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Market Company Strategy
2.1. Reasons for Internationalisation (Internationalisation)
As Kwon & Kopona (1993) state in their theory the choice of market entry should relate to the company's corporate strategy and the extent, depth and geographical coverage of the present and intended foreign activities. Furthermore, the decision for growing should be made when there is a sufficient understanding of the different types of entry.
On the one hand companies could gather experience through alliances and on the other hand fail to see that in particular cases an acqusition would be more successful (Clark, 2005). Dyer et al. (2004) state that a specific advice is needed about when to apply each strategy that is based on internal and external circumstances.
Especially internally, the companies should focus on resources that are to be combined, the extent of unnecessary resources and the type of synergy which the firms seek. Externally, important factors are the degree of market uncertainty and the level of competition. As experience and interests of the company are different, these factors will have different degrees of importance.
In Porters (1987) point of view entering a new market must be attractive for the expanding company. It needs feasibility of making profits in the target organisation. The costs of entry must be taken into account. These include direct costs as the cost of shares and advisors and indirect costs include such costs as integration costs.
According to Dunning (1988) where he argues with the eclectic theory that additional costs can occur because of the failure of knowledge about market conditions, the legal and cultural diversities and the increased costs of operating at a distance. It also must be taken into consideration if the possibility of gaining synergies exist and what the opportunity of benefiting from the target company's core competences is.
The local advantages of countries play an important role. The main country advantages can be classified as economic advantages, consisting of quantitiy and quality factors such as transportation, production, scope and the size of the market. Then there are political advantages that include government policies which have a positive influence on the market entry. And finally there are social and cultural advantages, which implicate the physical distance between the home country and the foreign country, language and cultural diversities and the general attitude towards foreigners.
Dunning (1988) declared that companies have to be aware that relative attractiveness of locations can change over the year. He also declares that particular know-how and specific core abilities which count as an internalisation advantage can have a positive impact on the general business performance.
2.2. Methods of development
2.2.1. Merger and Acquisitions
As De Witt & Meyer (1998) state in their thesis, mergers and acquisition are the most popular and influential form of discretionary foreign direct investment. Aquiring of another company is a takeover, be it friendly or hostile, while mergers only represent the share in a company according to Douglas & Craig (1995). A non-adversarial approach benefits not only buyers but vendors as well, claimed by Beckett (2005).
Mergers and acquisitions are significant alternatives to internal growth of companys as they enable companys fast penetration of new and foreign markets, acquire necessary know-how and skilled personal and obtain economies of scale and scope, according to Jackson (1995). Companies that merge gain access to supply and distribution channels through an upstream alliance.
Furthermore Contractor & Lorange (1998) state that enhancing their reputaton and reducing competiton if the integrated company is a competitor might be seen as an advantage. M&As are a well developed strategy and not a reaction to the first apparent opportunity as Simmons (1988) argued.
According to Coyle (2000) synergy is the additional benefit that can be derived from combining the resources of the bidding and target companies. Synergy has been described as the two and two makes five effect. Ansoff (1986) classified different types of synergies. Management synergy occurs when the top management of one of the companies resolves problems of the other company through their experience. Investment synergy can occur from the joint use of plant and equipment, joint research and development efforts, and having common raw materials inventories.
Operating synergy can arise from better utilization of facilities and personnel and bulk-order purchasing to reduce upcoming material costs. And finally sales synergy where a merged organization can benefit from common sales administration, distribution channels, warehousing and sales promotion. As Coyle (2000) states, M&A can be the outcome of either an aggressive or defensive strategy. Aggresive would mean that the company will seek to improve its market position to create a bigger company and finally to produce on a bigger scale and more cheaply through economies of scale.
Defensive strategies on the other hand are made in order to survive in changing industry. A totaly different reason for doing M&A claimed Beckett (2005) as he said that companies may benefit from M&As when they aquire a company at a certain value and sell it later at a higher value. Through increasing shareholder value by providing a higher level of dividend and capital gain return and secruing a higher return on the investment.
This paper is mainly looking for the purposes for a merger and therefore for the realisation of potential synergy effects, as the purpose of most M&As is to achieve some kind of synergy. The belief is that two comparable companies together will achieve far better results than independently. Cost cuttings and savings will often lead to this effect. A successfull M&A can be classified as one where the potential synergies identified are to be utilised best as Coyle (2000) states.
