Question

When investing abroad, multinationals can choose between joint ventures and acquisitions. Using examples, critically assess the advantages and disadvantages of these two alternative ways to enter a foreign market. In your view, why have emerging markets multinationals favoured cross-border mergers and acquisitions (M&A) when investing in developed markets?

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Could you please give a broad answer of around 1500 words? Thank you!

Answer 1

Joint-venture:

A joint venture is a business institution established by two or more parties, generally characterized by shared ownership , shared returns and risks , and shared governance.

An example of a joint venture is the joint venture between taxi giant UBER and the heavy-duty vehicle manufacturer Volvo. The goal of the joint venture was to produce driverless cars The share of ownership is 50 per cent-50 per cent. The value of the business was $350 million as per the joint venture agreement.

Pros: International organizations find it affordable for them to expand beyond national borders.

1. The joint venture makes it conceivable to support large ventures requiring huge capital costs and, furthermore, to share labor.
2. Foreign organizations benefit from information provided by the domestic accomplice as they know the local market conditions, culture, dialect, policy and business frameworks.
3. Prompts the sharing of costs and risk with a local accomplice who helps an organization to enter the global market.

Cons:

1. The creation of a joint venture may result in more complex tax arrangements.
2. Success in a joint venture depends on a thorough investigation and analysis of the objectives.
3. The formation of a joint venture can be more expensive than a partnership.

Acquisition:

The acquisition is when one company purchases most or all of the shares of another company to gain control of that company. Purchasing more than 50 per cent of the shares and other assets of the target firm allows the acquirer to make decisions on the newly acquired assets without the approval of the shareholders of the company.

Since about March 2020 the largest acquisition ever was the acquisition by Vodafone Airtouch PLC of Mannesmann in 1999 of $183 billion ($281 billion adjusted for inflation). AT&T appears most of the time in these lists with five entries, for a combined transaction value of $311.4 billion.

Pros:

1. Speed: Acquisition is one of the growth strategies which is most time-efficient. It offers the opportunity to quickly acquire resources and core competencies that your company doesn't currently own. The entry into new product lines and markets is almost instantaneous, usually with a recognized brand or a positive reputation, and the existing customer base. However, the risks and costs usually associated with the production of new products will drop dramatically.

2. New resources, and new skills: Businesses may choose acquisition as a route to gain currently unmanaged resources and competencies. These can have multiple benefits, ranging from immediate revenue increases to improved long-term financial outlooks to making it easier for other growth strategies to raise capital. Diversity and expansion can also help a business to weather economic or market slumping times.

3. Power to market: An acquisition would rapidly develop the company's market position, rising market share while reducing the fortress of competition. Where competition has been particularly challenging, growth through acquisition can reduce competitiveness and level the field of play. Synergies are reached with the market.

4. Gain in finance: Acquiring low-value or low-price earning-ratio organizations can bring short-term gains due to the stripping of assets. Synergy between the surviving and acquired organizations can mean significant cost savings as well as more efficient use of soft financial gains resources.

5. Meeting expectations from stakeholders: Stakeholders may in some cases have growth expectations through acquisitions. While not all stakeholders will insist on acquisition especially as a growth strategy, stakeholders are looking for returns on any investment or other benefits for non-investing stakeholders under almost all circumstances. When there is pressure to perform and satisfy expectations for returns, an acquisition can often yield results faster than other growth means.

6. Barriers to entry reduced: Acquiring an existing entity can often overcome previously challenging barriers to market entry while minimizing the risks of adverse competitive reactions. Otherwise market penetration can be a expensive strategy, requiring market analysis among other upfront costs, and taking years to develop a large client base.

Cons:

1. Financial reckoning: Returns do not favor stakeholders to the degree anticipated, and due to a variety of changing factors, the projected cost savings may never materialize or may take much too long to materialise. This may include a higher than anticipated purchase price, an exceptionally long timeline for the acquisition process, loss of key management personnel, loss of key customers, less synergies than predicted and other unexpected circumstances.

