14

Alliances and Acquisitions

INTRODUCTION

You saw in Chapter 6 that firms choose different modes of foreign market entry. In an era of growing competition and globalization, this includes various forms of collaboration with domestic and international counterparts to find space in the global marketplace and help in strengthening their competitive advantage. Alliances and acquisitions are two major strategies for the growth of international business firms, which have gained in strength in recent years. This chapter explains what they constitute and various other issues such as the motives driving them and how firms can manage them.

STRATEGIC ALLIANCES

Strategic alliances are “voluntary agreements between firms involving exchange, sharing or co-developing of products, technologies or services”.¹ They refer to cooperative agreements between potential or actual competitors in the form of formal agreements with equity stakes or short-term contractual agreements for cooperation in a specific task. They take the form of transnational partnerships that attempt to pursue mutual interests through the sharing of resources and capabilities.

 

They can be formal agreements with equity stakes or short-term contractual agreements for cooperation in a specific task. The increase in the number of such alliances among TNCs all over the globe from different countries is transforming the global business environment as it facilitates foreign market entry, helps firms share fixed costs and risks, and benefits from the synergies of complementary skills and assets. These alliances are gaining importance worldwide as global competition intensifies for access to markets, products and technologies. As a means of survival and growth, strategic alliances have become a fundamental element of many TNCs’ key global business strategies.

The basic parameter for classifying strategic alliances is the existence of an equity component in them. We, therefore, classify them as equity-based alliances and contractual or non-equity-based alliances.

Equity-based Alliances

The most common foreign entry for TNCs has been through equity joint ventures, which entail establishing a new entity that is jointly owned and managed by two or more parent firms in different countries. To set up an equity joint venture, each partner contributes cash, facilities, equipment, materials, intellectual property rights, labour or land-use rights. These collaborative arrangements could have an equal ownership pattern; a 50–50 ownership or in any other proportion, according to the law of the land. Joint venture laws in most countries require a foreign investor's share to exceed a certain threshold of the total equity (25 per cent in many nations). While there is no upward limit in de-regulated industries in most countries, whether developed or developing, in governmentally controlled or institutionally restricted sectors, foreign investment is often restricted with respect to equity arrangements.

 

In a recent development, Larsen & Toubro Limited (L&T), India's diversified engineering and construction conglomerate, entered into a joint venture with Japan's Kobe Steel Ltd. The new venture, named L&T Kobelco Machinery Pvt Ltd, has been set up for the manufacture of equipment for tyre and rubber companies. Set up with a capital of INR 0.3 billion, the venture has L&T as the majority shareholder with a 51 per cent equity stake. The venture helps Kobe access the growing Indian market and L&T's established consumer base, and L&T benefits from Kobe's technological expertise.²

Strategic investment is another form of an equity-based alliance. In this form of collaboration, one partner makes an investment in the other's existing business. For instance, materials and films vendor 3M Company based in Maplewood, Minnesota, recently made a strategic investment of USD 3 million in Pixel Qi.

Cross-shareholding is a form of collaborative exercise in which both partners invest in each other's existing and running enterprises. The practice is common throughout the world but it is particularly used in the traditional industries (steel, paper and energy) of Japan. However, big global carmakers and electronics firms of Japan participate as well.

Although cross-holdings help to make alliances firm and strong, they also make firms captive to their partners and reinforce the inflexibility of the business environment, in this case Japan. In spite of these issues, cross-shareholding continues to be a part of Japanese business culture, as proved by the recent alliance between French, German and Japanese automobile manufacturers, that is, Renault-Nissan with Daimler.

Contractual Alliances

The cooperative joint venture (also known as contractual joint venture) is a collaborative agreement in which both profit sharing and responsibility sharing are defined as per the terms of a contract between the two parties. The profit sharing arrangement is not necessarily according to each partner's percentage of the total investment. Each partner or co-venturer cooperates as a separate legal entity and bears its own liabilities. Most cooperative joint ventures do not involve the creation of an independent corporate entity but follow carefully defined rules regarding allocation of tasks and costs and revenue sharing.

