International Mergers and Acquisitions - Case Study Example

Name: Institution: Tutor: Date of submission: Executive Summary As evident over the last couple of years, more and more businesses are turning to international trade to boost their earnings as well as take advantage of favorable conditions in other countries. This is beneficial to both the investor as well as the host country as they benefit from these investments in various ways. To penetrate a foreign market though, a company needs to have a strategic plan which starts from studying the market, appreciating and understanding varying beliefs, values and cultures of other countries. For a successful globalization an entrepreneur needs to maintain high levels of innovation, quality and hard work. This paper looks into the case of Hutchinson Whampoa limited, a company headquartered in Hong Kong China. The paper looks into strategic challenges and external environment factors facing the firm, its properties and resources and the firm’s current strategy, its implementation of current strategy and the issues that need attention through the company’s global strategy. It also analyses the advantages and disadvantages associated with mergers and acquisitions as a strategy for global expansion. Company Background Hutchinson Whampoa is a company headquartered in Hong Kong and holds a market share of about 26 U.S billion dollars. The company was founded in 1977 and has undergone a sequence of mergers with half of its shares owned by Cheung Kong Holdings Limited. The company has invested in five core businesses which are; logistic infrastructure and services, Energy, retail, development of real estate, ports and related services and telecommunications in addition to holding 87 percent ownership in Hong Kong international terminals. It also engages itself in managing, operating and development of port and container terminals. The company’s interests comprise of 52 ports in 26 countries with 278 operating berths. Its interest in real estate development comprises of commercial, industrial, office and residential premises. In addition the company has interest in hotels and retail stores that comprise of supermarkets, beauty and health products, electronics and electrical appliances. Advantages and disadvantages Associated with international mergers and acquisitions strategy There are many ways through which a company can expand their operations in global markets, however, in the past three decades or so, most companies have heavily relied on global strategic alliances and cross border mergers and acquisitions. Through global mergers and acquisitions, companies have been able to reach new markets and enhance their competitiveness. Even though the practice started many years ago, the forms and rate at which companies are strategically merging has been gradually transforming in the recent past (Lorange, 1993). The diagrams A and B below illustrate an acquisition and a merger respectively; Diagram A: Acquisition In an acquisition a parent company (A) Acquires and absorbs a subsidiary company (B) hence retaining its original identity. Diagram B: Merger In a merger, different companies/entities join together to form a new entity with its own identity and legal existence. Hutchinson Whampoa has strategically diversified its businesses overseas through acquisitions and mergers. This is as seen from recent developments where the company was facing competition from the European Union for approval of a merger between its UK mobile operator ‘Three” and Spanish Telefonica to buy 02 UK for 9.25 billion (Simon, 2015). Nevertheless, if such a merger were to be successive the merging companies would accrue a number of benefits associated with mergers and acquisitions. Such benefits include; The assets of the two companies would complement each other hence bringing about significant synergy to both companies. This is in addition to improved financial strength and competitive advantage. This would also enable the company to integrate both vertically and horizontally hence acquiring competitors and also customers, hence increasing their sales and access cheaper supplies (Simon, 2015). Through a merger, different firms work together to accrue mutual benefits. Thereby being able to share knowledge and expertise, share risks, and also have a competitive edge through access to new markets. It may also help to convert potential and current competitors into partners hence working together to achieve a common objective. According to Griffin and Michael (1999) Strategic alliances, mergers and acquisitions have grown to become a key asset for businesses in need of globalization. Through mergers and acquisitions, a firm is able to internationalize its operations more easily. Perlmutter (1969) notes that, despite the international business having been around for quite sometime, it has grown to become more complex over the past three decades. More and more firms are looking for the international market opportunities more than before and in that way influencing the lives of billions of people world wide.  