Case 13.1 CEMEX: Growing and growing stronger?[i]
Of all the countries and industries one could match, the combination of Mexico and cement does not necessarily sound like the ideal couple to produce an efficient organization, able to expand internationally, largely through effective acquisitions. Yet, CEMEX has done just that. It has grown from a local Mexican producer into one of the world’s largest cement producers, in the same league as the French-Swiss multinational, Holcim Ltd. During the 1990s, it reached a compounded annual growth rate of 26 per cent in operating cash flow, almost double the industry average.
Most of its international acquisitions have been successful, proving wrong the many commentators who doubted its ability to integrate the acquired firms. In April 2007, it acquired Rinker, the Australian building materials supplier with more than 80 per cent of its sales in the US, for a price of US $14.2 billion.[ii] Was this perhaps one bridge too far?
How did CEMEX develop and exploit its FSAs? What drove CEMEX to the path of international acquisitions? And what was its formula for successful acquisitions?
The global cement industry
Historically, the cement industry has been highly fragmented and localized. The raw materials, such as limestone and clay, are inexpensive, heavy and abundant in many areas of the world. The major costs of production are energy, materials, labour costs and transportation. At first, high road transportation costs limited the service area to a distance of 300 km from any plant. However, waterborne transportation was very economical, particularly with specialized ships and new systems of loading and unloading. Therefore, by the mid 1950s, cement producers were able to serve more distant markets if waterborne transportation was available.
Cement demand is directly related to economic growth rates – more specifically, to construction investment. Since the early 1980s, the growth in world demand has been highest in developing countries in Asia and Latin America, but flat in Western Europe and North America. Major markets for cement in absolute terms include China, the US and Japan.
Since the early 1980s, the global cement industry has started to consolidate. From 1988 to 1997, the 13 major cement producers increased their aggregate share of world production capacity from 18 per cent to 30 per cent. At that time, the cement industry was very fragmented with around 10,000 firms in the world, and high capital investment to sustain competitiveness had made it increasingly difficult for smaller firms (which typically lacked sufficient access to funding).
As of 2021, cross-border acquisitions have reduced the number of major cement producers, with 10 firms holding a share of approximately 45 per cent of the global market.[iii] Consequently, because of international mergers/acquisitions, the industry has become more concentrated with only around 1,000 remaining firms world-wide.[iv]
Developing ‘the CEMEX way’
CEMEX, headquartered in Monterrey, Mexico, was founded in 1906. In 1976, it started to trade on the Mexican Stock Exchange. It mainly expanded within Mexico by building and acquiring plants and, by the mid 1980s, CEMEX had become a major cement producer in Mexico with diverse businesses in mining, petrochemicals and tourism.
In 1985, Lorenzo Zambrano, an MBA from Stanford and the grandson of the founder, became CEMEX’s CEO at the age of 41. Zambrano acted as the CEO of CEMEX until he passed away, leaving Fernando González, the former chief of planning and finance, to fill his position as CEO in 2014. During his tenure, Zambrano led the company to refocus on the cement business and strengthened Cemex’s position in Mexico by acquiring domestic competitors Cementos Anahuac in 1987 and Tolteca in 1989. As a result, CEMEX became the second largest local cement producer. More importantly, Zambrano was instrumental to the firm adopting two important principles: that cement can be branded, and that modern information communication technology (ICT) can be incorporated into every aspect of the cement business.
As it expanded in Mexico, CEMEX developed a unique business model. Traditionally, cement had been a bulk product, sold to larger customers as a mere commodity without major service differences or price differentiation among producers. In contrast, CEMEX branded its cement and sold it in bags, to accommodate small and poor Mexican customers used to buying cheaper powdered cement in bags rather than pricier ready-mixed concrete. Thus, CEMEX differentiated itself from other producers in a fragmented market. Furthermore, CEMEX launched aggressive marketing campaigns to raise its profile in Mexico, via such tactics as sponsoring local football clubs. In addition, CEMEX convinced a large number of small local shops to join its franchise distribution network so that customers could easily buy a small bag of cement at a nearby store and carry it back home.
CEMEX also invested heavily in ICT systems, to improve the flow and the use of information. To improve its shipping efficiency, CEMEX adopted a satellite telecommunication system to coordinate its trucks in 1987. CEMEX also used computer systems to monitor each plant’s performance and each store’s sales.