 

Cooperative joint ventures can take the following forms:

Joint exploration projects for minerals and other natural resources are a form of non-equity cooperative alliance in which exploration costs are usually borne by the foreign partner and development costs are usually shared by the local partner. For instance, DiamondCorp plc, a UK-headquartered enterprise, has entered into a joint exploration project for the mining of diamonds in Botswana with exploration company GeoPerspectives (Pty) Limited.³ Such exploration projects allow the foreign firm to manage specific aspects of the project without the formation of a new corporate entity.

Research and development consortiums are also a form of collaboration in which the costs are allocated according to an agreed upon formula, but the revenue sharing depends on how each partner deals with the technology it created.

A co-marketing arrangement is an opportunity for different business enterprises to reach a larger consumer base. For instance, Praxair Technology Inc. (United States) and Merck KGaA (Germany) established a global alliance for the use of each other's distribution channels to market Praxair's gases and Merck's wet chemicals to consumers in the semiconductor market. Praxair has a strong distribution infrastructure in North America but is a minor player in Europe. Merck, in comparison, has a strong presence in Europe, but is not present in the US market.

 

IBM is also aggressively investing in co-marketing because it sees large white space opportunity in the midmarket to win new accounts. IBM, which has traditionally had co-marketing programmes for its distribution partners, has recently replaced these with marketing service vendors (MSVs). These are strategic marketing vendors, one in the United States and one in Europe, with channel marketing expertise that are enabled and funded by IBM on a three-to-one basis to help partners develop customized and repeatable marketing campaigns.⁴

Co-management arrangements are loosely structured alliances in which cross-national partners collaborate in training, production management, information systems development and value-chain integration. It serves as a platform for firms to acquire skills quickly and efficiently, especially for firms which realize that they lack the skills necessary to run foreign operations. The local counterpart benefits from the international experience and organizational skills of its partner. In Pakistan, a training initiative known as the Better Cotton Initiative (BCI) is a global programme made up of producers, international retailers and not-for-profit groups. The initiative counts IKEA Systems B.V. and H&M among its commercial partners, and training activities are organized by the environment group WWF, Oxfam and local civil society organizations to provide training to small farmers about the hazardous use of chemicals and how to optimize their usage.⁵

 

Co-production or co-service agreements find different partners responsible for manufacturing or fulfilling a part of the production or service agreement, with costs generally being a function of each partner's level of efficiency. Boeing entered China in the late 1970s through a co-production agreement with the Xi'an Aircraft Industry Group (Company) Limited, which co-produced 737 vertical fins, horizontal stabilizers and forward access doors, and another co-production agreement with the Shenyang Aircraft Corporation, which co-produced 737 tail sections and 757 cargo doors. Similarly, Indian IT major Tata Consultancy Services (TCS) has partnered with Cisco for the development of IT service solutions.

 

RATIONALE FOR STRATEGIC ALLIANCES

The basic rationale of a collaborative arrangement is to be able to avail of the synergy that arises out of such relationships. Synergy refers to the financial, operational and technological benefits that arise out of the use of complementary resources and capabilities. The term “synergy” denotes that the magnitude of benefit that is possible as a result of the combination of resources is greater than what is possible if both parties made the effort alone. These benefits are the result of risk reduction, knowledge acquisition, economies of scale and rationalization, reduced competition and market entry.⁶ Specifically, the reasons behind strategic alliances are as follows:

 

Risk Reduction and Cost Spreading

In order to tap the global market, a firm needs to incur certain fixed costs that may be a deterrent for its foreign market foray. At low levels of output, it may therefore prefer to outsource or contract out some business. However, the better option is for the firm to enter into a collaborative agreement that helps it to pool risks and cover increased investment costs. In cases where the host country environment is new, unfamiliar, or hostile, or the law of the land does not permit a firm to go it alone, a strategic alliance makes sense. The joint venture between Bharti and Walmart in India was driven by the prohibition on retail investment according to Indian laws, which allows 100 per cent foreign ownership in the domestic retail sector only if a company only establishes wholesale or cash-and-carry stores.

The same considerations have driven the entry of French retail chain Carrefour Group, which has forged an alliance with the local Future Group, which operates India's largest network of branded stores, including the Big Bazaar and Pantaloons chains.⁷ Alliances also help a firm to exit through a minimum cost outlay and to keep its reputation intact.

