The Hindu Business Line : Beware of mergers

THE PROPOSAL TO merge India's giant petroleum companies into megalithic corporations requires cautious appraisal. Mergers are, in theory, the very antithesis of competition, hence unwelcome in any open market economy. In practice, they are also extremely hard to pull off successfully, as measured by simultaneous creation of shareholder and customer value. The experience of mega mergers the world over suggests that the obvious benefits seldom materialise. The reduction in replicated overheads, such as head offices, accounting, legal and secretarial functionaries, is offset by the heavily entangled issues of harmonising staff policies and practices, and customer relation activities to deliver the same quality of service everywhere. The work culture, leadership styles and communication methods followed vary so greatly that the marriages are rarely smooth. Acquisitions fare better because of unequal sizes masking the difficulties, as the culture of the acquiring organisation simply overrides all others.

Stock markets too discount conglomerates by upwards of 15 per cent of the sum of independent values of the constituent units. Intrinsically high-risk and high-investment industries, such as pharmaceuticals and petroleum extraction, are naturals for agglomeration and consortium approaches to organisation; but the argument loses punch when it comes to anything that concerns the public (the tax-payer, the voter, you and me). At least two conditions are necessary for a merger to be anti-competitive: substantial concentration in market power in the post-merger entity, and very high barriers to new firms entering the market. Both these are present in the oil refining and distribution sector.

To the manager, size is always attractive because of its potential for monopolistic dominance. In the case of hydrocarbons, this also means possible bargaining power over supply lines, which are in themselves a cartel. The impact on consumers' interests is much less straightforward. It could be argued that largely state-owned entities merging could help the corporation transfer the economic benefits of scale to consumers. But this oversimplifies the case. The consumer benefits from competition in many ways, not the least of which is the quality of accessible and attentive personal service, and flexibility — qualities that don't exactly spring from the impersonal bureaucracy that inevitably steers a Ministry-run public sector. Few of us enjoy dealing with a mega-corporation, especially to make some sort of complaint or suggestion. Indeed, in banks, hotels, telecommunications and airlines, customer satisfaction, which is the essence, declines wherever high entry barriers to competition or a single large supplier operate.

In the end the caution against mergers is based not just on caveats against concentration of power, or that small is prettier, but also on the sheer inefficiencies of unwieldy size. Soon, an unscrambling of the mixture happens, replacing the company form with divisions or geographical units. Fashions in organisations tend to swing like the tide, between centralised power and some form of devolution. Otherwise, there would be no case for more than a single monolithic public sector bank or insurance company. That there has never been such a situation is an indication of the intractable complexities of mergers.

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