3.7 Domestic and Cross-Border M&As in Emerging Markets
3.7.5 Factors that Influence Emerging Market Firms to choose
Cross-border M&As activities offer companies in the emerging market the fastest opportunity of entry into new markets for the expansion of their products globally, overcome bottlenecks in trade and increase their value growth (Du & Boateng, 2015). In undertaking CBM&As, several factors are taken into consideration by firms, from the perspectives of the firm, country and the industry, which apply to both the target and acquirer firms.
At the country level, significant factors usually considered include labour, capital, endowment of natural resources as well as institutional factors like the cultural, political and the legal environments. A very important cultural factor that appears to influence emerging market acquirers’ decision to select cross-border M&A route hinges on their abilities to integrate both human and other resources. This issue of cultural integration with regard to M&As is well documented in literature, where scholars hold the view that, high cultural distance has the potential to adversely affect the success of firms’ integration (Brouthers &
Brouthers, 2000; Hennart & Reddy, 1997; Kogut & Singh, 1988). As a result, cultural distance has become a useful measure for country risk of firms which shows how different countries of the two firms are, and indicates how well the acquirer’s strategic advantages can
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be applied to a new environment or location. Shimizu, Hitt, Vaidyanath, and Pisano (2004) identify certain factors that can impact on firms’ decision to undertake M&As through the use of the cross-border route. These include the peculiarities in culture existing between host and home countries, the market growth in the host country, and the unique culture of the acquirer’s home country.
Another important factor is the issue of legitimacy, which affects firms from the emerging markets who are eager to have access to new markets abroad as first entrants. It is important to customers, domestic institutions, and value chain actors. Rules governing the M&A enterprise are defined by the institutions including the applicable regulations existing in the host country at that time (Davis et al., 2000). Through institutional arrangements, entry barriers like ownership limitations can be created. Some of these restrictions are usually used by foreign governments to protect local owners from outsiders. Brouthers (2002) found that, firms decide to have joint ventures to gain access to markets considered as having more legal restrictions or perceived to have them. As a result of these limitations, the institutional theory submits that, the ability of a firm to exploit (Morck & Yeung, 2001) its capabilities outside of its home country may not remain the same, but will largely depend on the institutional arrangements and contexts it invests in.
With respect to industry level factors, Shimizu et al. (2004) argue that the following factors can affect the selection of cross-border acquisition transactions by emerging market acquirers:
1. The level of technological intensity
If a firm’s level of competitive advantage depends on a complex technology it has, it usually becomes difficult to easily transfer that technology to a foreign place. This makes training of the acquired workers and other personnel difficult, unsuccessful and potentially expensive.
Therefore, high-tech companies might decide to engage in greenfield investments instead of acquisitions (Brouthers and Brouthers, 2000), because it will cost them less effort and financial resources to train and transfer their workers to foreign location.
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2. Advertising intensity
Investing firms generally value knowledge-based and intangible resources, but to identify and also manage intangible assets like technological capabilities and brand name bring many challenges and difficulties to investing companies. This makes equity-based modes appear the preferred choice in industries where research and development (R&D) are significant and intangible assets and the strength of adverts are also high (Delios & Beamish, 1999).
3. The level of sale force intensity
With this, sales capabilities and brands that relate to a particular market are what Anand and Delios (2002) identify. They argue that, companies differentiate capability-exploiting from that of capability-seeking acquisitions, based on the importance and availability of the various resource types.
At the firm level, the following factors influence firms’ mode of entry.
4. The reasons underlying the diversification action
If the motive of acquiring firms is to seek complementary resources, the most important factor that influences their choice of entry mode is the qualities of resources and how they fit and complement the firms’ existing resource base and their degree of embeddedness in the targeted organisation. For instance, Hennart and Reddy (1997) used the transaction cost economics (TCE) theoretical framework and identified that, when the main motive of investing firms is to obtain part of assets belonging to the target, they should choose an acquisition only if it is possible for them to separate those assets from the less interesting ones to them. However, it is the structure of the organisation that goes to determine the capability of investing firms to disentangle the complementary assets from the others.