For any company with an interest of globalization, for instance Hutchinson Whampoa, it should have the capacity to think on a global scale and study international cultures to strike a good understanding. Bhagwati (1972) argues that, through appreciating and understanding varying beliefs, values, behaviors and business strategies of various companies in other countries, firms are able to internationalize successfully. This is as seen in Hutchinson Whampoa as the company has been able to diversify its core businesses in over 26 countries, hence the capacity to think on a global scale. Through strategic international alliances, mergers and acquisitions, a firm is able to access a mode of entry into a particular market in the global scale. International mergers can also be aided by countries undergoing transition. This is because foreign investments can have substantial effects and importance towards achieving a successful economic transition. However, Doz and Gary (1998) note that dominance by foreign firms in a country is not very desirable in the host country’s perspective hence the need to have a strategic alliance or merge with another firm in the host country. A merger also gives a firm a competitive edge over its competitors. For example, through an alliance with the Spanish mobile operator ‘Telefonica’ the company gains a competitive edge over competitors from the accrued synergies and resources at the company’s disposal. There are however several reasons that a strategic alliance would fail. This includes lack of compatibility between the partners. Partners should analyze and discuss their business plan and strategy in advance, if they disagree on crucial elements of the business with regard to strategy then there is a possibility of the alliance failing. Another reason is Access to information. If a party enters into a merger or acquisition with the notion that there would be no sharing of information, any request of access to information by the other party could result in undesired results. This is because failure to give the required information would compromise the agreement leading to mistrust. A successful alliance should be based on mutual trust (Lorange, 1993). Strategic Challenges facing the company One of the major company’s challenges is competition. Globalization of markets and businesses has led to stiff competition on a global scale hence requiring companies to strategically place themselves through mergers and acquisitions. Among the company’s main competitors in Hong Kong include; Jardine Matheson, Wharf Holdings and Swire Pacific. The company is also challenged by its tendency to take large calculated risks which are done in well thought and planned mechanism. The management is known to execute business strategies successfully and reap the profits anytime an opportunity presents itself (Michelle, 2015). Simon (2015) indicates that the company has also been challenged by its low debt covering ratios. This has been significant in its 3G investments and structural subordination. This is reflected in the deteriorating cash flow measures that emanate from requirements for peak funding and startup losses of 3G development. The company’s large liquid reserves however, significantly lessen the short-term financial risks. It is necessary and to the best interest of a company investing in foreign markets to have a competitive advantage in such markets. However, this is affected by the characteristics of the home nation that are major determinants of the international success of a firm. Despite the complexity of businesses in the modern world and increased local competition, by following the right approach and having a well laid strategy, globalization would be beneficial to a firm due to the new international market opportunities (Bhagwati, 1972). The management of a business alliance can be done according to the agreement of the firms involved. Properties and resources of the firm The company however, enjoys a strong position and image from the diverse portfolio of business which also reflects on its strong competitive position in its core businesses in various markets. The company has invested in five core businesses which are; logistic infrastructure and services, Energy, retail, development of real estate, ports and related services and telecommunications. The company also holds a substantial share of 87 percent in Hong Kong international terminals. It also engages itself in managing, operating and development of port and container terminals. The company’s interests comprise of 52 ports in 26 countries with 278 operating berths. The company also has a wide interest in development of real estates which comprise of office, residential, commercial and industrial premises. In addition the company has interest in hotels and retail stores that comprise of supermarkets, retail stores in airports, beauty and health products, electronics and electrical appliances among others. Hutchinson’s port Holdings Source: http://www.port-investor.com/hph/ Some of its core businesses in ports, infrastructure and real estate generate substantial recurring operating cash flows. This is however underlined by the company’s management in its disciplined approach to manage financial risks which include the company’s strategy in the long term, to retain sufficient liquid reserves for initiatives involving business development. This strategy would come good for the company in the long run since with sufficient capital reserves, the company can avert risks as well as be able to cover for unprecedented losses that would emanate from unforeseen events (Simon, 2015). External environment factors facing the firm The group’s external environment remains uncertain due to a number of reasons. This is more as a result of risks and uncertainties that pertain to the group’s businesses either directly or indirectly. These factors which include; economic environment and conditions, trends in the industry and rates of interest, increased competition, natural disasters and fluctuations in currency may lead to the group’s financial condition and prospects for growth differing greatly from the company’s expectations or past results. These factors are not comprehensive in