Cementos Mexicanos Sa

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it is just a way to defend your company against a takeover threat;

 Add value, through synergies (revenue growth and cost savings), new resources and competencies, new technologies, scale economies, securing better distribution, acquiring intangible assets (brands, patents, trademarks);

 May help overcome entry barriers;

 Speed, can be one of the most efficient growth strategies;

 Gain market power and reduce competition;

 Meeting stockholder expectations, since it may be expected by the investors of some companies that they should grow through acquisitions;

 Diversification, increasing sales by targeting new segments and reducing risk by selling other products.

Negative Points

 Financial fallout, return of shareholders may end up being lower than expected;

 The process can be quite costly, you have to pay a premium and you may end up overpaying;

 Integration issues related to the culture of the companies involved, resistance by employees, incompatibility of managements styles;

 Unrelated diversification, when the acquisition brings together companies with different products and generates difficulties in managing resources and competencies;

 The acquisition process may lead to a distraction from operations, which may end up hurting the business and upsetting customers;

 High failure rate.

It is of particular importance for companies to understand the risks of financial fallout associated with acquisitions, since this may take the company to bankruptcy. CEMEX leaned this the hard way, when they acquired Rinker.

Rinker Acquisition

Despite controversy, CEMEX decided to go through with Rinker’s acquisitions and by April 2007 the deal was closed. The problems started to unfold when the 2008 financial crisis began to burst, affecting high cyclical industries such as the construction one. By the time prior to Rinker’s acquisition, CEMEX shares were trading at $35.00. It was then that its way took quite a downturn and by 2011 the company was in risk of violating its debt covenants with a stock price equal to $3.50. See attachment x.

As a rule, investors typically do not perceive acquisitions positively. Despite the business advantages that they may bring, the reality for shareholders is that often they lose value due to the unaccomplished synergies and cost reductions. On the other hand, managers frequently build up their case that the acquisition will prove to be successful sometime in the future and that it will, certainly, be accretive to earnings. Rinker’s acquisition portrays this misalignment of interests and it also illustrates how managers may go off track simply driven by their greed and pride, in particular when the target company resists. In the end, CEMEX ended up paying 11.3x peak EBITDA. To make matters worse, CEMEX financed the acquisition through debt. When the bubble busted, and markets came to their senses, CEMEX was left very close to bankruptcy.

Recommendations

Departing from where the case leaves, we identified a few elements that the company should take into consideration and implement in their strategy moving forward.

1. Strengthen the Organizational Culture: Despite the success in implementing internal technology-based communication systems, that does not suffice, especially in a highly centralized structure where employees may feel less accountable for their performances. Thus, having a strong culture comes as a solution to these sorts of disparities and helps fighting language and cultural barriers.

2. Continue expansion to Emerging Markets: CEMEX had already addressed the emerging markets, we feel it should continue to do so, on a larger scale. This way, CEMEX could not only improve its market share but also build a more solid global image. Furthermore, picking low performance firms and improving them with the knowledge already existent in the organization has proved to be a driver of valuable acquisitions.

3. Invest in Product Enhancement & Differentiation: As already mentioned before, this is the area that we feel CEMEX has been under addressing. Thus, investing in research & development, cost reduction and in more qualitative initiatives, such as the Mexican campaign and the alignment with the government policies, will ensure the stability needed for the long run.

4. Pay attention to Competition: The same way CEMEX did before, competitors have also acknowledged the benefits of going global and are acting accordingly. In particular, Lafarge attempted to acquire Blue Circle, a player that detained a very attractive market presence.

5. Improve Financial Performance: With the recent acquisitions in the Spanish market, CEMEX has been losing on its financial leverage position. According to the economist “the company has had a reputation of getting heavily into debt”, reason why the stock price has dropped in the past. Therefore, we feel CEMEX should focus on improving its capital structure and search alternative sources of funding.

6. Continue to Innovate its Practices: Technology is by far the most fast-moving industry. Therefore, keeping up with its advancements and implement them internally is crucial as the systems CEMEX has currently in place may quickly become outdated and add relative less value to its supply chain.

7. Improve Cement in Developing Countries: Knowing that cement in China is not being produced up to its full quality, we feel CEMEX should focus on improving the production process to fully exploit its potential on the small-scale building, as opposed to the mass mixed quantities it majorly delivers in developed countries. We believe that a good start would be to implement and improve the technology that CEMEX already has in use in the Asian manufacturing process.

Implementing this recommendations into their strategy may allow CEMEX to succeed in the long term, by being better prepared to deal with changes in demand and increase in competition, as well as allowing the company to lead the way in product innovation, which will help them dominate the market.

Conclusion

Despite the success of CEMEX strategy in growing through acquisitions, we believe that CEMEX should improve its focus on the core product and on delivering a better value proposition to its customers. After all, cement is a highly competitive industry where success