Founded in 1881 by Anglo-German merchants, Metallgesellschaft AG (MG) was a German corporation based at the heart of Frankfurt. Throughout the years, Metallgesellschaft business evolved from metal trading to becoming highly successful in trade, finance, building technology, engineering and contracting, and chemicals. Annual revenues exceeding 17 billion US dollars reflected their immense success with a workforce of 50,000 employees in the early 1990s.
The following timeline give a brief overview of Metallgesellschaft AG’s history dating from 1881 to 1992.
Timeline of Events
1881 Metallgesellschaft AG founded as a metals trading company.
1882-1914 MG goes global - represented on all continents, also introduction of mine investments.
1918 Many foreign investments lost in World War I.
1920 Gesellschaft für Entstubungsanlagen (GEA) was created, producing dedusting equipment.
1939-1945 Huge destruction of MG and GEA facilities in World War II.
1945-1980 A wide arrays of product innovations were developed and lead to commercial success.
1989 GEA goes public.
1992 MG acquired a chemistry company.
Until 1992, the company was a sound business, with constant product innovations and new market penetration. Furthermore, the company was also resilient in the World War I and World War II periods, recovering quickly to maintain operations.
However, Metallgesellschaft dull days began in December 1993 when the corporation revealed a $1.3 billion losses caused by its own U.S. subsidiary, MG Refining and Marketing Inc. (MGRM). The subsidiary was responsible for the derivatives trades, which were the main causes for the losses sustained. Surprisingly, th...
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...aft AG case provides an array of lessons for businesses, professionals, and academics who are interested in the practice of proper exposure hedging to various risks.
Lesson 1: Hedging vs. Speculating
One of the biggest mistakes caused by MGRM was that their long-term obligations, that is, offering dealers’ 10-year contracts on oil at a fixed price, were not matched with long-term hedges. This turned the company’s investment into a precarious speculation practice. The company should have been more aware that the price of oil will not remain static, and is prone to exogenous events. In addition, the assumption that oil prices will remain in backwardation for ten years was an unsurprisingly bad bet. Furthermore, their positions were so oversized, to the extent that MGRM became a factor in the market price, resulting in positions becoming vulnerable and highly illiquid.