Mergers and Acquisitions, the stuff of newspaper headlines, quite often fail. Around 50% of mergers don’t achieve their business objectives, and takeovers cause most of the acquirers to lose money, according to several studies conducted over the past four decades. Yet, in an ironic twist, companies from developing countries such as China, India, Malaysia, Russia, and South Africa are using M&A as their main globalization strategy today.
In this article, we try to bring out the difference in acquisition strategy of “companies from developing countries” and “companies from developed nations”. We describe characteristics of “companies from developing countries” ,their strategies and objectives of M&A. No doubt they are very confident but less arrogant. They are well-known entities in their home countries among customers, suppliers, and investors
Companies from developing countries
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- Are cash rich supported by the growing home markets and higher profit margins than those in the developed nations
- Are not unduly concerned about dilution of shareholding as business families/founder promoters hold large stakes in the companies
- Find valuation of companies from developed nations more attractive after the recent stock market crashes in the United States and Europe. Also, they can create value from takeovers more easily than corporations from developed countries.
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Further Drivers and reasons for the M&A are quite different from “companies from developed nations”.
Different strategies
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- Unlike Western companies, which use M&A primarily to increase size ,enter new markets and reduce cost, emerging giants acquire western companies to gain complementary competencies- that is learning to deploy assets such as technology and brands, and capabilities such as new business model and innovation skills – that will enable them to become global leaders. Tata acquired Corus to acquire and deploy technology and brands. Similarly, Hindalco acquired Novaris to acquire technology and make value-added products for its customers
- Operating costs aren’t an issue for emerging giants; as they know that they can transform an acquired company’s economics simply by switching to the low-cost resources and business processes in the home country.
- In addition, developing countries tend to increasingly absorb Western companies’ output of technologically superior products. Many slow growing companies with low margins can be turned into fast-growing, high-margin enterprises by their acquirers in developing countries by reducing costs and increasing utilization by selling in the home country of acquirer
- They recognize capabilities of a present management team of Target and hence avoid overturning acquisitions’ management structures. In fact, they retain them ,understand the whole processes and also make tough decisions for downsizing etc under old management leaders so that the regulatory authorities and workers do not object. and
- They don’t reduce headcount immediately considering sensitivity and tough labor laws they face in the home country and in the process ensure smoother integration.
- To realize their objectives, companies from developing countries now use new techniques to identify targets and integrate them. They acquire only to meet strategic goals; they don’t completely assimilate acquisitions; unless they are convinced that there is complete harmony in culture ,values and practices and that complete integration will not increase the burden on the parent by destroying/reducing its value.
- CEOs focus on the long term goals while planning takeovers and evaluating results. They have a clear long-term vision guiding their actions; they are willing to wait for a takeover to pay off. Tata is ready to wait and watch to get value out of Corus acquisition .it has not taken any steps to merge Corus with itself ,though it is a forgone conclusion. Similarly, Hindalco management is not likely to take any step to legally integrate Novalis with itself till it is fully convinced that all inefficiencies and unrequited baggage are taken car of .
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By applying these M&A principles, Indian aluminum producer Hindalco became one of the world’s largest manufacturers of aluminum. Hindalco pursued two prolonged strategies: It would generate economies of scale in the aluminum manufacturing business by setting up projects in India, and it would use cross-border acquisitions to break into the product market. Similarly, Tata becomes fourth largest steel producer in the world and has same strategies as Hindalco i.e. low-cost producer of steel in the world and value added steel products manufacturer by leveraging Corus technological superiority
Conclusion
Strategies used by “companies from developing countries” look risky in the short run but in the long run, they create a lot of value for all the stakeholder. They take all precautions to see that in their zeal to expand fast, they don’t destroy Value at home for their present stakeholders. Their strategies are comparatively sound because of their present strength as a low-cost producer ,ability and willingness to learn and absorb the technologies with no arrogance and support from huge local demands for newer and value added products.
So it is to be seen over next few years how MNC from developing countries create value and change headlines that most M&A succeed as compared to less than half the success rate as of now.
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