An event study of the merger proposal between BHP-Billiton and Rio-Tinto

Abstract: For the past years the iron ore industry has experienced a large number of mergers and acquisitions. In November 2007, BHP-Billiton came with a merger offer to Rio Tinto. This merger proposal was worth approximately 150 billion US dollars, which is the largest in the history of mining. BHP-Billiton is the second largest iron ore producer in the world and Rio-Tinto is the third largest, together with their closest rival CVRD they control 75% of the market. This merger proposal met strong objections from not only the steel industry but also the European Commission. They claimed that a successful merger could lead to decreased competition and hence increased iron ore prices. The purpose of this thesis was to investigate the main motive behind the merger proposal. This was done through a so called event study. The abnormal return for BHP-Billiton showed a negative result. The negative result can be interpreted as if the market did not believe that the merger would lead to larger profits. Perhaps because the market believed that the merger price was too high in proportion to future profits, or that the merger proposal would not go through.