The 2006 Freeport McMoran and Phelps Dodge merger's impact on stock price

¶ … billion merger between Freeport McMoran and Phelps Dodge (NYSE: PD) created the world's largest publicly held copper mining firm. The deal was announced on Sunday November 19, 2006 and was completed on March 19, 2007, five months later. After the merger, Freeport McMoran moved its headquarters from New Orleans to the Phoenix headquarters of Phelps Dodge. The company is now a significant producer of both gold and copper. Revenues are $16.9 billion and profit $2.7 billion. Much of this was supplied by Phelps Dodge which, despite being taken over, was the bigger of the two firms. This paper is going to examine the impact of the merger on the stock price of Freeport McMoran (NYSE: FCX).

The Offer

The offer was announced on Sunday November 19, 2006. Freeport McMoran offered to buy Phelps Dodge for a value of $126.46, which was comprised of $88 cash and 0.67 shares of FCX. The deal was announced on a Sunday, so there were no direct ramifications to either company's stock until the opening bell Monday morning. The deal was based on the closing prices for the stock on Friday November 17, 2006. The closing price for FCX on November 17th was $57.40. The closing price for Phelps Dodge was $95.08.

The fact that the deal was announced on a Sunday evening gives us a clear break for which to study this merger. There is no doubt when trading stopped and when in recommenced. However, it should be known that there were rumors of a deal before the actual announcement. The industry in general was going through a consolidation phase at the time, and Phelps Dodge in particular was rumored to be on the block. One of its lead shareholders, Atticus Capital, was reportedly disgruntled and shopping its near 10% share. PD had also been involved in a failed bid for Inco. Another company that failed in that bid, Teck Cominco, was rumored to still be in asset acquisition mode. All of this speculation and activity had resulted in the price of mining assets, in particular those of Phelps Dodge up the months prior to the takeover announcement by Freeport McMoran (Trounson, 2006).

Despite all of the rumors, there was little indication that Freeport McMoran, a company smaller than PD, was in the running. One analyst noted that there were only two firms large enough to acquire Phelps Dodge, Australian giants Rio Tinto and BHP (Schneiderman, 2006). Indeed, a complicating factor in our calculation was a surge in FCX a few days after the merger, when BHP was rumored to be interested in the combined entity (Mandaro, 2006).

Stock Price Data

For this project, we shall study the impact of the deal based on weekly stock prices of FCX through past the date of deal closure, finishing on June 29, 2007. This will allow us to study not only the interim period between the announcement and the closing, but also the impacts of the merger once the operational integration process was underway. Closing prices for each week will be used in this study.

Market Data

The benchmark index used will be the S&P 500. Unfortunately the S&P/TSX Global Mining Index did not exist during this period, as it would otherwise be the best index to use, as it reflects the global nature of the mining industry and the fact that New York does not specialize in mining. However, given this, the broader S&P 500 is the next best choice. The Dow Jones Mining Index is weak, due to the fact that most serious mining money is in either Toronto or Sydney. Thus, a broad market index is the best available comparison for the time period studies.

Abnormal Returns

The returns were generally abnormal. The actual returns on Freeport McMoran stock were considerably higher than the returns on the market over the study period. There was significant week-over-week variance, showing that on a week-to-week basis there is little if any correlation to the market.

Analysis of Results

Over the study period, Freeport McMoran's stock increased 44.28%, versus an expected increase of 8.04%. The stock should have finished the period at slightly above $62 per share. However, the acquisition appears to have boosted the fortunes of Freeport stock significantly in the first several months after the purchase announcement. The cyclical nature of the industry can explain some of the movements as commodity prices increased substantially over the study period. Copper prices rose 25% between November 2006 and June 2007. This increase was less than the increase on Freeport's stock, however.

The purchase was made for strategic reasons. One of the main outcomes is that Freeport emerged as one of the world's largest mining companies. This stronger position helped to propel the stock higher in the months following the purchase. It was unusual that Freeport stock did not fall immediately following the bid, a consequence of buyout rumors. This was followed by the rise in copper prices. Combined with favorable investor reaction to the purchase, Freeport dramatically outperformed historic expectations in the months following the announcement of the Phelps Dodge takeover.

Works Cited:

Press Release: Freeport-McMoran Copper & Gold to Acquire Phelps Dodge. Retrieved April 7, 2009 from http://www.fcx.com/news/2006/111906.pdf

Historical stock prices from Big Charts (WSJ). Retrieved April 7, 2009 from http://bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=fcx&close_date=11%2F17%2F06&x=43&y=24

Trounson, Andrew. (2006). Rumour Rockets Oxiana. The Australian. Retrieved April 7, 2009 from http://www.theaustralian.news.com.au/story/0,20867,20571418-643,00.html

Schneiderman, R.M. (2006). Atticus Capital Shopping Phelps Dodge. Forbes. Retrieved April 7, 2009 from http://www.forbes.com/2006/10/11/phelps-dodge-atticus-markets-equity-cx_rs_1011markets14.html

Mandaro, Laura. (2006). Copper Merger Twist: BHP Billiton Tipped as Bidder. MarketWatch. Retrieved April 7, 2009 from http://www.marketwatch.com/news/story/copper-merger-muddied-freeport-surges/story.aspx?guid={B2622BE7-E3F4-4D84-A1C2-08899768CC13}