Challenges and Opportunities of Cross-Border Deals

Contents

1. Introduction

2. Various types of cross-border deals
2.1 Merger and Acquisition (M&A)
2.2 Joint Venture

3. Challenges resulting from cross-border deals
3.1 Human Resources and Cultural differences
3.2 The power and pervasiveness of labour unions and employee representatives
3.3 Legal differences
3.4 Political considerations
3.5 Integration of operations

4. Opportunities for cross-border deals
4.1 Motives of Mergers and Acquisitions
4.2 Motives of Joint Ventures
4.3 Functions of Culture
4.4 Human Resource Management
4.5 Cross-Cultural Training

5. Conclusion

References

1. Introduction

The globalisation of business over the past decade has caused a search for competitive advantage that is worldwide in scale. In response to the pressures of the rapidly consolidating global economy, companies follow their customers who are going global themselves. In combination with other trends, such as increased deregulation, privatisation, and corporate restructuring, the internationalization process has led to increasing cross-border activities in business.

In the second chapter the authors present three types of cross-border deals, mergers, acquisitions and joint ventures. The following chapter covers challenges which these companies have to face when expanding to international businesses. The fourth part shows opportunities of the three cross-border types and examines their cultural and human resource aspects.

2. Various types of cross-border deals

There is a wide variety of opportunities for companies to configure their cross-border activities. However, this essay focuses on the topics of mergers, acquisitions and joint ventures.

2.1 Merger and Acquisition (M&A)

Merger and Acquisition is described as the process of combining two companies into a single firm. A merger is between equal partners, while acquisitions are the purchase or takeover of a company which can be friendly (the management of target firm agreed) or hostile (management of target firm disagreed).

Four types of M&A can be distinguished:

1. Horizontal M&A is the integration of two firms within the same line of business
2. Vertical M&A occurs between a firm and one of its suppliers or customers
3. Concentric M&A integrates firms which act in the same general industry but are not producing the same product
4. Conglomerate M&A is the activity to expand in a completely different, unrelated industry

(Cartwright and Cooper, 1996 p. 3)

At the end of the 1990s, on top of the economic boom, M&As were at their highest level in history with a volume of $3.4 trillion in the year 2000. After that they declined by approximately 66 percent to $1.17 trillion in the year 2002. A firm should increase its value through M&A activities. However, a study conducted 2002 by the Boston Consulting Group (BCG) on behalf of Business Week magazine showed that 61 percent of large U.S. mergers between 1995 and 2001 did not create value for the acquirerers´ shareholders, so they can not be considered as being successful. Strategic mismatch and failed or no integration efforts are named by managers as most frequently reasons.

Furthermore, the study found that strategically M&As, in periods of weak economic growth, provide good opportunities for companies to buy weaker competitors, consolidate markets, gain market share and strengthen competitive advantage (Henry, 2002 p.60-70).

M&A is a complex, challenging process where many mistakes can be made but on the other hand it raises great opportunities for the companies. In increasing globalization, most mergers are cross-border ones which are even more difficult to handle than national mergers (Kotzen et al. 2003 p.6).

2.2 Joint Venture

As presented in the chapters before, mergers and acquisitions have a high risk of nor achieving their expectations and aims. Companies therefore need to explore alternative forms of business co-operation for their mutual objectives to succeed. In recent years, joint ventures have become the most popular form of co-operation. These are defined as a specific type of strategic alliance which involves two or more legally distinct firms establishing a new separate entity from the parents firms (Sudarsanam, 1995).

Joint ventures can be distinguished as six basic types:

1. Complementary join ventures: the partners combine their technologies.
2. Market technology joint ventures: transfer of market knowledge and production or product know-how between organisations.
3. Sales joint ventures: the producer and domestic partner cooperate in an arrangement.
4. Concentration joint ventures: competitive companies work together to expand their economical units.
5. Research and development joint ventures: the partnerships attempt to use synergies, to specialize and standardize, and to share knowledge and risks.
6. Supply joint ventures: partners with similar input cooperate to safeguard supplies or to avoid the entry of new competitors.

(Buechel et al, 1998, p. 17-18)

There are two defining attributes, co-operation and autonomy, which are responsible both for strengths and weaknesses of joint ventures. On the one hand, the cooperative aspect refers to the collaboration of the partners creating a new entity, which they usually manage together. On the other hand, the entity is legally and organizationally independent from the original partners. In other words, the cooperating companies are often in competition with each other and expose conflicting goals and cultural differences.

3. Challenges resulting from cross-border deals

Successful integration of a cross-border deal is not an easy task for managers. There are many sources of difficulties and problems additional to national deals which are challenging. The main issues are legal, political and cultural differences as well as power and pervasiveness of labour unions / employee representatives and the integration process itself. If these challenges are not identified and considered at an early stage of the deal, serious problems can arise and will lead to much higher integration costs, and reduce the success of integration and value creation.

3.1 Human Resources and Cultural differences

Definition of culture: This has been defined as collective programming of the mind which distinguishes the members of one human group from another (Hofstede, 1983). A special thing about cross-border deals is that managers have to deal with possible totally different corporate (e.g. management style) and national cultures.

Why does culture matter so much?

Culture is a critical factor in success. In their book Corporate Culture & Performance (1992), based on a field study of 207 large U.S. firms in 22 different industries and over an eleven-year period, Harvard Business School professors Kotter and Heskett found out, that firms which “actively managed” their corporate cultures experienced an 682% increase in revenue and a 756% increase in net income. In contrast, for those firms which did not manage culture, revenues increased only by 166% and their net income by 1%. Furthermore, stock prices rose 901% for firms that actively managed their cultures, for those that did not, the rise was only 74%. This shows the tremendous effects of culture and also of cultural fit on organisations, their performance and, as a result, on their success (Marks, 1999 p.14).

When do cultural matters have to be considered?

The following scale can generally be applied to all forms of deals treated in this essay, and, as an example, the authors have selected the approach of M&A`s.

M&A`s are often carried out in three stages:

In the pre-merger phase, the deal is in planning and under negotiation. The merger phase represents the legal transformation and transaction of capital. The post-merger phase involves strategy implementation and primarily the integration of the firms (Krueger, 2000 p.19).

In many M&A`s in the pre-merger phase, executives do not think about cultural clashes, Daimler and Chrysler managers, for example, stated: “We are in the same industry, there will be no cultural clashes.” They did not talk about the topic during negotiations and had to make great efforts to manage cultural integration in the post-merger phase (Anon 2000, p.81). They forgot that an understanding of the partners’ mind is a great factor of success already by negotiating the deal. Managers also have to know if the two organisations would fit at all and therefore culture matters from the very beginning of the process.

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