The Hindu Business Line : Greenfield growth

The phenomenon of cement industry players looking at greenfield expansions, rather than take over existing units, is certain to trigger afresh the debate on the relative merits of an evolutionary approach (organic) versus adopting discontinuous growth spurts through acquisition (inorganic) as a sustainable model of business growth. Rather than view it as a choice between two competing models of growth, it would perhaps be more appropriate to see them as twin elements of a composite framework of strategic choice, each having its own relevance at a particular point.

Ownership changes are inevitable in any industry and cement is no exception. Certain structural factors affecting the cement industry have provided their own momentum to acquisition-led growth. It is just emerging out of a prolonged period of excess capacity that left a number of players unable to cope with the pressures of competition; these units were prime candidates for divestiture. That India is being seen as a booming destination by overseas firms whose home markets are either stagnating or growing at a sluggish pace has provided an extra sizzle to the corporate control game as these foreign firms seek a quick entry strategy into the country. The regulatory constraints in accessing secure sources of supply of raw materials or the time involved in brand building and gaining consumer acceptance are the other factors contributing to a vibrant market for mergers and acquisitions. It was only a matter of time before realisation dawned on prospective acquirers that they would have to pay such a quantum of premium for these advantages that the very viability of acquisitions was undermined.

In the past, Indian corporates did not have the freedom to look at inorganic growth as a viable strategy for accelerating shareholder returns. The policy framework, at least before economic liberalisation of the early 1990s which looked at acquisitions and takeovers as efforts that fritter away corporate energies from the real task of deploying funds for expansion in the stock of fixed capital, had something to do with it. But the policy of globalisation that India has embraced in the post-1990s has given rise to a situation where businesses frequently need to restructure themselves by exiting product lines no longer competitive. Consequently, mergers and acquisitions have come to occupy a prominent place in the strategy framework of corporate sector alongside the traditional approach of organic growth through incremental capacity expansion.

Indian corporates have pumped in roughly Rs 75,000 crore in mergers and acquisitions in the first half of 2006 — a manifold growth over the same period last year. Globally, too, cross-border mergers and acquisitions have continued to grow, as a UN study on world investment flows has shown. The new-found enthusiasm for organic growth notwithstanding, buyouts are an inescapable facet of corporate strategy.