Although he was considered to be a “take-charge” man of action, he actually came across as a man of reserve. Although well-spoken, he often appeared ill at ease in one-on-one encounters.

A Surprising Changing of the Guard

Prior to Grubb’s arrival, Henry Wingate had held Inco’s top position, the role of Chairman and Chief Officer of International Nickel Company of Canada, since 1960. Albert Gagnebin had been serving as Wingate’s second in command. Wingate had been expected to retire for some time, and the Inco Board of Directors met to decide the succession plan.

Everyone was expecting a smooth changing of the guard, but the board surprised them all.

The board passed over Wingate’s chosen candidate and successor, Albert Gagnebin. No-one had expected this. Wingate and Gagnebin had worked side by side for six years in the company’s top two posts. Back in 1966,Wingate had personally chosen Gagnebin to succeed James Roycroft Gordon, the first Canadian-born President.

In an unusual and surprising step at its last meeting, the board did not choose Gagnebin for the top position. Instead, it named Edward Grubb to succeed Henry Wingate.(4) Although Gagnebin was given the title of Chairman, it was Grubb who received the title of President and Chief Officer. (In the past, the Chairman had served as the Chief Officer as well.)

The board decision to appoint Grubb rather than Gagnebin had sent shivers down the spines of the management ranks at New York Plaza. Wingate had always gotten his way with the board. What had happened this time? Had Wingate made a mistake in appointing a board committee to look at the issue of succession? Had he been so sure of himself that he did not realize that they might choose someone other than his candidate? After all, in those days the board was the CEO’s creature.

Wingate had been at the helm of Inco for more than a dozen years and had had ample opportunity to reshape the board to his liking. More than half of the 25 directors had been appointed on Wingate’s watch, including prominent Chairmen from various organizations: Standard Oil, of the Bank of New York and the British General Electric Company. Not only was it a good board, but it was also “his” board.

And Wingate had strengthened the Canadian contingent of the board. He brought in the Principal of Queen’s University. Queen’s was a source of talent for many of the engineers hired by Inco. Wingate also recruited the board’s first French Canadian, who was the President of one of Canada’s premier pulp and paper companies. Moreover, he doubled the board’s representation from Manitoba, where the important Thompson mine was located.(5)

What had happened? Why had the board selected Grubb rather than Wingate’s chosen successor?

Annus Horribilis, Annus Mirabilis, Annus Horribilis

By end of 1971, patience was running thin among board members at Inco. Just as Inco management began to feel a sense of recovery after a terrible year in 1969, it then realized that 1971 would bring bad news once again. Financial results from 1971 were dismal, revealing that sales had dropped 25% and profits were more than halved. Accelerated market share losses in the late 1960s had now been punctuated by a series of misfortunes from 1969 to 1971.

These developments made it clear that major management changes were overdue. Financial markets had also handed in their verdict. On the Dow Jones, Inco’s shares were now changing hands at half the levels seen less than a year earlier. Inco had always been viewed as a blue chip company, consistent with its place in the rankings as one of America’s biggest and most important companies. Now it seemed to be a shadow of its former self.

The stomach-turning ups and downs experienced by the company since the late 1960s had shaken management to the core. How had this all come about? What had happened to Inco?

The year 1969 had been a terrible one for Inco. Poor labour relations had been exacerbating troubles at Inco. In spite of months of preparations, difficult union contract negotiations ensued with the United Steelworkers of America. An estimated 17,000 workers walked out in what was to become a four-month strike before a new agreement was signed. Henry Wingate, the Chairman of Inco, began his Annual Chairman’s Message to Shareholders with these words, “The dominant factor affecting the Company in 1969 was the …strike at our Ontario facilities. It seriously reduced deliveries and earnings. It worked hardships on customers. It delayed construction work on our large expansion plan in Canada. And it postponed the day when we shall be able to meet fully our customers’ demands for nickel.”

Inco’s horrible year was followed by a big pick-up in 1970. In the words of Chairman Wingate, 1970 was “a year of solid achievement. We operated more mines – we produced more nickel – we spent more on capital improvements – we paid more taxes – our net sales, earnings and dividends were larger in absolute terms than at any time in the Company’s history.” Unfortunately results collapsed unexpectedly the following year. Nickel deliveries had slumped to 382 million pounds in 1969, down from 500 million pounds in 1966. In 1970, deliveries then recovered to 519 million pounds, but then in 1971 dropped precipitously to 342 million pounds, the lowest level in ten years.

Management was at a loss to explain what had happened – the company had risen from the depths to the heights, and then plunged back into the depths again! But Wingate took solace in “a number of reassessments and hard decisions. …Most importantly, it has created a healthy self questioning in many areas of our activities of the methods and assumptions which enter into the functioning of our business.”

Matters had been made worse because Inco had suffered more than its competition, carrying 80% of the industry decline, while its smaller competitors, including Falconbridge, had fared better. The nickel industry’s “supplier of last resort” paid dearly in times of excess supply, carrying huge inventory maintenance charges. Inco’s loss of its monopolistic position became increasingly evident.

In 1960, there were a dozen or so producers of refined nickel in the world. In addition to Inco and Falconbridge there was the French firm, Le Nickel, Hanna Mining in the U.S., Rustenburg in South Africa, and Outokumpu in Finland. By the mid 1970s, there were nearly twice as many producers. Aside from those listed above, there were more producers in Japan, Australia, Zimbabwe, Greece, Indonesia, and Brazil, as well as imports to the non-Communist world from Russia and Cuba.

Weak markets and large inventory charges coincided with peaking debt payments on Inco’s capital expansion program. “We were spending nearly a million dollars a day more than we brought in,” recalls an Inco executive.

(1) Other global players such as Rio Tinto, BHP (Broken Hill Properties) Billiton and Anglo American were also perceived as threats. All of these global players are huge and have deep roots in the countries where the ores were originally found (Australia, South Africa) but now have listings in London and/or New York as well as in Melbourne and Johannesburg.

(2) Although as Jim Flaherty, the Federal Minister of Finance, noted, the nickel mines themselves aren’t moving.

(3) CVRD is the world’s largest iron ore miner and with the acquisition of Inco will be number two in nickel and will be able to focus more on non-steel uses of nickel.

(4) In Inco’s 1971 annual report, Chairman Henry S. Wingate wrote ‘The Board intends to elect L. Edward Grubb as President and Chief Officer, Alfred P. Gagnebin as Chairman of the Board and Chairman of the Executive Committee….These decisions reached and made known before the end of 1971, assure an orderly transition headed by Mr. Grubb….” However less than two years later, L. Edward Grubb was elected Chairman, J. Edwin Carter was elected President and Alfred P. Gagnebin, Wingate’s chosen successor, retired. So much for ‘the orderly transition.’ A former board member declined to comment.

(5) Wingate doubled the board’s Manitoba representation by bringing in George Richardson, brother of James Richardson, who had to resign when he was appointed to the Cabinet as Minister of Defense by Prime Minister Trudeau, and Peter Curry, Chairman of the largest mutual fund company in Canada.