Strategic merger and acquisition behavior of a coal mining company in various market situations and the implication to firm performance: a case study of Whitehaven Coal

Abstract

Coal operators may use different strategies for mergers or acquisitions, depending on commodity prices. Coal prices fluctuate as a function of global supply and demand. One approach for M&A opportunities may be to acquire new mines during low commodity prices, expecting the value to improve over time. Another alternative is to purchase a new mine during high prices when the target company is more profitable. This thesis examines the merger and acquisition strategy of Whitehaven Coal, an Australian pure-play producer, to determine if M&A investments are more successful during high or low market prices. Whitehaven Coal was chosen because it supplies coal to Asia, an emergent coal market. Whitehaven uses the Newcastle port in Australia, the largest coal exporting port in the world for now, and also uses the Newcastle coal price index (NEWC). Whitehaven is a public company with an average production rate. Furthermore, it’s existence as a pure-play miner makes it a less complex example for reviewing financial performance as a function of coal price fluctuations. This research examines the market situations during which Whitehaven Coal undertook a merger or acquisition. It then analyses how these investments impacted financial performance using the event study approach and operating performance approach. The results may help inform the investment strategies of similar coal operators in similar markets. This study shows that Whitehaven Coal preferred to do mergers or acquisitions during periods of high coal prices. An event study examining Whitehaven Coal’s merger with Aston Resources in 2012 demonstrated that it created value for Whitehaven as it generated a positive, abnormal return over event window. The operating performance provided benefits to Whitehaven Coal with improve market position and financial performance following the merger.