How successful (or terrible) have their acquisitions been?
Emerging Markets: Emerging Acquirers from China and India
Multinational enterprises (MNEs) from emerging economies, especially China and India, have emerged as a new breed of acquirers around the world. Provoking “oohs” and “ahhs,” they have grabbed media headlines and caused controversies. Anecdotes aside, what are the patterns of these new global acquirers? How do they differ? Only recently has rigorous academic research been conducted to allow for systematic comparison (Table 9.1).
Overall, China’s stock of outward foreign direct investment (OFDI) (1.7% of the worldwide total) is more than three times that of India (0.5%). One visible similarity is that both Chinese and Indian MNEs seem to use acquisitions as their primary mode of OFDI. Throughout the 2000s, Chinese firms spent US$130 billion to engage in acquisitions overseas, whereas Indian firms made acquisition deals worth US$60 billion.
MNEs from China and India target industries to support and strengthen their own most competitive industries at home. Given China’s prowess in manufacturing, Chinese firms’ overseas acquisitions primarily target energy, minerals, and mining—crucial supply industries that feed their operations at home. Indian MNEs’ world-class position in high-tech and software services is reflected in their interest in acquiring firms in these
The geographic spread of these MNEs is indicative of the level of their capabilities. Chinese firms have undertaken most of their deals in Asia, with Hong Kong being their most favorable location. In other words, the geographic distribution of Chinese acquisitions is not global; rather, it is quite regional. This reflects a relative lack of capabilities to engage in managerial challenges in regions distant from China, especially in more developed economies. Indian MNEs have primarily made deals in Europe, with the UK as the leading target country. For example, acquisitions made by Tata Motors (Jaguar Land Rover [JLR]) and Tata Steel (Corus Group) propelled Tata Group to become the number one private-sector employer in the UK. Overall, Indian firms display a more global spread in their acquisitions, and demonstrate a higher level of confidence and sophistication in making deals in developed economies.
From an institution-based view, the contrasts between the leading Chinese and Indian acquirers are significant. The primary players from China are state-owned enterprises (SOEs), which have their own advantages (such as strong support from the Chinese government) and trappings (such as resentment and suspicion from host-country governments). The movers and shakers of cross-border acquisitions from India are private business groups, which generally are not viewed with strong suspicion. The limited evidence suggests that M&As by Indian firms tend to create value for their shareholders. However, acquisitions by Chinese firms tend to destroy value for their shareholders—indicative of potential hubristic and managerial motives evidenced by empire building. Announcing high-profile deals is one thing, but completing them is another matter. Chinese multinationals have a particularly poor record in completing the overseas acquisition deals they announce. Fewer than half (47%) of their announced acquisitions were completed, which compares unfavorably to Indian MNEs’ 67% completion rate and to a global average of 80%-90% completion rate. Chinese MNEs’ lack of ability and experience in due diligence and financing is one reason, but another reason is the political backlash and resistance they encounter, especially in developed economies. The 2005 failure of CNOOC’s bid for Unocal in the United States and the 2009 failure of Chinalco’s bid for Rio Tinto’s assets in Australia are but two high-profile examples.
Even assuming successful completion, integration is a leading challenge during the post-acquisition phase. Acquirers from China and India have often taken the “high road” to acquisitions, in which acquirers deliberately allow acquired target companies to retain autonomy, keep the top management intact, and then gradually encourage interaction between the two sides. In contrast, the “low road” to acquisitions would be for acquirers to act quickly to impose their systems and rules on acquired target companies. Although the “high road” sounds noble, this is a reflection of these acquirers’ lack of international management experience and capabilities.
