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A company can grow in many ways. Growth can occur organically meaning that the company achieves strong sales for an extended period. However, this is a generally a slow and gradual process as it may take years to bear fruit. Otherwise, a company can choose a faster alternative through acquisitions. Acquisitions are the incorporation of one firm into another through a stock purchase, cash or the issuance of debt.
There are a number of reasons to prompt the acquisition of a firm. The first reason is that it is a means of obtaining valuable resources that can help an organization expand its product offerings and services (Dess et al, 2008). These resources can be in many forms such as technology, human resources or access to raw materials. Secondly, acquisitions provide the opportunity for firms to attain the three bases of synergy, which are leveraging core competencies, sharing activities and building market power (Goold & Campbell, 1998). Thirdly, acquisitions can lead to consolidation within an industry and can force other players to merge. There are numerous benefits to this such as cost savings, and greater research and development possibilities. Finally, acquisitions are a good way to enter new market segments (Ghoshal, 1987).
Acquisitions can occur within the same country or internationally. In our increasingly globalized world, international expansion is seen as the way to achieve growth on the grandest possible scale. The reasons for acquiring a firm in another country are similar to that in a home country. First, it allows the firm to increase the size of potential markets for a firm’s products and services. Expanding a firm’s global presence also automatically increases its scale of operations, providing it with a larger revenue and asset base (David, 2009). This will enable the firm to achieve economies of scale that has numerous advantages. One advantage is the spreading of fixed costs such as research and development over a larger volume of production. A second advantage would be reducing the costs of research and development as well as operating costs. A final advantage would be the attainment of greater purchasing power by pooling purchases.
International expansion can also extend the life cycle of a product that is in its maturity stage in a firm’s home country but has greater demand potential elsewhere. Finally, international expansion can enable a firm to optimize the physical location for every activity in its value chain. Optimizing the location for every activity in the value chain can yield one or more of three strategic advantages: performance enhancement, cost reduction and risk reduction.
Performance can be enhanced by locating research facilities to new locations where there is the needed talent pool. Location decisions can affect the quality with which any activity is performed in terms of the availability of needed talent, speed of learning and the quality of external and internal coordination(Gupta & Govindarajan, 2000). Cost reduction decisions can affect the cost structure in terms of local manpower and other resources, transportation and logistics and government incentives and the local tax structure. Performance enhancement and cost reduction benefits parallel the business level strategies of differentiation and overall cost leadership. Finally, optimizing the location for every activity in the value chain can help reduce risk (Hitt et al, 2001). One of the ways for companies to manage currency risk is to spread the high cost elements of their manufacturing operations across a few select and carefully chosen locations around the world. Location decisions such as these can affect the overall risk profile of the firm with respect to currency, economic and political risk.
1.2 Case Problem
Quigdao Haier Ltd (Haier) is China’s largest home appliance maker. While it is the world’s fifth largest household appliance company, in terms of scale of operations and reach, it lags far behind rivals like Whirlpool and General Electric. While the brand is much respected in China but is it relatively unknown in other parts of the world. Years of economic boom has made China increasingly wealthy and confident of itself to establish a larger presence on the world stage. As a result, the Chinese government would like to see home grown companies become large multinational corporations. Maytag is one of America’s most venerable household appliance makers. Sadly, in recent years it experienced a slump in sales due to changing consumer demands. As a result, its profits have dwindled and the company registered a net loss in 2005.
If Haier acquired Maytag, it would gain access to the American market, of which it previously had an insignificant presence. This would provide the company with its much needed foreign exchange cash flow. At the same time, acquiring a brand like Maytag would enhance the prestige of Haier’s own brand name. Even though the company is renowned for the quality of its products in China, Chinese brands generally suffer from a negative perception of poor quality among Westerners. Therefore, acquiring Maytag would be a great boon to Haier.
Despite its apparent benefits, there are many risks of international expansion via acquisitions. The first problem is political risk which is the potential threat to a firm’s operations in a country due to ineffectiveness of the domestic political system. Penetrating the U.S. market does not pose this type of risk. The second risk is economic, which consist of the potential threats to a firm’s operations in a country due to economic policies and conditions, including property rights laws and enforcement of those laws (Lu & Bearmish, 2004). Haier’s bid for Maytag might be blocked by Congress as lawmakers and the American public might balk at the thought of a Chinese firm acquiring an American icon. The third risk is currency risk which is the potential threat to a firm’s operations in a country due to fluctuations in the local currency’s exchange rate. The final risk is management risk which is the potential threat to a firm’s operations in a country due to the problems that managers have making decisions in the context of foreign markets (Hitt et al, 2004).
