This is the era of mergers and Acquisitions and we see a merger almost every other day. We also notice that the erstwhile strong Indian firms seem to vanish by getting merged or acquired by the foreign majors. There have been many protests from the industries asking a ban of foreign participation. This has taken off in the cement industry. The government has taken the initiative to declare that the foreign companies should not undertake any mergers or acquisitions with the money raised in India. How will this effect the cement industry? Who are benefited most?
During the last few years, India has witnessed a substantial rise in merger and acquisition activity. The number of mergers in India has risen sharply since the initiation of industrial deregulation. From a level as low as 30-35 mergers in the late 1980s, the merger activity touched a peak of 430 mergers in 1995, and 552 mergers in 1997, most of them by the multinational companies.
Another recently observed trend is the monopolization of joint ventures by foreign partners. With liberalization, though, three routes were available for foreign participation - joint ventures; 100 per cent subsidiaries; and technical collaborations. Most of the activities are seen in the first and second types mainly to capitalize on the local expertise of the domestic companies.
Even before liberalization in India, there was presence of foreign multinationals but by holding some minority stake initially and later making it a completely owned subsidiary. Since liberalization, it became much easier for the MNCs to have a dominant presence in India.
A recent trend among the MNCs has been the setting up of 100 per cent subsidiaries. For example, Procter & Gamble has set up a 100 per cent subsidiary. Hoechst has also done so by taking over all export operations from Color-Chem. GEC Alsthom has decided to transfer its furnace and metres business to its wholly-owned subsidiary.
Coming bask to the Government's move in the cement sector. In August 2000, the government has declared that MNCs having holding companies in India will not be allowed to undertake any mergers with the complete resources raised within India. Instead, the company would be given a support of funding the debt part of the acquisition and the equity portion in every deal has to be brought from the parent company.
With this decision in the cement industry, many multinationals like Italcementi, Blue Circle, Cemex, Holderbank and Heidelberger, which are planning to make a foray into India are hit badly and would have second thoughts now of taking any move. And of course, Lafarge is the worst hit. The French cement major Lafarge, which had made a foray into India in 1998 by acquiring Tisco’s cement plant, has also proposed acquisition of Raymond’s cement plant in early 2000 through its wholly owned subsidiary Lafarge India at a whopping price of Rs.750 crore and is yet to finalize the deal wit the government. At this juncture, the decision of not supporting the MNCs to the extent of 100% in acquisitions is a set back for the company. Confronting to the standards of maintaining a debt-equity ratio of 1:1.5 in the cement sector, Lafarge has to get Rs.300 crore to fund the Raymond’s acquisition.
In its first acquisition of Tisco’s cement unit, Lafarge has brought in Rs.300 crore and the rest amount was funded by ICICI to an extent of Rs.250 crore. This has evinced the government to take action against the measures of these MNCs to safeguard the Indian cement industry.
On the whole, with this government decision, the Indian cement companies seem to be relieved to some extent from all the long standing tensions. Gujarat Ambuja Cements Ltd (GACL) would be the most benefitted by this decision. The company, which has acquired DLF cement and ACC at a higher price just to pip Lafarge would have some relief from all these multinationals. On the other hand, L&T is one company that would be adversely affected as it plans to diversify its business and concentrate on its core construction business.
Thanks to government for its late trial of reviving the Indian industry. Hopefully, such steps would be taken for the other industries too enforcing the foreign companies to be a distant away from the acquisitions.
K Venu Babu