The Idea in Brief
The Idea in Brief
Half of mergers don’t deliver their hoped-for business value. Yet companies from developing countries are defying these odds. They’re using M&A as their main globalization strategy and generating more value from takeovers than their counterparts from developed nations.
How do they do it? Unlike Western companies that use M&A primarily to promote efficiency or instant growth, emerging giants acquire companies for more strategic reasons. For example:
- They use takeovers to obtain technologies, competencies, and knowledge essential for their strategy—not merely to lower costs.
- They avoid overturning acquired firms’ management structures or people, ensuring smoother integration.
- They have a clear long-term vision guiding their actions, so they’re willing to wait for a takeover to pay off.
Using these principles, India’s Hindalco used M&A to boost revenues from $500 million to $15 billion in seven years, becoming the world’s largest aluminum and aluminum-products manufacturer.
The Idea in Practice
How to use M&A strategically:
Acquire Needed Competencies
Use takeovers to gain skills and knowledge essential for achieving your strategy.Example:
During the 2000s, Hindalco made a series of acquisitions, initially small and local, but eventually culminating in big global plays. Each takeover gained the company new competencies essential to its strategy of becoming a global leader by expanding its aluminum business, manufacturing more value-added products, and selling aluminum and related products around the world. Newly gained competencies included bidding for, negotiating, and integrating companies in Hindalco’s home country; turning around companies in receivership; operating companies in developed markets; managing investor relations; and managing a global supply chain.
Eliminate Your Key Weaknesses
Identify key weaknesses in your company and target companies for M&A whose purchase would eliminate those weaknesses.Example:
In 2003 Hindalco was an upstream player in a commoditized industry (it made aluminum), so its profits varied over time. It decided to add downstream operations (converting aluminum into aluminum products) to its portfolio to steady the profit stream and reduce its dependence on the commoditized business. To that end, it acquired the two leading downstream companies in the aluminum industry (Indal in India, and Novelis in North America).
Prioritize Integration Tasks
Instead of spending a lot of time tackling post-M&A issues such as who’s going to get what job and how financial reporting is going to work, resolve those issues quickly. Then focus on integrating business processes to score short-term wins and combine markets to create long-term value.Example:
After acquiring Novelis, Hindalco prioritized integration tasks:
- Financial integration: It quickly aligned the two companies’ financial-reporting periods, consolidated quarterly results, and ensured that both entities met regulators’ guidelines.
- Organizational integration: It kept Novelis people in all top management jobs there and sent just two of its own executives (a risk-management and a logistics expert) to Novelis to help improve its global supply chain.
- Business-process integration: Hindalco established a company in India to handle Novelis’s IT systems, leveraging the availability of inexpensive engineers there.
- Market integration: Hindalco projected that India’s demand for aluminum products would double from 2007 to 2012; half of that increase would be for the flat-rolled products Novelis produces. It planned for India to absorb one-third of Novelis’s output in three years. It also supplies aluminum-can manufacturers in India with flat-rolled aluminum from a Novelis plant in South Korea. When volumes increase, it will set up a flat-rolled aluminum plant in India.
Mergers and acquisitions, the stuff of newspaper headlines, quite often fail. Around 50% of mergers don’t achieve their business objectives, and takeovers cause the shareholders of most acquirers to lose money, according to several studies conducted over the past four decades. Yet, in an ironic twist, companies from developing countries such as China, India, Malaysia, Russia, and South Africa are using M&A as their main globalization strategy today.
Even after the economic crisis engulfed the world in the last quarter of 2008, the Indian technology major Tata Consultancy Services picked up Citigroup Global Services (the North American bank’s India-based outsourcing division) for $505 million in October 2008; another Indian technology company, HCL, bought Britain’s Axon Group for $672 million in December 2008; and China’s Minmetals made a $1.7 billion bid for the Australian company OZ Minerals in February 2009. In fact, emerging giants clinched 26% of the previous year’s takeover deals between developed countries and developing ones, a recent A.T. Kearney study shows.
