Chasing synergies in a downturn

One of the arguments for mergers and acquisitions (M&A) is the synergies that come from sharing value chain activities (economies of scope). Coupled with better parenting, this should see M&As produce cost savings and efficiencies. It can all fall apart, however, if you paid too much for the acquisition, or the costs of funding the purchase leap considerably.

This Economist piece highlights the dramas facing six of the world’s largest materials and mining firms (Xstrata, ArcelorMittal, Tata Steel, Rio Tinto, Lafarge and Cemex) as they try to bed down some very significant M&As from past year or so.

As the article notes, with debt refinancing a whole lot harder to get, and share prices tumbling, these firms are finding life a hell of lot more difficult than they were. It certainly demonstrates the dangers of buying at (or near) the top of the boom, and reminds us again that firms too regularly overestimate the ease of realising such synergies. One hopes that these experienced multinationals have also accurately assessed the complexities of chasing such syenergies across borders.

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The Chavez-Cemex saga continues

Venezuelan President Hugo Chavez has maintained his anger at Mexican cement giant Cemex this week (I discussed this in Lecture 8 as an example of political risk). He still intends to take over their Venezuelan operations (i.e. to nationalise their assets). Cemex has announced it will seek international arbitration of the dispute, leading Chavez to make accusations about the environmental impact of Cemex’s operations. Threats (and actual incidents) of nationalisation are pretty rare these days, but Venezuela has done it a few times now, including in oil (although some have argued he was merely catching up with other oil-producing nations on that front) and also banking.

The impact of such moves can be seen in the perceptions of Venezuela as a place to make investments. Despite being a fast-growing economy (typically GDP has being growing at >4% per annum) with middle-tier income levels (>US$9000 per capita), Venezuela lags a long way behind similar sized nations on rankings of the “Best Countries for Business” (where it is #115 behind Bangaldesh and Ethopia) and of corruption (where it is #162 behind Zimbabwe and Cambodia).