Acquisitions, Joint Ventures and Strategic Alliances in Global Business Strategy
If a man does not make new acquaintances as he advances through life, he will soon find himself left alone.
Samuel Johnson (1709-1784).
Lexicographer, playwright, essayist, poet.
Most large companies are eager to grow but not all are especially decisive in their considerations of how to do so. The pros and cons of diversification and other growth vectors are not our main interest here, although they are essential for understanding global business strategy alongside discussions of corporate recovery and turnaround and there is always scope for probable routes to success despite apparently improbable outcomes.
Of far greater concern in this book (and this chapter) are the methods which firms typically take when striving for growth and the organizational challenges each of these creates.
There are essentially three approaches firms take when expanding their global business operations:
- Organic (internal) development. In SMEs, this typically leads to exporting initiatives. In established international companies and global corporations, this typically involves the launch of new products through established global supply chains (see the discussion relating to the ‘Profitable Growth Framework’ in Chapter Five, Analysing Global Markets and the Intelligent Company).
- Mergers and acquisitions (M&As).
- ‘Network’ solutions, including International Joint Ventures (IJVs) and Strategic Alliances (SAs).
In this chapter, we focus on categories 2 and 3. Organic growth features heavily in Chapter Five and also in Chapter Six, Strategic Marketing and Global Brand Management.
We begin with a discussion of the challenges associated with global business strategy by M&A. This FDI market entry mode is of huge significance as the title of this Financial Times article indicates: ‘Global M&A sprints past $1tn mark in record time after series of megadeals’ (Platt and Fontanella-Khan, 2018, 22nd March). But successful global business strategy via M&A has a very chequered history, most notably negative for the acquiring company and its increasingly detached institutional (short-term, indifferent) and retail (long-term, disenfranchised) investors.
For readers interested in exploring the wide-ranging issues associated with mergers and acquisitions, our recommended textbook, based upon the multiple criteria presented in the Preface, is Gaughan, 2018, Mergers, Acquisitions and Corporate Restructurings. It does come with a ‘health warning’ that the book is quite technical in places, not surprising given the multiple complexities associated with acquisitive strategies, many of which we discuss in the following sections. As Gaughan observes, three broad disciplines define the M&A subject arena:
- Corporate finance.
We add our own four dimensions in the discussion which follows, making seven components in total:
4. Business environment dynamics.
5. Global business strategy options.
6. Interorganizational management capabilities for IJV and SA success.
7. Effective and efficient post-acquisition integration capabilities and competencies.
For readers interested in a more detailed exploration of the subject of strategic alliances and how they might be managed, our recommended textbook, based on the same selection criteria and as indicated in Chapter Seven is: Tjemkes, et al., 2017, Strategic Alliance Management.
In this chapter, we have acknowledged the importance of M&A in global business strategy, but we have also drawn attention to the paradox which underpins both its simplicity and complexity. Acquisition is a simple strategy: in a nutshell, don’t build market position, buy it. Complexity arises in post-acquisition integration and, from a different yet all-too-frequent perspective, explaining to angry investors where the enterprise value disappeared to!
There are winners, of course, most notably the shareholders of the acquired company. On this topic, the most common question this author is asked is: ‘what is the difference between a merger and an acquisition?’ Or, ‘which company acquired which?’ In response we can revert to complex discussions rooted in financial theory or tell the truth, i.e. it depends on who you ask. This is neither flippant nor facetious: many Castrol managers to this day genuinely believe that Castrol acquired BP. And their managers, in turn, do not denude them of the fallacy.
Network solutions are a much bigger, ongoing dimension of international business. The world’s number one brand, Apple, derives much of its enterprise value from the sweat and toil of its strategic alliance (Contract Manufacturer) partner Foxconn; Coca-Cola relies heavily on its business partners such as independent bottlers Coca-Cola European Partners and Coca-Cola Amatil for its income in what is probably the world’s biggest single Licensing arrangement. A significant percentage of BP-branded petrol stations worldwide are operated by Franchisees; ditto Marriot hotels, McDonald’s restaurants, Starbucks coffee houses and the mechanic’s favourite, Snap-on workshop tools.
Well-managed strategic alliances which bring together complementary assets and competencies (e.g. Snap-on and its franchisees which combines global presence with local market knowledge) typically have a more enduring lifespan than equity-based joint ventures such as that between Philips and LG Display which brought substitutable assets and diverging parent company ambitions.
As the old Chinese proverb proclaims: same bed, different dreams.
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All content © Colin Edward Egan, 2021