CEMEX’s success at home can largely be attributed to recognizing the unique market conditions in Mexico and developing a model to effectively meet the demands of its Mexican customers. CEMEX summarized its business model as ‘the CEMEX way’, meaning the “company wide effort to manage our global knowledge base efficiently, identify and disseminate best practices, standardize our business processes, implement key information and Internet based technologies, and foster innovation”.[v] Generally speaking, the CEMEX model was quite centralized and efficient, with simplified and standard business processes. However, marketing was largely left to its affiliates in order to respond to local conditions quickly.
After the introduction of the ‘CEMEX way’ in 2000, the company saw improved results from its acquisitions in terms of cost savings and integration periods decreasing from 18 to four months.[vi]
Learning to acquire abroad
CEMEX started to feel the pressure of international competition in the mid and late 1980s, when the Mexican government began to liberalize the economy. Multinational cement producers began to penetrate the Mexican market. As Zambrano recalls, “We suddenly found ourselves competing with very large international companies at a time of consolidation in the global cement industry. There were few independent producers left. Either we became large and international, or we would end up being purchased by a bigger player.”[vii]
CEMEX chose to start its international expansion by exporting cement to the US, as the US market was adjacent, stable and highly fragmented. Moreover, CEMEX had shipping facilities on the Gulf of Mexico due to its earlier acquisitions of Anahuac and Tolteca. Unfortunately, the antidumping ruling imposed by the US government in 1990 as a result of the lobbying of a group of American cement producers hindered CEMEX’s expansion in the US market.
CEMEX continued to look for international acquisition opportunities, switching its attention from geographically proximate markets to culturally proximate markets. In 1992, CEMEX acquired the two largest Spanish cement producers, Valenciana and LACSA. CEMEX chose Spain for four reasons. First, Spain was culturally proximate, with strong historical connections to Mexico. Second, Spain was less economically developed than other European countries and offered more opportunities for growth. Third, Spain’s cement market was more similar to Mexico’s than that of many other European countries. Fourth, as Spain had become an important market for major European companies, CEMEX could use Spain to ‘counter’ these companies’ investments in Mexico, especially the heavy investment of the Swiss Holderbank (now Holcim) in Grupo Cementos Apasco, the number two cement producer in Mexico.
CEMEX faced a daunting task of integrating the two acquired companies. The market perception was that CEMEX not only overpaid for the two Spanish companies, but would also “suffer from indigestion”.[viii] CEMEX set up a post-acquisition integration team, consisting of 23 experienced functional managers. The team analysed managerial skills of local managers, information technology, business processes and the structure of functional areas in the acquired companies and looked for ways to merge ‘the CEMEX way’ with the current operations. During the 18-month integration process, Zambrano travelled to Spain every month to meet face-to-face with the team.
The team found that the two Spanish companies were very inefficient, especially in the areas of inventory management, energy consumption and plant automation. Moreover, the acquired companies did not use ICT effectively. For example, they still used paper to record orders and payment.
CEMEX engaged in a large-scale effort to bring the use of ICT up to CEMEX’s standard. It brought in its ICT system to track everyday operational results. Moreover, CEMEX streamlined management, introduced more efficient fuel sources such as petrocoke and improved plant automation. By the end of the integration process, operation margins had risen from 7 per cent to 24 per cent.
The skyrocketing economic performance at the two acquired companies then gave CEMEX the confidence to integrate its own dispersed Mexican operations. In 1994, CEMEX consolidated its Mexican operations into one managerial unit by applying the integration processes developed during the Spanish acquisitions. As a result, CEMEX gained US $85 million in profits.
Systemizing the acquisition process
During the domestic and Spanish acquisitions, CEMEX gradually developed its own systematic acquisition processes, including a target selection process and a post-acquisition process.[ix]
CEMEX is always alert to acquisition opportunities around the world, but it does not really target specific acquisitions in particular countries. As Hector Medina, former executive vice-president of planning and finance, put it: “when someone is ready to sell that’s when we’re ready to buy … So when we’re offered an acquisition opportunity it can only be at the right price.”[x]
Moreover, CEMEX carefully evaluates an acquisition/merger target when opportunities do present themselves. The target should meet three objectives. First, and most importantly, CEMEX should be able to integrate the target into its existing management structure and system of operations. Before any deal is closed, CEMEX’s human resources division always collects all relevant information about the target and its products, and creates a booklet on key issues for due diligence. CEMEX also sends a team of experienced functional managers from the head office to the targeted company, and then the team interacts with managers of the targeted company to discuss CEMEX’s post-acquisition approach. Second, the investment in an acquisition should not negatively affect CEMEX’s financial performance benchmarks, and if it does, any negative impact on the capital structure and cost should be temporary. For example, the group level interest expense ratio should be maintained below 4.5 per cent, and the ratio of net debt to net earnings before interest, taxes, depreciation and amortization should be kept below 2.7 per cent. Third, acquisitions should be accretive, in the sense of increasing earnings per share, meaning, inter alia, that new purchases should not start until CEMEX has finished integrating current acquisitions and has started to pay off debt related to such acquisitions.
