CHAPTER 18
Top of Heidrick & Struggles’ list of candidates to replace John Prescott were Brian Gilbertson, chairman and chief executive of Billiton, and Paul M. Anderson, a pragmatic, results-orientated, motorbike-riding American. Gilbertson was the man with a proven track record in mining. The headhunter told him that BHP was like a plane flying on one engine and he was the industry’s choice to fix it. Gilbertson found it a tempting prospect – either joining BHP or, alternatively, taking it over – and he discussed the matter with some of his directors.
‘In late 1998, Brian told us privately outside a board meeting that BHP was sniffing at him,’ John Jackson says. ‘I thought that although this would be quite tricky if Brian moved to BHP, it might open up some very interesting possibilities for the future.’ 1
In fact, we can reveal that Gilbertson was actually offered the job. He asked his colleagues on the Billicom, ‘What do you think we should do about it? Should I take the offer?’
He was told, ‘If it’s a way of creating a merger between Billiton and BHP, then yes. If not, it’s up to you.’ 2 Gilbertson went back to Melbourne and told BHP he would be interested in the job if it were seen as a precursor to a merger. ‘They couldn’t swallow it,’ says a Billiton source. ‘The reason was BHP had a lot of mess to clear up and they didn’t want to go into a merger and let us do it. It was not in the interests of Australian shareholders, so they said no to Brian and he said, “Sorry, I’m off.”’ 3
Over in Charlotte, North Carolina, Paul Anderson was contemplating early retirement from his role as president and chief operating officer of Duke Energy. In a 20-year career in the oil-and-gas industry, he had masterminded two multibillion-dollar mergers and was still young enough, at 53, to enjoy riding his Harley-Davidson around the United States with his wife, Kathy, or going yachting and scuba-diving with his two daughters, both in their twenties.
Born on April Fool’s Day 1945, Anderson grew up on the west coast of America and gained a degree in mechanical engineering from the University of Washington (1967) and an MBA at Stanford University (1969). He worked for the Ford Motor Company until 1977 when he switched to oil and gas, starting as director of corporate planning at Texas Eastern. When Texas Eastern merged with Panhandle Eastern in 1995, he became chief executive of PanEnergy. Then, in 1997, he ‘engineered himself out of the job’ with the US$7.7 billion merger between PanEnergy and Duke Power, although as president and chief operating officer he was second in command of Duke Energy.
But then came the offer from BHP, a job regarded by the Financial Times as ‘the most compelling challenge for any executive in the resources industry’. 4 ‘From a financial standpoint, I would have been better off to stay with Duke,’ Anderson says. ‘But I was familiar with BHP, and when they explained the situation and the challenge, I said, “Well, one more campaign can’t be bad – I’ll take this one on.”’ 5 With Anderson’s appointment, the BHP caste system was decisively broken. Not since General Douglas MacArthur had taken control of the Australian Army during the Pacific War in 1942 had such an important Australian position been handed to an American. ‘It was a brilliant move and I do claim that as mine – no one else does, but I do,’ Jerry Ellis says. ‘I led the mission that found Paul Anderson. We had a small committee of the board, which included, of course, Don Argus, because by then we had decided that Don would take over from me and the candidate had to be agreeable to Don. Yes, it was an opportunity to break from the old BHP mould, which was a formula that no longer worked.’ 6
Anderson’s arrival was keenly awaited by investors, stockbrokers, reporters and employees alike. He flew to Melbourne in November 1998 and started work on 1 December on what was described as ‘a fundamental restructuring of BHP’. 7
The first Paul Anderson knew that the phone at his new Toorak home was connected was a call from Brian Gilbertson, who was sitting in a Billicom meeting in London. Not one for idle chit-chat, the South African said, ‘Hello, Paul, you don’t know me. I’m Brian Gilbertson. I run a company called Billiton. Our two companies belong together and we need to put them together.’