2. Problems surrounding integration. The integration of the organization acquired can bring in a number of challenges. Cultural clash between companies can erupt, and the old organizations' activities may not mesh as well as anticipate when forming the newly combined entity. Employees can resent the acquisition, and anxiety and anger may cause undercurrents to challenge integration.

3. Cost heavily:  Under certain circumstances, acquisition costs can climb steeply, well beyond earlier projections. This is especially true in hostile takeover bidding situations. The added value may not be sufficient in some runaway cost situations to justify the cost in dollars and resources that went into making the acquisition happen.

4. Diversification which is not related: There may be difficulties in managing resources and competences when an acquisition brings together diverse product or service lines. Employee and department management will face significant challenges, and the time taken to resolve these problems will deplete much of the value the transaction may otherwise offer.

5. Distractions from operations: If the transaction faces too many obstacles or the completion period lasts longer than expected, too much of the managerial attention is diverted from internal growth and day-to-day operations. Due to lack of managerial resources, the post-acquisition organization can be harmed, resulting in fewer synergies or, at least, delays in savings made from synergies.

6. Poor matching partner: Unless he or she has extensive first-hand experience in implementing acquisition as a growth strategy, a business owner who does not seek professional advice to identify a potential acquisition company may be targeting a business that brings the equation too many challenges. A failure to acquire can rob an otherwise healthy organisation

Cross Border Mergers and Acquisitions:

Cross-border mergers and acquisitions or M&A are deals within the target country between foreign firms and domestic firms. With the global economy globalizing, the trend of rising cross-border M&A has accelerated. Indeed, the 1990s was a "golden decade" for cross-border M&A with a nearly 200 per cent rise in the Asia Pacific region's amount of these transactions. This region was favored for cross-border M&A as most countries in this region were opening up their economies and liberalizing their policies, which gave such deals the much needed boost. Of course, it's another matter that more cross-border M&A has been attracting Latin America and Africa in recent years. This is due to a combination of political gridlock in countries like India that can't make up their minds about whether the country needs more foreign investment, China's saturation, and Africa 's rapid emergence as a destination for investment. Moreover, the fact that Latin America is preferred is attributed largely to the high growth rates of the region's economies.

Factors: While everyone else has said that, it must be remembered that cross-border M&A only actualizes when incentives are in place to do so. In other words, both the foreign firm and the domestic partner must gain from the deal as otherwise; the deal would eventually turn sour. Given that many domestic firms overestimate their capabilities in many emerging markets in order to attract M&A, international firms have to do their due diligence when contemplating an M&A deal with a domestic firm. That is why many multinational businesses are taking advantage of management consultancies and investment banks before they enter into an M&A transaction. In addition , foreign firms also consider the risk factors associated with cross-border M&A, a mix of political risk, economic risk , social risk, and general risk associated with black swan events. Foreign firms assess potential M&A partners and countries by forming a risk matrix composed of all these elements, and they decide on the M&A deal depending on whether the score is appropriate or not. Thirdly, cross-border M&A also needs regulatory approvals as well as political support, because the deals can not go through in the absence of such facilitating factors.

Example:

When we take some recent examples of cross-border M&A deals, the Jet-Etihad deal and the Air Asia deal in India's aviation sector are clear examples of how cross-border M&A deals need to be measured against the points previously listed. There's support and opposition to the Jet-Etihad agreement as well as to the Air Asia contract, for example. This has made other foreign firms tired of entering India. On the other hand, if we consider the cross-border M&A deals in the opposite direction , i.e. from the developing markets to the developed world, the Chinese oil major SNOPC had to face strong opposition from the US Senate due to security concerns and possible ownership problems. The recent takeover of Unilever 's subsidiaries worldwide is of course an example of a good transaction. The obvious consequences of all these successes and failures are that a mechanism needs to be organized and developed in each country and by each company on how to handle the M&A contract. Otherwise, the chances of animosity creep into the mechanism and vitiate the economic climate for all stakeholders are there. Before any such transactions are considered, due diligence must be practiced further.

Conclusion: In one word the cross-border merger and acquisition are preferred because it overcomes entry barriers in another region.

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