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Dilemma in Ambuja & Acc Merger

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Dilemma in Ambuja & ACC Merger

After the news of the merger between Ambuja cement and ACC came out, there was a big fluctuation in their share prices. Many investors and dealers were eagerly waiting for this merger to happen after restructuring of companies done by LafargeHolcim in 2013. But the merger between such big cement giants will be that easy? Both the companies has formed a committee of Independent Directors to see all the possible scenarios of merger. In such big mergers there will always be some problems or dilemmas appearing. There will always be issues of finance, morale, market etc. Some dilemmas which may arise in merger and need to be solved are

  1. Royalty Issues: Currently LafargeHolcim is leading shareholders of both the companies and all the distribution of profit, future investment, dividend payment is decided by it. For some time LafargeHolcim is not doing any of such thing. It is simply collecting all the cash. What company wants to do with all the cash? How it will make its shareholders happy, as after the news of merger many of them are unhappy?

  1. Share Swapping Ration: Swap ratio of Ambuja to ACC is 6.7x (6.7 share of Ambuja for 1share of ACC) and it is average 6.3x of six months. It is not yet decided what will be the swap ratio but according to rating agencies Ambuja shareholders will surely reap some benefits of merger.

  1. Approval of Merger: After the merger, the market share will increase by a big number in some areas which may increase it by more than it is required. This increase will create problem in getting approval from Competition Commission.
  1. Employee management: By the merger the upper management body of both the companies will also combine, but there will be no need of these may people in upper management. It will be just wastage of money on salary and it will also be disguised unemployment. It will increase redundancy.
  1. Brand name: ACC and Ambuja are very big name in the cement industry as they are  2nd and 3rd largest cement producers in the country. After this merger one of the big dilemma will be to decide which brand to keep and which to loose or keep both which is unlikely as it will only increase marketing cost. But this merger may probably end ACC, one of  the oldest legacy of industry in coutry.
  1. Market Distribution: After merger major strategy can be to focus and push ACC where is already strong and push Ambuja where it is strong. It will help in saving resources as alternate brand can be taken out of the market. But what about markets where both are in strong position and close rival? Which brand to promote and which brand to take out?
  1. Production Cost: Process of merger has been initiated because of decreasing demand, increasing cost and increase in production. Ambuja cement is one of the most profitable cement company with lowest cost of production of cement in the industry. After the merger there will surely be price differences in cement of both brands as the production cost is different. Will they decrease the price or increase it?  On increasing the price they may lose the market but on decreasing the price profit of the company will also decrease. How company will tackle this issue?
  1. Condition of Cement Market: Condition of cement market in US and Europe is not in good condition. Cement market in other countries is fluctuation on daily basis. As LafargeHolcim is a biggest global cement brand because of these market conditions it will also face this issue and LafargeHolcim is trying to have merger in such conditions. Is it really necessary in such conditions?

Indian cement market is also facing similar issues with decrease in demand

and increasing in production cost. ACC is also losing its market share. How company will handle this issue?

  1. Benefit Distribution: As the swap ratio of share is not decided yet, shareholders are in a big dilemma. It is said merger is for benefit of all the shareholders but How? Also after merger will there be no partiality in developing both brand (if both brands are kept) and what will be the ratio of distribution?

Also EBITDA of both the companies is very different. Ambuja cements have EBITDA of Rs. 800 per tonne whereas EBITDA of ACC is Rs. 600 per tonne which clearly shows ACC is the winning party here. What is there for Ambuja Cements and its shareholders in the deal?

  1. Growth: For past some years market share of both the companies is decreasing. In 2013 market share of Ambuja cements was 8.5% but it 2016 it declined to 7.4%. As other large companies buying stakes in other companies and increasing their market share, how this new merger will keep pace with increasing competition when LafargeHolcim is hoarding all the money and there are no new investments?

  1. Future: Currently all the talk is about benefit of synergy and further expansion of company but all these can only be seen after 4-5 years of realization. Market prediction is very difficult task and no one knows future of the merger.



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