Acquisition of Knowledge and Resources

A firm's competitive advantage arises out of the possession of firm-specific advantages that take the form of routines and organizational culture. In today's fast-changing competitive environment, alliances allow firms to benefit from each other's knowledge without going through the time-consuming effort of having to build them up. India's Oil and Natural Gas Corporation (ONGC) Limited acquired a 40 per cent stake in the San Cristobal oilfield in Venezuela for USD 356 million through its overseas investment arm ONGC Videsh, which has a presence in 29 oil and gas projects spread over 15 countries and is spearheading India's quest to secure energy security through overseas equity oil.⁸

Benefits of Economies of Scale and Scope

The ability of a firm to produce on a global scale and penetrate the global market depends to a large extent on how well it is able to reap the benefits of scale and scope. The use of complementary resources, competencies and skills gives rise to synergistic effects that are unavailable if a firm is producing on its own. The use of strategic alliances also permits the use of larger financial resources and the sharing of the costs of these resources. It also permits alliance partners to raise funds from different parts of the global market, permitting the shareholder to reap the benefits of global portfolio diversification.

Bypassing Barriers to Entry

In many countries, foreign business firms are encouraged to enter the domestic market in the form of an equity joint venture rather than as a wholly owned subsidiary. For instance, in the 1980s, the Indian Government had imposed several restrictions on the entry of TNCs in the form of repatriation of profit, technology transfer and product distribution. As a result, when PepsiCo entered the Indian market, it came through a joint venture with Punjab Agro-Industries Corporation and Voltas Limited. This helped it to establish a presence through the use of market power and marketing channels of its local partners.

Acceptance in the Local Market

The success of a foreign firm is subject to its acceptance in the local market by local customers. The use of a domestic partner often helps a firm to gain acceptance. Entry into Japan is encouraged through the assistance of a local partner who understands the distinctive marketing and distribution practices in Japan.

Ability to Face Competition

Alliances enable rivals to survive in a market that may not have enough space for both of them individually and where the only route to survival is through co-opetition—cooperative competition. For instance, Clark Material Handling Company and AB Volvo forged an alliance for the manufacture of earth-moving equipment to compete in their respective home markets of the United States and Europe against global giants Caterpillar, Inc. and Komatsu Limited. In a more aggressive move, Caterpillar teamed up with Mitsubishi Heavy Industries Ltd in Japan in 1963 to get a share of the market from their common competitor Komatsu, which had almost 80 per cent share of the market.

India's leader in the social expression industry, Archies Limited, entered into a tie up with US brand Hallmark Cards, replacing its earlier partner Vintage Cards and Creations Limited. The tie-up with Archies, which has a countrywide presence in the social expression industry, is expected to help the US brand scale up faster in the booming Indian market and will simultaneously increase Archies’ international exposure too as its cards will be sold across Hallmark stores in the Middle East, Canada, Australia and the UK during festive occasions such as Diwali, Rakhi, and Eid. However, there exists the possibility of Archies eventually being cannibalized by Hallmark and the eventual sharing of competition between the two brands, which may result in more choices for the consumer and help in the overall growth of the market.⁹

BUILDING STRATEGIC ALLIANCES

The various stages of building strategic alliances are as follows:

The Decision to Cooperate

At the very outset, a firm has to take a decision regarding whether it wants to rely on pure market transactions or acquisitions. This is a time-consuming and demanding option even for resource-rich TNCs. This is the basic reason that firms decide to enter into alliances.

Contract or Equity

The next stage is the choice between contract and equity. This decision depends on four different factors:

The key decision parameter is the character of shared capabilities. If capabilities required in the venture are hard to describe and codify—in other words, if they are tacit capabilities—then equity is the preferred mode of involvement. A basic characteristic of tacit knowledge is that it is complex and embedded in the firm's systems and routines, and hence difficult to isolate from the firm and considered “sticky”. It is best learnt through real action rather than by reading manuals and reports. Tacit knowledge can therefore be acquired via learning by doing with the help of expert alliance partners.

For instance, if it was possible for Toyota Motor Corporation to compile all its knowledge about the legendary Toyota production system into a manual, it would still be impossible for a firm to replicate the Toyota model on that basis. This is the reason for the joint venture between Toyota and General Motors Company. General Motors saw the joint venture as an opportunity to learn about lean manufacturing from the Japanese company, while Toyota gained its first manufacturing base in North America and a chance to implement its production system in an American labour environment. The alliance came to an end in 2009.¹⁰ In general, firms enter into equity-based alliances when they are dealing with more complex skills and technology, but they may use the franchising model when skills are less complex and can be easily transferred, as in the case of McDonald's.

