Unending Hunger for Concentration
Unending Hunger for Concentration

Unending Hunger for Concentration

In India itself, seven major M&A deals have been announced or completed in the last three years in the cement sector involving a total capacity of 41 million tonne (10 per cent of total installed capacity) and a value of US $4.3 billion. No, this is not an original discovery by us, we are only quoting from a recent report by a reputed investment banking group. If the scale and urgency of this phenomenon sounds rather unusual, it may be worth rationalising that the desire to consolidate has always been driven by the ultimate goal of acquiring more and more pricing power. This is what we term as the unending hunger for concentration.

In one of our editorial analyses last year titled´Shortcut to growing Bigger´, we had critiqued this trend in the context of the great big global cement merger of our times, between Lafarge and Holcim. We had also questioned the reality of value creation through such global mergers for local commodities like cement. We had also said that it is not necessary that the biggest companies thrive, but it is the ´fittest´ (a la Charles Darwin?) who will prosper. In addition, our submission was that such massive mergers routinely chase mirages of value creation through blindsided cost-reduction measures, and therefore, while being dubiously beneficial to shareholders, these are certainly value destroying for other stakeholders like customers and employees. Read this in the contemporary context of sustainable management philosophies, and you will know that this does not make for a story with a happy ending.

Why are we revisiting these postulates now? Because, the Lafarge-Holcim merger has now been consummated, the merged entity has been listed in Zurich and Paris stock exchanges since July 2015, and meanwhile, another global merger involving Heidelberg and Italcementi has been approved - and it is time to take stock of these stocks! Both Market Capitalisation and Equity Price of Lafarge Holcim have nosedived during this period, with the shares losing 38 per cent in the last one year.

Markets are unforgiving examiners of companies´ performances and even factor in the expected outcomes of management actions being planned. So, leave alone the employees and customers, even the shareholders have given an unequivocal thumbs-down to this merger. What this essentially means is that there is a confidence deficit in the ambitious cost-reduction plans announced by the management during merger. And, in case you hadn´t noticed, the merger has not caused even a kilogram of concentration in India, since the whole of Lafarge India´s business is now having to be divested in a controlled manner to one of the smaller players.

Even as all this dust is settling down on the famous merger of mergers, the proposed amalgamation of Heidelberg and Italcementi has been given the go-ahead. As of now, we have no idea what this will achieve, apart from rewriting the global top ten list of cement companies, which to my mind is immaterial, given that the markets are very very national/local. The lesson for all stakeholders is to watch these moves very carefully, and not get carried away by hyperbole of any kind.

There is however, one positive development is supporting the appetite for consolidation in the cement sector in India. The government has gone the extra mile by amending the MMDR Act to give space to cement mergers by allowing transfer of mines obtained through non-auction routes, and make some extra money on the side. We hope this helps the cement players in their unending pursuit of consolidation, but we also hope that in the end, all of this somehow, also helps the customers get better products and services. Man lives on Hope.

Sumit Banerjee
Chairman, Editorial Advisory Board

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