GLOBAL BUSINESS MANAGEMENT AND SOCIAL

RESPONSIBILITY Session 07

Professor: Ricardo Abelardo Mejía Peralta

April - 2015

Resume Session 05… •  Types of Globalization. •  Globalization's drivers. •  Global Industry. World market.

Economies of scale and scope. •  Global market characteristics &

strategy. Indicators of its effectiveness.

•  Multi-domestic strategy. •  Drivers of nature or extent to a

potential globalization of industry.

Build? Or Buy? Entry modes

Entrance dilemma 1

So, if there are: •  High entrance barriers. •  Good local name and intangible assets. •  Good customer base. •  Foreign market to a near saturation point.

Entrance dilemma 2 So, if there are: •  Green field to investment. •  Not a suitable target company. •  Government-related benefits for FDI. •  Mature own market. •  Risk of cannibalizing the local existing

business.

Build? or Buy? Common considerations (1)…

•  Both require similar disciplines in terms of cost-benefit analysis and careful execution.

•  Go-to-market timing. •  Infrastructure, customer base, cash flow,

inventory, physical plant, distribution network and supply chain. Vital ingredients.

•  Process to inherit. •  Is it what you want?

•  Justification to sacrifice your ability to tailor your business.

•  Stable management team. Accounting. Top-notch team.

•  The financial infrastructure is the matter. •  Ready to grow? •  Problem: A lot of stress on working capital and

ability to measure.

Build? or Buy? Common considerations (2)…

•  Team’s strength, infrastructure to support new customers, solid financial controls and metrics. But… experience at deal-making.

•  Advisor’s payment, only for results achieved. •  Very fast growth of an industry. •  Fit in with the marketplace. •  Changes to the market that could affect the

business. •  Attention to the underestimation of costs.

Build or Buy? Common considerations (3)…

Building matters

•  Costs, equipment costs, tax costs, inventory costs, changes to accounts receivables.

•  Additional support staff.

Acquisition matters •  Outside help, such as lawyers, attorneys,

and other intermediaries. Bounty of fees. More complex, the larger those fees will grow.

•  IT and accounting systems. •  Economies of scale. Insurances, spaces,

bonuses, promotions, etc. •  Be prepare. Potentially costly surprises.

Rules for successful acquisition Rule 1. Choose a core objective.

Boost market share. Build economies of scale. Recruit top talent. These corporate objectives are all fine, but they can’t -and shouldn‘t- collectively color your acquisition strategy. Choose one goal and tailor your acquisitions accordingly. “At Cisco, we were pretty clear that we wanted to enter new markets,” writes Volpi(*), who is now a partner at Index Ventures. “We fundamentally believed that we could better leverage [our] distribution channel with a product portfolio that was broader than what our development organization could produce within the necessary timeframes. As a result, we bought lots of young companies with promising technologies or products.”

(*) Mike Volpi, former chief strategic officer of CISCO, under Volpi’s management in the 1990s, Cisco was an M&A powerhouse (75 acquisitions in seven years)

Rules for successful acquisition Rule 2. Develop a portfolio.

Technology acquisitions are not standalone events. They should build an interconnected investment portfolio. Some of those investments will pan out; others will not.

“No matter how good of an acquisition process you assemble, the odds are stacked against you that any given deal will succeed,” Volpi writes. “. . . It’s only when you assume a certain failure rate to be the norm and believe in the occasional massive success that the probability and expected value equation begin to work in your favor.”

Rules for successful acquisition Rule 3. Understand that valuation is secondary.

Roughly 20 percent of a firm’s acquisitions will yield huge results. You are better off hunting down those two out of 10 “outsized returns” — and paying up to a 30 percent premium for them — than you are trying to finagle the best deal.

“Worry less about what you pay and worry more about what the market is saying about the products and the company’s fit with your organization.”

Rules for successful acquisition Rule 4. Built incentives for the long-term.

These incentives, often tied to revenue, earnings, market share, or other milestones for the acquired firm, are too easily gamed. And they “create a schism right at the starting point of the two companies’ relationship”

“Simple acquisitions using stock rather than cash are much more effective. Of course, they help retain the acquired employees. But most importantly, this aligns the incentives of both parties: Everyone involved wants the acquirer’s stock price to increase in value.”

Rules for successful acquisition Rule 5. Second-best is not enough.

Corporate development teams are often faced with this decision: Buy an expensive market leader, a relatively cheaper No. 2, or one of many tier-two competitors. Though the first option appears the most expensive (and, therefore, not a “good deal”), leaders must to think less about price and more about value.

“There were many YouTube wannabes in the market,” Volpi says. “Google could have acquired any one of them for 1/10 YouTube’s value. Instead, it paid $1.75 billion for the market leader, a seemingly enormous amount of value for a young company. But few today would suggest that it was not a good deal. Through that bold move, Google closed out that market.”

Rules for successful acquisition Rule 6. Match your leverage points with their

strengths. The synergies are important. But what does it really means to align synergies? There are two examples: distribution and operations. The former places the acquired company’s best product into a large distribution channel of the acquiring company, and the latter uses the larger company’s economies of scale to procure of services (bandwidth, server, storage) or scale production for the smaller company.

Volpi also warns against cost-cutting. “When acquisitions are justified by cost-cutting in the acquired company, that should always raise a skeptical eyebrow.”

Strategic entry modes Direct related to the decision-making process for location, determined by internal and external factors. There are six basic entry modes: 1.  Agents and distributors. 2.  Representative or branch office. 3.  Licensing. 4.  Join venture. 5.  Wholly owned subsidiaries (M&A). 6.  Wholly owned subsidiaries (Greenfield). A company should make a final determination based on how much power is needed to achieve the original goal.

Timing of market entry •  When demand becomes significant and rights of access

are available… ¡A window opens! •  When competitors have established a strong market

presence or pre-empted available sources… ¡The window is closed!

•  In such case, only M&A or innovation will enable entrants to open the window.

•  Timing of market entry is also restricted by the maturity of the market.

•  There are time pressures on MNCs to determine the right timing of entering the target country.

•  Finally, external factors and internal factors will have an important influence to choose the mode of entry.

…Timing of entry by maturity of market

In resume…

•  If the managing people, infrastructure and industry have all to support the expansion strategy cost effectively. “Making an acquisition is likely the way to go”.

•  To the methodical type that likes to put their stamp on every aspects and not handle well the fear of the unknown. “Build-out strategy is the best course of action”