Once a target is selected, CEMEX addresses two key phases to aid in the acquisition process. After CEMEX’s first acquisition in Spain, the company quickly realized that analysing the targets’ IT infrastructure was the most pressing concern. Zambrano stated, “information is your ally: you use it to detect problems more quickly and get better faster”.[xi] Integrating the acquired company’s IT has become the first phase in CEMEX’s acquisition process. The second phase involves analysing the acquired firm’s business processes using ARIS (Architecture of Integrated Information Systems). ARIS was developed to set company wide standards in processes for CEMEX’s many departments. These standards are then compared with those of the acquisition to determine areas where the two firms face discrepancies. Based off these results, CEMEX is able to determine the intensity of the post-acquisition process.
Finally, CEMEX has also formalized the post-acquisition/merger integration process. The post acquisition/merger team, consisting of individuals known as ‘CEMEX widows’ because they are told not to take their families,[xii] analyses the target firm, benchmarks the target against CEMEX’s own operations and presents its findings, focusing on a list of improvements, to the firm’s Executive Committee. If CEMEX uncovers unique and useful procedures adopted by the acquired companies, CEMEX attempts to take these and transfer them to other units within the company. After the acquisition, CEMEX sends operational teams to initiate changes in the acquired company, and to raise its performance to CEMEX’s levels.
New areas of international expansion
In the past 30 years, CEMEX has continued to expand internationally through acquisitions. Geographically, it has moved from Latin-American-based emerging countries to other emerging countries, and finally to developed countries. Its long list of acquisitions has allowed CEMEX to expand into the Middle East, Africa, Asia, Israel, the United Kingdom, France, Germany, Colombia, the Dominican Republic, and the Caribbean, amongst many other countries.[xiii] In fact, between the years 1980 to 2010, CEMEX spent an estimated US $29 billion on its acquisitions.[xiv]
The acquisitions in developed country markets should be interpreted partly as a reaction to the critiques of some financial analysts and partly as the outcome of CEMEX’s strategy to control its exposure to country-specific risk. As CEMEX operated almost entirely in emerging markets before 2000, some analysts considered CEMEX’s portfolio too risky, given the possibility of political and social instability in those countries. CEMEX agreed, and it also wanted to reduce its reliance on any particular single country, especially after it weathered the tumultuous 1995 Mexican peso crisis.
CEMEX has also expanded its acquisitions along the value chain, to gain the benefits of vertical integration. In 2005, CEMEX acquired RMC, the troubled UK cement producer and the world’s largest concrete producer, thereby positioning CEMEX as the third largest cement producer in the world. In this case, CEMEX expected to gain synergies by providing raw materials for RMC’s ready-mix concrete. CEO Zambrano commented, “The whole point of buying RMC is to get vertical integration for CEMEX overall … not only in the US but everywhere – the UK, Germany, Croatia, everywhere.”[xv]
Although some analysts were sceptical about the likelihood of performance improvements at RMC, CEMEX achieved synergies of approximately US $360 million after only six months. CEMEX’s ratio of net debt to net earnings before interest, taxes, depreciation and amortization also fell to 2.3 per cent, much lower than its threshold of 2.7 per cent.[xvi] During the process of integrating RMC, CEMEX sent about 400 people around the world to observe RMC operations.[xvii]
CEMEX had experienced great success with approximately 20 acquisitions during Zambrano’s tenure as CEO. (The one significant ‘failure’ was CEMEX’s withdrawal from Indonesia. However, in that case, CEMEX withdrew – selling its stakes in Semen Gresik in 2005 – simply because it was not able to gain majority control of the firm.) CEMEX gradually expanded its acquisition scope, both geographically and across the value chain, and acquired the Rinker Group in 2007.
CEMEX’s struggle with the recession
The acquisition of the Rinker Group in 2007 drastically changed CEMEX’s capital structure by tripling the amount of debt it held.[xviii] The Rinker Group was an Australian company that conducted most of its business in the US. When CEMEX acquired the firm, it was aware of potential troubles in the American housing market. However, it did not foresee the substantial impact a collapse would have on the Rinker Group’s operations. Zambrano commented “that every time we bought something, [the country where it was located] would go into recession. We called it the ‘Cemex effect’”.[xix] This indeed often happened as CEMEX acquired firms that were actually choosing to be sold, not coincidentally at times when their home nation’s economy was struggling. With earlier acquisitions, this had been only a minor issue for CEMEX, as it had typically been able to impose efficiencies and generate net benefits from its acquisitions within five years.[xx] The expectation was no different when acquiring the Rinker Group and CEMEX continued to finance this acquisition as it had done before with other ones, using primarily short-term debt.
