X Cement Group's Financing Management after Mergers and Acquisitions

Shao Pengrui

(Chuzhou Zhonglian Cement Co.,LTD,Chuzhou,Anhui 239000)

Abstract：X Cement Group was established in June 1999.It is the core enterprise of China State Construction Materials Group Co.,Ltd,a large-scale central enterprise managed by the state-owned assets supervision and administration commission of the state council.It is also an important business segment of Hong Kong H-share listed company—China Building Materials Co.,Ltd,and an extra-large cement group supported by the state.This paper analyzes the enterprise financing management system and existing problems before the merger and reorganization of X Cement Group,improves and perfects the existing financing management system aiming at the original problem.Through meeting new challenges and opportunities for the industry and enterprises under the new normal,we can find new hope for the survival and development of enterprises.

Keywords：mergers and acquisitions;financing management;challenge opportunity

I.Introduction to the Background Information of X Cement Group

X Cement Group was established in June 1999.It is the core enterprise of China State Construction Materials Group Co.,Ltd,a large-scale central enterprise managed by the state-owned assets supervision and administration commission of the state council.It is also an important business segment of Hong Kong H-share listed company—China Building Materials Co.,Ltd,and an extra-large cement group supported by the state.X Cement Group owns 75 wholly-owned and controlled large-scale cement manufacturing enterprises and 34 large-scale commercial concrete enterprises,which are distributed in Shandong,Jiangsu,Henan,Hebei,Anhui,Shanxi,Inner Mongolia,Beijing and other provinces and autonomous regions.The annual production capacity of cement is 110 million tons,the annual production capacity of commercial concrete is 200 million cubic meters,the annual production capacity of aggregates is 27 million tons,the total assets are 79.5 billion RMB,and the number of employees is 27,000.

X Cement Group adheres to the corporate mission of“use of resources and service construction”of Chinese building materials,and takes“global excellent cement and concrete professional service providers”as its vision,and advocates the core values of“innovation,performance,harmony and re-sponsibility”and actively builds“ four types of innovative performance,resource-saving,environment-friendly,and socially responsible companies are committed to providing customers with highquality green building materials.X Cement Group insists on the production of high-quality products with professional manufacturing technology and expert management methods;insists on the responsibility of consumers with perfect market guarantee system and dedicated service concept;insists on promoting low-carbon production and management methods,to build a green environmental protection industry and fulfill the social responsibilities of corporate citizens;adhere to the healthy development of the company,continue to pay attention to the health and welfare of employees,and achieve the common growth of enterprises and employees.[1]

II.Financing Managementbefore the Mergerand Reorganization ofX Cement Group

Most of the cement and concrete enterprises affiliated to X Cement Group belong to mergers and acquisitions.Before the reorganization,these types of enterprises vary widely,and the levels of financing management are uneven.They can be roughly divided into three types.

1.The first type of enterprises originally belongs to the state building materials bureau,such as Southern Shandong Zhonglian,Huaihai Zhonglian,and Nanyang Zhonglian,these enterprises are typical old state-owned enterprises.They were born in the 70th and 80th centuries,and the financing management is relatively standardized.Most enterprises have experienced“relocation and loan reform”and“l(fā)oan reform”.The financing scale is large,and the majority of financing sources are state-owned large commercial banks and large joint-stock banks.The interest rate is basically the same as the benchmark interest rate announced by the People’s Bank of China.From the'borrowing new and old'to'returning old loans',the guarantees generally use the local large-scale enterprises to protect each other.Basically,there are external bad guarantees,which bear the responsibility of joint repayment,which seriously affects the daily production and operation of enterprises[2].

2.The second type originally belonged to local state-owned enterprises to participate in a small number of individual shares,such as Nanjing Zhonglian,Qufu Zhonglian,etc.At the beginning of 21th century,many companies realized management buyouts,and the financing management system has a strong local government color and individual boss color.These enterprises get their financing from local municipal banks,such as credit unions,the financing scale is small and the sources are relatively scattered.The stage of enterprise project construction basically goes through the process of serious shortage of funds or even fund-raising of employees.Many enterprises have privately guaranteed by bosses.In the case of fund raising,the debt ratio is generally high,and the interest rate is generally higher than the benchmark interest rate of the People's Bank of China by 50~80%.[3]Most of the guarantee methods are self-owned assets or provincial and municipal micro-guarantee companies.

