Merger, he said

There is a lot to be said in favour of the proposal mooted by public sector oil giant Oil and Natural Gas Corporation (ONGC) that it take over the downstream or marketing assets of either Hindustan Petroleum Corporation Ltd (HPCL) or Bharat Petroleum Corporation Ltd (BPCL), as the synergies are obvious.

Globally, the oil majors are integrated players and there is no reason why ONGC should not strive to become one as well. The reasons for this are many. One, prices of crude and petroleum products move in the same direction, but with a lag, and so an integrated company gets the benefits of both phases of the price cycle.

ONGC Chairman Subir Raha has detailed the savings in transactions costs (his figure is around 5 per cent of total costs) if such a merger is allowed. There are the obviously higher margins in the retail end of the business, which a company like ONGC would like to be able to share.

However, should such a merger be allowed, there are important issues to keep in mind.

The most obvious, of course, is that few mergers of any consequence the world over have succeeded in adding value for the investor, the HP-Compaq disaster being only the most recent and high-profile example.

Companies that merge have different work cultures, and ONGC and HPCL/BPCL are no exception to this rule. While ONGC’s organic growth into an integrated company by swallowing up smaller companies like MRPL is one thing, having to merge work forces and management cadres of behemoths like HPCL/BPCL is an altogether different challenge.

It doesn’t help that while large retrenchments are almost par for the course in global mergers, because that is where a lot of value is got, it is difficult to see this happening in India in the current political environment.

The most vital issue that would need to be addressed in the event of a merger is what happens to competition. Theoretically, if there are two big PSU giants post the merger (one led by ONGC and the other by IOC), Reliance Industries, and maybe one or two foreign giants like Shell, there is no shortage of competition.

But it is worth keeping in mind that, in most cities, the land available for setting up new petrol pumps is severely restricted, so merging two oil giants can only reduce competition. This may not apply to an ONGC takeover of HPCL, for instance, but if that in turn is to be followed by IOC taking over BPCL, the consequences are obvious.

A merger of the sort proposed, needless to say, will have the blessings of the political class as it does two things. One, the combined ONGC-HPCL becomes so big that the chances of it getting privatised recede into the background. Two, as long as it is government-owned, there is so much more for the politico-bureaucratic class to try to influence.

It’s difficult enough to make mergers work when both the parties involved are privately owned; to do so in a situation where both are publicly owned only complicates matters even more.