It did not take long before the American housing bubble burst and demand for new construction fell drastically. Not only was CEMEX’s product demand affected, but the banks that held its loans were unwilling to renew these. By 2009, CEMEX was close to defaulting on US $21.7 billion of debt and was subsequently downgraded in terms of S&P’s investment rating.[xxi] Negotiations with creditors resulted and a ‘Financing Agreement’ was reached outlining CEMEX’s obligations for US $15 billion in refinancing. CEMEX eventually sold numerous assets in Australia, Austria, the Canary Islands and Hungary to strengthen its balance sheet. The agreement capped spending on acquisitions at US $100 million annually and mandated that these be creditor approved.[xxii] These restrictions, along with the company’s substantial debt, have left CEMEX with little room to continue its growth strategy since its last acquisition in 2007. This has raised some concerns for the company, as it is believed that the industry is approaching another consolidation period. In 2009, the number of acquisitions in the industry tripled as compared to the previous year.[xxiii] Fernando González, chief of planning and finance at that time, warned that “The largest players might grow faster than what we can do in the next five years.”[xxiv]
CEMEX in BRIC countries
Competitors have been shifting efforts towards the BRIC countries (Brazil, Russia, India and China) as demand for construction is expected to remain strong in these areas. In the same way, CEMEX established a joint venture with a Russian construction group (TVA) in 2009, forming CEMEX Baltic Cement, and began operating in that country. As for Brazil and India, CEMEX briefly entered both countries, but divested its operations in both locations during the years 2016 and 2018, respectively. Like CEMEX’s other divestments, it used the proceeds from selling its Bangladesh operations in India predominantly to reduce debt[xxv]. In addition, CEMEX briefly operated six concrete factories in China via strategic partnerships within the cities Tianjin and Qingdao but divested itself from these during the years 2013 and 2014[xxvi]. That said, the newly established Corporate Venture Capital Unit of CEMEX, CEMEX Ventures, announced in 2019 that it signed a deal with Glodon and Interdream Ventures to re-enter China.[xxvii]
‘A Stronger CEMEX’ and ‘Operation Resilience’
Although ‘the CEMEX way’ initially improved the company’s acquisitions results and improved cost savings, when coupled with the financial recession, this strategy arguably put CEMEX in a difficult financial place. In 2018, González, as the CEO announced ‘A Stronger CEMEX’ plan, to address operational initiatives, optimize its portfolio, lower debt levels, increase shareholder return and pursue relevant growth and divestment opportunities.[xxviii] González noted that CEMEX had “a number of assets to be divested, either because they [were] low growth, or because they [were] not necessarily integrated to other business lines.”[xxix]
A notable point within ‘A Stronger CEMEX’ plan was the goal of divesting US $1.5 – $2.0 billion in assets by the end of 2020 and lowering debt levels of US $3.5 billion by 2020. By the end of 2020, CEMEX reached the lower end of its divestiture target with approximately US $1.7 billion worth of asset disposals, but fell short of its debt reduction target, reaching a total decrease in debt of USD $1 billion.[xxx] As the end of 2020 inevitably arrived, CEMEX announced its midterm strategy, ‘Operation Resilience,’ to be followed up until 2023.
‘Operation Resilience,’ a plan to continue addressing these relevant financial challenges and to build “a lower risk and faster growing business,”[xxxi] consists of four main pillars. Namely, the enhancement of EBITDA margins by reaching a cost reduction goal of US $280 million, optimization of CEMEX’s portfolio including seeking strategic investment opportunities and relevant divestitures, improvement of capital structure to reach a leverage goal of minimum 3.0X, and recognition of sustainability as a competitive advantage.[xxxii] González commented on the plan, stating that he was “confident that the virtuous circle of enhanced EBITDA, increased free cash flow generation and asset divestitures [would] allow [CEMEX] to achieve [its] long-sought investment grade capital structure.”[xxxiii]
QUESTIONS
- What are the dynamics of industry concentration in the cement industry? Has internationalization led to higher concentration in the industry? Did the low consolidation level provide a rationale for international M&As?
