Bigger may not be better

In looking to answer the above question, one must not make these twin mistakes. Ambitious mergers have often been the trigger for radical structural and organisational change. The big-ticket combinations of the ’90s—Exxon-Mobil, BP-Amoco-Arco and Total-Fina-Elf, among the most well-known—did lead to a complete refashioning of the working arrangements within these companies. It allowed them to knock out billions in overhead costs by eliminating or outsourcing non-core functions and through staff retrenchment. They were also able to improve their business portfolios by closing down or divesting poor performing units and by focusing on growth opportunities in large emerging markets.

All this was possible because the shareholders and management were aligned on the objective and there were no insuperable regulatory, legal or political hurdles. The question is, whether this would be so with the above proposed merger? Would the management of the merged PSU entity be allowed, for instance, to close down poorly performing units? Would they have operational autonomy free from the shackles of bureaucratic vigilance? Would they be able to overcome the backlash from trade unions and the rigidities of our labour laws to shed excess staff? If the answer is affirmative, the merger will unquestionably add value. If not, the move would be premature.

Vertical integration is the other avowed driver. Here again the logic is strong. But is it contemporaneous? In today’s global and wired world, size and economies of scale do not determine a company’s distinctiveness. Nor does it assure growth or profitability. What does is operational excellence, technical skills, low overhead costs and commercial acumen. This is because entry barriers have collapsed, the market has fragmented into an array of niches and capital is readily available to all well-managed companies irrespective of size. There are many examples of relatively small oil and gas companies that have taken advantage of this changed market reality to enter and successfully compete against the vertically integrated super majors, along not the entire value chain in which these majors are present but in selected segments only—that is, for example, in refining, logistics or marketing (or even a sub-segment of these categories) with no upstream or downstream linkage. Vertical integration will no doubt strengthen the balance sheets of our PSUs, but it will not transform their fortunes. That would happen only if they can first bring their current operations to world-class standards.

Is such an ambitious merger the only avenue available for extracting the synergy benefits of size and vertical integration? I ask becuse it will not be easy to carry out the necessary changes given our political and regulatory context. I also ask because the consumer does derive benefits from intra-public sector competition and this must not be ignored. And I ask because with monopoly over the logistics and distribution network and with over 20,000 retail outlets, the real threat to the public sector’s current market position is not the private sector, whether Indian or MNCs, but their own internal functioning. Are there not simpler options for realising such synergy benefits than to take a route that will undoubtedly raise distracting legal, operational and management issues?

The Ministry of Petroleum as the custodian of the shareholders’ interest acts effectively like a holding company. It sets the strategic direction for the industry and has overriding influence over crucial management and commercial decisions. Why not formalise this situation by creating a Supervisory Board chaired by the Minister (if not the Secretary), with CMDs of PSUs as members? The board could be the paramount decision-making body of the industry responsible for strategy, monitoring of the performance of the individual companies and cross-company/business coordination in the deployment of investible resources. And when size is indeed of importance, such as for bidding against the super majors for overseas assets, for ensuring that the companies speak with one voice and with the full weight of the industry’s balance sheet behind the bid.

Such a step may not have the legal, financial and organisational clarity that comes from creating one company, but it is not without precedent. Many companies worldwide manage their separate businesses through a supervisory body. The essential advantage in India would be that it would facilitate greater cohesion and coordination amongst the PSUs but without abridging the legal or operational identity of the individual companies.

Mergers can offer an opportunity for substantial value creation. But if mishandled, they can also lead to the dis-economies of managing a large, unwieldy and complex behemoth. We should be wary of arguments that throw back to the days of closed markets when size and scale were of consequence. More pertinent, we should not let the generalities of international experience blind us to the particularities of the Indian context.

The writer is Chairman of the Shell Group of Companies in India. These are his personal views.