Integrative Case 2 Cemex

Competitive Position Southdown

Southdown is the strongest and most profitable building materials companies in the U.S. with 12 cement plants, 45 distribution centers, and 616 ready-mix trucks. The company operates its own mines and produces raw material for cement plants along with other specialty mineral products. The company’s mission for continued growth and shareholder value requires the board to consider a share repurchase plan, expansion through domestic or international acquisitions, or the merger or sale of the Company.

As the board reviews options to ensure a strong future for Southdown and its’ employees, many factors must be weighed. These factors include: Energy costs, economic trends, production, capacity, global expansion, competition, and technology.

Fuel is the largest cost in the production of cement, accounting for 50 percent or more of total variable costs.  Rising energy costs were weighing on operating margins, with an approximate 11% decline. U.S cement consumption only accounted for 8% of the world consumption totals in 2000, indicating global expansion may need to be considered for continued growth. U.S. cement production in 2000 was 89.5 million metric tons, with countries such as China and India exceeding U.S. production numbers of 583 million and 95 million metric tons respectively.  Industry growth of less developed countries is expected to outpace industrialized countries and many large competitors such as Lafarge, Holderbank, and Cemex were engaged in significant acquisitions.  

In efforts to reduce costs, Southdown has invested heavily in new dry-process technology and retiring inefficient wet plants. This investment has provided them with significant cost savings and energy efficiencies.  U.S. demand for cement continues to exceed available supply, resulting in a 31% increase of imports in 1999, with U.S. demand forecasted to move from 115.7 million metric tons to over 128 million metric tons by 2004.  Estimated cost savings for integration of Southdown and Cemex operations valued at $60 million.

Top Five Cement Producers (millions of metric tons)

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Competitive Position Cemex

Cemex is a Multinational cement producer, ranking 3rd worldwide behind Lafarge and Holderbank. The company was founded in 1906 and is based out of Monterrey, Mexico. The company’s mission is to become the world’s most efficient and profitable multinational cement company by applying free cash flow toward investments that will further its geographic diversification.  Cemex has an historical record of successful acquisitions with strong management, turn-around expertise, and value associated with cost savings metrics through integration. Cemex has global operations in several countries including Mexico, United States, Venezuela, Dominican Republic, Central America, Caribbean, Spain, Egypt, Philippines, and Indonesia. Similar to Southdown, Cemex typically owns and operates its’ own mines, trucks, and port facilities.

Cemex operates 18 plants and 74 distribution centers in Mexico, which accounts for 44 percent of total worldwide sales. U.S. operations for Cemex include 4 plants and 12.2% of sales with a very limited production capacity of 1.2 million metric tons. Residential consumers of bagged cement account for a large portion of sales accounting for approximately 75% of private sector demand in Mexico. U.S. consumption of cement is very different, with the vast majority consumed thru bulk quantity order via ready-mix trucks.  Cemex currently imports a significant amount of cement into the U.S. which is very inefficient due to transportation costs. The economic forecast for cement demand in the U.S. continues to show signs of growth, which is why further expansion into the U.S. by Cemex may provide significant opportunity to drive revenues, increased margins, and cost savings through integration.

Cemex has a significant competitive advantage regarding energy costs as it has established a 20-year energy contract with Pemex. This agreement will enable the firm to maintain a stable energy cost structure for years to come.

The Southdown Offer - When is the Right Time to Sell?

Investment in New Technology Failed to Create Momentum

One of the efforts undertaken by Southdown to reduce costs was to modernize their production process and plant operations.  After liquidating their hazardous-waste disposal facilities in 1992, Southdown began to focus its resources on modernizing these facilities.  Their main goal was to reduce their reliance on less efficient wet plants, and increasing investment in the newer dry-process technology.  This change allowed the organization to reduce their energy consumption needs significantly, and the bottom line gains began showing the fruits of these efforts during the latter half of the decade.  By 1998 the organization was operating with around 88% of their production capacity utilizing dry-process technology, compared to an average of 52% for the rest of the U.S. industry.  These upgrades also increased productivity by 50 to 100% during the same period.

Southdown’s focus on modernization allowed them to more than double their production capacity, while holding steady on employment at around 4,000.  This allowed them to increase revenue, without increasing costs at the same time.  While the efforts had clearly trickled down to the bottom line by 1998, share prices continued to decline.

Declining Share Price

The main condition that drove Southdown to seek a buyer is in their declining stock price.  While the company steadily increased both their top and bottom lines from 1997 through 1999, the stock price had fallen from $74 in mid-1998 to $45 at the close of 1999 (1).  The decline of nearly 40% frustrated company leadership, which felt that their growth agenda and tight cost controls were not being rewarded by investors.  The decline came during a period in which the tech-heavy NASDAQ composite index nearly tripled, and the DOW index climbed 28%.

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From 1997 through 1999, revenue increased steadily from $1.1 billion to $1.3 billion, representing a 16% gain.  Additionally, earnings from continuing operations also increased from $153 million in 1997 to $213 million in 1999, nearly a 45% increase.

Geographic Rollup Merger and Acquisition (M&A)

Southdown, Inc. participates in a commodity market with both their premixed and bagged dry cement products.  This type of market lends itself to geographic rollup M&A activity as defined by Bower in his 2001 article Not All M&A’s Are Alike – and That Matters.  While geographic rollup M&A often occurs early on in an industry life cycle, the cement business is quite mature.  Many of Southdown’s competitors were already acquired by European companies during the oil crisis of the early 1970’s due to skyrocketing costs of energy during that time.  This has left Southdown as one of the largest domestically owned cement companies in the U.S., making them an attractive target for larger multinational companies to expand their footprint into North America.  While being one of the largest U.S. cement producers, Southdown is too small to target their larger multinational competitors for expansion through acquisition themselves.