Question

Traditionally Foreign Direct Investments (FDI) has followed foreign trade since foreign trade is typically less costly and risky than making a direct investment into foreign markets. Entering a market via FDI allows management to enter the market in small increments controlling their investment. However, the globalization of markets is challenging this traditional market entry strategy.

For example, you have probably noticed that currency risk and fluctuations, such as the weaker dollar, higher euro - and sovereign financial debt and austerity measures in countries and ECB actions have been at the forefront of economic discussions for a number of years. In the midst, some time ago there was discussion in Washington on the Chinese purchase of Smithfield. InBev, the Belgian-Brazilian beer company, led the way in 2008 by acquiring Anheuser-Busch. For America needs businesses from the BRICS (Brazil, Russia, India, China, and South Africa) and businesses from all over the world to take a new look at the U.S. market. Investments by foreign firms are vital to fund growth and expansion of the U.S. companies. The United States generally remains the largest single recipient of foreign direct investment in the world for recent several years.

How is this new international business environment causing the path to market expansion to change. How would you analyze this development and purchase of American companies by businesses from emerging economies?

Answer 1

Around 50 per cent of mergers do not achieve their corporate objectives, and takeovers cause the stockholders of most acquirers to lose funds, according to many studies conducted over the last 4 decades. Yet, in an atypical twist, firms from developing nations such as China, Malaysia, and South Africa are utilizing M&A as their chief globalization strategy now.

Even after the economic slump engulfed the world in 2008, the Indian technology giant TCS picked up Citigroup Global Services (the American bank’s India-based outsourcing part) for 505 million dollars in October 2008; another Indian technology firm, HCL, bought U.K’s Axon Group for 672 million dollars in December 2008.

Fuelling this trend is the reality that many emergent giants are cash rich. Economies like India & China grew at around double-digit rates over the last few decades, & that, combined with corporations’ restructuring produced profitability margins of 10%, double that of the developed countries. Reflecting those firms’ ballooned balance sheets, a survey found that 50 per cent of CEOs from developing nations want to fund their bids with internal means & 46 per cent thru issuing fresh equity. They are not anxious of diluting shareholdings: Business dynasties/ founder-promoters have big stakes in firms in developing countries. Those majority shareholdings safeguard that CEOs don’t lose control if stock prices decline, so smart ones can concentrate upon generating long run value. Also, suitors from developing economies are finding the valuations of firms more lucrative after the 2008 share market crashes in the U.S & Europe.

Cash is not the only factor behind this M&A wave. Studies show that emergent giants can also create worth from takeovers more easily than businesses from developed nations. U.S. & European firms, inhibited by slow-growing domestic markets, acquire rivals mainly to become larger & hence create economies of scale. After each merger, executives attempt to identify synergies, fashion effectual processes, & lessen head count so that expenses will decline. In a slow-growing marketplace, lessening costs to improve margins is the only way to increase profits. This storyline is simple to sell the to investors; a CEO can explain a merger’s advantages beforehand & demonstrate few of them soon afterward.

On the other hand, when emergent corporate giants go in for international acquisitions in particular, they do not seek conventional synergies / try to lessen their expenses. They purchase Western firms to obtain complementary competencies—i.e, to learn to utilize assets like techniques & brands, & capabilities such as new corporate models & innovation competencies—that will aid them become global leads. Operating costs are not a concern; the emergent giant knows it can modify an acquisition’s economics just by switching to the low-cost means & corporate processes in its home nation. Additionally, developing nations will increasingly absorb Western firms’ output of technically better products. Several slow-growing firms having low margins can be converted into swiftly-growing, high-margin firms by their acquirers in developing nations, the rationale of ‘reverse’ M&A suggests.

To realize their goals, firms from developing economies are utilizing new techniques to discover targets & integrate them. They do acquisitions only to fulfil strategic aims; they do not totally assimilate acquisitions; & the Chief Executive Officers focus upon the long-run whilst planning takeovers & assessing the results. One firm showing the path is India’s Hindalco, which has utilized M&A to become one of the globe’s biggest producers of aluminum. In this process, Hindalco turned into an integrated worldwide major & boosted its revenues by 30 times in only 7 years.