Playing on a Global Stage: Asian Firms See a New Strategy in Acquisitions Abroad and at HomePublished: April 28, 2010 in Knowledge@Wharton
Asia has become the world's hottest arena for mergers and acquisitions.
European and American companies are seeking a larger presence in the world's fastest-growing economies even as Asian companies with strong local currencies and ample credit are pushing to enter new markets or consolidate existing ones at home. During the first quarter, Asian M&A activity more than doubled from a year earlier while activity in the United States and Europe declined, according to merger-market tracker Dealogic.
With Asian emerging markets catapulting out of the global recession much faster than developed markets, "the economic situation is a catalyst," says Wharton management professor Saikat Chaudhuri, noting that the trend started earlier due to "emerging markets' globalization as these players [began to] look for new opportunities to grow. Asian firms want to become global players. This is the next step in their evolution."
Wharton management professor Harbir Singh, vice dean for global initiatives, says M&A appetite varies among countries. For example, the worldwide economic slowdown affected China more than India because its manufacturing exports were hurt. In addition, because the Chinese yuan is pegged to the dollar, Chinese firms have not had the currency boost to help them buy aggressively.
Overall, M&A activity in Asia is moving rapidly toward equality with more established U.S. and European takeover hotbeds. For the first quarter of 2010, Dealogic reported that Asia Pacific M&A, excluding Japan, jumped 126% to $141 billion and accounted for a record 23% of announced global M&A volume. It was only 10% a year earlier and 13% in the first quarter of 2008, according to the data. Add in Japan, where most of the M&A activity is inside the country, and Asia Pacific volume totaled $166 billion, up 79% from the year earlier and more than the $162 billion total for Europe, which declined 3%. The U.S. market, the world's largest, fell 11% to $220 billion in the quarter. Asia's totals were boosted by the inclusion of the single biggest deal in the quarter -- British insurer Prudential PLC's $35.5 billion acquisition of American International Group's Asian life insurance business. Dealogic's methodology assigns activity based on where the acquired operation is located. Even excluding that deal, activity in Asia grew while Europe and the U.S. shrank.
Change in Strategy
For many years, Asian companies were reluctant to embark on international acquisition as a strategy. They didn't have the capital or borrowing capabilities to make big purchases. And government restrictions in countries like India, China and Japan often made it difficult for firms in the developed world to acquire Asian companies.
But a few Asian companies showed that big international acquisitions could work. India's Mittal Steel started making overseas acquisitions in 1989; in 2006, when the company acquired Europe's Arcelor, it became the world's biggest steelmaker. China's Lenovo Group became a household name after it acquired IBM's PC business in 2005.
Since 2000, Asian M&A as a share of the worldwide market has grown from 10% to 26% last year. Some of the growth in share reflects a decline in the overall market. Indeed, 2007, when there was $728 billion in activity, remains the record for Asia. Last year, Asia accounted for $625 billion in activity, according to Dealogic.
Farhan Faruqui, head of global banking in Asia Pacific at Citigroup, told The Wall Street Journal that he expects Asia will steadily increase its global share of M&A activity and will frequently represent one third of global activity in the future. "Dialogues with clients suggest that M&A volume will be substantially higher in Asia this year," he adds.
According to Wharton management professor Lawrence G. Hrebiniak, Asian companies view acquisitions as a way to outgrow their rivals. They can increasingly take advantage of their strong local currencies and available bank loans to make acquisitions, both inside their countries and overseas, he suggests. "A lot of companies have cash, and higher interest rates in developing markets strengthen their currencies" relative to the dollar and the euro. For example, from last November to mid-April, the dollar has declined 7.6% against the Indian rupee, 5.6% against the South Korean won and 6.6% against the Indonesian rupiah.
Stronger currencies give Asian companies a cushion in their acquisition strategy. "Mergers fail because people pay too much of a premium," Hrebiniak says. "If your currency is strong, you can get a bargain." Asian companies face the same issues as other companies in making mergers succeed, he adds, but "a strong currency absolutely helps. Things are cheaper." The currency advantage is particularly significant when an Asian company is bidding against a Western company that has to borrow or issue stock in its home currency and then make an acquisition in a market with a stronger currency.
Asian companies used to regard M&A as "risky," says Singh. "Now it's seen as an acceptable mode of growth." One reason is that as companies have grown, "in some industries, there's no other choice." Wireless telecommunications is a classic example where "it's clear that the economies of scale are such that you can't have hundreds or even tens of companies." Other industries such as specialty chemicals and pharmaceuticals also have been consolidating because of global economies of scale, he says.
