6 - Failure of Merger and Acquisition

Last week, I discussed about how firm could gain advantages by using FDI, and this week is something seminar to FDI, as this is one of method in FDI, Merger and Acquisition (M&As). To those multinational enterprise who seek for competitive advantages in their industry, sometimes they do not have a competitive advantage or even a competitive disadvantage, and thus they will use M&As to cover it. The concept of M&As is to help company grow quickly in their industry, or enter a new market, without using joint venture or create a subsidiary. According to Arnold (2012), he defines that there are a number of M&As motives, such as market power, entry to new markets and industries, risk diversification, acquire superior management skills, and technological innovation. From above we could see that M&As lead an enterprise to a successful model.

Although M&As has a lot of advantages to lead a company to success, it still have some factors to consider with, for example, company A may merger with a fake performance of company B, once they merger, the overall of the business maybe doing badly, and also when they merger, it will exploit company A share price increase, however when the news come out with the overall of their business has no increase as the market expected, their share price will drop afterward.  

The example was HP, HP made a deal with Autonomy which bid 12bn USD. The company was planning to move away from making computer industry into the software business. Although this would be a market power for HP as Autonomy is a existed player for over 10 years and they are the industry-leading technology in the industry and this could lead HP more profitable, Autonomy had misled HP which provided a fake report to HP, which causing HP over bid to the company. When the news came out, HP share price dramatic dropped around 12%, this was the 10years lowest point.

From this case, HP was overbid Autonomy as they think the position of Autonomy in software industry was essential, however Autonomy through falsify, conceal, and other techniques to conceal the company's financial position, and misled HP acquisition valuation, which causing HP loss over bid fund and damaged their share price value.

To sum up, enterprise could gain advantages from Merger and Acquisition which lead company increase their profit, and improve their management skill. However, they also need to aware of the company to merger that they are choosing, as they could conceal and mislead the bidder and as a result it could damage to their company.

 

5 - Foreign Direct Investment

Foreign Direct Investment (FDI) is now a common activity over the world, the reasons why many companies seek to FDI is to increases their sales and profits, enter a global market, reduce costs, gain a foothold in economic blocs, protect and remain their substantial domestic markets and foreign market, and acquire technological and managerial know-how.  Furthermore, some developing countries also encourage FDI as it can obtain overseas resources, increase access to return markets, increase local capital markets, and drive economic growth. This makes me remind an example of how a developing country encourages FDI in the past, China.

China was a developing country in 20th century and Chinese economy was in a depressed situation, as there had no government policy liberalisation in China to allow foreign fund inflow and outflow. However, Chinese government started to encourage FDI inflow into their country and established a policy called “Open door policy”, which allows inflow FDI into China and drive Chinese economy growth, and also gain resource transfer from overseas firms. After that, during a period of inflow FDI into China, Chinese firms are able to outward FDI to foreign country, and Chinese government also intend to create a global leading Chinese firms. Therefore Chinese government intervene to this and established a policy called “Go global policy”, which enable Chinese firms outward FDI to foreign country, and also encourage and support national firms in order to enhance international competitiveness of domestic firms , obtain overseas resources, and improve Chinese economic growth.

On the other hand, back to the attractive of companies to FDI. As mentioned in the first paragraph, there are many reasons that companies seek to FDI. The recent example of a well-known multinational enterprise called Ikea, the company has already allocated in many countries worldwide, and now the company seeks to FDI into the Indian market. From this FDI both Ikea and India would be benefit to itself, for Ikea, they can enter India market to increases their sales and profits, and also gain a foothold in economic blocs and protect domestic markets and foreign market. For India, they could increase local capital markets, and spur their slowing economic growth.

From this case we could use FDI theory “Dunning Eclectic Paradigm”, which to explain the nature and direction of FDI in Ikea. Dunning Eclectic Paradigm has identified three conditions which the firm must engage with. These are location advantage, ownership advantage, and internalisation advantage.   For location advantage, India may have its existence of raw material and low labour costs which Ikea can obtain. For ownership advantage, Ikea is a well-known trademark, and also has its own production technique, it could define as greater competitive advantages to Ikea which lead to the reason engage in their foreign production. For Internalization advantages, they are not licencing to other firms to operate their business, which is the advantages by own production.  

To sum up, the idea of FDI could benefit to both firms and inflow FDI to the country, to concern of firm FDI, they need to look at Dunning Eclectic Paradigm to see do they engage any of these conditions, which allow them to see could they obtain any competitive advantage when they FDI into a foregin country.