3.The third type originally belonged to private or individual family enterprises.The financing management was relatively chaotic and simple,basically belongs to the folk loan that guarantees with boss individual credit,the interest rate level is higher than people's bank benchmark interest rate 3~5 times commonly.The funds needed for enterprise development depends entirely on the strength of the boss or his family.

III.Financing Management after the Mergerand Reorganization ofX Cement Group

(i)X Cement Group's existing Financing Man--agement Model odel

After more than 10 years of exploration and standardization,X Cement Group has formed a rela-tively complete financing management system.This system clearly requires any financing behavior,including new working capital,project loan,renewal of loan,etc.,interest rate and term of financing,etc.,of all affiliated enterprises must be submitted to X cement group for approval and approved by China construction engineering co.,Ltd.External guarantees are not allowed,and external enterprises are not allowed to guarantee the enterprises.Only the mutual insurance between the parent company and the subsidiaries is allowed.All guarantees must be submitted to the X Cement Group and approved by China construction engineering co.,Ltd.When the company's repayment funds are insufficient,it will apply to the X Cement Group for temporary loans in advance,and bear the interest according to the borrowing time.The loan turnover will be returned in time.The temporary fund lending between the subsidiaries will be implemented according to the fund transfer order after the approval of the X Cement Group.X Cement Group uses its own advantages and leverages the advantages of superior companies to realize the group credit of most national banks,and to supplement their own and their corporate capital needs with short-term and ultra-short-term financing.Enterprises with better financing conditions will supervise the financing of the group companies to support other brother companies.[4]

(ii) Advantages of X Cement Group's Existing Financing Management Model

Procedural specification:X Cement Group has formed a complete set of complete financing management system,covering all aspects and various links of financing management of itself and its affiliated enterprises.It has clear regulations on which all types of enterprises can be executed,and is highly operable.The enterprises of mergers and acquisitions and reorganization have appointed the chief financial officer to effectively ensure the implementation of the financing system.

Low cost:X Cement Group uses its own platform and leverages the platform of superior company to realize the unified group credit of each bank,which is beneficial to expand the financing channels of enterprises at all levels,effectively reducing the financing cost of affiliated enterprises,and basically achieving the appointment of bank benchmark interest rate financing.The restructuring will reduce the financing cost by 30%,and the entire group will save about 500 million RMB in financial expenses each year.[5]

The risk is controllable:no external responsibility is allowed,the guarantee risk is completely resolved,and the joint guarantee liability is avoided.Centralized dispatch repayment avoids overdue financing,greatly alleviates corporate capital risks,and at the same time helps corporate financing negotiations and reduces financing costs.

(iii) X Cement Group's Existing Financing Management Model

Longer financing approval time:The financing used by the enterprises of X Cement Group needs to be reported to the Group and approved by its superior company.This approval process will take at least 1 month.After approval by the superior company,X Cement Group will issue the board of directors and shareholders,and the bank signs the loan and guarantee contract after underwriting.The entire business process generally takes 2 months to directly affect the capital turnover of the company when any changes in bank financing conditions occur.The temporary repayment of funds within the group usually takes about one month to approve.[6]

Insufficient flexibility:X Cement Group will set the highest financing cost according to the superior company.It is difficult for all enterprises of different types and different scales with different benefits to adapt completely,resulting in uneven floods and floods.In some relatively remote areas,companies with smaller performances are less likely to finance,and even if they change their financing conditions in exchange for funds to meet operational needs,they will push up the financing costs of the brother companies in the surrounding areas to a certain extent,affecting the capital efficiency of the entire group.[7]

IV.The Focus of X Cement Group Financing Management

Funding is the premise for the survival and development of X Cement Group.The financing of enterprise groups is more complicated than the financing decision of individual enterprises.From the perspective of the enterprise group as a whole,the focus of its financing management mainly includes the following four aspects.