Paul Anderson replied, ‘Well, thanks for saying hello. I’ve literally walked into my new home. I didn’t even know my phone was working. I’ve got a lot to do at BHP to sort things out, but thank you for your call.’ 8
Back at BHP Tower, Anderson called in the senior leadership team. ‘I explained who I was, why I was there and what my expectations were,’ he says. ‘I told them I was going to meet with each one of them for an hour or more and listen to what they had to say. I asked each of them to put together a two-page paper: the first page was a little introduction – who they were, their background, job responsibilities, the issues they were facing in their job and whether they required any major capital expenditure in the next six months; then, on the second page, I asked them to put down what they would do if they were CEO of this company. I said, “That one will be between you and me. It won’t go any place. But I’d like to know if you ran the company, what would you do – no holds barred?”’ 9
Anderson seemed unnervingly receptive to fresh ideas, telling staff to call him by his first name. Graham Evans, then director of external affairs, says that for the first few weeks back at headquarters, ‘He really didn’t do anything. He just went around talking to people and listening to what they had to say. He regarded that as an important characteristic of a good leader, listening and understanding what drove people in terms of attitude and so on.’ 10
When he did act, he was decisive. ‘He was quite strong on demonstrating by his own behaviour that he was serious about the things he wanted to do in the company,’ Evans says. ‘He started eating in the general cafeteria. He made a number of changes that flagged a different sort of company. He introduced “casual Friday” in terms of dress and subsequently moved to a position where people could dress casually every day. But within sensible bounds. If it made others uncomfortable if you weren’t wearing a suit, then he expected you to wear one, and he did so himself.
‘He tried to interface a lot more directly with staff. He used to hold regular staff briefings. He’d encourage people if they had issues to send him an email and he’d respond to that. If there was one characteristic of Paul’s style which was typically striking, it was that he was a very good listener.’ 11
Discovering that each sector had become a little enclave that enjoyed considerable financial independence, he pulled everything into a centralised system of rigorous analysis and budgetary control. He shook up BHP’s corporate culture by changing the company’s idiosyncratic June–May fiscal year to bring it into line with the rest of the Australian business community and even renamed it from the cumbrous Broken Hill Proprietary Company Limited to BHP Limited.
He trimmed the executive ranks, tied two-thirds of their pay to performance, eliminated the company car as an automatic perk and ripped out the en suite office bathrooms. 12 Many of BHP’s traditional titles disappeared. ‘We really only need three titles,’ he told executives. ‘If you’ve got board responsibility, you’re a president, and if you report to a president, you’re a vice president, and if you report to a vice president or you’re somewhere else in the organisation, you’re a manager. If that doesn’t make sense, come see me.’ 13
One employee was moved to express his feelings in an anonymous message in BHP’s intranet chatroom: ‘Yankee go home!’ 14
One of Anderson’s most trusted advisers was his wife, Kathy, who had been in charge of public and investor relations for Enron, the United States energy group that bought most of BHP’s copper concentrate (but later crashed in one of the biggest financial scandals of all time). Kathy attended analyst meetings and offered advice, all with the blessing of the BHP board. 15 ‘She was a great unpaid consultant,’ Anderson says. ‘I would take her around with me on tours of plants or mines and it was a second set of eyes that was very helpful. She would get input from people who were reluctant or afraid to talk to me. Where a plant manager was stifling everybody under him and I don’t get to see that because he’s managing me, Kathy would say, “Go visit this part of the operation.”’ 16
She was also valuable through her background in investor relations. ‘We didn’t have a US investor-relations program, so we cranked that up quite a bit,’ he says, ‘and the percentage of shares owned in the US went up fairly dramatically.’
