Strategies of Cooperation

Prof Bharat Nadkarni

Mergers & Acquisitions

International Business

Mergers & Acquisitions M & A involve the combination of two organisations. The term merger refers to the integration of two previously independent organisations into a completely new organisation; Acquisition involves the purchase of one organisation by another for integration into the acquiring organisation. Organisations have a number of reasons for wanting to acquire or merge with other firms, including horizontal or vertical integration, diversification ; gaining access to global markets, technology, or other resources; and achieving operational efficiencies, improved innovation, or resource sharing. As a result, M&A have become a preferred method for rapid growth and strategic change.

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Types of Mergers & acquisitions 1. Horizontal mergers ex. Tata Steel acquiring Corus, Bridgestone and Firestone 2. Vertical mergers ex. Tata Power acquiring Boomi coalmines 3. Concentric mergers ex. Footware co merging with Hosiery co making socks. 4. Conglomerate mergers ex. Reliance Textiles to petrochemicals or Mobile Telephony

International Business Domestic and Cross Border Mergers & acquisitions M & A have been a very important market entry strategy as well as expansion strategy. It may be noted that the major part of the recent FDI has been driven by cross border M&As. Between 1980 and 2000, the value of cross border M&As grew at an average annual rate of over 40%. It continues to be a powerful driver of international investment and globalisation. Several industries, such as automobiles, pharmaceuticals, banking, telecom, etc. have undergone a global restructuring as a result of cross border M&As. Advantages of M&As 1. Market entry 2. Possession of marketing infrastructure 3. Achieving economies of scale 4. Increasing the market power

International Business 5. Diversification 6. Acquisition of technology 7. Use of surplus funds 8. Optimum utilization of resources and facilities 9. Product mix optimisation 10. Pre-emptive strategy (to block competitor from acquisition) 11. Horizontal or Vertical integration 12. Tax benefits 13. Logistical factors 14. Acquisition of brands 15. Minimisation of Risk 16. Regulatory factors Ex. Asian Paints takeover of Singapore based Berger paints entry to 11 countries incl China. Tata Steel Corus entry to Europe and Latin America.

International Business Disadvantages of M&As 1. Indiscriminate acquisitions land several companies in financial and other problems 2. When company is taken over, its problems are also often inherited 3. If adequate homework was not done and the evaluation was not right, the acquisition decision could be wrong. 4. Some of the units acquired would have problems such as old plant, obsolete technology, surplus or demoralised labour 5. The company may not have the experience and expertise to manage the unit taken over if it is in an entirely new field.

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How Mergers & Acquisitions take place?

Spell out the objectives

Indicate how the objective would be achieved?

Assess managerial quality

Check the compatibility of business styles

Anticipate and solve problems early

Treat people with dignity and concern

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Hostile takeovers Where a takeover is resisted, or expected to be opposed, by the existing management or professionals, follow a different route. Here, the shares are picked up from open markets and controlling interests obtained. With the tacit help of other majority shareholders (usually one or more of the financial institutions) , a bid is made to enter companys board and to acquire control. Resistance is offered by the existing management by refusing to register the transfer of shares, or to forestall the moves by deals through court orders and injunctions. It is believed that political support matters a lot in the measure of success achieved in a bid to takeover a firm. Arguments That professionalism gets replaced by money power, that takeovers do not create any real assets for the society and are detrimental to the national economy, the interests of the minority shareholders is not protected and avoidable stresses and strains are created in the companies taken over or

International Business

exposed to the threat of takeovers. Besides, takeovers reduce competition and thereby facilitate monopolistic or oligopolistic tendencies among firms, increase of price and job losses for employees. Also, there could be difficulties in the cultural integration of the merging firms and while dealing with the hidden liabilities of the target firms.

International Business

Joint Venture Strategies

A joint venture could be considered as an entity resulting from a long term contractual agreement between two or more parties, to undertake mutually beneficial economic activities, exercise joint control and contribute equity and share in the profits or losses of the entity. The technical definition of Joint venture by the RBI is : a foreign concern formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party makes a direct investment, whether such investment amounts to a majority or minority shareholding.

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Conditions for Joint ventures

Joint ventures may be useful to gain access to new business, mainly under four conditions:

1. When an activity is uneconomical for an organisation to do alone.

2. When the risk of the business has to be shared and, therefore, is reduced for the participating firms. 3. When the distinctive competence of two or more organisations can be brought together. 4. When setting up an organisation requires surmounting hurdles such as import quotas, tariffs, nationalistic-political interests and cultural roadblocks.

International Business

Triggers for Joint venture

Technology Geography Regulation Sharing of risk and capital

Intellectual exchange

Benefits and drawbacks in Joint Ventures Change of strategy by one partner Regulatory changes Success of Joint venture Having partner, hampers growth Lack of transparency

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Strategic alliances
Characteristics: 1. Two or more firms unite to pursue a set of agreed upon goals, but remain independent subsequent to the formation of the alliance. 2. The partner firms share the benefits of the alliance and control over the performance of assigned tasks perhaps the most distinctive characteristic of alliances and the ones that makes them so difficult to manage. 3. The partner firms contribute on a continuing basis, in one or more key strategic areas, for example, technology, product and so forth.

International Business

Reasons for Strategic Alliances

Entering new markets Reducing manufacturing costs Developing and diffusing technology

Thank you