Wednesday, June 03, 2009

The New Rules of M&A


I am reading Nirmalya Kumar's India's Global Powerhouses, a story about Indian businesses expanding abroad and rewriting the norms of global business. It is indeed an interesting read - particularly in the context of my stated belief that India will assume a pre-eminent position in the world commerce post-recession - and to read about various Indian companies going through the process of 'breaking out' is indeed exciting.

At the same time, I also came across Professor Kumar's article on How Emerging Giants Are Rewriting the Rules of M&A in Harvard Business Review and thought it fit to put the two in context.

Professor Kumar's HBR article seeks to answer one important question. As most M&A activities fail [the article states that over half the mergers fail to deliver their expected business value], why then do Indian, and other important emerging nation, companies are pursuing global M&A with a vengence? Obviously, there were several high profile M&A activities made headlines recently in Britain, Arcelor-Mittal [Professor Kumar does count Mittal Steel as an Indian company, despite its country of incorporation], the purchase of Land Rover & Jaguar by Tata Motors, the acquisition of Corus by Tata Steel, the purchase of MG Rover by the Chinese car makers, the purchase of IBM's Personal Computer brand by Lenovo, etc. In some cases, we have already seen the signs of trouble - recent workers' protests in Arcelor-Mittal and the admission by Ratan Tata that Tata Motors paid way too much for the car brands - but this did not deter the emerging nation companies from seeking to enhance their business value through M&A.

Professor Kumar argues that this is because these companies have a different approach to M&A altogether, and therefore, such activities still make sense. The essence of this approach is to acquire a company not just to benefit from the economies of scale, but to acquire competences and knowledge in the first place. This approach allows the emerging nation companies to take a long view of the M&A and develop a far more modest benefit expectation in the short run. This approach is apparently supported by the emerging market financiers and shareholders, though we have seen stock prices drop with the annoucement of such gigantic M&A activites, these fluctuations were not brutal and still allowed the companies to go through with their proposed plans. The loans were forthcoming, and as Professor Kumar argued in his book about the Indian companies, these companies are used to live with a much higher debt-equity ratio than their Western counterparts anyway. All these factors together create a conducive environment for the M&A activities, which we have experiencing in the recent months.

Professor Kumar contrasts the M&A activities by emerging nation companies with that of Western corporations along five dimensions [I quote]:

RATIONALE

Western Approach: The aim of takeover is usually to lower costs, though some companies use acquisitions to obtain technologies, enter niches or break into new countries.

Emerging Company Approach: The aim is to obtain new technologies, brands and consumers in foreign countries.

SYNERGY LEVELS

Western Approach: The acquirer and the acquisition usually have the same business model. Even when the company takes over a start-up, the approach to market is the same.

Emerging Company Approach: The acquirer is often a low cost commodity player, while the acquisition is a value-added branded products company.

INTEGRATION SPEED

Western Company Approach: The buyer makes several changes in the acquisition soon after the takeover. It slows the quest for synergies thereafter.

Emerging Company Approach: Integration is slow moving at first. After a while, the buyer starts pulling the acquisition closer.

ORGANIZATIONAL FALL-OUT

Western Approach: High executive turnover and head-count reduction is likely at first. Culture clashes occur and productivity declines, but things settle down over time.

Emerging Company Approach: Little interference, executive turnover or head-count reduction occurs right after the acquisition. Although it is too soon to tell as of now, tensions could simmer over the long run and blow up.

GOALS

Western Approach: The buyer has clear short term aims but may not have thought through the long term goals.

Emerging Company Approach: The acquirer's short term objectives may be fuzzy but its long term vision for the acquisition is clear.

I do find this above contrast insightful and extremely relevant as the emerging nation companies are likely to step up acquisitions yet again the moment some clarity emerges out of the recession cloud. We already seem to be seeing the green shoots of life, more in India than in Europe, which will further embolden Indian companies to venture abroad and buy up cheaper assets.

As evident from the above discussion, the executives in the Western companies need not be as worried about an emerging giant takeover as they should be in case of a takeover by a competitor from their own marketspace. They can, and will be allowed to, play a far more constructive role in the former scenario than the latter. Obviously, when an emerging nation company takes over a business for the sake of knowledge and expertise, the last thing they have in mind is getting rid of the key people who run the target businesses.

Finally, from the point of view of my own interests, the need for cross-culture training and integration practises will be ever expanding in these 'reverse' takeover scenario, and therefore, I am encouraged to pursue my cross-culture interests further. As Professor Kumar points out, the risk in these emerging mergers come primarily from culture conflicts - I have recently learnt about the deep cultural division in a 20 year old $5 billion Indian infrastructure company which has taken over an 100 year old Engineer firm in England - and a lot of good work can go waste if these divisions are not bridged.

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