The Rise of Spanish Multinationals: On the Move in a Global EconomyPublished: March 08, 2006 in Knowledge@Wharton
Last fall, Spain's Banco Santander Central Hispano announced that it would pay $2.4 billion for a 20% stake in Philadelphia-based Sovereign Bank. The investment gives Santander the right to negotiate a complete takeover of Sovereign after two years. Perhaps some observers regarded the deal as just another acquisition in the wave of consolidations and mergers that has transformed the U.S. retail banking market in recent years. Mauro F. Guillén knew it was much more.
Guillén, professor of international management at Wharton, has watched with great interest the strategic moves of 150-year-old Grupo Santander since it began its current expansion abroad in the early 1980s. His fascination grew in the summer of 2004 when Santander announced the acquisition of Abbey National, a British bank with 18 million customers. The move was Santander's boldest expansion yet and one that propelled it into the ranks of the world's top 10 banks.
The latest Sovereign Bank investment is a significant strategic step for Banco Santander as it seeks to enter and establish a foothold in the competitive U.S. retail banking market. "It's a story of growth and determination," notes Guillén. "Spain has several banks, but not all of them have succeeded. Santander is one of two, perhaps three, that have expanded around the world. I think the retail banking market in the United States is up for grabs. The good retail banks in the world are the British, the Dutch and the Spanish. I think foreigners are going to take an increasing role in the retail segment. This is just the beginning of the story for Santander."
And it is a story, suggests Guillén, that needs to be told. In his book The Rise of Spanish Multinationals: European Business in the Global Economy, Guillén explores why, since 1992, Spanish companies in a variety of industries have acquired a prominent presence in the global economy. Guillén looks at the economic, financial, political and social consequences for Spain and Europe and considers the future of the Spanish multinationals as players in the global economy.
Indeed, an article in last week's Economist noted that "since the return of democracy, the Spanish have rediscovered the outside world, none more so than the country's businessmen, whose exuberant expansionism has led to them being dubbed the 'new conquistadores.'" The magazine cites an anticipated bid by Spanish construction company Ferrovial for the British Airport Authority (BAA) as "just the latest evidence of the emergence of Spanish firms as a global force. Buoyed by healthy profits, a rising stock market and a purring economy, Spanish firms are increasingly using audacious -- and expensive -- deals to expand abroad." (As it turns out, however, Spanish firms may suddenly be feeling the heat of other companies' cross-border ambitions. E.ON, Germany's biggest power group, yesterday made a $34.6 billion bid for Endesa, the former Spanish electric monopoly. The Spanish government has vowed to oppose the move, even as the European Commission -- which wants to create a Europe-wide energy market -- is asking Spanish authorities not to veto the offer, according to press reports.)
In addition to financial institutions like Santander and Banco Bilbao Vizcaya Argentaria (BBVA), global Spanish firms include Telefónica, the world's fourth-largest telecommunications provider and the largest in Latin America; Repsol YPF, the ninth-largest oil company, and Iberdrola, an electrical utility that is the world's largest operator of wind generators. "Be mindful of the fact that Spain is a very small country," says Guillén, a native of Spain who began researching The Rise of Multinationals in 1993. "It is hardly 2% of global GDP. It is quite remarkable that these large firms are among the top 10 or 20 in their industries in the world."
The advance of the Spanish multinationals was triggered by Spain's entrance into the European Union in 1986. Until that point in the 1980s, notes Guillén, Spain was a protected country that operated outside the global economy. Since about 1980, firms in Spain have undergone a process of change, including deregulation, privatization, enhanced competition and increasing exposure to imports and inward foreign investment. "My prediction was that as the country opened up, some companies would go bust and others would get acquired," explains Guillén. "But if you believe in the dynamics of the market, other companies would react and do well. That is what has happened."
In addition, a country like Spain, which never had a strong currency, now has the euro, and thus gets more leverage in the global marketplace. Companies can more easily borrow money at very low rates, and they can also issue more equity that foreign institutional investors are eager to buy. Since 1993, Spanish firms have invested nearly $220 billion abroad. And while in 1980 Spain was the 20th largest foreign direct investor in the world, by the end of 2002 it had become the 10th largest.
Spanish firms have grown in importance in global markets, thanks to the rapid deregulation of their own domestic market which forced them to develop new managerial and organizational capabilities, says Guillén. Given that the country is not well-known for technology, Spanish firms have focused on running telecommunications networks, infrastructure, toll highways, airports, and other large-scale operations. For instance, if the BAA acquisition goes through, Ferrovial would easily become the world's largest operator of transportation infrastructure.
Latin America: Common Culture and Language
The impact on the global economy has been dramatic in terms of the balance of power, particularly in Latin America where Spanish firms have the most influence. When it came to foreign expansion, large Spanish firms chose the path of least resistance that led them straight to Latin America, writes Guillén, whose book was funded by the Fundacion Rafael del Pino. The region offered vast opportunities for growth, a deregulated market, which Spanish firms understood, and a common culture and language. Spain is now almost the largest foreign investor in Latin America. "Fifteen years ago, whenever a Latin American country got into trouble and needed money, its president would go to Washington, D.C., New York and London," notes Guillén. "These days, they go to Washington, D.C., New York, London and Madrid. If the government in Latin America wants to issue bonds and sell them, it has to come to the Spanish government and the banks in Spain because those banks will help the Latin American government sell those bonds. This is a very dramatic change in terms of the impact of Spain in Latin America."
While Guillén discusses the expansion of large, powerful service-sector firms like Telefónica in his book, he also details the experiences of Spain's family-owned and worker-controlled multinationals. Many of these have interesting stories to tell within the global economy, including Freixenet, the leading exporter of sparkling wines into the U.S. market; Nutrexpa, which makes and sells cocoa, cookies, patés, milk, baby foods and other products; Chupa Chups, the world's largest maker and seller of lollipops; and Inditex, the owner of the Zara clothing brand. The internationalization of Spanish family- and worker-owned firms, says Guillén, has been driven by home market saturation and investments in intangible assets, like brands.
Brands and marketing know-how have been important components of the international strategy of large Spanish companies. Firms such as Telefónica, Repsol and Iberdrola have demonstrated over the years a "superior ability," writes Guillén, to set up and run telecommunications, energy and water infrastructures. Even with these strengths and other political advantages, Guillén notes that Spanish multinationals also have their weaknesses -- which typically begin at the top. "The biggest bottleneck in these service-sector firms is good executives," he says. "Now the game is to expand into Europe, the United States and Asia. It becomes harder. They need to work internally and externally to develop more international managers so they can operate in other areas of the world."
Further expansion, adds Guillén, is the biggest challenge facing Spanish multinationals, effective leadership or not. Thus far, the firms have gone for the "low-hanging fruit," by making significant moves into Latin America. But a well-established presence in Spain and Latin America is only the beginning. Expansion into the rest of the world will be tougher and, stresses Guillén, only the strong will survive. Who will that be? "We have some clues as to which are the stronger ones now, but you can never be 100% sure," says Guillén. "Given that there are several that are trying to be very competitive worldwide, at least a few of them will succeed in the next 10 years. There's a good chance that BBVA and Santander will be winners."