Fueling the trend is the fact that many emerging giants are cash rich. Economies like China and India grew at near double-digit rates over the past 15 years, and that, along with corporations’ restructuring, resulted in profit margins of 10%, twice those in the developed world. Reflecting those companies’ bloated balance sheets, a survey conducted by HBR and the World Economic Forum in 2008 found that 50% of CEOs from developing economies plan to finance their bids with internal resources and 46% by issuing fresh equity. They aren’t worried about diluting shareholdings: Business families or founder-promoters hold large stakes in companies in developing nations. Those majority shareholdings also ensure that CEOs won’t lose control if stock prices fall, so smart ones can focus on generating long-term value. Moreover, suitors from developing countries are finding the valuations of companies more attractive after the recent stock market crashes in the United States and Europe.
Cash isn’t the only factor behind the M&A wave. My research indicates that emerging giants can also create value from takeovers more easily than corporations from developed countries. U.S. and European companies, inhibited by slow-growing home markets, acquire rivals primarily to become bigger and thus create economies of scale. After every merger, executives try to identify synergies, fashion efficient processes, and reduce head count so that costs will fall. In a slow-growing market, lowering costs to enhance margins is the only way to boost profits. This storyline is easy to sell to investors; a CEO can describe a merger’s benefits beforehand and demonstrate some of them soon afterward.
By contrast, when emerging giants pursue cross-border acquisitions in particular, they don’t search for traditional synergies or try to lower their costs. They buy Western companies to gain complementary competencies—that is, to learn to deploy assets such as technologies and brands, and capabilities such as new business models and innovation skills—that will help them become global leaders. Operating costs aren’t an issue; the emerging giant knows it can transform an acquisition’s economics simply by switching to the low-cost resources and business processes in its home country. In addition, developing countries will increasingly absorb Western companies’ output of technologically superior products. Many slow-growing companies with low margins can be turned into fast-growing, high-margin enterprises by their acquirers in developing countries, the logic of “reverse” M&A suggests.
To realize their objectives, companies from developing countries are using new techniques to identify targets and integrate them. They acquire only to meet strategic goals; they don’t completely assimilate acquisitions; and CEOs focus on the long term while planning takeovers and evaluating results. One company showing the way is India’s Hindalco, which has used M&A to become one of the world’s largest manufacturers of aluminum. In the process, the Indian commodities player turned into an integrated global major and boosted revenues by 30 times, from $500 million to $15 billion, in just seven years. Although the current recession is hurting Hindalco, its strategies are a harbinger of how emerging giants will increasingly approach M&A in the global market and gain an advantage over companies that use more traditional acquisition strategies.
Hindalco’s Global Ambitions
Unknown outside India until recently, Hindalco is the flagship company of the $28 billion Aditya Birla Group, one of the country’s oldest and most diversified family business houses. Set up in 1857, the group went overseas in the 1970s when the founder’s great-great-grandson, Aditya Birla, established 19 joint ventures in Egypt, Indonesia, Malaysia, the Philippines, and Thailand. It was unusual for Indian entrepreneurs to operate abroad in those days, and the experience laid the foundations of the group’s global ambitions. After Aditya’s death, in 1995, son Kumar Birla continued to focus on growth; by 1999, the group was one of the world’s biggest manufacturers of cement, carbon black, and viscose staple fiber.
By then, Hindalco had grown into India’s largest aluminum producer, with a nearly 40% share of the market. It had built a dozen processing plants and also captive power plants and coal mines, and the organization concentrated on upstream operations such as bauxite mining, alumina refining, and aluminum smelting. It was a commodity manufacturer predominantly focused on the Indian market, although it exported a fifth of its output. Senior executives in the group, like Debu Bhattacharya, who became Hindalco’s CEO in July 2003, were dissatisfied with that. Hindalco could do better, they believed, because India had large reserves of bauxite and the company boasted low processing costs.