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.