nature hence the possibility of other risks that might not be material at the moment but could become material in the future (Neil, 2015). The ports business was a major income generator for Hutchison Whampoa, but with the ongoing developments and changes in world economy and environment the business is not bringing in as much returns as it used to. A report in the southern China morning post once reported that there was the possibility of the company selling a 40 percent stake of Hutchison port holdings to some state owned companies in mainland China. If this were to happen, it would underscore the company’s benefits accrued from monetizing port assets to raise capital for steering other fast-growing ventures. Banks (1983) argues that, for a company’s survival and best interests, it should create and develop a competitive advantage in the international market. This development however, takes place interactively with the environment.  The characteristics of the home nation command a significant role in the international success of a firm. It serves as a vital criterion for evaluating an organization’s strengths and weaknesses, as compared to other foreign competitors. According to Heileiner (1973), this is impacted by some elements which include; Factor conditions; most competitive advantages of countries are brought about by those factors whose degree of mobility is the most minimal. For instance climate has a low degree of changing as compared to something like human resource, which has a high degree of mobility. The Conditions of demand in the host country act as a reflection on the international development. A company’s whose product has a large market share in the home market will most probably develop cost advantage based on a scale as well as the experience. Related Supporting Industries in the home country are also vital in the determination of an organization’s success. For instance, Ting (1982) notes that having complementary organizations in the same industry would be advantageous due to reduction of transportation costs for intermediate goods. The labor attracted by such a cluster will be of help to the firm due to its availability and skills for supporting industries. The firm’s Strategy; Structure and competition in the home country dictates a firm’s chances of thriving in that country, it may however, bring out a positive effect on a firm’s ability to compete in the global market. Through this competition, inferior technologies are brought forth together with new products and management practices. It is similar to a firm under pressure to improve its efficiency, which is in their best interest at the long run (Sharan, 1981). The company’s Current strategy, its implementation and the issues that need attention through the company’s global strategy In March 2011 the company also offered the public its interest in Hutchison Holding Trust for 5.45 billion U.S dollars that used to account for 30 percent revenue and half of earnings before interest and tax (Neil, 2015). This is the company’s current strategy in offloading some of its interest whose returns and revenue has gone down and reinvesting its resources in more fast growing businesses. The company’s focus has been shifted more in recent times to the telecommunications sector with the business in line for some huge mergers and acquisitions. Before engaging in a cross border merger or acquisition, a company should seek to establish a number of things. For instance, in this case the company should put into consideration what would drive it into a merger or acquisition. It should also consider what reasons with regard to accomplishments or disappointment, would lead to mergers and acquisitions? It is therefore important to establish the key determinants that are crucial in the process of ascertaining a strategic alliance. With the continued advancements in technology and infrastructural developments, it has become easier for firms to engage in international business hence enhancing business globalization. Tall man (1988) suggests that this has further led to creation of international strategic mergers and acquisitions. However, whether or not to enter into an international strategic alliance depends entirely on the objectives of the firm concerned and the laws governing business operations in the foreign countries of interest. Through a merger or acquisition, it becomes easy for a company to venture into the new markets. This is because the company in the host country can provide adequate information and expertise with regard to the country’s market, supply chain and customer preferences. Ting (1982) notes indicates that this is also underlined by the fact that in some foreign countries, total ownership of a business is not permitted unless a particular percentage of ownership remains with a citizen. It is important for a firm to consider various elements before entering into a strategic alliance. There is need to establish the compatibility of the two firms with regard to management styles and the overall objectives. It is also necessary to ascertain that the company’s businesses complement each other rather than compete directly against each other. It therefore calls for a firm to gather as much information as it can get about a potential business ally, so as to establish any potential risks involved or flaws that would hinder a successful strategic alliance. Such information would include whether the potential ally has been in a strategic alliance before and whether they failed or succeeded (Robinson, 1981). After completing an analysis of the firm and making a conclusion to enter into a merger or acquisition, there