Xstrata shareholders caught in 'prisoner's dilemma' Could Anglo or Vale free them?

Shareholders of Swiss neighbours Xstrata plc (LON:XTA) and Glencore International (LON:GLEN) will finally vote on the $37 billion merger of the two commodities giants on November 20.

The deal – initially billed as a 'merger of equals' in February, but now more resembling an unfriendly takeover – was pushed to the verge of collapse in July when Xstrata's largest shareholder Qatar with 12% of the miner unexpectedly opposed the deal's terms.

Glencore already owns 34% of Xstrata and was offering 2.8 shares for every one of Xstrata, but in September Glencore CEO and largest shareholder with more than 15%, Ivan Glasenberg, relented under pressure and upped the offer to 3.05.

As part of the revised offer which would be the largest corporate deal of the year, Glasenberg (pictured above), would lead the combined company and not current Xstrata CEO Mick Davis (pictured on the right), who was earlier slated to lead a post-merger 'Glenstrata'.

According to the latest merger documentation released last week Qatar would own 8.4% of Glenstrata based on the current terms while Glasenberg's stake in the combined entity would be just under 8.3%.

But Glasenberg's role and stake in a Glenstrata are not the most contentious issues before shareholders. That would be the more than generous $200 million set aside for 'retention bonuses' for Xstrata's top management.

Writing in the NYTimes Steven M. Davidoff, a professor at the Michael E. Moritz College of Law at The Ohio State University, argues shareholders are caught in "a diabolical game of the prisoner’s dilemma:"

As Institutional Shareholder Services wrote in a note to its clients this week, the only viable strategy if you want the merger to succeed is to vote yes for both parts of Question 2. Otherwise, you could be left with no merger and no compensation package. But such a vote almost ensures the passage of the retention package with the merger.

Executive compensation is a hot topic everywhere in the corporate world, but especially in London and $200 million for golden handcuffs seems dear even by earlier standards.

This and the fact that many of Xstrata's large shareholders, including Qatar, have maintained all along a 3.25 ratio would be more acceptable and that Glencore is underpaying, may end up being enough to sink the deal.

And besides, Xstrata's board and institutional backers may have other options opening up.

In June 2009, it took only two hours for Anglo-American's (LON:AAL) CEO and board to reject talks with Xstrata about a merger.

With Cynthia Carroll's departure the world's fourth largest miner is urgently looking for a new chief and a new direction for the underperforming company. Today overtures from Xstrata may receive a much friendlier response.

And then there's Vale (VALE:NYQ). Xstrata and the Brazilian giant spent months in 2008 in advanced talks about a merger to create the world's largest mining company.

Xstrata and Vale have always been a good fit.

A deal would boost Vale's production of coal, copper, zinc and nickel and enable it to diversify beyond its core iron ore operations.

For its part Xstrata – even when combined with Glencore – has always been deficient in iron ore and has limited scope to rapidly grow its exposure to the steelmaking ingredient.

When in 2008 Xstrata and Vale called things off, it apparently was over Glencore's 34% stake in Xstrata and the commodity traders role in marketing of Vale's output.

After being snubbed for the top position of a merged Xstrata-Glencore, Davis may work harder to overcome this obstacle if he ever gets the chance to work out a new deal with Vale.