At Brad Mills’s suggestion, Anderson moved all the portraits of former chairmen, ‘glowering from the walls on the executive floor – the 49th – to the conference-room floor – the 50th – and put some nice art on the executive floor. It changed the symbology of this ancient way of history that was dragging the place down.’ 17
Jerry Ellis found Anderson to be ‘a straight talker, down to earth, with a great set of values. He was universally accepted as an excellent person for the job,’ he says. ‘Paul had lived in some pretty tough environments, so he knew how to look after cash. I don’t ever remember anything said negatively about his predecessors. He never had a bad word. He only spoke about what he needed to do in the future. I didn’t come under any criticism from him or any of his staff at all.’ 18
For the vital role of chief finance officer, Anderson placed his faith in a fellow American with the appointment of 40-year-old Chip Goodyear, who had first been approached in September 1998 when he received a telephone call from a New York headhunter who asked him, ‘Any interest in being the CFO of BHP?’ Goodyear replied, ‘Until you get a CEO, it doesn’t make any sense to be talking about a CFO.’ 19
Descended from an immensely successful American lumber baron, Goodyear was born in Hartford, Connecticut, and raised in Houston, Texas, where his father worked for Exxon. After graduating from Yale in 1980 with a degree in geology and geophysics, Goodyear began his career as a geologist at Mobil. He left to complete an MBA at the Wharton School of the University of Pennsylvania, then moved into investment banking in 1983 with the Wall Street firm of Kidder Peabody. Six years later, he joined Freeport McMoRan, the copper-and-gold producer based in New Orleans, as chief financial officer. At the time of the BHP approach, he was president of Goodyear Capital Corps, his family’s private investment company. 20
Then, in November 1998, he heard that Paul Anderson had been appointed chief executive of BHP. They had met when Goodyear was at Kidder Peabody during the merger between Texas Eastern and Panhandle Eastern. Anderson says, ‘I pulled up the names of everybody who had been suggested by the headhunters. Chip was made for the job: his background was perfect, including his experience with Freeport McMoRan and Kidder Peabody. I put him at the top of the list.’ 21
The headhunter called Goodyear again: ‘Okay, we’ve got the CEO, now what do you think?’ Goodyear flew to Melbourne for an interview. ‘He was from central casting – when he walked in the room, he looked like he should be the CFO,’ Anderson says. ‘[His wife] Elizabeth got along with Kathy. It wasn’t very hard to make the decision; it was mainly hard to convince him that he wanted to leave the United States and come over to Australia.’ 22
Says Brad Mills, ‘I interviewed Chip to come down to work with us; I was one of the interview panel. I like Chip – he was a modern American finance guy, a confident character, and he worked well with Paul.’ 23
Goodyear accepts he joined BHP at a difficult time but it was a challenge that he relished. ‘I like restructuring opportunities, I like rebuilding and I had known the company probably a lot longer than Paul had known the company. My experience covered everything from oil and gas and minerals – not steel, admittedly – but then you had that finance side of it, so it was really an excellent fit in terms of my background and interests,’ he says. ‘So we worked together, not only with Paul but with Don [Argus], the board and the management team, and we set up a strategy that first of all Paul felt was righting the ship and bringing it back on an even keel to tap the quality of the assets and the business so that the bad decisions from HBI, Beenup, Hartley, Magma didn’t sink the company. Those things would have sunk any lesser organisation.’ 24
The tall, softly spoken Ivy Leaguer said in the press release that marked his arrival in June 1999, ‘My joining the management team will drive a new era of value creation and growth at BHP.’ There were some who might question that estimation: in the first two years, the dynamic duo of Anderson and Goodyear would shed 2000 jobs and $6.9 billion worth of assets in 30 deals. 25
‘One thing I’ve found is that no matter what I do, there’ll be people who disagree with it,’ Anderson told the Financial Times in an interview at that time. 26 This was certainly true of his attempt – at Graham Evans’s suggestion – to develop a mission statement in the form of a company charter. ‘The first thing Graham did,’ he says, ‘was to put together a cross section of about 30 people in the organisation. I gave them the skeleton outline of what I wanted it to have – a purpose and some imperatives, what are our values and how do we judge success? The group finally came up with a charter and we circulated it to about a thousand people and the general reaction was, “This is bullshit. This is something clearly written by a committee.” So I took everything we had and locked myself in a room over a weekend and hand-wrote the charter, which is very similar to the one that’s in the annual report now.
‘It was a very useful document, a touchstone – whenever you had major decisions, it was a good thing to refer back to.’ 27 Anderson wrote:
Anderson found a willing ally in his compatriot Brad Mills. ‘Paul came out of the same school of business that I went to, the Stanford School of Business. [He was] a pragmatic, competent American businessman who understood the structural issues and the strategic issues,’ he says. ‘When he landed, we had the complete map for what needed to happen to the company. Paul picked it up and said, “Okay, let’s execute it.” Over the next three years, there was the execution of that very substantial corporate turnaround, a clean-up plan.