The ability to monitor and control is another consideration driving choice of alliance. Equity relationships allow firms to have some degree of partial direct control over joint activities on a continuing basis, which contractual relationships do not permit. Firms generally prefer equity alliances if they fear loss of intellectual property or the likelihood that it may be expropriated. This explains the predominance of joint ventures versus licensing/franchising agreements in China.

A third consideration is the use of alliances as stepping stones to later equity relationships. For instance, the Airbus consortium originally consisted of two partners, France's Aerospatiale and Germany's Deutsche Aerospace AG in the 1960s, and initiated contractual relationships with Spain's CASA and UK's British Aerospace. In the 1970s, CASA and British Aerospace became full-fledged equity members of the consortium.¹¹

Institutional constraints also force the choice between contract and equity. It has often been found that governments in emerging economies have a preference for joint ventures as vehicles of technology transfer. The Chinese auto industry is a case in point.

Alliance Evolution

The most vital ingredient in building an alliance is the choice of the alliance partner. The choice of partner is a function of complementary skills, competencies and capabilities that help the firm to accomplish its strategic objectives. The following criteria are important for the selection of an alliance partner:

Compatibility of Goals

The goals of an alliance need to be compatible or congruent as they are representative of the collective benefit of all partners. Alliance goals should be representative of and lead to synergy. If the goals of the alliance are incompatible, it leads to conflict between parties and the eventual collapse of the alliance. For instance, Peugeot's alliance with Guanzhou Automobile Industry Group Co., Ltd in China came to an end because Peugeot wanted to target the local market, but the local firm was more interested in the acquisition of technology and in penetrating international markets.

To ensure goal compatibility, firms sometimes team up with companies with whom they have had cooperative experiences in the past. Some instances of this are the alliance between Mitsubishi Electric Corporation and Westinghouse Electric Corporation, which had a historical precedent back to the 1920s. Similarly, Nippon Sheet Glass Co., Ltd and Hankuk Glass Industries Inc. established an alliance in Korea based on technical and capital ties built over a period of 15 years.¹² IBM and Seimens AG entered a cooperative agreement to develop 16-megabit chips for the first time in 1989 and followed it up by a joint manufacturing pact in 1991 to launch volume production of these.¹³

Complementary Resources

Resource complemantarity refers to the extent to which resource possession of the two parties leads to synergy in the alliance. The extent of resource complementarity has a direct relation with the value addition of the enterprise since it reduces governance and coordination costs and improves the learning curve. For instance, in the example given before, Volvo had a strong presence in Europe and the Middle East, where Clark was weak and Clark had 70 per cent of its sales in North America where Volvo had virtually no presence.¹⁴ The alliance led to the pooling of their marketing resources and helped them cover a much broader geography.

Cooperative Culture

This refers to compatibility of corporate culture and a better working environment. The Closing Case illustrates this point vividly by bringing out the differences in the corporate culture between the United States and Israel. You also read about cultural differences in Chapter 5 and saw how American culture is individualistic, compared to a more group-oriented focus among the Japanese. This was an important issue in the Toyota–General Motors (GM) alliance, in which Toyota's team approach, combined with GM's corporate focus on innovation, made a significant contribution to enhanced productivity at the their California-based manufacturing company. Pertinent issues in this context are the centralized versus decentralized nature of the organization, flexibility in managerial practice, and ways and means of overcoming these difficulties.

Commitment

This refers to the likelihood of continuous contribution of resources and skills to joint operations and to the enhancing of a joint payoff. A partner's commitment has a bearing on the building of trust and helps to stabilize environmental uncertainties. The alliance between Daewoo International Corporation and General Motors ended due to the lack of commitment of the two parties in the marketing of the Pontiac LeMans in the United States. Daewoo accused General Motors of failing to market the LeMans aggressively enough, while General Motors’ response was to blame the poor quality of the LeMans and its unreliable supplies for bringing the alliance to an end.

