Managers of Emerging Multinationals, who show The Strength to Acquire Brands bigger than Themselves, are now Faced with an Unusual Paradox. They are Asked, as a Precondition to The Deal, to make Explicit Commitments in order to Preserve The Identity of The Acquired firms.
High profile, and often expensive, acquisitions of household brands in advanced countries by firms originated in emerging economies are increasing and raising a new set of managerial challenges for their initiators. Tata’s acquisition of Jaguar-Land Rover (JLR) in 2008, and Geely’s takeover of Volvo in 2010 are emblematic of this new trend. The Indian Tata conglomerate paid $2.3 billion for the iconic British brands and added another $1.9 billion to cover losses in the two years following the acquisition. It took the Chinese Geely $1.5 billion to own the no less iconic Swedish auto maker.
There is a widely held opinion that the leaders of emerging multinationals are paying a “national pride premium” or snatching cheap, but ill fated, targets. I will not add my voice to this conversation but rather focus on what happens after the acquisition paper work is completed.
Managers of emerging multinationals are faced with an unusual paradox. In most cases, they are asked, as a precondition to the deal, to make explicit commitments in order to preserve the identity of acquired firms. And also, they have to assume some level of control in the acquired firms if they want to realise the fruits of their investment.
The fact that the leaders of Tata, Geely, and other emerging multinationals are asked to make such commitments reflects an identity disadvantage. Because of who they are, emerging multinationals are suspected of planning to transfer jobs to low cost countries, of “stealing” technologies or, in extreme cases, of threatening national interests of host countries. Emerging multinationals are feared to destroy brand equity as they are usually perceived as less prestigious than the brands they acquire. Finally, emerging multinationals are thought to be less managerially sophisticated and, thus, less able to add value to their acquisitions.
To deal with the identity disadvantage, the leaders of emerging multinationals have to address two related questions. Does an investment require involvement in running the acquired company? If yes, how should we proceed to achieve some level of integration without destroying the value of acquired companies?
Overcoming the identity liability is relatively easy when the answer to the first question is no. In this case, the investors deliberately avoid intervention in acquired firms and are content with a shareholder role. This approach is successfully followed by business magnates and sovereign funds from oil rich countries, for example. These investors prefer to fly below the radar, in advanced countries, and make minority, though sometimes very significant, investments in large firms.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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