Therefore, for the investing firm to acquire assets of the target that are of interest to it, perhaps, the target firm must be divided so that, that specific divisions could be acquired. On the other hand, it will be more appropriate for the investing firm to pursue a joint venture arrangement with the target firm, if the assets of the target firm are firmly embedded and distributed across the organisation.
5. The level of prior experience of the investing firm
A number of studies have examined learning and experience as factors that affect acquisition transactions (Meyer & Thaijongrak, 2013). The conclusion of most of these scholars is that, prior experience in M&As has the tendency to increase the possibility of subsequent ones (Haleblian, Kim, & Rajagopalan, 2006; Lebedev et al., 2015). Studies indicate that, the
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experiences firms from developing economies accumulate over time help them to overcome the problem of liability of foreignness as they undertake acquisition transactions in developed markets at regular intervals (Lebedev et al., 2014). The basic principle is that, learning is acquired through different kinds of experiences. Firms become exposed to different ideas and events as they operate in different environment and circumstances (Huber, 1991), which make them broaden their knowledge base, become stronger in terms of technological capabilities and innovation.
Previous experience from M&A transactions may help in the identification and integration process of resources of the target firm, which the improvement of the acquirer’s post- acquisition performance may depend on (Hitt, Harrison, & Ireland, 2001; King, Dalton, Daily, & Covin, 2004).
For example, Chen and Lin (2009) observe that past M&A experience positively affects the returns of Chinese acquirer firms. Bertrand and Betschinger (2012), however, indicate that acquirer firms from Russia experience a cumulative negative effect as they execute more cross-border acquisitions, even though, previous domestic M&A experience has value.
Absence of prior M&A experience and previous absence in the target firm’s country can affect the gains acquirer is likely to derive from the transaction (Aybar & Ficici, 2009).
Furthermore, according to Aybar and Ficci (2009), a culturally and geographically close target will not help to improve the desired success the acquirer firm wants to achieve.
6. Geographic diversification
Several authors argue that the economic performance of firms can improve through diversification (Bertrand & Betschinger, 2012; Erel, Liao, & Weisbach, 2012). In the estimation of Wang and Boateng (2007), firms become less vulnerable to international dynamics if they pursue cross-border M&As. Apart from new customers and resources that become available to acquirers, they also have access to new knowledge and opportunities which make them improve on their competencies (Shimizu et al., 2004). With such advantages, the expectation is that, cross-border acquisitions will contribute to the possibility of achieving of synergy and increase in profit levels of firms (Wang & Boateng, 2007).
However, literature suggests that, firms are likely to encounter some challenges when they decide to invest abroad, since potentially, it could hinder the achievement of the desired synergistic benefits and can even further destroy the performances of these acquirers (Gomes, Angwin, Weber, & Tarba, 2013; Kling & Weitzel, 2011; Moeller, Schlingemann, & Stulz, 2004). The nonexistence of organisational abilities has been identified to have a negative
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impact on Russian firms’ foreign acquisitions (Bertrand & Betschinger, 2012). Gomes et al.
(2013) also state that, communication and cross-cultural sensitivity are very important when it comes to cross-border M&A, the lack of these skills could negatively affect the firms undertaking the M&A activity to integrate properly.
7. To take advantage of discount acquirers enjoy in cross-border M&As
According to Denis, Denis, and Yost (2002), industrial and international diversifications are each associated with a substantial firm discount. Internationally as well as industrially, firms that become diversified experience a more significant higher discount. Cross-border M&A transactions, all other things being equal, increase the level of international diversification, but a domestic M&A deal for a firm that is already internationally diversified reduces the level of its international diversification. Denis et al. (2002) reveal that, international diversification over time has increased steadily compared to industrial diversification which has over the years decreased.