Firstly,handle the relationship between the group as a whole and the capital structure of the group members.The capital structure refers to the relationship between the various capital applications of the enterprise(including the use of various equity capitals and debt capital).A good capital structure can provide guidance for the financing of enterprises,and is conducive to reducing financing costs and financing risks,and is also the basis for the smooth development of enterprises.On the one hand,the parent company of the group can use the leverage of capital to realize the control of more capital with a small amount of self-owned interests.The increasingly dispersed nature of modern corporate equity also provides good conditions for the realization of leverage.Therefore,the overall debt ratio of the enterprise group may be much higher than that of the single enterprise.On the other hand,this leverage makes it possible for the parent company at the apex to have a higher rate of return than the subsidiary at the bottom of the tower in the pyramidal structure of the group,once the subsidiary’s rate of return any change will result in several times the amplification effect at the parent company level,which must be taken into account when considering the capital structure of the group.[8]

Secondly,centralized management of financing authority.Centralization offinancing authority means that the decision-making power of largescale financing is concentrated in the company headquarters.The concentration of financing authority is conducive to reducing the risk of creditors,which can increase the amount of funds raised and expand financing channels.From the perspective of the group,the concentration of financing authority is conducive to realizing the scale effect of group financing,reducing financing costs,and at the same time,financing rights are concentrated.It also facilitates the preparation and assessment of the group budget.[9]

Thidly,the choice of financing methods is combined with the transformation of the group model.The financing purpose of enterprise groups is often both investment and restructuring.For example,the spin-off of a branch office has resulted in a large amount of funds on the one hand and a change in the relationship with the core company on the other hand;and the listing of subsidiaries often allows the group to maintain control over its capital while obtaining large amounts of capital.When the semiclosed or loose layer of the enterprise group needs to raise funds,the core layer will take the opportunity to increase the shareholding ratio and change the organizational structure of the group.

Fourthly,give full play to the various advantages of corporate group financing.In comparison,the financing methods and channels of enterprise groups are more abundant.Not only can the group be financed as a financing entity,but member companies can also finance as a main body.The enterprise group should make full use of these advantages in financing,and can adopt the following forms:fund lending between group finance companies and member companies,internal financing of group member companies with accounts payable,and mutual guarantee or guarantee of group member companies.Mutual leasing and debt restructuring are used for debt transfer,and even the parent company can transfer part of the equity financing of the subsidiary without changing its controlling position[10].

V.New Challenges and New Opportunities Encountered in the Financing Management of X Cement Group under the New Normal

(i) New Challenges Encountered in the FinancingManagement of X Cement Group under the New Normal

Under the new normal of China's economy,the cement industry has been in volume for nearly two years.Many affiliated companies have maintained their prices below the cost line,their profitability has fallen sharply,and capital turnover has been difficult.In the industry,Shanshui Cement's shortterm debt defaulted and continued to ferment,affecting the short-term issuance of X Cement Group.X Cement Group is the earliest established subsidiary of China Construction Group.The state has limited capital injection.Due to the rapid expansion of new construction and acquisition in the past ten years,the scale of financing has been expanding continuously.The current asset-liability ratio has exceeded 80%,and the ratio of goodwill to net assets higher.As the saying goes,“The small streams rise when the main stream is high,when the main stream is low,the small streams run dry.”The current X Cement Group has a state of emergency in which the water level of is greatly reduced.Coal,steel and other industries have suffered losses for more than three years,at present,there has been widespread bankruptcy.There is no substantial policy support at the national level in the fully competitive cement industry.It can be foreseen that the current status of the coal and steel industry is the future of the cement industry[11].

(ii). New Opportunities Encountered in the FinancingManagement of X Cement Group under the New Normal

Recently,with the substantial increase in the scale of the national“Iron Rooster”construction,real estate recovery,and rural renovation projects,the decline in cement demand has slowed down and prices have gradually picked up.Since the beginning of 2017,the state has continuously increased the intensity of supply-side reforms,such as peak production,mergers of two materials,and restructuring of projection.If it can reach a certain tacit agreement with the most powerful conch cement in the industry,it will lose both sides of the cruel and fierce price war.It is the gospel of the cement industry and the hope of practitioners in this industry.