Capability

A primary motive of all global alliance is the pursuit and use of capabilities—strategic, financial and organizational. Strategic capabilities refer to the firm's market power, marketing competence, technological skills, relationship-building industrial experience and corporate image. Market power is representative of the firm's industrial and business background, market position, and marketing and distribution networks. The market power of the local partner is a valuable resource for the success of an alliance as the firm's history and reputation help to create a brand image, as in the case of the Tata–NTT DOCOMO alliance in the opening vignette.

Organizational capabilities include organizational skills, previous collaboration, learning ability and previous foreign market experience. These are reflected in the blending of cultures and management styles, orientation and training and in virtually all aspects of organizational existence. A good fit between the alliance partners is imperative for the smooth functioning and existence of the alliance.

Financial capabilities are reflected in risk management, exposure hedging, financing and cash-flow management. A partner's risk management ability affects risk reduction and hedging against foreign exchange fluctuations. The ability to manage foreign exchange risk is imperative for the survival of the firm. The financial strength of the local partner also helps to obtain resources which might otherwise be unavailable. Financial capabilities thus have a huge bearing on the profitability, liquidity, working capital structure, leverage and cash positions of the TNC.

Performance of the Alliance

There is little consensus on what constitutes alliance performance and how it can be measured. Usually, a combination of objective measures such as profits and market share and subjective measures such as managerial satisfaction can be used to assess the performance of an alliance. There are four main factors that affect alliance performance even though none of them may have a direct measurable impact on it. These are:

• The level of equity is indicative of the level of commitment of an alliance partner. A higher level of equity indicates a stronger commitment and is likely to result in higher performance.
• Learning is an important parameter to judge alliance performance. Being abstract and hence difficult to measure, it is often substituted with experience. It has been observed that experience has a linear relationship with performance, but its impact ends after some time.
• Alliances among firms of similar nationality are more successful and lead to fewer conflicts and disputes.
• Relational capabilities that are firm-specific and difficult to codify and transfer are often the factors that make or break an alliance.

The ultimate success of the alliance, however, is a result of a combination of all these factors rather than the existence of any of them in isolation.

Alliance Management

An alliance is the coming together of firms with different skills, knowledge bases and organizational cultures. This creates a unique learning opportunity through the sharing of resources and the creation of new knowledge. For this, a firm needs to first identify what knowledge it needs and then extract and transfer this knowledge from its partner to its own organization. Germany's Bosch Group, for instance, established strategy meetings with its Japanese partners and also sent technicians and marketing managers to various joint ventures to acquire partner skills and knowledge.

Sometimes, it becomes necessary to protect knowledge that may be the source of competitive advantage and may therefore be vital and sensitive. Core knowledge may be protected in several different ways. The alliance contract may have safeguards written into it to prevent alliance partners from entering into competing contracts or producing competing goods. Both parties to the alliance may agree in advance to exchange specific skills and technologies to ensure that they both benefit. An example of cross-licensing agreements is that between Motorola and Toshiba Corporation, in which Motorola licensed some of its microprocessor technology to Toshiba and in return Toshiba licensed some of its memory chip technology to Motorola. Avoiding undue dependence on an alliance can also help to reduce risk of leakage. For instance, Toyota provides General Motors with high-quality, low-cost small cars and exercises a dominant influence over its family of suppliers, buys a large portion of their output and often provides finance in addition to equipment and managerial advice. Development of inter-partner cooperation and reducing conflict through sustained personal contact between managerial personnel, careful selection of personnel, setting joint milestones, understanding the different resource groups and maintaining flexibility goes a long way in keeping the alliance healthy and happy.

ALLIANCES: AN EVALUATION

Alliances as a mode of entry have several advantages. They facilitate entry into a foreign market, especially hitherto closed markets like China, which are difficult to penetrate without a local partner. Warner Bros., for instance, entered the Chinese market through a strategic alliance with the help of two local partners when it realized that doing it alone meant having to go through a complex process of approval. Strategic alliances also help firms to diversify risks and costs associated with a large project. For instance, MG Rover's attempt to enter the Chinese automobile market was driven by the need to share costs. It also enables firms to establish synergy through the coming together of complementary skills and assets that neither can develop entirely on its own. It also leads to the establishment of industry standards such as in the alliance between Sony and Palm Computers, which established Palm's operating system as the industry standard as against rival Microsoft Corporation's Windows operating system.

