Synergy theory is a strong branch of mergers and acquisitions (M&A) literature. Traditionally, synergy studies in M&A context have focused on two critical aspects of synergy—financial and operational. Operating synergy or operating economies may be involved in horizontal or vertical mergers, both of which create economies of scale. These economies, in turn, may reflect indivisibilities and better utilization of capacities after the merger; or important complementarities in organizational capabilities may be present that would result in gains that are not attainable from internal investments in the short-run. The Indian cement sector has seen a lot of M&A activities in the last two decades. The prime motivation has been achieving significant economies of scale or operating synergy. The industry is expected to significantly consolidate in the future. This paper is an attempt to trace some of the mergers and acquisitions in the Indian cement industry, in order to capture the operating synergy accruals. The results partially support synergy accruals for the target and acquiring firms in the Indian cement industry.
M&A
activity often points to imminent consolidation in an industry. The Indian corporate
world is gradually waking up to the issue of critical mass. Our markets have traditionally
been either extremely concentrated or else acutely fragmented, depending upon
the industry. As a result, we have ended up creating near-monopoly positions in
some industries, while others have been left with extremely region-based limited
capacities. Cement is a game of scales and today, it is one of the fast consolidating
industries. The scale considerations in the M&As cases under study have been
as varied as raw material reserves to power and fuel savings through the target
firm's captive power plants. The issue gains a lot of significance in the current
context, where recently we have witnessed the Holicem and GACL case as a definite
pointer to spurt in M&A activity in this sector. The interest generated in
MNCs for worthy acquisition targets in India is propelled by various considerations,
the most prominent of which could be the almost virgin market opportunity. The
per capita cement consumption in India stands at one of the lowest levels globally.
The inorganic route (M&As) to serve such a market is definitely the most expeditious
one.
M&As
are driven by incremental value expectations. There are many categories of merger
motives. These motives have been found to be as varied as increasing the market
concentration to facilitate intra-industry collusion, or from dominant firm pricing
to restructuring of the target firm for better performance, as well as managerial
propensity for better control. Alternately, the mergers could be motivated by
the expectations of synergy gains, which can be generated in both cases of horizontal
as well as vertical integration, by way of M&As. |
