Cementos Mexicanos Sa
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To start the case analysis, a brief overview of the company was conducted and some of the factors behind M&A decisions were highlighted. They can be growth motivations; synergies seeking; diversification or increased power through vertical integration. Cementos Mexicanos SA, commonly known as CEMEX had set as its main goal to become the best cement company in the world. To achieve that, it implemented a strategy heavily based on successful acquisitions that allowed the company to, both, enter new markets and take out competition. Of course, this strategy also brings some challenges related to entering into new markets, namely, dealing with exposure to market risks (e.g. exchange rates, interests, etc.); cultural differences; post-acquisition issues; and maintaining management consistency across the company, etc., that must be addressed properly in order to succeed.
A more in-depth analysis was taken to understand the benefits of internationalization and determine whether these outweigh the challenges. Moreover, the advantages and disadvantages of this type of growth through acquisitions were taken into account and compared to other potential forms of growth. To conclude the project, some critical opinions were presented along with some recommendations that included a continued expansion into emerging markets; investment in product enhancement and differentiation; improvement of financial performance and continued innovation of the company’s business practices. Some further attention was given to the Rinker’s acquisition and the reasons for its poor outcome and, finally, some overall M&A learning insights were also presented.
Introduction
Strategy Behind CEMEX Acquisitions
Challenges of Going Global
Exposure to Market Risk
Consistent Strategy
Cultural Differences
Selecting the Right Target
Post-Acquisition Issues
Benefits of Going Global
Despite all the challenges CEMEX, and other companies still choose to go global. It is clear that some benefits, should therefore, result from this strategy. The most direct owns are:
Mitigation of Regional Risk: Having a global company can compensate negative effects of down term cycles in specific countries. As Zambrano refers: “developing credit lines outside of Mexico and diversifying geographically protected CEMEX from losing its shirt during the Mexican economic crisis”;
Increased Market Share: By acquiring companies all over the world, CEMEX consequently increases its global market share and increases (or eventually gains) market share in those particular regions as well;
Increased Production Capacity: Following the same reasoning, by acquiring new plants worldwide, CEMEX boosted its production capacity (being in 2006 the 3rd largest cement producer);
Improvements in Management Practices: As CEMEX has a global presence, it is exposed to a range of different markets and local issues, which ends up enforcing the development of valuable managerial skills;
Brand Awareness: Becoming global also enables the company to be recognize by a larger volume of people, which translates into an intensification of the power of the brand.
As mentioned before, if it brings so many challenges, why enter the global market instead of simply growing operations in Mexico? The answer comprises two main arguments: First, s the CEO himself pointed out, had CEMEX not taken that step, the company would not have survived; Second, the benefits of going to new markets are greater than the challenges posed by this strategy. On the top of this, it is possible to cope with the (unavoidable) challenges of having a global presence and CEMEX has been quite successful in overcoming those.
Acquisitions vs Organic Growth
But to go global, companies need to grow. They can do so either through acquisitions or through organic growth. We will now explore both of these possibilities.
According to a paper of McKinsey, “The value premium of organic growth”, although it takes more effort and time to affect firm size, organic growth usually generates more value. One of the main reasons behind this is that companies do not need to invest so much up front (as when acquiring another business). However, organic growth may take longer to boost earnings and, therefore, firms should try to find an equilibrium between acquisitions and organic growth.
It is then important to understand the ways a company can grow other than through acquisitions:
Target Other Markets: Opening in another location or even just widening your customer base by selling to new areas (e.g. using the Internet as a sales breaker);
Franchise: Putting the business available for franchise may be a good option to grow the business. The franchisee supports initial costs and it generates an extra stream of revenue (depends on how franchise contract is made);
License the Product: If possible this can be an effective way to grow. The cost of doing it are low and it is a good way to minimize the risk of losing control over the service or product provided by the firm;
Form an Alliance: Forming an alliance with other firms or your distributors may be a strategic way to increase awareness of your products or services and thus, lead to an increase in sales, which, in turn, may mean more growth. Making deals with suppliers may be a way of cutting costs;
Diversify Product Range: Selling a wider range of products and including complements for your existing ones. It’s a way of diversifying your revenues stream (minimizing the risk of being dependent on just one product) and should also lead to an increase in sales;
Focus on Efficiency: By improving processes, reducing costs, increasing product quality, optimizing the business can lead to a more efficient and more competitive firm, which, in turn, may translate into growth.
But even with all these possibilities for organic growth, CEMEX still chose the acquisitions path. This strategic move comes with positive and negatives, so CEMEX should identify them in order to leverage on the positives and offset the negatives.
Growing through Acquisitions – Positive and Negative Points
Here are some of the advantages and disadvantages of depending on acquisitions for growth:
Positive Points:
“Buy or be bought”, sometimes