The flip-side of strategic alliances is that they give competitors a low-cost route to access new technology and markets. As an example, Japanese alliances with US counterparts in semiconductors and machine tools were a strategy to keep high-paying value-added jobs in Japan, but use the alliance to acquire the production and project-engineering skills, which were the core competitive advantage of the US corporation.

Undoubtedly, alliances can be risky, but if managed properly, can lead to benefits for both partners.

ACQUISITIONS

An acquisition is the purchase of an existing business venture in a foreign country. From a legal point of view, the target company ceases to exist, the buyer “swallows” the business and the buyer's stock continues to be traded. It can be the purchase of a minority stake (where a firm purchases between 10 to 49 per cent of the company's stock) or a majority stake (in which it acquires over 50 per cent stock). An acquisition could be hostile if the acquired company is unwilling to be bought or it could be friendly and with the consent of the acquired enterprise.

Acquisitions are different from mergers, which refer to the amalgamation of two existing enterprises. A merger is a voluntary and permanent combination of two businesses that integrate their operations and identities with those of another. The merged enterprises then functions as a new entity. For example, both Daimler-Benz AG and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler AG (now known as simply Daimler AG), was created.

Reasons for Acquisitions

The basic rationale for firm internationalization is to increase or protect profitability and/or capital value by exploiting existing competitive advantages or safeguarding, increasing or adding to them.¹⁵ Cross-border M&As as a mode of FDI entry is the fastest means for a firm to expand its production and marketing internationally. When time is vital, takeover of or merger with an existing firm in a new market with an established distribution system is preferable to developing a new local distribution and marketing network. Similarly, for latecomers to a market or a new field of technology, cross-border M&As can provide a way to catch up rapidly. In an era of enhanced competition and shorter product life cycles, there are increasing pressures for firms to respond quickly to opportunities in the fast-changing global environment.

The increasing incidence of cross-border M&As as an important form of FDI has been the fallout of declining trade and investment barriers, and is driven by the following motives:

Market-Seeking M&As

The search for new markets is a constant concern for all business firms. Through cross-border M&As, firms can quickly access international new market opportunities. Firms seek to protect or exploit new markets, motivated by prospects for growth and large market share, to establish a presence in a new market prior to competitors or to counteract similar action by competitors. By taking over an existing company, an acquiring firm can immediately have access to a local network of suppliers and customers, fulfilling its desire for market power. In a recent spate of mergers from India's IT sector between 2000 and 2007, India's MphasiS acquired Navion Software to expand its operations into the Chinese and Japanese markets. The need for developing a near-shore centre for the Japanese market and the plan to tap China's skilled labour force triggered this acquisition. The company also plans to tap the local market at a later stage and use the Chinese base as an alternative centre for its offshore services in the region.

Efficiency-Seeking M&As

Efficiency-seeking M&As are meant to take advantage of different factor endowments, economic systems, policies and market structures to concentrate production in a limited number of locations. Efficiency gains are the result of synergies—both static and dynamic—in cross-border M&As.

 

Static synergies include the pooling of management resources; revenue enhancement through use of each other's marketing and distribution networks; purchasing synergies; economies of scale in production leading to cost reductions; and the avoidance of duplication of production, R&D or other activities.

Dynamic synergies involve the matching of complementary skills and resources to enhance a firm's innovatory capabilities with a long-term positive effect on sales, market shares and profits. The search for static synergies is particularly important in industries characterized by increased competitive pressure, falling prices and excess capacity, such as in the automotive industry. Dynamic synergies, on the other hand, may be crucial in industries experiencing fast technological change and which are innovation-driven, such as information technology and pharmaceuticals.

The merger of India's Polaris Software Lab Ltd with Orbitech saw a spurt in the merged entity's revenues from USD 60 million to USD 125 million as well as the addition of 1,400 employees to Polaris, taking the total employee strength to 4,000. Similarly, for Bangalore-based Vmoksha Technologies, the logic behind the acquisition of two US-based companies, Challenger Process Systems Company and XMedia, Inc., was to increase in size by widening its customer base.