But the success of an acquisition also depends on the choice of the merger partner. The environmental situation can have a profound effect upon the stability of the merger as market conditions, technological developments and government policy change and can have an equal impact upon the outcome of the combination. Furthermore, culture-related problems can also occur. The lack of a well-planned post-merger integration is, according to Epstein (2004), often responsible for the failure of a merger. Epstein (2004) suggested five drivers of successful post-merger integration: a coherent strategy, a strong integration team, consistent and constant communication, speed in implementation and success measured at the merger strategy and vision.
The failure is often caused by defective post-integration. Stonehouse et. al (2005) recognised that integration failed because of lack of research on the target company and its internal and external performance, cultural incompatibility, especially when two different countries clash, lack of communication, loss of key employees at the target company, the paid price was too high and overexposed the acquired company, the assumption that the target market will continue to grow, but the fact remains that market trends can fall and rise.
Sirower (1997) reported that legislative or regulatory frameworks can prevent the integration of M&A, but they are outside the control of the acquirer. The high failure rate indicates that M&A have to be planned very carefully before entering cooperation (Sirower, 1997). Coyle (2000) recognised that a strategy only based on acquisition often does not work. In the short term, the operating cost can be higher than expected and the benefits lower.
When the expected synergies do not occur the costs can be excessive and performance disappointing. In the long term, an unsuccessful strategy might be replaced by a completely different one. Simmons (1988) argued that many M&As do not measure up to the expectations of the partner and, therefore, are not the answer to problems companies perceive to be solvable through such a tactic.
Johnson (1999) has declared that defining strategic alliances are difficult to define as various forms exist. Clark (2005) defines it as two companies which are brought together with similar interest but with different strengths to work on particular projects, developmental approaches and marketing agreements which will offer benefits for both companies. Preece (1995) recognised 6 main reasons for strategic alliances, starting all with the letter L, therefore they can be named as the 6 Ls.
Learning is the first one of them, as he argues that knowledge will be acquired. Leaning is meant as replacing the value chain activities and filling in the missing infrastructure. Leveraging will fully integrate the firm's operation. Linking suggests that the links between supplier and customer should be build closer. Leaping pursues a radically new area of endeavour. And finally Locking out, which means reducing competitive pressure from non-partners.
2.2.3. M&A versus Alliances
The main difference between M&A and Alliances is the power of control according to Lorange & Roos (1992). A pure acquisition would mean that the brought up company is under the control of the ones who bought it. To achieve growth due to acquisition and remain in control, huge financial resources are needed.
Rather than buying a whole company, a corporation can propose a joint venture with a specific division in which the corporation is interested in. In case this joint venture works well, a multi-activity alliance could be grown. Equity swaps can be conducted for long-term stabilisation. However, without full control the corporation cannot decide for its own how the alliance or the merger will develop or if it will continue. A company with two equal CEO's does not work out well due to different interest and objects as Lorange & Roos (1992) state.
2.2.4. Reasons for merging
Economic motives for acquiring include many important reasons to merge. One is to establish economies of scale. A second closely related reason is to be able to reduce costs due to redundant resources of two firms in the same or closely related industry. A third reason is the stock of the firms from a particular countrymay be undervalued. A final reason might be due to macroeconomic differences between countries.
The merits of using mergers to reduce costs are disputed by managers and by practitioners. For example, managers have been heard to comment that costs reductions are the merger benefit that is most likely to be achieved whereas the achievement of synergy is higly uncertain. On the other hand, Michael Porter argues that what passes for strategy today is simply improving operational effectivness. Porter (1998) argues, In many companies, leadership has degenerated into orchestrating operational improvements and making deals (p.70).
It is understandable how operational effectivness may have come to be the driving motive for many mergers, however. Often at the same time a merger is announced, there will be an announcement of a cost reduction target.
Firms engage in merger and aquisition activity for many reasons. Effective mergers and acquisitions can, for example: serve as a platform for corporate growth, lead to increased market share, provide the foundations required to generate and gain advantages from economies of scale (these are benefits that accure when the firm is able to use its resources to drive costs lower across multiple products; scale economies are acquired primarily at the operational level) and economies of scope (these are benefits realized through using one unit's resources in the operations of another unit), and reduce organizational expenses by eliminating duplication and transferring knowledge between and among business units and/or individual product lines (Collins and Montgomery, 1999).
Mergers and acquisiton have become the most dramatic demonstration of vision and strategy in the corporate world. More than 50 percent of the mergers so far have led to a decrease in share value and another 25 percent have shown no significant increase. (Buckley and Ghauri, 2002)
The first category is synergy or efficiency, in which total value from the combination is greater than the sum of the values of the component firms operating independently. Hubris is the result of the winner's curse, causing bidders to overpay; it postulates that value is unchanged. Of course, in a synergistic merger, it would be possible for the bidder to overpay as well. The third class of mergers comprises those in which total value is decreased as a result of mistakes or managers who put their own preferences above the well-being of the firm, the agency problem. (Weston and Weaver, 2001).
