How Emerging Giants Are Rewriting the Rules of M&A

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, […]

by

Nirmalya Kumar

by

Nirmalya Kumar

From the Magazine (May 2009)

Summary.

Reprint: R0905K

While Western companies struggle with mergers and acquisitions, emerging giants like Indian aluminum producer Hindalco are using M&A as their main globalization strategy. That’s partly because developing economies grew at near double-digit rates in the past 15 years, enabling many enterprises to make acquisitions. It’s also because, according to the author’s research, those corporations create more value from takeovers. To compete, Western multinationals should change their mind-set and shift the locus of their M&A efforts to regional headquarters in developing countries.

U.S. and European companies, inhibited by slow-growing home markets, acquire rivals primarily to become bigger and thus create economies of scale. By contrast, emerging giants buy companies—often Western ones—to gain competencies that will help them become global leaders. They acquire only to meet strategic goals; they don’t completely assimilate acquisitions; and their CEOs focus on the long term.

Using this approach, Hindalco boosted revenues in seven years from $500 million to $15 billion. It acquired companies to expand its aluminum business, manufacture more value-added products, and extend its global reach. Rather than immediately seek targets overseas, the company patiently executed small takeovers, first in India and later abroad, before making a big global play. With each move, Hindalco climbed what the author calls an M&A competency stairway, gaining the skills it needed to pursue other targets. When it was ready, Hindalco bought Novelis, a North American corporation more than twice its size.

Because of the global downturn, Hindalco will not realize the benefits of that acquisition as quickly as it had expected. But the fact that the company developed and adhered to a long-term M&A strategy will help it ride out the storm.

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.

A version of this article appeared in the May 2009 issue of Harvard Business Review.

NK

Nirmalya Kumar is the Lee Kong Chian Professor of Marketing at Singapore Management University and a Distinguished Academic Fellow at INSEAD Emerging Markets Institute.

How Emerging Giants Are Rewriting the Rules of M&A

The Idea in Brief

Acquire Needed Competencies

Eliminate Your Key Weaknesses

Prioritize Integration Tasks

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