Strategic Growth and Globalization through Mergers and Acquisitions: Evidence from Emerging Markets Giants

October 10, 2022

Strategic Growth and Globalization through Mergers and Acquisitions: Evidence from Emerging Markets Giants

This blog could have been titled “Why are international mergers and acquisitions the dominant FDI mode for emerging market multinationals [EMMs] venturing into the developed markets of North America (U.S. / Canada) and the EU?” but I wish to evoke readers’ thoughts on a divisive phenomenon by inserting globalization in the title. In the short/near term it seems from a political perspective that globalization may be in retreat, however, even as some scholars/academics may be hedging their thoughts on the topic it is noteworthy to keep in mind that advancements in manufacturing technology (automation, robotics, mass customization, etc] are potential forces which are likely to wane/moderate the low cost advantages of China and many developing countries going forward. What makes me sleep like a baby [i.e. wake up every 2 hours crying] is the question/concern that are developed countries investing sufficient/significant resources in automation, industry 4.0, digital disruption, etc to regain market share lost to their developing market rivals (especially China) over the last few decades. For example the ballooning market share of Haier in the white goods [aka appliances] segment? I would rather have you investigate the issue/concern for yourself but here is a small hint. China is investing perhaps more than twice as much in advanced manufacturing / automation than the U.S.A. Now, the focus of the blog should revert to the subject matter of external growth strategy via mergers and acquisitions. In the 21st century’s increasingly competitive borderless world, forward thinking organizations may have to merge, acquire, form alliances, divest and restructure business activities to grow, create, and leverage competitive advantage(s). Whether growth is generated organically through internal resource based capabilities and/or externally by through mergers and acquisitions is largely dependent on an organization’s strategic plans or influenced by the dynamism of the economic and industry environments. During the second half of the 20th century, the developed markets of the North America (U.S. / Canada), E.U. and Japan (collectively termed “triad” in this essay) accounted for the bulk of World GDP growth. During this period, foreign direct investment (FDI) outflows originating from the “triad” through their leading multinationals/ trans-nationals (henceforth termed DMMs) represented on average 1.4% of emerging markets gross domestic product ( GDP) during the late ‘90s. FDI inflows (mainly in the form cross border M&As to developed countries accounted for 0.5% and 2.0% of developed markets GDPs in 1988 and 1998 respectively (UNCTAD, 2000, pg 112). It is noteworthy that while the U.S. declined in importance as a source of FDI outflows, the U.S. continues to attract the bulk of global FDI inflows; being the largest recipient of global FDI in 2009, valued at $130 billion. This figure represents a 59% decline from the 1998 level of $316 billion but is still $35 billion more than the inflows to China. Cross border mergers and acquisitions (M&As) and greenfield investments (de novo entry) are the two primary modes of foreign direct investments. As a percentage of FDI inflows, cross border M&As have remained consistently high around 80% in the United States and E.U. throughout the late ‘90s (UNCTAD, 2000). Cross border acquisitions nonetheless, remain the preferred investment route for EMMs undertaking FDI in developed markets despite the consistent and notoriously high failure rates of M&As. A few successful high profile EMM cross border takeovers completed during past 20 years include Lenovo’s (China) acquisition of IBM’s personal computer division, Mittal Steel’s (Netherland, UK, India) merger with Acelor(Luxembourg) to form the world’s largest steel producer, Hindalco’s (India) takeover of North America (U.S. / Canada) (Toronto-Canada) based Novelis, Tata Motors’ (India) purchase of venerable U.K. auto brands Jaguar and LandRover. As a FDI mode, cross-border M&As offer two key advantages over greenfield investments: speed and access to proprietary assets. Cross border acquisitions may produce a greater combination potential (through greater economies of scale, opportunities to exploit new foreign markets more quickly, overcome barriers to entry, transfer skills and resources to improve targets performance and/or acquire skills and resources that are invaluable in the acquirer’s home country, achieve greater marketing power, etc) than can be realized from domestic combinations. Given its record of consistently high failure rates, why are border combinations still the dominant mode of FDI for EMMs venturing into the developed markets? To delineate the plausible motives for cross border acquisition based on the global experiences of EMMs managers (specifically BRIC) the author argues that unlike their developed markets rivals which predominantly seek static synergies from business combinations EMM cross border M&As are influenced by dynamic synergies and the need to build/improve organizational capabilities [competencies, tools, processes, governance] and the acquisition of strategic assets which can be leveraged for sustained profitable growth. During the past 30 years, M&As have become the preferred instrument of corporate control and corporate development in the developed world; however, this highly risky activity is more aptly applied in North America (U.S. / Canada) and the E.U. where rapid and sustained M&A activities (merger waves) have coincided with several periods of booming stock markets and strong economic growth. Despite the consistently high failure rates M&As continue to enjoy strong popularity with managers. Why? The overwhelming conclusion from the body of research studies is that M&As are motivated by the drive to maximize shareholder value and obviously this is a logical/rational argument. However, the consistently high failure rates of the M&A universe (domestic and international) does point to moderately large numbers of M&A transactions not motivated by value creation opportunities. In fact, empirical evidence from a number of M&A implosions in the early 2000s may suggest that some acquisitions are driven by non-value maximizing motives such as hubris, agency problems, etc.