‘We spun the steel business in two bits instead of one: we chopped off the long products and then the flat products. Paul was a good politician – he took his board with him. Once that happened, we were able to sort out the Foster’s thing, write down all the bad assets – the HBIs and the Beenups – clean up the operating structure, and the business started performing much, much better in terms of having the focus at the right time. But it was very tough on the corporate culture of BHP. The metric I often look back on: if you look at the top hundred executives in BHP at the time Paul Anderson started, 60 of them left over the next three years. So it was when the culture changed to being an international mining company.’ 28
As foreshadowed the previous year, Jerry Ellis had departed on 31 March 1999 and Don Argus, the feisty Queenslander recruited to the board from National Australia Bank, had become chairman. As a young man, he had represented his state as a hockey player and coach for ten years. Indeed, as the only Australian with international coaching qualifications, he had considered making it his career before turning to banking. Nothing, however, could prevent The Big Australian plunging $2.31 billion (US$1.14 billion) into the red in the year to the end of May that year – Australia’s worst-ever corporate loss. Paul Anderson told the ABC, ‘The good news is that while the financial results are deplorable, and I use that word carefully, in part they reflect the fact that we’ve taken a number of difficult but very necessary steps to provide a solid foundation for the future.’ 29
Anderson had also authorised a makeover of the company’s image. ‘We were already preparing to change the identity of the company,’ says Michael Spencer, BHP’s then vice president communications. ‘We were very keen to move away from The Big Australian. The whole company rested on this image. The problem was that big meant not being nimble; being the Australian constrained you. In the States, it was seen as being quaint but not global. We had to position ourselves as a global player; the days of national entities were passing.’ 30
Spencer engaged a local company to do ‘pilot testing’ of concepts that would underpin the new identity. The crowd favourite – particularly with staffers – was ‘being resourceful’: a resourceful resource company, that said it all. He was off and running.
The first opportunity that Paul and Kathy Anderson had to explore Australia for themselves came six months into the assignment, when they took off on his Harley-Davidson motorbike to see some of the country. With the saddlebags packed and Kathy riding pillion, they headed down Victoria’s Great Ocean Road. ‘We’d heard a lot about it, so we took the bike and rode down to Port Campbell and back – it was a great ride,’ he says. 31
On his return, BHP shut down its loss-making titanium project at Beenup, pulled out of freight shipping between Australia and New Zealand and sold its power generation and transmission assets for $509 million to Anderson’s previous employer, Duke Energy. It also banked around $650 million for the sale of its manganese twins, GEMCO and TEMCO, to Billiton plc, whose manganese arm, Samancor, had been restructured as a joint venture between Billiton (60 per cent) and Anglo American (40 per cent). As a result, Samancor became manager of BHP’s manganese mine on Groote Island and smelter at Bell Bay, Tasmania. The sell-offs enabled BHP to cut its debt-to-equity ratio from 52.5 per cent to around 49.5 per cent. 32
‘Paul is a great guy and a wonderful businessman with a distinguished record,’ Lance Hockridge says. ‘He was very focused, knew with a remarkable degree of precision what he wanted and, equally importantly, what he didn’t want. He set about rebuilding the company out of what were, to say the least, very troubled times.’ 33
In late June, with copper averaging just 64 US cents a pound – the lowest price of the century in inflation-adjusted dollars – Anderson made his biggest decision so far: he closed the San Manuel mine and smelter indefinitely, throwing almost 2200 people out of work. An additional 400 employees were laid off elsewhere in Arizona and Nevada, representing the company’s almost total withdrawal from the American copper industry.
BHP spokesman Jay Rhodes said the company was forced to stop most production in the United States because it was unprofitable at such low prices. Closing mines and laying off workers, while unfortunate, was hardly unusual in the industry. ‘Copper is a cyclical business,’ Rhodes said. ‘It’s been one where when the price increases, the players holding low-grade deposits open them for production. When the cycle is down, they have to put them on hold.’ 34
Paul Anderson told an ABC news reporter on 25 June 1999, ‘The spot price of copper today is down another six/seven cents versus the average of last year, but I would be surprised if we didn’t see some movement as a result of the closure of our south-west properties.’ 35
The effect on little San Manuel was cataclysmic. According to one former resident, ‘an entire community lost its identity and lifeblood in the blink of an eye’. ‘BHP didn’t pull the plug on San Manuel because the ore was gone,’ says Richard Ducote of the Arizona Daily Star, published in nearby Tucson. ‘Nearly two billion pounds of copper remains entombed in the lower reaches of the San Manuel and Kalamazoo ore bodies that were in production when the lights went out.’ 36 37
‘The San Manuel operation had been shut down but the smelter was still in place and could have been started in a couple of months,’ says Dave Lowell, who had discovered the Kalamazoo deposit back in the 1970s. ‘The copper price had to rise about five cents. San Manuel and Kalamazoo had a big flow of water and it was terribly expensive to keep the mine, so they made the decision to turn the pumps off and flood the mine. Within two months, the price of copper had risen to their target price and were the mines in operation now, they would be making billions of dollars a year.’ 38
Paul Anderson maintains that the Magma operation was refocused on ways of maximising the value without developing the mine further. ‘We switched over to an exit plan to do some acid leaching of some of the ore piles that were already there and get some copper out of what had already been taken out of the mine, and we would see if we could find a home for the smelter in a deal with Phelps Dodge or somebody like that,’ he says. ‘Ultimately, we got some leached copper out, but the smelter – there was a lot of games-playing between ourselves and our competitors, and they realised that they had the upper hand and they would be better off if the smelter got shut. It could have made sense to do something with one of the competitors but we would have benefited a lot more than they would have and they realised that.’ 39
So the mines were stripped of equipment, sealed and allowed to flood. The huge smelter disappeared, as did the rod plant and electrolytic refinery. The twin smelter stacks, more than 500 feet tall and each weighing 10,000 tons, were demolished by explosives – an event that provoked a new wave of anguish and resentment among the people of San Manuel. 40 Women wept as the giant chimneys, landmarks in so many facets of their lives, crashed to the ground in clouds of brick-dust. To many, it seemed like an act of corporate vandalism.
