Globalization today presents substantial challenges for firms in East, South and Southeast Asia to compete on an international platform. However, some successful firms have strategically planned their businesses such that they get a head start on becoming key regional and global players in our increasingly global world. One such strategy to get a head start, according to Associate Professor Andrew Delios, is through international acquisitions.
Acquisitions are a fundamental aspect of an internationalization strategy – and for companies in Asia, the importance of acquisitions is only growing. Acquisitions can enable a company to build their international presence rapidly. Yet, this rapid expansion must also be matched by a value creation component, so that the acquisition is a source of enduring advantage for a company.
Singapore Airlines (SIA), like many other leading companies in the Asia Pacific, is one company that has been using acquisitions to build stakes in other regional carriers. Its recent high profile pursuit of Chinese Eastern airlines, to develop its presence in the greater China area, including on the high volume Hong Kong – Shanghai, is one such example. Yet, the costs of this bid, as well as competition from other carriers such as Cathay Pacific, illustrates some of the competitive and regulatory challenges that can accompany an acquisition strategy.
We have found in our research that two out of three companies in Hong Kong, Singapore and mainland China, that undertake an acquisition, lose value in the short term as a consequence of that acquisition. The strong potential for a loss in firm value emphasizes the need to have a clear and present strategy for value creation in an acquisition. Before a firm decides to make an acquisition, it is important that its strategy considers four factors – Acquisition Drivers, Acquisition Strategy, Acquisition Pricing and Acquisition Implementation – to identify and realize the potential for value creation in the acquisition.
Acquisition drivers include four external drivers: political, economic, industry and technological; and three internal drivers: strategic, managerial and financial. Firms need to have a thorough understanding of these drivers before making an acquisition since these major drivers will represent a firm’s criteria for analyzing the suitability of a company for acquisition, as well as identifying the broader level economic and regulatory influences on the feasibility of an acquisition.
Firms also need to formulate a good acquisition strategy by setting clear and precise objectives for the acquisition in their strategy. The strategic considerations can be many, but a firm’s leaders should always consider how the acquired unit would add value to their own company. Value creation can come from the creation of greater market power, which allows a firm to be more independent in setting pricing in its industry. Value creation can come from an effective merging of the competencies and assets of the acquiring firm and the target to achieve competitive gains in the cost position or distribution capabilities of the merged company.
In some ways, the seeking of value creation in an acquisition strategy is simple: it comes from generating greater revenue from a higher price position or from greater levels of sales, or from decreasing costs by gaining rationalization or scope economies. What is simple is actually difficult, as leaders need to have a clear and well-communicated strategy on how the acquirer and target will fit together as a merged entity to realize those competitive gains in pricing, costs or sales.
To enhance the chances of success in an acquisition, a firm must have a clear understanding of their own financial strengths. It must also have a clear understanding of the various corporate finance methods available for acquisition and the structure of the purchase. Most importantly, it is important to consider what is the maximum price at which an acquisition can be effected. If a bidding war erupts, such as what happened when Singtel was pursuing Hong Kong Telecom in Hong Kong, it is easy to overpay for a target firm. A firm’s leaders should set a reservation price, which will not be exceeded in any subsequent negotiation or bidding war.
After a successful bid for a target firm, the real challenge begins, which is how to make the acquisition successful. Many acquisitions fail at the level of implementation, because much of the leaders’ energies are devoted to the challenges inherent to the pursuit of a target firm.
Leaders also need to consider implementation issues, such as what would be the new organizational structure of the merged entity, or what will be the incentives to keep key target employees in the merged firm. A successful acquirer will establish clear and distinct integration terms that will facilitate the merger of the two companies in a short period of time.
As with the successful implementation of any strategy, clear and direct communication of the leaders’ vision for the merged entities is fundamental to the success of the integration of the acquirer and the target.
Associate Professor Andrew Delios is Head of the Department of Business Policy at NUS Business School. He is an author (along with interim Dean of NUS Business School, Kulwant Singh) of Strategy for Success in Asia (Wiley).
“Acquisitions can enable a company to build their international presence rapidly.”
~ A/P Andrew Delios, Head of Business Policy, NUS Business School