Pay out cash to shareholders and that will stop bosses wasting it on empire-building deals. This is activism-101 and it’s a big component in the dual-fronted assault on Anglo-Australian miner BHP Billiton Ltd. The snag is that, in this industry at least, siphoning out cash to the max is a counterproductive way of keeping managers in check.
Hedge fund Elliott Advisors thinks BHP will generate $31 billion of excess cash flow in the next five years. It wants $33 billion returned to shareholders in a five-year buyback program to thwart management doing bad M&A.
Sydney-based Tribeca Investment Partners is just as concerned about misguided capital spending coming after bad M&A — throwing good money after bad. It cites BHP’s foray into the U.S. onshore energy business, calculating that this has delivered a cumulative cash outflow of $26 billion and substantial impairment charges, which may not be over. It wants the operation sold and part of the proceeds returned to investors.
At least BHP was saved by politicians and regulators from two deals that would have torched billions of shareholders’ funds. Potash Corporation and Rio Tinto Plc are worth less today than BHP was willing to pay for them in 2010 and 2007.
Potash Corp shares have fallen since BHP was interested. Mining bosses need to learn restraint in both M&A and capital expenditure. When the cycle is on the up, they splash out on new projects with abandon, creating a capacity glut that makes the next downturn worse.
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