‘There are three-generation families in this area that worked there – I worked there, my son worked there, my grandson worked there and there were many families like that. If you were in the family, it was easy to get a job there,’ Taffy Tafoya says. ‘I mean, hell, while you were in high school they were already training you. You could get jobs in the mine. If you go look at that area now, you’re not going to believe what you see – nice rolling hills. They planted grass and smoothed out all the gullies and made it beautiful – it looks like beautiful parkland. It’s not open to the public. They erased everything off the top of the earth.’ 41
With the price of copper hitting US$4 a pound, Lance Hockridge says, ‘A lot of it was timing. If the Magma Company had been bought today, it would have been superb – but life as a manager is as much about getting the timing right as anything else.’ 42
Hockridge was singing the same tune as Brian Gilbertson, who was looking around for a partner to consolidate Billiton’s position and protect it from the predatory lions that were systematically devouring the weak in the ‘victor or victim’ dismemberment of the mining industry. ‘We’d sorted out Billiton and we wanted to take the next step,’ Mike Salamon says. ‘We were still in this world where mining was bad news; the mining industry was dead. You needed to be much more efficient. The way to do that was to take bigger businesses and merge them. We looked around the world and said, “What’s doable?” The list wasn’t very long: you had the national champions like CVRD, which you couldn’t do; then you had Anglo American, which would, in a sense, have been back to the future; Rio Tinto, a dominant number one; and then BHP, which was going through a lot of issues but had a fantastic resource base, in particular iron ore, coking coal, Escondida – those were outstanding franchises.’ 43
Paul Anderson finally met Brian Gilbertson some six months after their telephone conversation when the two chief executives ran into each other in London in June 1999. Once again, Gilbertson raised the question of a possible merger. ‘We’ve got a strategy we’re pursuing and I don’t want to divert the attention of the troops,’ Anderson told him. ‘We’ve got so much stuff going on that the idea of even talking about a combination or anything like that wouldn’t be appropriate.’ 44
Once again, Gilbertson said he was prepared to bide his time. ‘One of Brian’s greatest strengths is a huge persistence and a total inability to know when he’s being unreasonable and a complete refusal to take no for an answer,’ Dave Munro says. ‘He’d approached BHP on several occasions, and had it not been for his persistence there would have been no deal.’ 45
Gilbertson called his vision of a merger ‘Project Bardot’ after his favourite film star. He’d had a crush on her since seeing her in Viva Maria! when he was working in Paris during the 1960s. ‘I’ve always said Project Bardot was creating the most desirable company in the world,’ he says, ‘That was our internal name for it on the Billiton side.’ 46
Back in 1998, it had taken Ian Fraser three months to find Gilbertson’s heir apparent. ‘I met all the senior people, dug about and came back to Brian with a huge pile of CVs,’ he says. ‘Brian hated paper, so I did it deliberately. He said, “What the hell’s all that paper?” I said, “Don’t panic – you only have to look at one.” I pulled out a CV and he said, “What’s that?” and I said, “That’s the guy you need.” He read it and, of course, it was Marius Kloppers. He’d recruited Marius but he didn’t really know him. Marius had built the Hillside smelter and it was running brilliantly. He’d just moved to Holland and was doing aluminium marketing. We then had to test him and grow him into this role. Brian went about designing his career.’ 47