are important issues that should be considered. These include; careful selection of a partner, deciding on the form of ownership of the business and assess the best way possible to manage the business. Griffin and Michael (1999) suggest that it is important to ensure there is mutual trust and compatibility in the visions and objectives of the parties involved in a merger and acquisition. It is with no doubt that mergers and acquisitions have become more and more common in the global business. Hutchinson Whampoa has largely benefited from merging with other international companies to be where it is today as noted by Sito (2015). This has enabled the company access a number of benefits such as access to new markets, risk sharing, and synergy garnered from shared skills and expertise. Despite being faced with a number of risks and points to ponder before entering into any form of alliance, it is quite certain that strategic alliances will remain to be a key element in the globalization of businesses. Before exploring new markets market, a firm should look at the history of that industry in that specific market and see if there is a chance of achieving the intended goals. The Choice of an entry mode involves consideration of many factors. None of the modes can be termed as the best since the suitability also depends on circumstances, which also keep changing. Doz and Gary (1998) indicate that contemporary dynamics and variation in the process of globalization prevents the development of an all-embracing theory. Different firms have varied internationalization strategies hence they decide to invest in a certain country for entirely varying reasons. However, all foreign investments are strongly related to the existence of trade barriers or market imperfections. Two distinct categories of market imperfections exist: those due to government regulations and those occurring naturally It is also important for a business to weigh the different entry modes into a country, and choose the one that suits them best. Barriers of trade in foreign countries should also be put into consideration so as to assess the effect they are likely to have on a company’s business. Foreign investments could have a substantial effect in countries under transition, and are important for achieving a successful economic transition. (Perlmutter, 1969). However mergers and acquisitions have been touted as the best entry methods in foreign countries for the benefits they accrue. There are different ways through which management can be overseen. The management system can be shared whereby every member of the alliance is fully involved in the management process. This however, calls for a high scale of cooperation. Another system is through designation of management to one party. In most cases, management is assigned to the party that holds majority shares. Management can also be assigned to executive managers of the alliance whereby, the said executives can be hired from outside or picked from either side of the alliance. These managers remain responsible for the day to day running of the business without interference from any party of the strategic alliance (Griffin & Michael, 1999). There is a point of concern with regard to international alliances. This is related to finance with respect to currency and the exchange rates. This is because of unprecedented instances of fluctuations in currency and exchange rates. There is therefore the need to consider which form of currency is to be used by the business for payments between the businesses involved from differing countries. The involved parties should also look at the political nature in the countries of their potential partners. There is need to assess the possibility of political instability and any concerns with relation to democratic reforms. One form of a strategic alliance is in the form of a joint venture. This is whereby two or more firms join together to create a new business that remains separate from the parent businesses. A joint venture can also be through acquisition. Doz and Gary (1998) note that ownership can be in form of shares either equal or unequal and may provide for change in ownership of share. An alliance through joint venture can take many forms. These are; Through subsidiary, this is where two entities join to form a third which exist legally. A second form of a joint venture is through acquisition; this is whereby an entity purchases another entity either in whole or part of the shares. Another joint venture is formed through a merger. Here two or more business entities are dissolved and exist as one legal entity. However, joint ventures by mergers are not often used and are mostly used on international joint ventures. Another form of strategic alliance can be initiated whereby it does not constitute a joint venture. These alliances are formed for a short period of time and for a narrow purpose. For instance, United Airlines and British Airlines had a strategic alliance aimed at publicizing and promoting their North American and European routes in the year 1988. They however broke the agreement after a year due to shifts in the market (Tallman, 1988). References Bhagwati, J. 1972. Book Review Raymond Vernon Sovereignity at Bay. The multinational spread of US Enterprises. Journal of international economics XIV (4) 455-59 Banks, G. 1983.The economics and politics of counter trade the world economy Journal VI (2) 159-82 Doz, Y. L., and Gary, H. 1998. Alliance Advantage: The Art of Creating Value through Partnering. Cambridge, MA: Harvard Business School Press Griffin, R. & Michael, W. 1999. 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