Therefore, it is by considering the risk and other factors should we evaluate whether the acquisition of Maytag by Haier would contribute to synergy and greater competitive advantage or whether it would lead to a financial failure.
2.0 ANALYSIS AND EVALUATION
2.1. Industry Assessment
Michael Porter’s Five Forces Model (1990) is employed to perform an industry assessment. Porter’s framework consists of five forces which are the threat of new entrants, the bargaining power of customers, the bargaining power of suppliers, the threat of substitute products and services and the intensity of rivalry among competitors in an industry. We will examine each of the five forces to evaluate whether Haier will be able to compete in the U.S. home appliance industry.
2.1.1 The Threat of New Entrants
This refers to the possibility that the profits of established firms in the industry may be eroded by new competitors (Porter, 1990). The extent of the threat depends on existing barriers to entry and the combined reactions from existing competitors. The threat of a new entrant is low if for example, there are very high entry barriers or if established competitors launch sharp retaliation. These circumstances discourage new competitors.
The first source of entry barrier is economies of scale (David, 2009). This refers to spreading the costs of production over the number of units produced. The cost of a product per unit declines as the absolute volume per period increases. Acquiring Maytag will provide Haier to achieve even greater economies of scale as it will be able to further lower manufacturing costs per unit as operations will be on a more expansive scale. The second source of entry barrier is product differentiation. This will be more challenging as each of the major home appliance manufacturer in the U.S. has its own specific brand identification and customer loyalty. Maytag is renowned for its high quality, durability and premium price. An acquisition by Haier may confuse customers who may be suspicious that a Chinese company produces inferior goods.
The third entry barrier is capital requirements. Very large and risky capital requirements, especially if for research and development or advertising purposes can be another entry barrier (Bamford et al, 2003). Haier has no such concerns as it is flushed with cash. Even if the company were to encounter some cash flow problems, it has the support of the Chinese government to provide it with further capital. The fourth entry barrier is the cost of switching to rivals. This can be in the form of hefty one-time transfer costs when the buyer changes from one supplier to another. This kind of costs does not exist for home appliances so there is no concern for Haier. The fifth entry barrier is access to distribution channels. The new entrant’s need to secure distribution for its products can create a barrier to entry. One of the reasons why Haier wants to acquire Maytag is to enhance its distribution channels in the U.S. which are limited at present. The final entry barrier is government intervention. This can be in the form of government subsidies for domestic firms and favourable government policies that effectively block new foreign entrants. It is not known whether the U.S. government will prohibit the acquisition of Maytag by Haier the way it did by prohibiting an Kuwaiti firm from acquiring key U.S. ports.
2.1.2 The Bargaining Power of Buyers
Buyers profoundly influence an industry by their ability to demand for better quality and augmented services. They can force prices to become lower and pit business rivals against each other in a price war (Porter, 1990). When one or all these things take place, industry profitability is eroded. A buyer group become powerful depending on the market situation and the relative importance placed on the purchases from that particular group when compared with the overall business of the industry. A buyer group is powerful under some conditions.
First, it is concentrated or purchases large volumes relative to seller sales (Dess et al, 2008). If a large percentage of a supplier’s sales are purchased by a single buyer, the importance of the buyer’s business to the supplier increases. Large volume buyers also are powerful in industries with high fixed costs. In this respect, the appliance market consists of many buyers, each of whom buys a small amount from manufacturers. Hence, in this respect the bargaining power of buyers is low. However, the second condition that makes the bargaining power of buyers high is the standardization of products. While there may be subtle differences in the products by each manufacturer, the undiscerning buyer will not be concerned with them. To the average buyer, a toaster is a toaster whether it is made by Whirlpool, Electrolux or Brand X. Therefore, it this situation, the bargaining power of customers is high.
Similarly, the bargaining power of customers is high if they face few switching costs. Since there is little to no switching costs between brands, the buyer does not experience any difficulty brand hopping. Next, the bargaining power of customers is high when the buyer is unconcerned about the quality of the product or service. Whenever quality ceases to become a main issue, the buyer becomes more price sensitive (David, 2009). This occurs particularly during a recession or for commodities
2.1.3 The Bargaining Power of Suppliers
Like buyers, suppliers too can exert a profound influence over an industry. They can threaten to increase prices or lower supply of goods (Porter, 1990). In fact, when suppliers become too powerful, they can virtually squeeze the profit for firms to much that they can barely recover the cost of raw materials used in production. The factors that make suppliers powerful tend to mirror those that make buyers powerful.
