This week’s blog looks into the merger of two European
companies, namely Holcim and Lafarge. Based
in Switzerland, Holcim is a global
company, operating in 70 countries across all continents, specialising building material which include
the production of cement, aggregates,
concrete products and asphalt. Lafarge is a French company operating in 61
countries, specialises in the
production of cement, construction aggregates, and concrete. Lafarge is a
slightly smaller company than Holcim, it also has lower earnings and
weaker cash generation. Just from this basic information, it clearly suggests
that we could have horizontal merger on the horizon. Combined, the group is
claimed to be “uniquely positioned in 90 countries around the world with a
balanced exposure to both developed and high growth markets and hope to
“Enhance performance through incremental synergies” (Lafarge, 2015 para. 5). However,
as I discuss, all may not be as it seems.
It was back in
April 2014, when Holcim and Lafarge announced their intention to combine the
two companies. LafargeHolcim, new global company with European roots is said to
“offer an unprecedented range of products and services to answer the changing demands
of the building materials industry and the challenges of increasing
urbanization” (Lafarge, 2015, para. 2). However, this deal has not been
as simple process. On March 15 2015, a letter from the Chairman of the Board of
Directors of Holcim indicated the decision of the Board of Holcim not to pursue
the execution of the Combination Agreement, challenging the financial terms and
governance structure of the proposed merger. This deal was rejected by Holcim
just a day later. Shareholders complained that, given the leadership changes
and lower ratio, this is a takeover without a premium (Financial Times, 2015a).
However, on 20th
March 2015 the two companies finally announced that they had reached an
agreement on revised terms for the merger of equals between both companies.
Using a share-to-share merger, both parties agreed on a new exchange
ratio of 9 Holcim shares for 10 Lafarge shares, which in my opinion will
satisfy Lafarge’s shareholders much more than Holcim’s.
In my opinion, this merger is bound for failure. Evidence to
support this view has been kindly provided by the chairman and chief executive
of France’s Lafarge decision to use a private jet to fly across the US. A decision
said to be against Holcim’s company guidelines (Financial Times, 2015b). In
addition to this, it raises concerns as to why a man who was set to lead the
group can spend tens of thousands of euros for a flight! This is clearly not in
the best interest of shareholders and may even impact on customers. Not a wise
move at all in my opinion.
The decision to select a suitable merger is often primarily driven by
financial and strategic considerations, yet many mergers fail to meet
expectations because the cultures of the partners are incompatible (Cartwright & Cooper, 1993). Corporate and cultural differences are a major
issue which should be considered in the initial value assessing process prior
to the announcement of the merger. To me this indicates that the managers are
so determined to get the deal done, they have clearly disregarded the basics. I
believe this deal is heavily drive by senior management ego’s and not the best
interests of the shareholders, who’s primary concern is the company’s ability
to generate additional wealth.
Successful
M&A's tend to complete a deal quickly as a way of demonstrating that the
new combination of companies is already producing value (Angwin, 2004), this is
certainly not the case here. The deal has been a long ongoing process which in
my opinion suggests there will be further complications and disruption if this
deal is eventually fully approved. It would be a fair argument to state that
they must take their time to ensure the deal is made correctly, however these
issues should have been resolved long before this stage. In fact, this blog was
difficult to create and I had originally planned to post it much sooner, but
given all these developments, it would be mindless of me not to address this.
To summarise, bringing
together two companies of such size is an enormous task. Although the company’s
state that the deal will create synergies and reduce cost etc., I don’t believe
this will occur, certainly not to the extent implied by senior management.
Firstly because I believe the merger is very much lead by the egos of both
company’s senior management. Secondly I think the deal will generate
diseconomies of scale. These are the two largest players in the industry, I
believe that combined the company will be too big and will no longer be able to
operate efficiently without making gigantic cuts. This considered with the
clear cut cultural issues to me, suggests this merger is headed for failure.
References
Angwin, D. (2004).
Speed in M&A integration: The first 100 days. European Management Journal, 22(4),
418-430. doi:10.1016/j.emj.2004.06.005
Cartwright, S.,
& Cooper, C. L. (1993). The role of culture compatibility in successful
organizational marriage. The Academy of Management Executive
(1993-2005), 7(2), 57-70.
Financial Times (2015a).
Holcim rejects €40bn merger with rival Lafarge. Retrieved 23td March 2015, from
http://www.ft.com/cms/s/0/c965ab5c-cbb2-11e4-aeb5-00144feab7de.html#axzz3VaCwjqTb
Financial Times
(2015b). Holcim and Lafarge: A
merger of egos. Retrieved 23rd March 2015, from http://www.ft.com/cms/s/0/41d317c8-d14e-11e4-98a4-00144feab7de.html
Lafarge (2015). Merger project.
Retrieved 23rd March 2015, from http://www.lafarge.com/wps/portal/1_9-Projet-fusion
Lafarge (2015). Lafarge Merger Project Press Release.
Retrieved 23rd March 2015, from http://www.lafarge.com/03202015-press_finance-LafargeHolcim_mergerproject-uk.pdf
