Deck 12: Making Alliances and Acquisitions Work

Question 1

Of the two methods allied firms can use to combat opportunism, which one do you think is better Why

Answer 1

The threats can be minimized by the following ways:
1. Restricting the critical capabilities
2. Exchanging critical capabilities through reliable assurances
1. Restricting the critical capabilities
The company may prevent it by restring the technological or specialized knowledge. The firms that involves in merger and acquisition could share their knowledge or skills partially to prevent the threat of opportunism.
2. Exchanging critical capabilities through reliable assurances
This is a strategy wherein each firm agrees to share their skills and knowledge. If a firm breaches the agreement then crucial competencies of that company will be exposed by the other firm.
Since there is a natural loss, this method is more effective to combat opportunism, as both the firms are scared of losing their respective crucial competencies.

Question 2

What happens when an alliance fails and must be terminated Summarize the process.

Answer 2

Dissolution Model:
The dissolution model involves the following phases:
Phase 1 - Initiation:
Corporate process of breaking up between two firms occurs when a partner starts feeling discomfort due to certain reasons in an alliance. Thus, that partner initiates the process of termination of the alliance (and hence called initiator), the corresponding process being called as initiation.
Phase 2 - Public announcement:
In the second stage, the firms go public. The one who first does it gains an unofficial sentiment of the stakeholders, and the media, and hence gains from exposing the situation. In most cases, the initiator announces it first, though in some cases the other partner may also pre-empt the process.
Phase 3 - Alliance dissolution:
In the third phase of uncoupling, the companies may be volatile, or smooth in their approach. If they are smooth, there are multiple mutual settlements in process. And, for hostile processes, there may be several lawsuits and long duration cases of settlement.
Phase 4 - Finding new alliance:
In the fourth stage of aftermath, the firms may or may not go for new partner searching. But most of the firm would search for new alliances.

Question 3

Of the four factors that may influence alliance performance shown in Figure 12.6, which do you think is the most important, and which the least important Why

Answer 3

The four factors that influence the alliances are as follows:
1. Equity
2. Learning and experience
3. Nationality
4. Relational capabilities
Extensive research of the situation before actual alliance takes place is important, which is not done in case of most unsuccessful alliances, and this is thus a major reason of failure of alliances.
The managers in most cases overestimate on their ability to manage the situation and creation of value. The factors of how the middle and high level management deal the situations are also of utmost importance. Thus relational capabilities are most important.
Again, the post-acquisition reasons like failure of integration of organization are lesser important factors comparatively, as those happen after the alliance and can be mended to an extent. However, for multinational M A endeavors the cross-cultural fittings of environment are far more challenging. Given the top and middle level management deals the alliance situations well, the customers and front desk employees are far less important factors. Thus, nationality is the least important factors.

Question 4

EMERGING MARKETS: Emerging Acquirers from China-and India
Multinational enterprises (MNEs) from emerging economies, especially those from China and India, have emerged as a new breed of acquirers around the world. Causing "oohs" and "ahhs," they have grabbed media headlines and caused controversies. Anecdotes aside, are the patterns of these new global acquirers similar How do they differ Only recently has rigorous academic research been conducted to allow for systematic comparison (Table 12.8).
Overall, China's stock of outward foreign direct investment (OFDI) (1.5% of the worldwide total) is about three times India's (0.5%). One visible similarity is that both Chinese and Indian MNEs seem to use M As as their primary mode of OFDI.Throughout the 2000s, Chinese firms spent US$130 billion to engage in M As overseas, whereas Indian firms made M A deals worth US$60 billion.
MNEs from China and India target different industries to support and strengthen their own most competitive industries at home. Given China's prowess in manufacturing, Chinese firms' overseas M As primarily target energy, minerals, and mining-crucial supply industries that feed their manufacturing operations at home. Indian MNEs' world-class position in high-tech and software services is reflected in their interest in acquiring firms in these industries. 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 M As 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 M As, 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 M A 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 M As 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. On the other hand, M As by Chinese firms tend to destroy value for their shareholders-indicative of potential hubristic and managerial motives evidenced by empire building and agency problems.
Announcing high-profile deals is one thing, but completing them is another matter. Chinese MNEs have particularly poor records 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% to 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 RioTinto'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 far and 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. Fiat, for example, could only utilize 40% of its factory capacity in Italy. 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, Lenovo 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.
Table 12.8
Source: Extracted from 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.
Comparing Cross-Border M As Undertaken by Chinese and Indian MNE s


Sources: Based on (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 cf International Business Studies, 42: 128-151; (7) 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); (8) 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; (9) Y. Yang, 2014, "I came back because the company needed me," Harvard Business Review, July: 104-108.
Why have M As emerged as the primary mode of foreign market entry for Chinese and Indian MNEs

Question 5

ON CULTURE: How could dissimilarities in national culture affect the performance of alliances

Question 6

Pick any recent announcement of a cross-border strategic alliance or acquisition. Predict its likelihood of success or failure.

Question 7

Describe the three most common motives for acquisition.

Question 8

You are an entrepreneur seeking to develop alliances in Ireland and generate new business ideas. Based on information found on globalEDGE, which region of Ireland may be most conducive to developing your global entrepreneurship network What information and details support your thinking

Question 9

How does hubris affect value in a different way than the other two motives for acquisition

Question 10

List several examples of contractual and equity-based alliances.