2.1.4 The Threat of Substitute Products or Services
All firms within an industry compete with industries producing substitute products and services (Porter, 1990). When there are substitute products, they effectively dictate the ceiling price and profitability earned by an industry. The more attractive the price/performance ratio of substitute products, the tighter the lid on industry profits.
The home appliance industry is relatively safe as there are no viable substitutes for the products they manufacture in our modern society. No busy person is willing to cook on a charcoal stove instead of a gas cooker, or wash clothes by hand instead of using a washing machine. Similarly, some alternatives are so impractical that the consumer is forced to use home appliances. People will not substitute a refrigerator by smoking or preserving meat in brine, nor can fans replace the comforts air conditioners provide. Hence, home appliance prices are largely dictated by forces other than the threat of substitutes.
2.1.5 The Intensity of Rivalry among Competitors in an Industry
Rivalry among existing competitors takes the form of jockeying for position. Firms use tactics like lowering prices, having advertising campaigns, introducing new products and extending the period for product warranties or customer service. Rivalry occurs when competitors sense the pressure or act on an opportunity to improve their position (Porter, 1990).
Some forms of competition, such as price competition, are typically highly destabilizing and likely to erode the average level of profitability in an industry. Rivals in the home appliance industry easily match price cuts, an action that lowers profits for all firms. On the other hand, advertising battles expand overall demand or improve the amount of differentiation of products within that industry. Intense rivalry is the result of several interacting factors, including numerous or equally balanced competitors. When there are many firms in an industry, such as the home appliance industry, the likelihood of mavericks is great (Dess et al, 2008). Slow industry growth, especially in the mature home appliance industry, turns competition into a fight for market share, since firms seek to expand their sales. When fixed costs are high, they compel firms to increase capacity and when there is an excess of capacity, prices are often slashed.
As mentioned earlier, where the product or service is construed as being a commodity or almost a commodity, the buyer’s choice is typically based on price and service, resulting in pressures for intense price and service competition. Lack of switching costs also has the same effects. High exit barriers also keep firms competing even though they may be earning low or negative returns on their investments (Bamford et al, 2004). Some exit barriers are specialized assets, fixed costs of exist, strategic interrelationships, emotional barriers and government and social pressures.
2.2 Market Analysis
The U.S. household appliance market is the largest and the most saturated. In 2004, the market stood at $30.5 billion and it grew by 8.9% compared with the previous year. The appliance market can be divided into five major product categories which are cooking, home laundry, kitchen clean up, food preservation and home comfort. The market share of the top U.S. manufacturers of home appliances in 2004 is as follows:
Table 1: Top Home Appliance Makers in the U.S. in 2004
The acquisition of Maytag has the potential of Haier significantly improving its share of the U.S. market. The following table demonstrates the relative market share of each of these product categories from 2000 to 2006:
Table 2: Relative Market Share of Product Category from 2000 to 2006
From this table we can infer that the relative market share of each product category remained constant during the six year period. Haier’s presence in the U.S. market is currently focused on the home laundry category and small scale refrigerators. It does not have a range of cooking appliances. Maytag’s market strength also lies in the home laundry category so acquiring it will not mean that Haier will obtain the technology or product range to compete more effectively in other categories.
Another development in the U.S. home appliance market is an increase in both high end and low end product range, resulting in a shrinking of the middle end product range. This situation is one of the reasons why Maytag’s sales and revenues dropped in recent years. Haier ought to take note of it for its acquisition may not necessarily translate into the market strength and economies of scale that it may hope to achieve.
2.3 SWOT Analysis
A SWOT analysis is a framework for analyzing a company’s internal and external environment. The general idea of SWOT analysis is that a firm’s strategy must build on its strengths, try to remedy the weaknesses or work around them, take advantage of the opportunities presented by the environment and protect the firm from other threats. A SWOT analysis of Haier after its acquisition of Maytag in the U.S. will be as follows.
A larger market share
Currently, Haier commands less than 1 percent of the U.S. home appliance market. If it acquires Maytag, it will gain immediate access to over 15% of the market share. This is a dramatic increase in revenue. If the company pursues the right strategy, there is no reason why the market share cannot grow further.
A strong brand presence
In the U.S., Haier occupies a niche position as a maker of innovative, high quality and inexpensive refrigerators even though it sells other products. On the other hand, Maytag is a household name which is synonymous for superior quality and durability. Hence, Haier can leverage on the Maytag brand by selling its own range of products under this name.