From a resource-based view, examples of emerging acquirers that can do a good job in integration and deliver value are few. According to the Economist, Tata “worked wonders” at JLR by increasing 30% sales and keeping the factory at full capacity. This took place during a recession when European automakers were suffering. According to Bloomberg Businessweek, Lenovo was able to “find treasure in the PC industry’s trash” by turning around the former IBM PC division and using it to propel itself to become the biggest PC maker in the world. In ten years it grew from a US$3 billion company to a US$40 billion one. However, Lenovo knew that worldwide PC sales were going down, thanks to the rise of mobile devices. In response, it recently bought “the mobile phone industry’s trash”— Motorola Mobility division—from Google and endeavored to leverage the Motorola brand to become a top player in the smartphone world. This deal quickly made Lenovo the world’s third best-selling smartphone maker, after Samsung and Apple.
1. BBC News, 2014, Lenovo completes Motorola takeover after Google sale, October 30: www. bbc.co.uk;
2. Bloomberg Businessweek, 2014, Jackpot! How Lenovo found treasure in the PC industry’s trash, May 12: 46-51;
3. Y. Chen & M. Young, 2010, Cross-border M&As by Chinese listed companies, Asia Pacific Journal of Management, 27: 523-539;
4. Economist, 2012, The cat returns, September 29: 63;
5. S. Gubbi, P. Aulakh, S. Ray, M. Sarkar, & R. Chittoor, 2010, Do international acquisitions by emerging economy firms create shareholder value? Journal of International Business Studies,41: 397-418;
6. O. Hope, W. Thomas, & D. Vyas, 2011, The cost of pride, Journal of International Business Studies, 42: 128-151;
7. S. Lahiri, B. Elango, & S. Kundu, 2014, Cross-border acquisition in services, Journal of World Business, 49: 409-420;
8. S. Lebedev, M. W. Peng, E. Xie, & C. Stevens, 2015, Mergers and acquisitions in and out of emerging economies, Journal of World Business (in press);
9. S. Sun, M. W. Peng, B. Ren, & D. Yan, 2012, A comparative ownership advantage framework for cross-border M&As: The rise of Chinese and Indian MNEs, Journal of World Business, 47:4-16;
10. Y. Yang, 2014, “I came back because the company needed me,” Harvard Business Review, July: 104-108.
How successful (or terrible) have their acquisitions been?
The case has provided enough information to answer the success or terrible of acquisition as it has also mentioned almost everything that can provide an overview of the acquisition pattern of China and India. Chinese acquisition mostly state-owned and backed by a political interest more than economical and Indian acquisition are mostly done by the private-owned companies whose motives are completely business driven with a higher rate of commitment than Chinese. The success of acquisition is evident from the growth of the acquired firms as given in the information furnished in the case
The success of merger and acquisition by china and India helps these developing economies to grow as the acquisition is taken place with developed nations will help the countries to share their resources and help each other by man, money and material whenever and wherever required.
The acquisition by third world countries are not only helping the acquirers but also aids the acquiree in terms of better management, skills and extensive expertise of the acquirers in their fields, the rate of labour from developing countries like India and China is comparatively lower than the rate in the developed nations. Therefore, the acquisition is a win-win situation for both economies.
The success of the acquisition is evident from Tata Motors acquired Jaguar Land Rover and the Tata steel's idea of acquiring the Corus group in Europe helps Tata Gropu to be at NO. 1 position in the world in their respective domain of automobiles and steel industry. Lenovo has a tremendous growth from $3 Billion to $40 Billion within 10 years and becomes the world's biggest computer manufacturer in the deal with IBM. Lenevo reads the market nerve that PC market became saturated. therefore, jumped into the mobile industry by acquiring Motorola and it becomes the third-largest name in the mobile industry after a decline stage followed by apple and Samsung in the race.
The drawback of the outward foreign direct investment is the increased expectations of the developed nations from the developing countries in terms of investment, resources and expertise. The commitment of China to invest in foreign companies remain unfulfilled by the rate of 53% would hamper the reputation in the international business world. Although, India has also an unfulfilled commitment rate i.e 20% less than China. The world's rate of unfulfilled commitment is around 10-20%. This situation may give a terrible result in terms of acquisition in the international market.