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

University essay from Luleå/Industriell ekonomi och samhällsvetenskap

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.