You will have noticed in the news pages of this month's issue the number of new cement plant projects and also the number of company reorganisations, mergers, buy-outs, acquisitions, divestments and general organisational reshuffling. The new cement plant projects are fantastic news for everyone: Growing populations throughout the developing world mean burgeoning demand for cement and higher capacity utilisation figures, higher profits and more investment. Partly through the action of the cement industry, more and more people around the world are being brought out of absolute poverty1 and are being given access to reliable infrastructure such as hospitals and clean water.
However, the perpetual reorganisation of the cement industry has always perplexed me slightly: Is it really needed? The topic of the day in the global cement industry is the proposed merger of Holcim and Lafarge: the two largest western multinationals coming together to create a cement behemoth, larger even than the world's current largest cement company, Anhui Conch of China.2 To our knowledge, the two companies have never really said why they are doing this, and seem to have left it up to us to decide whether it's a good thing or not. They certainly haven't tried to persuade us: perhaps all the persuasion that was necessary (of big pension funds, family trusts and ultra-rich billionaire shareholders) was done behind closed doors. We were all presented with a fait accompli. No doubt the companies would seek to explain the merger in terms of 'industry leverage,' 'reduced costs,' 'developing country focus' and 'industrial synergies,' but could it be just that 'Big, bigger, biggest' is currently the latest management fad?
This factor shouldn't be discounted: new management theories are taught in MBA courses around the world all the time, and there are bound to be theories that are currently in vogue (and those that are out). In the past we've seen fads for horizontal expansion (Blue Circle Industries once owned not only a heating division but also Armitage Shanks, famous manufacturers of high quality 'sanitary porcelain') and vertical integration (cement producers buying aggregate suppliers and concrete producers) until the competition authorities started to wake up and realise that this can lead to uncomfortable concentrations of market power in the hands of a single company or group of companies. Horizontal expansion went out of fashion years ago (indeed, it was its own undoing, since the bloated companies could be taken over and the 'non-core' companies sold to help pay down any debt taken on during the takeover and to give the new shareholders an immediate payback). The high water mark for vertical integration may be nearing, or it may have passed: it depends on whether the local competition authority is still asleep or not.
We've also been through a prolonged phase of bigger cement companies accreting many smaller (and some not-so-small) cement companies in order to build themselves into multinationals. This model seemed to work well, through spreading risk around a variety of geographical areas so that when one region or country was down, the other areas would compensate. It seemed to work well, that is, until the Great Recession, where everywhere was down.
I see the proposed Lafarge-Holcim organism as the first example of the next management phase: what might be called '21stCenturyism.' This involves a bold casting-off of an organisation's history, its legacy systems, its previous ways of doing things and its entire mind-set and world-view. The bosses of these two companies may have sat down and thought to themselves, 'If we were starting from scratch, how would we like our company to be?' I'll tell you how: with lower debts in the increasingly normalising-interest-rate world; as large as possible to decrease finance, R&D, IT, recruitment and other inflexible costs; concentrated very heavily in high growth markets; out of the low-growth and possibly loss-making legacy markets of western Europe; not in the cross-hairs of the competition authorities.
A tie-up with each other was perhaps the quickest solution, albeit with some unpalatable decisions that have to be made. Which assets to divest (answer - the ones that we don't need and the ones that will be demanded by the competition authorities); Who gets which jobs (the synergies will be seen at head office and in middle management - cement plant workers' jobs will be safe); What the logo will look like. You can be sure that an army of lawyers, consultants, accountants and bankers will be crawling over this deal, pocketing fees as they go.
This will certainly be just the first in a line of deals. The question is, who's next? Anhui Conch-HeidelbergCement? CNBM-Italcementi? Cemex-Taiwan Cement?
1 http://www.worldbank.org/en/news/press-release/2013/04/17/remarkable-declines-in-global-poverty-but-major-challenges-remain
2 http://www.globalcement.com/magazine/articles/822-top-75-global-cement-companies
