The return of the mega-merger as signalled by the world's two biggest cement producers Lafarge and Holcim revitalises the debate on how much value these ventures actually produce. Associate Professor of Strategic Management Christian Stadler looks at the pros and cons of this latest mega-merger.

The world’s biggest cement producers Lafarge and Holcim have announced plans to merge. In an industry with strong economies of scale that already pumps out more cement than the world needs, consolidation seems to be a smart move.

But such mega-mergers have a bad reputation for good reason. While they make headlines and tend to look fantastic when first presented, all too often they have a destructive effect. DaimlerChrysler and TimeWarner are two particularly painful examples. So why would successful companies like Lafarge and Holcim be tempted?

A recent report by Goldman Sachs gives a hint. They write: “M&A that drives an industry toward oligopoly is the good kind.” Why? Well you are able to cut down costs and dictate terms to customers once they have less choice. Companies “can turn a cut-throat commodity industry into a highly profitable one.”

Of course this is exactly the type of merger which competition authorities should (and will) be worried about. The deal is expected to face scrutiny in at least 13 countries, ranging from Madagascar to France.

In an attempt to pre-empt any trouble the two companies announced they will be selling off around €5 billion (£4.13 billion) of assets. That should help jump through the authorities' anti-trust hoops and it also allows them to reduce operations in lower growth Europe and America. This is a deal very much aimed at emerging markets, where cement demand is expected to grow the fastest.

But even if Lafarge and Holcim were able to clear the regulatory hurdle and move towards the oligopolistic industry they desire, questions still remain. So what should the two companies and their investors look out for?

The pros:

Scale: Even though the cement industry is already dominated by a few big players it is still marked by over-capacity. Demand tends to closely follow the economic cycle, and the cement world was hit particularly hard by the financial crisis as investment is always very long-term. When a sudden downturn hits, supply cannot be easily reduced. Further concentration can therefore bring big benefits, as the new entity can eliminate excess production, get better deals with suppliers, sort out their logistics and generally search for synergies between the two halves.

Risk reduction: The cement industry is highly dependent on overall economic health. A geographic spread can help reduce exposure to one particular economy. For example during the 1970s oil crisis, when building slowed down in Europe, Lafarge benefited from its activities in the Middle East and North Africa where the high oil price allowed more spending on building. The merger will create the geographically most diverse firm in the industry. Lafarge is strong in the Middle East and Africa, Holcim in Latin America. In Europe and North America there will be overlaps (hence some of the sell-offs).

Innovation: The new company’s R&D budget will comfortably outstrip any of its rivals. In a mature industry such as cement and building materials where there are few easy discoveries left to be made, research on such a scale matters.

The cons:

Clash of cultures: This is never seen as much of problem when investment bankers prepare the documents, but it turns out to be tricky in day-to-day life post-merger. Take the Daimler and Chrysler deal. The Germans were used to setting a target and working towards it, while the Americans made adjustments along the way. The Germans thought Chrysler never stuck to a plan, while the Americans got the impression that Daimler stuck to a plan even when it no longer made sense.

Lack of experience in mega-mergers: Both companies have experience in acquiring and integrating sizeable companies. Lafarge paid €10 billion (£8.25 billion) for Middle Eastern cement maker Orascom in 2007, for instance, and Holcim bought British construction group Aggregate Industries for $3.4 billion (£2.81 billion) in 2005. This will be helpful but its far from the size involved here. Typically lots of small acquisitions is a better way to build a large firm, as new innovations are more easily integrated.

Duplications and political battles: The fact that corporate functions will be both in Paris and Zurich reflects a political compromise (and helps to sell the merger to the respective governments) but is bound to lead to duplications and turf wars.

So as with most mega-mergers, this is an attractive proposition on paper. But whether the new Holcim-Lafarge will prove to be greater than the sum of its parts depends on putting the fancy wording of the merger document into practice.

Regardless of what happens, at least one group will benefit: the Goldman Sachs of this world who will offer advice during the process and bill accordingly.

This article was originally published on The Conversation. Read the original article.

See this article featured in the Financial Times, Swissinfo and the Daily Express.

Dr Christian Stadler teaches Strategic Advantage and Strategy and Practice on the Warwick Executive MBA and Warwick MBA by full-time study. He also teaches Strategy Analysis and Practice on the MSc Management.