The Polaris-Orbitech merger helped in combining the skill sets of both companies, which in turn led to growth and expansion of the merged entity. While Polaris was looking for a specialized product suite, Orbitech was looking forward to efficient marketing and service support for its products. Post-merger, Polaris got the Orbi suite framework and combined it with its service expertise to win more customers. After the merger, Polaris has become a large, specialized company in the banking, financial services and insurance (BFSI) space, offering solutions, products and transaction services. Polaris has had some recent post-merger wins, including ABN AMRO Bank N. V., Commercial Bank of Kuwait, and Deutsche Leasing.

Wipro IT Business similarly acquired GE Medical Systems Information Technologies (now known as GE HealthCare) to leverage its specialization in the health-science domain. The intellectual property that Wipro acquired provided it with a platform to expand its offerings in the Indian and the Asia-Pacific healthcare IT market. Similarly, when Wipro acquired the global energy practice of American Management System and the R&D divisions of Telefonaktiebolaget LM Ericsson (popularly known as Ericsson), it acquired skilled professionals and a strong customer base in the areas of energy consultancy and telecom R&D.

Strategic-Asset-Seeking M&As

The strategic asset seekers may engage in cross-border M&As as a means for sustaining or enhancing their international competitiveness. Merging with or acquiring an existing company is the least costly and sometimes the only way to acquire strategic assets such as R&D or technical knowhow, patents, brand names, local permits and licences and supplier and distribution networks, because they are not available elsewhere in the market and take time to develop. Such assets may be crucial to increase a firm's income-generating resources and capabilities.¹⁶

 

Polaris had six major customer wins after it acquired the intellectual property rights (IPR) of Orbitech's Orbi suite framework of banking solutions. Vmoksha also saw a rise in the number of its customers due to acquisitions as it expanded considerably in the US market and leveraged on the existing customer base. MphasiS also added new customers in the Japanese and Chinese markets after the acquisition of Navion Software.

Resource-Seeking Fdi

A resource-seeking FDI is usually associated with firms in the primary sector. The resource seekers are motivated by their need for cheaper resources, including physical, human, technological or organizational resources. These include large state-owned TNCs from the emerging markets such as ONGC from India. Rising prices of international raw materials and rapid economic growth have intensified the competition for these resources.

Risk Reduction

The desire for risk reduction through product or geographical market diversification is another motive for cross-border M&As. Firms may undertake to merge or acquire across borders on the basis that industry returns across economies may be less correlated than within an economy.¹⁷ As intensified global competition and rapid technological development have led firms to focus on their core activities, the need for product diversification has become less important,¹⁸ although geographical diversification plays a role.

Financial Motives

Financial motives also play a role in cross-border M&As. If bad management, imperfections in the capital market or major exchange rate rearrangements provide short-term capital gains, it can make sense to acquire an undervalued firm.

Managerial Hubris

Managerial hubris refers to the overconfidence of managers in their capabilities¹⁹ and is reflected in a firm usually paying a premium over the intrinsic value of the target firm. The fact that M&As usually come in waves bears testimony to herd behaviour, as where managers rush in to acquire prompted by the acquisitions by early movers.

 

It may be pertinent to mention here that much of the research on internationalization motives has strived to separate and identify the primary motive of M&As with a view to finding out if the market reacts as implied by the motive. It has generally been seen that motives are not only diverse (that is, they might vary across firms) but also multiple (that is, there is always more than a reason for overseas M&As) and dynamic (that is, they might vary over time).

Acquisitions: An Evaluation

An acquisition is the fastest way of making a foreign market entry and establishing a presence in a foreign market.

Acquisitions can also be a pre-emptive strategy, especially in rapidly globalizing industries like telecommunications, where deregulation and liberalization is opening up new markets and creating huge potential. There was a spate of acquisitions in the industry driven by regulatory changes in the global market. This resulted in the USD 60 billion acquisition of AirTouch Communications Inc. by Vodafone Limited of the UK, the USD 13 billion acquisition of One 2 One in the UK by Deutsche Telekom²⁰ and more recently, the takeover of Zain's African assets by Indian telecom major Bharti Enterprises. There was a similar wave of cross-border acquisitions in the global automobile industry as Daimler-Benz acquired Chyrsler, Ford Motor Company acquired Volvo Cars, and Renault acquired Nissan Motor Co. Ltd.

