Why buy? Indian firms seeking partner who…

International business researchers have always been interested in the motivations for foreign direct investments. Pre-eminent IB scholar John Dunning argued that there were four core drivers:
– the quest for more customers (market-seeking)
– gaining access to inputs unavailable, or less palatable, at home (resource-seeking)
– looking to build a more efficient chain of value adding activities (efficiency-seeking)
– building up the knowledge-based resources of the firm and portfolio of brands (strategic-asset-seeking).

This recent Economist article gives a nice catalogue of recent international acquisitions by Indian firms, and offers decent examples of several fronts.

The acquisitions mentioned by Avantha (in engineering), Tata Steel and Tata Motors all can be lumped under the strategic-asset-seeking banner, as the firms sought to tap into technologies and brands unavailable in their home market and which are crucial to further international growth. This is comparable to Lenovo’s purchase of IBM’s PC business a few years back (and pretty typical for emerging market multinationals).

What is less clear in terms of motivation is what is driving Bharti Airtel’s pursuit of South African mobile giant MTN.

Are they chasing MTN’s (admittedly outstanding) competencies in rolling out networks in very poor countries (in terms of household incomes and also physical infrastructure)? These may well mesh in very well with Bharti’s own experiences in India, and set the firm up for a huge play in markets across the developing world (i.e. a strategic-asset-seeking approach).

Or they simply chasing the almost billion possible customers in Africa (to throw on top of a similar top of comparable target market in India)? This would clearly be market-seeking FDI…

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Chasing synergies in a downturn

One of the arguments for mergers and acquisitions (M&A) is the synergies that come from sharing value chain activities (economies of scope). Coupled with better parenting, this should see M&As produce cost savings and efficiencies. It can all fall apart, however, if you paid too much for the acquisition, or the costs of funding the purchase leap considerably.

This Economist piece highlights the dramas facing six of the world’s largest materials and mining firms (Xstrata, ArcelorMittal, Tata Steel, Rio Tinto, Lafarge and Cemex) as they try to bed down some very significant M&As from past year or so.

As the article notes, with debt refinancing a whole lot harder to get, and share prices tumbling, these firms are finding life a hell of lot more difficult than they were. It certainly demonstrates the dangers of buying at (or near) the top of the boom, and reminds us again that firms too regularly overestimate the ease of realising such synergies. One hopes that these experienced multinationals have also accurately assessed the complexities of chasing such syenergies across borders.