MMTC, STC & PEC: The urge to merge

Three can be a crowd. Which is why MMTC, State Trading Corporation Limited (STC) and Project Equipment Corporation (PEC) are toying with the idea of becoming one. With a bit of luck, the proposed merger of these three trading firms should go through soon. It's the employees who are going to decide and from the looks of it, they are buying the idea. Says a senior official at STC,"There's a mixed feeling of excitement and apprehension, but no one seems averse to the idea."

That's good news .The merger of the three trading companies has been recommended by management consultancy firm McKinsey and would result in a behemoth with over 3,000 employees and combined turnover of more than Rs 27,000 crore (Revenues for 2005-06 ).

The government has been questioning the rationale for the firms operating on their own, for some time now. Given that each of the firms is taking on the other in spaces such as bullion, metals, hydrocarbons and oilseed extracts, it makes sense for them to pool together their resources and take on the competition together.

The merged entity will work on a new business model to get access to international markets and face global competition. "The role of pure trading companies is getting reduced," says an official, adding that employees understand that these companies wouldn't survive for long if left on their own. As it is they face fierce competition from foreign countries; for instance they compete against Thailand and Vietnam in the rice trade.

The McKinsey report suggests that businesses in the merged entity should be both horizontally and vertically integrated. The idea is that the company should move beyond being merely a trader and tap related opportunities.

For instance, if a company is exporting iron ore it could probably explore the opportunity to get into mining. Similarly, for agro bulk commodities and agro perishable commodities, the business heads could perhaps look at getting into food processing and cold chain development instead of simply just exporting the product.

Besides, McKinsey recommends that minority joint ventures- a public-private-partnership model "� be formed for each of the businesses, whether it is bullion trading, metal imports or coal trading. These joint ventures, the report says, could be equity- based and structured such that the new entity has a stake of less than 50 per cent.

The JVs would be better placed to hire talent and pay market-linked salaries. Moreover, employees too could be permitted to join them. "There's a dearth of competent people and through these joint ventures, fresh talent can be attracted," points out a government official.

That would be a boost for employees who might not be worried about being retrenched, but are certainly concerned about career progression and work responsibilities. Of course, the government would need to decide on the portfolios and tenures of the directors and heads of the three companies.

Interestingly, both MMTC and PEC are offshoots of STC which was set up in 1956; MMTC was incorporated in 1963 whereas PEC Ltd was formed in 1971. However, with an annual turnover of over Rs 16,000 crore, MMTC today is the largest trading company in the country followed by STC, with Rs 7,125 crore. PEC is relatively smaller with an annual turnover of Rs 3,725 crore.

While MMTC focuses on importing metals and minerals, STC trades in the international markets for agro products. "If the merger goes through, both can leverage each other's infrastructure and network," observes an industry analyst.

While building a new business model, the new entity should keep in mind its existing mandates. Says Hiranyava Bhadra, associate director, KPMG, "As government entities they have a mandate to follow: MMTC needs to identify markets to get metals and minerals to India in order to support the country's growth. On the other hand, STC has to help maintain market harmony in agro products and support the agro community." Bhadra adds, "The challenge before the government would be to see that none of these mandates gets diluted in the merged business because they are crucial for next 15 years." That should not be too.