Analysis of Foreign Expansion though Acquisition - Essay Example

Corporate Expansion The purpose of this paper is to provide a critical discussion on the issue of firm expansion though acquiring a foreign firm. The paper will be written from the perspective of a CEO in the midst of foreign expansion though acquisition. The format that this paper will utilize is to first outline some basic background information on the two firms and discuss their organizational objectives. After this point a discussion will be conducted on the issue of how to proceed given the fact that the majority of mergers and acquisitions fail. The next section of the paper will deal with the issue of institution-based issues that one could possibly encounter followed by a discussion of managerial motives. As a further point the paper will provide a discussion on the issue of hubris. As a final point this paper will discuss strategies that could be employed to ensure the success of this acquisition • 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. What does your firm do and what does the foreign firm you are trying to acquire do? Where are the firms based?. For the focus of this paper I am the CEO of a major motorcycle manufacturer named BWW based in Germany. Currently the company has a wide spectrum of products, including street bikes, cruisers, sport bikes, touring & sport touring motorcycles, dual sport, speciality and performance motorcycles. However we recognize that one of the biggest growth areas in the motorcycle market is off-road market segment which includes motocross, rally raid, trials bikes and track bikes. Because our company does not have much experience in designing, manufacturing and marketing bikes in this category is a logical solution to acquire another firm with experience in this field. As such BWW hopes to acquire a smaller firm that specializes in this segment and the logical solution is to merge with a company that specializes in this segment. KTN is an Austrian manufacturer of almost exclusively off-road category motorcycles yet suffers from a poor profit margin owing to decreased economies of scale. Owing to the fact that that KTN is an incorporated business it is possible for BWW to purchase stock outright from the major shareholders to gain controlling interest in KTN and ultimately fold the property, plant and equipment into the BWW company. •You are very enthusiastic about the opportunity to be a leading captain of industry and the associated power, prestige, and income. (You expect your salary, bonus, and stock option to double next year). However, you are troubled by the fact that 70% of mergers and acquisitions (M&As) reportedly fail. How would you proceed? Assuming that the acquisition is successful I can assume that my salary, bonus, and stock option to double in the next year. From this perspective it would be wise to ensure that there is a forward looking plan to ensure that the acquisition goes as smoothly as possible. Before proceeding one has to look at the motivations for both firms to ensure that the organization goals and objectives are being met by both organizations. Firstly it is the case that this acquisition closely resembles a horizontal merger which according to Giddy (2009) transpires when two companies produce similar products in the same industry. Because KTN is itself not a small operation I would want to keep the entire KTN manufacturing facility in operation basically as it remains today but affix our brand logo onto newly manufactured product. The only thing that would change significantly would be to ensure that there are no organizational redundancies (Which may require layoffs). From this perspective both groups in many respects are not overly dissimilar. By BWW acquiring KTN both companies would be able to draw on a large pool of organizational talent and corporate information. Moreover, significant savings can be found through economies of scale. This means that the people in both organizations would have access to increased or better resources. Moreover because Austrian cultural norms are not overly dissimilar from German cultural norms one could assume that there is a decreased risk of friction between the two organizations. •What institution-based issues would you encounter? Discuss. According to Peng (2009) There are a number of institution-based considerations that must be made before moving forward with an acquisition the first of which are formal institutions such as specific banning of intra-industry mergers, or specific constraints regarding geographic diversification through FDI policies. However given the fact that BWW and KTN are based in Germany and Austria respectively it is likely that there will be fewer specific foreign acquisition restrictions owing to the fact that both countries are part of the European Union and use a common currency. Moreover it could be argued that because there would still remain numerous other motorcycle manufacturers based in Europe (Including domestic and foreign owned firms) it is unlikely that there would be anti-monopolistic restrictions on the acquisition from government enforcement agencies. In terms of Informal Institutions it was further argued by Peng (2009) that there are often