Question 11

What are some criteria managers should consider to avoid pre- and post-acquisition problems

Question 12

EMERGING MARKETS: Emerging Acquirers from China-and India
Multinational enterprises (MNEs) from emerging economies, especially those from China and India, have emerged as a new breed of acquirers around the world. Causing "oohs" and "ahhs," they have grabbed media headlines and caused controversies. Anecdotes aside, are the patterns of these new global acquirers similar How do they differ Only recently has rigorous academic research been conducted to allow for systematic comparison (Table 12.8).
Overall, China's stock of outward foreign direct investment (OFDI) (1.5% of the worldwide total) is about three times India's (0.5%). One visible similarity is that both Chinese and Indian MNEs seem to use M As as their primary mode of OFDI.Throughout the 2000s, Chinese firms spent US$130 billion to engage in M As overseas, whereas Indian firms made M A deals worth US$60 billion.
MNEs from China and India target different industries to support and strengthen their own most competitive industries at home. Given China's prowess in manufacturing, Chinese firms' overseas M As primarily target energy, minerals, and mining-crucial supply industries that feed their manufacturing operations at home. Indian MNEs' world-class position in high-tech and software services is reflected in their interest in acquiring firms in these industries. 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 M As 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 M As, 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 M A 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 M As 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. On the other hand, M As by Chinese firms tend to destroy value for their shareholders-indicative of potential hubristic and managerial motives evidenced by empire building and agency problems.
Announcing high-profile deals is one thing, but completing them is another matter. Chinese MNEs have particularly poor records 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% to 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 RioTinto'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 far and 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. Fiat, for example, could only utilize 40% of its factory capacity in Italy. 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, Lenovo 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.
Table 12.8
Source: Extracted from 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.
Comparing Cross-Border M As Undertaken by Chinese and Indian MNEs


Sources: Based on (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 cf International Business Studies, 42: 128-151; (7) 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); (8) 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; (9) Y. Yang, 2014, "I came back because the company needed me," Harvard Business Review, July: 104-108.
Drawing on the industry-based and resourcebased views, outline the similarities and differences between Chinese and Indian multinational acquirers.

Question 13

ON CULTURE: What impact does the combination of organizational culture and national culture have on cross-border M A's

Question 14

ON ETHICS: During the courtship and negotiation stages, managers often emphasize "equal partnerships" and do not reveal (or even try to hide) their true intentions. What are the ethical dilemmas here

Question 15

If you were part of a firm's leadership team, under what conditions would you choose an acquisition over an alliance and vice versa

Question 16

Identifying new sources of energy has been an important business opportunity for quite some time. Given recent growth in Asia, your company is seeking the acquisition of geothermal and solar energy firms in the region. Based on your firm's energy and resource development emphasis, use resources found on globalEDGE to identify three Asian countries in which this is most possible.

Question 17

When does a majority JV seem more appropriate, and when is a minority JV more appealing

Question 18

Are mergers or acquisitions more common Why

Question 19

Identify a country or region on PengAtlas Map 3.1 in which it is relatively difficult to do business. In spite of any difficulty, suppose you wish to expand into that country. Woidd you expand through an acquisition or an alliance Why

Question 20

EMERGING MARKETS: Emerging Acquirers from China-and India
Multinational enterprises (MNEs) from emerging economies, especially those from China and India, have emerged as a new breed of acquirers around the world. Causing "oohs" and "ahhs," they have grabbed media headlines and caused controversies. Anecdotes aside, are the patterns of these new global acquirers similar How do they differ Only recently has rigorous academic research been conducted to allow for systematic comparison (Table 12.8).
Overall, China's stock of outward foreign direct investment (OFDI) (1.5% of the worldwide total) is about three times India's (0.5%). One visible similarity is that both Chinese and Indian MNEs seem to use M As as their primary mode of OFDI.Throughout the 2000s, Chinese firms spent US$130 billion to engage in M As overseas, whereas Indian firms made M A deals worth US$60 billion.
MNEs from China and India target different industries to support and strengthen their own most competitive industries at home. Given China's prowess in manufacturing, Chinese firms' overseas M As primarily target energy, minerals, and mining-crucial supply industries that feed their manufacturing operations at home. Indian MNEs' world-class position in high-tech and software services is reflected in their interest in acquiring firms in these industries. 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 M As 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 M As, 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 M A 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 M As 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. On the other hand, M As by Chinese firms tend to destroy value for their shareholders-indicative of potential hubristic and managerial motives evidenced by empire building and agency problems.
Announcing high-profile deals is one thing, but completing them is another matter. Chinese MNEs have particularly poor records 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% to 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 RioTinto'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 far and 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. Fiat, for example, could only utilize 40% of its factory capacity in Italy. 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, Lenovo 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.
Table 12.8
Source: Extracted from 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.
Comparing Cross-Border M As Undertaken by Chinese and Indian MNEs


Sources: Based on (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 cf International Business Studies, 42: 128-151; (7) 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); (8) 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; (9) Y. Yang, 2014, "I came back because the company needed me," Harvard Business Review, July: 104-108.
ON ETHICS: As CEO of a firm from either China or India engaging in a high-profile acquisition overseas, shareholders at home are criticizing you of "squandering" their money, and target firm management and unions-as well as host country government and the media-are resisting. Should you proceed with the acquisition or consider abandoning the deal If you are considering abandoning the deal, under what conditions would you abandon it

Question 21

In reference to PengAtlas Map 1.1, firms in which group of countries are most likely to overpay for acquisitions in the other group of countries

Question 22

ON ETHICS: As a CEO, you are trying to acquire a foreign firm. The size of your firm will double, and it will become the largest in your industry. On the one hand, you are excited about the opportunity to be a leading captain of industry and to attain the associated power, prestige, and income. (You expect your salary, bonus, and stock option to double next year.) On the other hand, you have just read this chapter and are troubled by the findings that 70% of M As reportedly fail. How would you proceed

Question 23

In what two primary areas do formal institutions affect alliances

Question 24

Describe at least one norm (or collective assumption) and how it would affect a firm's perspective on creating an alliance.

Question 25

Explain the three stages in the formation of an alliance.