The question as to whether merge primarily concerns the idenification of the corporate objects and which of these objects are to be pursued through organic growth and which through M&A in the form of participations or a full takeover. At the same time, the consequences of the growth strategy and its economic or financial effects in the light of the competition situation and the extension of the value added chain must be carefully examined.
Empirically, in approximately 85 per cent of all concentrations between undertakings and acquisitions, the question as to whether is answered with a view to the object of achieving growth in the core business. (Picot, 2002)
The announcement that Germany's Daimler-Benz AG und United States' Chrysler Corporaton intended to merge stunned the automobile industry. At the time, this cross-boarder transaction was the world's largest industrial merger. The merger between two of the automobile industry's most profitable manufactures created a company that ranked third globally in sales revenue and fifth in vehicle unit sales. The official primary goal of this cross-border merger was to create the world's preeminent automotive, transportation, and services company. (Hitt et al, 2001)
The most important motive for M&A activities, as seen from the experience of the last decade, has been economies of scale and scope. Companies aim to achieve economies of scale by combining resources of two merging companies or create economies of scope by acquriring a company allowing product/market diversification. Other motives include access to each other's technology or market reach, achieving a dominant position in the industry, consolidation of the industry, and manipulating rules of competition and antitrust as Buckley and Ghauri (2002) state.
2.4.1.Types of mergers
In a merger, the assets of two previously separate firms are combined to establish a new legal entity. In fact, the number of mergers in mergers and acquisition is almost vanishingly small. Less than 3 percent of cross border mergers and acquisitions by number are mergers. In reality, even when the mergers are supposedly between equal partners, most are acquisitons where one company controls the other.
When there is a merger between two competing firms in the same industry, it is called a horizontal merger. (Buckley and Ghauri, 2002). When there is a vertical merger, two companies merge that have a buyer-seller relationship. Then there are the three conglomerate types. Pure conglomerate will be a merger where there are diffenrent markets and different products, so totally unrelated.
Then there is conglomerate market extension where it is a merger between a company that offers the same products but in a different geographical market. The last type is the conglomerate product extension, where the merged company sells non-competing products, but functionally related in production and distribution.
This essay focusses on horizontal mergers ( and alliances) which operate on overlapping markets and segments.
Cartwright & Cooper (1996) claimed that the definitions and intentions of M&As often read like a cheesy novel with a likeness to a more or less welcomed dating or courtship. The following four approaches are made:
- Pillage and Plunder
- One-night stand
- Courtship/Just Friends
- Love and Marriage
Love and Marriage would certainly best fit to the focus of this paper, as the aim is to achieve a positive long term international growth. The fourth category is aiming for a long term intergration through assimilation and blending.
Strategic motives for a cross-border merger involve acquisitions that improve the strengh of a firm's strategy. Examples would include mergers intended to create synergy, capitalize on firm's core competence, increase market power, provide the firm with complimentary resources/products/strengths, or finally to take advantage of a parenting advantage. Merging to create synergy is probably the most often citied justification for an aquirer to pay premium for a target firm.
However, in a recent book by Mark Sirower (1997) he argues that synergy rarely justifies the premium paid. Sirower declares, many aquisitions premiums require performance improvements that are virtually impossible to realize even for the best managers in the best of industry conditions (p.14). In exploiting a core competence a firm takes an intangible skill, expertise, or knowledge and leverages it by expanding its use to additional industries where it may create a competitive advantage in several different businesses. One strategic reason to aquire is to gain complimentary products, resources or strenghts.
Research shows that one important driver of cross-border mergers and acquisitions may be undervaluation (Gonzalez et al., 1998). A driver of cross-border mergers might be differences in the macro-economic conditions in two countries. That is, one country might have a higher growth rate and more opportunity than some other country. Thus, it would seem reasonable to expect the slower growth country to be more often home to acquirers whereas the faster growth country is likely to more often home to target firms. (Hitt et al, 2001)
Reasons for cross-border acquisitions include market power, overcoming market entry barriers, covering the cost of new product development, increasing the speed of entry into a market, and greater diversification. Cross-border acquisitions can produce both economies of scale and ecnomies of scope. They help a firm enter new international markets and thereby enhance their ability to complete in global markets. Of course, cross-border acquisitions are even more challenging to complete successfully than aquisitions of domestic firms. (Hitt et al, 2001)