- What were the major objectives of CEMEX’s international acquisitions? Did CEMEX show any of the six biases identified in Ghemawat and Ghadar’s article? Did CEMEX pursue any of the alternative strategies proposed by Ghemawat and Ghadar?
- What are CEMEX’s key FSAs? Has it been able to diffuse these FSAs to all acquired entities?
- How did CEMEX integrate the firms it acquired? Did CEMEX pay attention to the problems of distance during the integration process?
- How did the acquisition of the Rinker Group ultimately affect CEMEX’s international acquisition strategy? Please use materials available on the Web to update your response.
- When seeking future strategic investment opportunities, can and should CEMEX revert to its previously successful acquisition strategy of waiting for the “right time to acquire the right target;”[xxxiv] or could this again (because of debt and risk increases) trigger the need for a more conservative ‘A Stronger CEMEX’- like plan in the future?
Notes
[i] ‘Cemex 2005 Annual report’ (2006), 1–2.
[ii] Adam Thomson, ‘Shareholders accept Cemex bid for Rinker’, Financial Times (9 June 2007), 9.
[iii] Peter Edwards.. ’Top 10 Cement Profiles 2020.’ Global Cement Magazine( July 2020).
[iv] Sabine Schlorke, Marek Stec, Juan Villar Mallagray, Hassan Kaleem, ‘The Impact of COVID-19 on the Cement Industry’, International Finance Corporation (IFC), World Bank Group (August 2020).
[v] Lorenzo Zambrano, ‘Remarks to the “CEMEX Americas” global analyst meeting’, (Houston, Texas: 19 July 2001), 13.
[vi] Donald Marchand, ‘Into the CEMEX Womb’, Go India (December 2008), 56–9.
[vii] Leslie Crawford, ‘Long reach opens new sources of finance: Leslie Crawford on how thinking big helped the group survive’, Financial Times (7 November 1997), 16.
[viii] Ibid.
[ix] Steven Prokopy, ‘A conversation with CEMEX’s President of U.S. Operations Gilberto Perez’, Cement Americas (1 July 2002), http://cementamericas.com/mag/cement_conversa tion_cemexs_president/, accessed on 29 July 2007.
[x] ‘Emerging titans: Mexico, India’, FDI Magazine (2 December 2003), www.fdimagazine.com/news/fullstory.php/aid/185/Emerging_titansMexico,_India.html, accessed on July 29, 2007.
[xi] Donald Marchand, ‘Into the CEMEX Womb’, Go India (December 2008), 56–9.
[xii] ‘Success at home has bred victory abroad’, Financial Times (9 May 2007), 6.
[xiii] CEMEX, 20-F Report, 2020.
[xiv] Thomas Black, ‘Cemex says debt terms create “nightmares” of missing cement acquisitions’, Bloomberg (14 June 2010).
[xv] Sara Silver, ‘Cemex waits to cement its gains’, Financial Times (18 November 2004), 33.
[xvi] Adam Thomson, ‘Cemented: a reputation for efficiency’, Financial Times (11 April 2007), 26.
[xvii] ‘Success at home has bred victory abroad’, Financial Times (9 May 2007), 6..
[xviii] Thomas Black, ‘Cemex should have financed ‘more conservatively’: week ahead’, Bloomberg (2 November 2009).
[xix] ‘A Q&A with Cemex CEO Lorenzo Zambrano’, Bloomberg BusinessWeek (29 October 2009).
[xx] Ibid.
[xxi] Geri Smith, ‘Hard times ease for Cemex, Mexico’s cement giant’, Bloomberg BusinessWeek (29 October 2009).
[xxii] Thomas Black, ‘Cemex says debt terms create “nightmares” of missing cement acquisitions’, Bloomberg (14 June 2010).
[xxiii] Ibid.
[xxiv] Ibid.
[xxv] CEMEX Press Release, ‘CEMEX closes Bangladesh and Thailand transaction,’ (2016).
[xxvi] Ibid, 12.
[xxvii] Global Cement News, ‘CEMEX Ventures to enter Chinese market,’ (2019).
[xxviii] CEMEX 20-F Report, (2019).
[xxix] David Perilli, ‘Cemex joins the divestment party,’ Global Cement (1 August 2018). https://www.globalcement.com/news/item/7883-cemex-joins-the-divestment-party
[xxx] CEMEX Integrated Report, (2019).
[xxxi] Ibid, 12.
[xxxii] CEMEX Press Release, ‘Operation Resilience paves a road to a better future,’ (2020).
[xxxiii] Ibid.
[xxxiv] Ibid, 9.