Another trend boosting the acquisitiveness of Asian firms is investors' acceptance of conglomerates, says Hrebiniak. "In the U.S., we don't like diversified firms. We devalue diversification. Asian countries value growth by acquisition." Widely diversified companies such as India's Tata Group and South Korea's LG Corp. are among their nation's most powerful, he adds.
Singh also points to cultural changes, noting that in Asian markets there has been increasing acceptance of working for global companies headquartered elsewhere -- an acceptance that has strengthened the willingness of Asian companies to be acquired and to make international acquisitions.
Finally, changes in developed markets make companies more willing to be acquired, Chaudhuri states. "Targets come cheaper and with less resistance if Western firms are hurting." That explains the fact that "Asia players are buying into developed markets. When business is going well, companies are more hesitant to be bought."
Managing with Uncertainty
While Western companies are buying in Asia, Asian companies are also moving to consolidate their home markets and to reach overseas into new markets. In some cases, they are buying troubled outfits cheaply in an effort to learn how a foreign market operates.
There is some evidence that Asian companies may have more success with acquisitions than Western companies have had, according to Chaudhuri. He points to an A.T. Kearney study concluding that Indian companies were less likely to overpay for acquisitions than most acquirers. "They may be more prudent because they don't have as many resources," Chaudhuri says.
He speculates that executives from India and other developing Asian countries may have more success than Western managers because they are used to handling vast cultural differences in their home markets. Wealth variations in India or China are much greater than they are in the West. In India, in particular, "there are so many cultural divides," including language, religion and caste. "An Indian company may not know how to manage French culture, but it understands how to manage cultural differences."
Chaudhuri says it is also possible that building a company in the developing world -- and dealing with imperfect information and constant change -- gives a manager experiences he or she wouldn't get in the developed world. "Western companies have trouble managing with uncertainty. Asian firms may be more adept at this," he suggests.
The growth in Asian M&A is contributing to moves by Western banks to expand rapidly in the region. On April 20, J.P. Morgan Chase announced it had poached a top banker from HSBC Holdings to head its corporate banking business in China, which comprises both investment banking and treasury services. The same week, Credit Suisse said it had hired J.P. Morgan's top investment banker in India to head up its own investment banking operation there.
Nevertheless, the growth of Asian M&A is likely to have its rough patches.
Many studies have determined that between 40% and 60% of all acquisitions turn out to be failures in terms of boosting market value of the acquired company by more than the amount invested. Acquisitions of Asian companies and by Asian companies face the same hurdles as M&A activity elsewhere, says Hrebiniak. "They have to think about the strategic reasons for making an acquisition -- the logic of it. If they're trying to achieve economies of scale in manufacturing, they have to integrate pretty rapidly. Crushing two companies together is hard."
India-based Tata Motors' painful experience in buying two British automakers from Ford may frighten some Asian acquirers. Tata, which says it is among the top five commercial vehicle manufacturers in the world, acquired Jaguar and Land Rover from Ford for $2.5 billion in 2008. So far, the transaction has been a failure, with both luxury car and SUV sales plunging in the recession. The acquired companies contributed to Tata's first annual loss in seven years and Tata's debt rating has repeatedly been downgraded. Earlier this year it named a German auto-industry veteran to turn around the car operations.
In addition, legal barriers can hinder acquisitions in some countries. Even in the U.S., ownership of television stations is restricted to U.S. citizens, and foreign firms cannot own more than 25% of an airline. China has many restrictions on foreign ownership, according to Chaudhuri, and the Chinese government can also trip up domestic companies when they try to make overseas acquisitions. A plan by a Chinese company to buy General Motors' iconic Hummer SUV line fell apart under murky circumstances. Sichuan Tengzhong Heavy Industrial Machinery Co. said in February that Chinese regulators hadn't approved its $150 million bid for the unit. Neither the company nor the government disclosed any reasons for the regulators' stance at the time. As a result, GM closed down Hummer, a brand that until a couple of years ago was one of the automaker's biggest money makers.
Such missteps are to be expected in acquisitions, experts say. "Asian acquirers tend to be long-term focused," says Chaudhuri. "If they are buying access to markets, they will give autonomy to their target. They are trying to learn from the firms they acquire. They aren't aggressive on meeting cost targets right away." So long as their home economies and home currencies are stronger than those in Europe and the U.S. they will have an advantage in bidding. "They can afford to do it if their price premiums are lower."