normative pressures to jump on the diversification bandwagon. So from this perspective it would be wise to determine if it is a logical step for BWW to enter into the motocross marketplace and if this decision is based on genuine growth expectations. •What resource-based issues would you face? Describe.. The resource based issues that we would face could be broken down into two categories. Firstly there is the physical product factor inputs that must be considered. As KTN is a manufacturer of a different class of motorcycles, it its likely that they use several different components and sub-assemblies in the manufacturing process that BWW is not used to. From this perspective it can be that BWW may not have the relationships with specialized suppliers to ensure a steady delivery of these parts in the future. Secondly one must make consideration for human capital. As the employees are a resource, one must make special consideration of the training that must be made to ensure that the newly acquired employees are efficiently brought on board to the new corporate culture. Moreover it may be that the engineers working for BWW have little or no experience in manufacturing this class of motorcycles so consideration must be made to ensure that the KTN engineers are free to express their concerns to BWW management. •What are your managerial motives? Explain.. Quite simply, the primary managerial motive is to generate a new revenue stream for the company. From the company perspective this acquisition would theoretically gain a new successful business venture for BWW so that the company could compete in all product categories. From the perspective of the manager, if it is the case that the new business venture is successful there would be three potential positive returns. Firstly,there would be a lot of prestige for the manager insofar as the new positive business venture would demonstrate a level of utility for BWW and would likely mean that the manager could effectively move up within the organization. Secondly there would be a financial incentive for the manager through increased share value, bonuses, rewards increased salary etc. Finally there is a managerial motive of experience. Through successfully navigating BWWs acquisition of a new firm a great deal of knowledge is gained by the manager which is information that can be used to start new business ventures for BWW or potentially break off from the company and organically start a new company. •Do you possess hubris? Explain your answer. As with any circumstance in which an organization demonstrates a degree of power over a smaller organization one could expect a high degree of extreme arrogance. There are a number of complications that could arise out of this activity such as foolhardy decisions made without long consideration, or disenfranchising the employees of the newly acquired firm which would drive them to seek gainful employment with competitive firms. This would have negative consequences for BWW. Although it is the case that I would argue that I do possess hubris, it would be wise to downplay this behaviour through formalizing strategy as much as possible and deviating from the plan as little as possible. However it could be argued that not every characteristic of hubris is negative. One often associated confidence with hubris and demonstrating this characteristic could be beneficial for the organization. •How would you ensure the success of your acquisition?. As with any business venture there is the potential for risk of failure. In order to ensure that the M&A is successful there must be a great deal of planning that needs to take place. Aenlle (2011) suggested a number of tips to ensure that the process of M&A generates positive returns. Firstly it was suggested that companies should make acquisitions in their core sectors. As KTN is a business which is not only a company that manufactures in the same sector but much like BMM also remains committed to producing products of the highest quality, this strategy is being adhered to. It was further argued by Aenlle (2011) that it would be wise to make the acquisition at the optimal time. From a management perspective it may be the case that the acquisition process may have to be put off for an extended period of time to ensure that both businesses are financially and physically perfect for the commitment. Finally, a strong attention to detail should be employed to ensure that the process goes as smoothly as possible. If it is the case that there is anything or anyone that is working against successfully integrating the two businesses this should be dealt with as soon as possible. References Aenlle, C (2011) Tips for Spotting a Successful M&A Deal. CBS Money Watch. [online] Available at http://moneywatch.bnet.com/investing/blog/against-grain/tips-for-spotting-a-successful-ma-deal/1144/ Accessed on August 19th 2011. Giddy, I (2009) Briefing: Mergers & Aquisitions Definitions and Motivations. New York University. [online] Available at http://pages.stern.nyu.edu/~igiddy/articles/mergers_and_acquisitions.html Accessed on August 20th 2011. Peng, M (2009) Global Strategy Chapter 9 Diversifying, Acquiring and Restructuring. 2nd Edition Cengage Learning. Mason, OH. Read More