Acquisitions also help build up the firm's asset portfolio in a stroke as against building it up from scratch as in a greenfield investment. In the acquisition of Zain, Bharti acquired assets that were spread over 15 countries. The combined firm has revenues of some USD 13 billion, and earnings before interest, taxes, depreciation and amortization (EBITDA) of around USD 5 billion.

Despite these advantages, the success rates of acquisitions are not very promising as many of them end up eroding shareholder value and fail to achieve expected revenues and profits. The acquisition of Columbia Pictures Industries, Inc. by Sony Pictures International in 1989 is a classic case of what not to do in a cross-border deal. Sony paid a significant premium, and kept a hands-off attitude toward their senior executives in Hollywood, who were busy overspending on office renovations, company perks, and unsuccessful movies. As a result, Sony was forced to take an unprecedented USD 3.2 billion write-down in 1994.

Sony also faced legal problems stemming from their recruitment of senior management who were under contract at Time Warner, lack of internal controls over budgeting, weak understanding of the fundamentals of the acquired business, and an overly optimistic belief in “synergies” arising from vertical integration and from applying Sony's technological competencies to the movie and television business. Although these are mistakes that can happen in any merger or acquisition, what compounds the issue in cross-border deals are the inherently greater challenges of trying to blend different country cultures, communicating across long distances, dealing with misunderstandings arising from different business norms, and even fundamental differences in management style.

One of the leading causes of failure of a merger or acquisition is the price paid by the acquirer. Very often, as is discussed here, firms pay a premium over the target firm's market capitalization, a manifestation of the “hubris hypothesis”. Managerial hubris is the overconfidence that managers have in their ability to create value from an acquisition, arising out of an exaggerated sense of their own abilities.

Leading an extensive integration effort in a foreign marketplace remains one of the biggest challenges in cross-border acquisitions. This is exemplified by the acquisition of US tyre manufacturer Firestone Tire and Rubber Co. by Japan's Bridgestone Corporation in 1988, outbidding Pirelli Tyre S.p.A. by paying a premium of 158 per cent of the value of Firestone. The acquisition was driven by Bridgestone's desire to develop on a global scale in a rapidly consolidating industry and service Japanese car-makers setting up production in the United States. However, no real integration effort took place for five years as Bridgestone left senior Firestone management in place and did little to generate cost savings. As a result, the tire maker, which had performed poorly before the acquisition, continued to do so, with total losses rising to USD 1 billion by 1992. Bridgestone subsequently spent USD 1.5 billion to upgrade and expand Firestone's operations. Firestone workers, however, ended up in a highly contentious strike in 1994–95, driven by their reaction to Bridgestone's belated cost-cutting efforts.

Employee stress and uncertainty can also be the cause of trouble in cross-border deals. Mergers create uncertainty and stress for employees, and the firm faces the very real danger that some of the best people in a company will leave since, after all, it is usually the best who have the most attractive outside opportunities. Studies indicate that the root cause of employee problems are feelings of mistrust and stress from perceived restrictions in career plans, and attacks on established cultural traditions within the acquired company, each of which is exaggerated by the fundamental differences that exist between both merging companies and the countries in which they are based. The merger of Daimler with Chrysler faced similar problems and saw many senior managers having left Chrysler in the first year after the merger. Chrysler executives found the decision-making dominated by Daimler's German managers and the Germans resented that Daimler's American managers were paid several times their salary.²¹

Co-management arrangement

Co-marketing arrangement

Co-production or co-service agreement

Cooperative joint venture

Effi ciency-seeking M&As

Equity joint venture

Managerial hubris

Strategic alliances

Strategic-asset-seeking M&As

Synergy

1. What are the major forms that collaborative agreements can take?
2. What are the major differences between equity and non-equity based strategic alliances?
3. Enumerate the major factors which encourage firms to enter collaborative agreements.
4. What are the main motives driving international acquisitions? Also, discuss the main factors responsible for their failure.

1. Using the Half-yearly Dealtracker for 2011 (http://www.wcgt.in/html/publications/), analyse M&A activity in the Indian context.
2. The RBI publishes monthly data on outward investment flows from India as either joint ventures or wholly owned subsidiaries (WOS). Using the link given here (http://www.rbi.org.in/scripts/Data_Overseas_Investment.aspx), make a comparative report on the two forms of outbound investment between July 2011 and December 2011.