A wider distribution channel
At present, Haier’s products are sold at national retailers like Lowe’s, Best Buys, Sears, Target and Wal-Mart. Its products are also sold at regional distributors like Brandsmart and Mennards. Maytag also sells its products at these retailers, but it has its own fleet of Maytag stores which comprise the bulk of sales. Acquiring Maytag will give immediate access to these stores along which translates into the ability to penetrate new areas in the U.S.
Lack of Synergy
The main reason why many mergers and acquisitions fail is because of a lack of synergy. Many corporations claim to do their homework before acquiring other firms but the end result is failure. Hence, Haier can never be certain that its acquisition of Maytag will be successful. There may be many compatibility issues, one of which is corporate culture. The corporate culture in China is vastly different from the U.S. and failure to comprehend these differences may lead to conflict and hostility. Lack of synergy can be crippling for both sides and this is a major weakness that must be overcome.
If Haier acquires Maytag, it will acquire a loss making firm and it will have to bear these losses. If the acquisition is not as successful as planned, this could mean years of losses. This would affect the profitability of the parent company as well. Will Haier be willing to endure years of losses?
Capturing a larger share of the U.S. home appliance market
Haier’s rationale of entering the U.S. market is that if it can succeed there, it can succeed anywhere. A combined company would give a market share of 15% but this has enormous growth potential if the company pursues the right marketing strategy. At present, Haier is a successful niche brand for freezers and refrigerators. Acquiring the Maytag brand will enable it to diversify into other product categories so that it can capture a larger market share.
The success in the U.S. market will be a springboard for Haier to become the number one global brand of household appliances. Currently, it is the fifth largest manufacturer in the world but sales are centered in China. Even though its products are sold in 160 countries, sales are limited outside China. Asia, Africa and Western Europe are new markets that Haier can explore.
Escalating costs of raw materials
Raw material costs account for 60 percent of material costs and the rising costs of steel, aluminum and packing materials will erode profit margins. While Haier is a lower cost manufacturer, it was still adversely affected by rising costs since 2002. Hence, the company will have to strive to keep costs low by outsourcing production to countries with lower production costs.
All enterprises will suffer when there is a recession. The home appliance industry is no exception and is particularly vulnerable as consumers typically buy these products infrequently. During a recession, they are more likely to repair their faulty appliances rather than replacing them and this will affect sales.
Changing consumer tastes
The proportion of the key product categories in the home appliance market has remained somewhat constant over the years. However, changing consumer tastes may cause demands to shift in the long term. For example, consumers now prefer appliances that have lower energy consumption or have green technology. Similarly, plasma TVs have replaced the CRT ones. Over time, demographics of a country change. In the U.S., the demographic changes that may occur in the coming decades are a more multicultural society, and aging population and rising affluence among women. These are changes that will dramatically affect consumption patterns and preference and must be noted by the company to avoid producing goods that are unpopular.
2.4 Financial Implications of Acquisition
The immediate financial implication of acquiring Maytag would be a loss for Haier. The long term financial implications will depend on Maytag’s performance. Assuming that the competitive advantages through the acquisition are sustainable and difficult to copy, investors will not be willing to pay a high premium for the stock. Similarly, the time value of money must be factored into the stock price. Acquisition costs are paid up front. Conversely, Haier pays for research and development, ongoing marketing and capacity expansion over time. Stock analysts want to see immediate results from the large cash outlay for an acquisition and if the acquired firm does not produce results quickly, investors often sell the stock, driving the price down (Dess et al, 2008).
2.5 Business Processes
Since this will be a piecemeal acquisition, Haier will assume all of Maytag’s operations. Consequently, it has to make major decisions regarding Maytag’s business processes. This will affect the entire value chain from procurement of raw materials to the final sale and delivery to customers. Details on how Haier should deal with it are discussed in the recommendations section.
2.6 Alternative Course of Actions
Haier is determined to pursue a more aggressive growth strategy in the U.S. The options available to it are to acquire Maytag, acquire other home appliance makers or establish a strategic venture with a U.S. company. Out of the three, the acquisition of Maytag is the best because it will bring the most long term benefits to Haier. Haier can choose to wait for another company to acquire but it seems unlikely that Whirlpool or General Electric will be likely to be sold soon. Similarly, Haier has already established a joint venture with U.S. manufacturers but the outcome is slower growth than what the company hopes to achieve. Also, joint ventures lead to a loss of control since the governance is shared between two or more entities. A gridlock may occur if strategic partners fail to reach a consensus.
