Without a doubt, the achievement of growth is a company’s management and board’s major goal. However, it must be guaranteed by managers that growth is also what would generate good returns for shareholders. Sometimes, management should keep their company at a stable size while generating good returns, but choose to go with aggressive growth instead. Boards should always determine whether the growth is worth the cost by examining the expected profitability of the revenue derived from growth.
The Hewlett-Packard Case
For instance, Hewlett-Packard made a questionable $19 billion mega-acquisition of Compaq in 2002. And managed many business segments in which it was a leader in only one. In 2009, the company had revenues over $114 billion. If it had the goal of, say, 10% per year. Then it needs to make about $11 billion in new revenues annually. That said, it still needs to create another large company’s worth of revenues every year to meet the growth goals. Take note that Compaq itself used to acquire Tandem Computers in 1997 and Digital Equipment in 1998. And the case happened post-Fiorina era. Growth can be a huge difficulty when much of its business comes from highly competitive personal computer markets. With its weak margins coupled with steady product price deflation.
After the departure of Fiorina, many failed acquisitions continued to occur in the company, and with Mark Hurd at the helm, HP acquired EDS. The corporation tried hard to catch AT&T for the position of “world leader” in M&A failures. This was followed by an $8 billion write-down, and HP acquired Autonomy in 2011 for $10 billion, with Leo Apotheker as CEO. Later on, an acquisition-related charge was done for $8.8 billion. In 2013, however, HP acquired data storage giant EMC. HP started growing and the market got fed up, deciding it had enough. Later on, it got divided into two, the PC and printer business called HP, Inc., and the services and data unit called HP Enterprise. While the former remained competitive, the latter had been experiencing declines in revenues. Although the enterprise believes it has more potential for growth.
Cross-Border Takeovers
As the word indicates, cross-border activities include interactions between two separate countries, we may, therefore, assume that cross-border mergers and acquisitions. Those transactions in which the target business and the acquirer business originate from different countries of origin. Cross-border acquisitions are a tremendous boost to the regional market for companies with already popular products. They have been a great way to achieve more profits and revenues, even more, convenient than pursuing further growth within their own nation. This is because pursuing growth within the country may potentially diminish their returns. While cross-border acquisitions let them enter a new market. This kind of deal lets acquirers use the country-specific know-how of the target, as the indigenous laborers and distribution network. Many factors encouraging cross-border deals include financial market globalization and market conditions. Also consider the foreign competition, technology shares and the aim of profitably rising.
The main concern here is if the risk-adjusted return from the acquisition is bigger than what can be achieved. With the next best use of the capital that is invested. It’s the same question in every other acquisition.
The European Common Market helped reduce cross-country barriers, giving rise to a spate of cross-border deals in the continent. Asian markets, however, continue to be resistant to foreign acquirers. But it is said that cross-border deals in this region. And it will be less than what it will be in the future if and when the artificial market restrictions be more relaxed. There are actually signs that this is changing.
Challenges with Cross-Border Acquisitions
Despite the potential of cross-border acquisitions, it poses some challenges that domestic deals lack. First, a business model doesn’t always work in two different countries. For example, Target failed to expand in Canada. They thought that Canadian tourists in the US liked to shop at Target and it was a sign to expand into the country. But in 2015, target only closed its 133 Canadian stores two years after the expansion strategy. Another challenge is linguistic barriers. This may pose a challenge not only in the initial negotiations but in the post-deal integration. Physical distance is also an obvious challenge that they may face as this will surely require more managerial demands.
Comparative Study
Just like with any type of acquisition, it is important to consider the reaction of the market to international M&As and compare them to domestic deals. In a study by Doukas and Travlos, they found that unlike many domestic acquisitions. Acquirers enjoyed positive returns when they acquired targets in countries in which they did not previously have operations. Returns are usually negative when the acquirers already had operations in these foreign countries. Investors may be less sanguine about the gains that may be realized through an increased presence in the same region when the company is already in the market.
In another comparative study by Cakiki, Hessel, and Tandon. It is found that non-U.S. acquirers generated statistically significant returns of just under 2% over a 10-day window. Whereas the U.S. acquirers realized the negative returns that we often generally see from acquisitions.
On the other hand, Markides and Oyon used a sample of 236 deals, compared US acquisitions of European ones and US acquisitions of Canadian targets. Results showed found positive announcement effects for acquisitions of continental European targets but not for acquisitions of British or Canadian target firms. The same negative shareholder wealth effects for acquisitions of Candian firms were also discovered in a study by Eckbo and Thorburn. Where they used 390 sample deals that involve Candian companies over the period of 1962-1983.
In these studies, it can be concluded that non-US targets by US companies can be riskier than deals involving all-US targets. This issue is underscored by a large sample study by Moeller and Schlingemann who analyzed 4430 deals from 1985-1992. And, later on, found that US bidders who pursued cross-border deals acquired lower returns than acquisitions where bidders choose US targets.
© Image credits to Anni Roenkae