Acquisitions in Developed Markets:

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Acquisitions in Developed Markets:

Challenges for Emerging Market Multinationals

Department of International Business Studies Uppsala University

Spring 2011

Maria Ardila

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Abstract

This paper departs from the observation that emerging market multinationals (EM MNCs) rapidly conquer global markets, at the same time as our knowledge about the operations of MNCs in general is almost exclusively derived from mature, well-‐

established markets. In particular this is true when it comes to post acquisition

processes, which arguably reflects a passed pattern, where firms in emerging markets rather were targets for acquirers. The objective of this paper is therefore to describe how EM MNCs integrate and control their acquisitions in order to sustain and advance their international competitiveness. Since the main interest in this endeavor resides in the processes of integration and control, the empirical evidence consists of a careful study of one case: Bharat Forge Limited, an Indian MNC that over the two last decades has grown into a global player in its field, mostly through acquisitions. Since there are no theories specifically focusing on integration and control processes of EM MNCs, this paper builds five expectations, based on US-‐ and Eurocentric theories. The expectations were more or less met. The case displayed a rapid internationalization process in order to acquire strategic assets. It also displayed ingenious strategies to keep production costs down. In line with expectations, it showed as well as a low degree of management turnover. However, the expectation that there would be no interference in marketing and financial integration was only partly met. The interference consisted in supplying design and low cost products when needed. The fifth expectation was met, in the sense that the relationship between BFL and Kilsta can be categorized as symbiotic. In terms of control, however, the evidence from the case study suggests that the distinction between strategic and operational control is indistinct. The match between the theoretical

framework and the case suggests that prior theories to a large extent are useful for understanding post acquisition processes of EM MNCs. There may also be some room to amend these theories to better fit a globalized world, in which various resources seem to be somewhat more evenly spread than before.

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1. Introduction

Critics of foreign direct investment (FDI) pointed out that MNCs create concentration of power and restrain competition in different nations. Others, less pessimistic, recognized that MNCs are instrumental for transferring capital, technology and organizational skills between countries. Many years have gone since the first wave of MNCs begun to expand and now we are seeing as a result of FDI, a new wave of MNCs from less developed countries operating and expanding in the global arena.

Over the past two decades, MNCs from industrialized countries have, through foreign direct investment, transferred capital, organizational and technological skills to firms in developing economies. Today we are witnessing how emerging market MNCs are investing abroad on their own, capitalizing on the benefits gained from experienced global ǯ inward direct investment (OECD 2006).

Dupoux et al. (2011) identify in China, India, Brazil, Mexico and Russia the top one hundred firms, from 16 rapid developing economies (RDEs), in terms of ǲglobal challengersǳ because they have shown outstanding growth records of in average 18 percent annually between 2000 and 2009. They represent diverse industries such as industrial goods, consumer durables, technology equipment, telecommunication,

pharmaceuticals, and information technologies, among others. Dupoux et al. (2011) also shows that these firms are internationalizing increasingly, not only through export operations, but also through foreign direct investment, including acquisitions. In the past decade, about 60 percent ǯ-‐border deals have taken place in developed markets. These deals have also been larger than those held in

developing countries. The average value of deals in industrialized countries mounted up to $554 million compared to $337 million in less developed countries (Dupoux et al.

2011).

The fact that EM MNCs are increasingly internationalizing through acquisitions in developed markets challenges prior perceptions of EM MNCs as acquisition targets, which raises a number of questions. First, these firms differ significantly from mature

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market MNCs in that the firmsǯ competitive advantage is generally based on low-‐cost production rather than on technological breakthroughs (Kumar & McLeod 1981). In addition, EM MNCs ǯresources and experience in the global arena, as their counterparts. As a result, their internationalization strategies are also substantially different. These firms often target developed countries in search for strategic assets (Buckley 2006; Li 2007), which testifies to an internationalization driven by asset seeking rather than by an asset-‐exploiting nature (Dunning 1998; Mathews 2006).