Acquiring Maytag is in the best long term strategic interest of Haier and it is a strategy that must be pursued. In order to maximize success and minimize failure, the following are recommended:
3.1 Ensure that Haier does not overpay for acquisition
Before any grand plans can be made about how Haier can transform Maytag, it needs to buy it first. It has made a bid, but is it too high or too low? Most of the time, the takeover premium that is paid for an acquisition is very high. Two times out of three, the stock price of the acquiring company falls once the deal is made public which is precisely what happened to Maytag’s stock price when the public found out that Haier was making a bid for it. Since the acquiring firm often pays a 30% to 40% premium for the target company, the acquirer must create synergies and economies of scale that result in sales and market gains exceeding the premium price. Firms paying higher premiums set the performance hurdle even higher. Historically, paying a high premium over the stock price has been a largely unprofitable strategy (Dess et al, 2008).
During the period which Haier contemplated buying over Maytag, its stock price was around US$15.31. Even though Haier cost of capital was zero due to the patronage of the Chinese government, it would still not make prudent financial sense to overpay for the acquisition. It should always be remembered that an acquisition is for long term strategic growth and not quick financial gains. Adopting a myopic approach and overpaying will result in considerable financial trouble for Haier. Haier should make a careful evaluation of Maytag’s intrinsic stock price. In addition, it should also be aware of market factors that might cause the stock price to be overvalued, thus causing the firm to overpay (Anslinger & Copeland, 1996). During the time when Maytag was up for offer, the U.S. stock market was experiencing a bubble. Hence, prices became artificially high and this might compel Haier to overpay to justify the purchase of Maytag.
As beneficial as the acquisition might seem, Haier should not act impulsively. It should make a fair offer to the extent that it views the acquisition as being beneficial. Exceeding their target price is reckless and will cost the company for years to come.
5.2 Manage Corporate Culture
Assuming that Haier was successful in its acquisition of Maytag. Now comes the hard part. Many acquisitions fail shortly after they are completed. A survey by consultants A. T. Kearney revealed that 58% of acquisitions failed to reach the value goals set by top management. The primary cause of failure is conflicting organizational cultures. Organizational culture can be defined as a system of shared values and beliefs that shape a company’s people, organizational structures, and control systems to produce behavioral norms (Robbins & Judge, 2007). The key challenge for Haier is aligning Maytag’s corporate culture so that it complements its own. China and the U.S. are two very different countries with very different cultures, including work culture. Hence, what is perceived to be work cultural norms in China would be alien to the U.S. and vice versa. For example, the cultural norms of Asia promote loyalty and teamwork in typical Chinese workers and influence how these people work. Chinese workers often expect lifetime employment in return for unquestionable loyalty (Mondy et al, 2008). In China, the focus is on the workgroup, in keeping with the Confucian culture whereas in the U.S., the focus is on the individual.
Obviously, such cultural differences have specific human resource implications. Employee practices must be adapted to local cultural norms, and therefore most human resource staff members in the U.S. must be drawn from host country nationals (Bhagat et al, 2002). Similarly, Haier has to understand that workers in the U.S. are much more unionized than in China and demand better working conditions, shorter hours and more pay. Duplicating the corporate culture from China is not only dangerous but will doom the acquisition from the onset (Ricks, 2006).
Maintaining an effective corporate culture that reflects the culture of the home country is essential for continuity worldwide. Achieving this often requires innovative insight. Hiring too many local people in foreign offices may risk it losing the unique set of values and operating procedures that define corporate culture (Mondy et al, 2008). To ensure a parallel corporate culture, Haier should bring in a critical mass of expatriates from China to carry the culture with them at the beginning of the acquisition. Also critical is for Haier to leave at least one or two expatriates behind to oversee the locals and ensure that they are following corporate policies. Haier must also conduct a lot of briefings on how the new corporate culture will influence former Maytag employees and seek to find ways to minimize culture shock and stress among employees. To this extent, the human resource division plays a critical role in inculcating the new corporate culture in the U.S.
It is important that whenever a company is acquired by another, the employees working in the acquired company should be made to feel that they are a valued part of the new organization. All too often, these employees are treated like unwanted stepchildren or pawns in a battle and this leads to resentment and bitterness. Hence, the Haier headquarters should make an effort to integrate the American acquisition as part of the global corporate family and listen to their concerns and grievances and not act like some Chinese overlord.
When Haier acquires Maytag, it must ensure that the corporate culture and management style of the two companies must be blended together as quickly as possible. Long term success means having a corporate culture that supports the goals of Haier and effectively deals with the international business environment. The corporate culture must focus on making a profit (Anard & Khanna, 2000). Haier must strive to achieve a corporate culture that effectively copes with the global environment and at the same time is profitable. When Haier becomes a global brand it should perhaps dispense with its Chinese-centric vision and develop one that is more global and all encompassing. This will make
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