The shortcut to growing bigger
Why do companies merge? Mergers are seen as pathways to creating value for shareholders, through stronger and/or larger market presence, synergies in operations, or reduction in costs, resulting in better financial performance and higher stock prices, but it does not always happen. In this instance, the merged entity named as LafargeHolcim Ltd has hit a market capitalisation of approximately 41 billion Swiss francs or US$42.9 billion, which is just about the sum total of what Lafarge and Holcim individually stood for, before the merger. Although it is early days yet, clearly, the stock markets of Zurich and Paris do not foresee any substantial improvement in business results arising from this merger, in the short term, that could be factored into the share price. One would do well to remember that while some mergers create value, some others destroy value, and the rest of the multitudes are neither here, nor there!
Even as we are discussing this mega-merger, and even before the dust has settled down on this great big marriage of equals, there is talk of more consolidation. German group HeidelbergCement has chosen to strengthen its position with an offer to buy control of Italcementi. The market cap of HeidelbergCement is C13.3 billion and that of Italcementi, is €2.3 billion. While we shall have to wait and watch what this merger holds in store for us and for the shareholders, one thing is certain from simple arithmetical perspective. This will create the third largest cement entity in the world - whatever that means to you!
While looking at global mergers as a subject of further exploration, including what happened in other sectors, we see that all mergers have not been successful, to name a few Daimler Benz and Chrysler, Daiichi Sankyo and Ranbaxy, Microsoft and Nokia are the standout examples. A real exception has been the one between Exxon/Mobil, which happened in 1998 between the largest and the second-largest oil producers in the US, with a combined market capitalisation of $237.53 billion, nearly five times that of today´s LafargeHolcim; that has been one of the most successful ones. Cement is very local, commodity business where global brands do not hold sway, technology is available freely, real entry barriers are natural resources, economies of scale are site-specific, etc, etc, all of which go to show that global integrations may not necessarily bring about magical improvements in this industry.
One development that might have gone relatively unnoticed, is that with these two mergers, India´s own UltraTech Cement has quietly entered the venerable top 10 league of the world cement pecking order. With recent talks about the long-awaited integration of Century Cement into UltraTech finally gathering steam, this newly acquired position of the Indian player can only further improve from here. Overall, our position is that mergers ill-conceived or badly managed do not give desired results. We need to remember, it is not survival of the biggest, but survival of the fittest! This hypothesis has been proved time and again not only in respect of animal species, but also for companies; and, we also need to remember that, there is no such easy shortcut to getting "fitter", which, to my mind, means getting competitive. On the other hand, those mergers that do deliver value to shareholders, do so at the expense of other stakeholders such as customers and employees - simply because such value comes from increased pricing power or savings in people costs.
We deeply mourn the passing away of former president Dr A P J Abdul Kalam. Missile man, scientist, teacher and inspiration, his light will continue to guide us for a better tomorrow. Fondly known as the ´People´s President´, Kalam was simplicity personified and we do hope that we as a nation are able to attain the goals he set for us.
Sumit Banerjee Chairman, Editorial Advisory Board