Trends in International and Cross border Mergers and Acquisitions
Cross-border mergers and acquisitions (M&A) activity is booming. It is not hard to see why. As the recession bites in many countries more and more companies are looking abroad for acquisition targets or merger partners to help them meet their growth targets. Yet for many companies , the prospect of acquiring or merging with a company in an unfamiliar market is daunting.
Highly publicized disasters have contributed to a perception that international deals are a fast track to the destruction of shareholder value. Of course, transnational deals are not the only ones that go bad. Many M&A within national markets are more likely to destroy shareholder value than create it. However, international deals offer a different mix of opportunities and risks, which need to be understood and managed if the deals are to be successful.
Why do brands across borders?
International and regional acquisitions are more often about growth. And in recent time, it is about finding new markets to prop up dwindling domestic profits. Companies seek ready-made access to customers, products, brands, distribution channels and market knowledge which all make acquisitions an appealing option for geographic expansion. Opportunities for revenue growth can arise from the cross selling of products, the exchange of knowledge about markets or technology, or
the ability to offer existing customers more comprehensive global coverage. Moreover, when the market in question is developing rapidly, first movers have access to more and better deals than will be available for those that follow.
Keys to Success in Cross border and International Mergers and Acquisitions
1. Start with a clear and compelling strategy
The most successful regional and international acquirers begin with a clear view of both the role that the acquisitions will play in their strategy and the type of companies best equipped to fill that role. This clear strategic logic is well demonstrated by Heineken, one of the world’s leading brewers. The company has been on a growth spate in recent years, targeting markets in Eastern Europe and Asia, where younger people constitute a large and growing proportion of the population The company also buys only strong local brands and businesses that can support Heineken’s desired positioning as a premium brand in these markets.
2. Understand the markets and their environments
The greatest risks in regional and international transactions arise from the failure to understand the
culture, regulatory structure or competitive environment – and sometimes all three considerations – in the target market. These oversights can lead to overly optimistic assumptions about revenue growth or cost-savings opportunities. In many cases, acquiring companies assume that their detailed knowledge of their own market will translate directly to the target market, and they therefore see little reason to invest in upfront fact-finding. In other cases, where a market is undergoing rapid development, acquirers may decide that there is too much uncertainty for a detailed investigation of the current state of play to be relevant. Or if an acquirer feels pressure to act because a herd mentality takes over, it may decide there simply is not time to do its homework. Whatever the reason, the failure to do homework on an acquisition can lead to costly mistakes. For example, when
Naïve reliance on the protection offered by government contracts or intellectual property law in some of the more chaotic developing markets can lead to disaster as governments change tactic or intellectual rights are ignored.
Assuming that customers in new markets are fundamentally the same as those at home is another classic mistake. Proper due diligence can expose these challenges and ensure that they are accurately reflected upon. A straightforward investigation of local rules and regulations may be all that is required. Local advisors who can help explain critical differences in customer needs, competitive behaviour or cultural factors will typically repay the investment in their services many times over.
3. Convey respect for employees of acquired company
Regardless of the rationale for the acquisition, a key asset in a cross-border acquisition is people. Local employees have knowledge of the market, customers and supplier relationships, technical capabilities. The relationship between local management with their employees is also an essential levers for extracting value from an acquisition.
The successful integration of an acquired management team requires sensitivity and careful attention to the cultural gaps that exist between acquirer and target, or between merging partners in an international merger. Tolerance for uncertainty, attitudes toward power, cultural biases toward individualism versus collectivism, and preferences for how decisions are made differ widely across national boundaries. Companies that fail to recognize these differences can make costly mistakes that result in the loss of essential skills critical to future success.
The need to protect value in the acquisition has implications for the speed and degree of integration. In general, international and regional acquisitions offer fewer opportunities for cost reduction than national acquisitions, since they are not undertaken to achieve dramatic headcount reductions. Instead, the acquisitions are driven by an interest in gaining market access. Therefore, a light touch to integration, leaving the existing management team to get on with business as usual, may be the safest approach.
4. Execution, execution, execution
Successful execution begins early – in some cases, long before the deal is done. Once a deal has been agreed to in principle, integration planning should begin as early as possible. It is easy to underestimate the effort involved in any acquisition. Management from both sides are expected to guide a complex integration process in addition to carrying out their continued responsibilities for day-to-day operations. Without careful attention, critical sources of value, like existing customer relationships and distribution channels, are bound to fall through the cracks, with negative consequences for both the integration process and the day-to-day business of the merging companies.
Recent Mergers and Acquisitions Disasters
German Daimler Benz and US Chrysler
In 1998, Mercedes-Benz manufacturer Daimler Benz merged with U.S. auto maker Chrysler to create Daimler Chrysler for $37 billion. The logic was obvious: create a trans-Atlantic car-making powerhouse that would dominate the markets. But by 2007, Daimler Benz sold Chrysler to the Cerberus Capital Management firm, which specializes in restructuring troubled companies, for a mere $7 billion.
What happened? It may be another case of corporate culture clash. Chrysler was nowhere near the league of high-end Daimler Benz, and many felt that Daimler strutted in and tried to tell the Chrysler side how things are done. Such clashes always work to undermine the new alliance; combine that with dragging sales and a recession, and you have a recipe for corporate divorce.
Mattel/The Learning Company ($3.5B)
Mattel has remained a USA childhood staple for decades, and in 1999, it attempted to tap into the educational software market by scooping up almost-bankrupt The Learning Company. Less than a year later, The Learning Company lost $206 million, taking down Mattel’s profit with it. By 2000, Mattel was losing $1.5 million a day and its stock prices kept dropping. The Learning Company was sold by the end of 2000, but Mattel was forced to lay off 10% of its employees in order to cut costs.
In 2005, a major communication merger occurred between Sprint and Nextel Communications. These two companies believed that merging opposite ends of a market’s spectrum – personal cell phones and home service from Sprint, and business/infrastructure/transportation market from Nextel – would create one big happy communication family (for only $35 billion).
But the family did not stay together long; soon after the merger, Nextel executives and managers left the new company in droves, claiming that the two cultures could not get along. Competition from AT&T, Verizon, and the iPhone drove down sales, and Sprint/Nextel began lay-offs. Its stocks plummeted, and for all those involved, the merger clearly failed.
1) C Firstbrook: www.accenture.com//transnationalmergers/acquisitions. 2007
2) Mary Dimaggio. www.rasmussen.edu/degrees/business. The top 10 Best and Worst Corporate Mergers of all time…or the Good, the Bad and the Ugly. September 2009.