Secondly, foreign acquisitions are known to be intrinsically complex events, where the parties involved differ in many dimensions (Fubini et al. 2006). The targets are

embedded in different national cultures, and are likely to have different rules,

procedures, conventions and strategies (Greenwood et al. 1994), because they belong to different national economic and institutional systems. These factors purportedly explain why, despite the increasing scale and speed of mergers and acquisitions (M&A),

academic researchers have consistently shown that on average, M&A deliver mediocre performance outcomes (Fubini et al. 2006).

Prior research on M&ǲǳ

ǯȋet al. 2003; Haspeslagh and Jemison 1991). Only few studies have looked at these processes within the context of EM MNCs (Kumar 2009). Therefore, this paper is preoccupied with the question of how EM MNCs integrate and control their acquisitions in order to sustain and advance their international competitiveness. In so doing, a subordinated aim is to develop a theoretically driven frame for analysis, based on prior knowledge of M&A, which can yield expectations on the empirical analysis. Understanding how EM MNCs integrate and control their acquisitions is important, first because it is an increasing phenomenon, and also because there may be lessons to learn from these experiences of value to developed

ǯǤ

The empirical body of this paper consists of a case study on Bharat Forge Limited (BFL), an Indian multinational that manufactures various forged and machined components for the automotive and non-‐automotive sector. ǯ

Director BN Kalyani, says that it is imperative for Indian companies to climb the value

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chain through adequate investment in R&D. He wants Indian industries to look for intellectual and design product leadership and not focus on cost alone. Since the beginning in 1961, BFL has done significant achievements, rising to a leading position.

Today BFL is the supplier to almost all global original equipment manufacturers (OEM), such as Mercedes-‐Benz, Toyota, BMW, Volkswagen and Audi among others. Additionally, every second truck built in the US and in Europe has some part made by Bharat Forge Ltd.

The internationalization strategy of BFL is to grow through different forms of external associations with other companies. This research focuses on the integration and control of the acquisitions that BFL systematically made between 2003 and 2005, mainly in the European market, notably including Swedish Imatra Kilsta AB.

Companies can grow through organic expansion (start-‐ups) or through various forms of external associations as for example M&A. Among the external associations, M&A imply higher levels of integration. However, mergers differ from acquisitions in that mergers aim at the total integration of two or more partners into one new corporation while acquisitions permit a degree of choice regarding the level of integration (Haspeslagh and Jemison 1991).

Different fields involved in M&A research aim at exploring variables that influence the performance of firms before and after the acquisiǯǤ Cartwright and Schoenberg (2006) identified a number of categorically distinct perspectives of M&A studies. Firstly, finance scholars have focused on the issue of whether acquisitions are wealth creating or wealth reducing events for shareholders. Secondly, the strategic management research has identified the importance of ǲstrategic fitǳ and process factors that may explain the performance variance between individual acquisitions. Recent extensions of this perspective have analyzed the value creation mechanisms into acquisitions based on resource sharing and knowledge transfer (Capron et al. 2002).

The ǲprocessǳ literature discusses the choice of integration strategy and acquisition process. Both strategy and organizational behavior researchers point out that no matter how attractive the acquisitions appear on paper, value is not created until after the acquisition, when capabilities are transferred and people from both organizations

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collaborate to achieve the expected benefits or discover others (Haspeslagh and Jemison 1991). They argue that ǯintimately hinge upon the

appropriateness of decision-‐making, negotiation and integration processes.

2. Literature Review

Since little is known about how emerging market MNCs integrate and control their acquisitions, I am going to review existing literature on how developed market MNCs carry out this process. On the basis of that literature I build five expectations at the end of the literature review.

Traditionally the international business literature has separated the analyses of the internationalization process and the entry mode. However, in this case I consider it important to combine these processes, because I argue that the crafting of EM MNCs competitive advantage to gain global leadership starts with their internationalization strategy. Since this strategy is often carried out through acquisitions, a well executed internationalization depends on how well EM MNCs integrate and manage their acquisitions.

This review is organized around a series of challenges and questions, derived from my research problem. In order to analyze how EM MNCs integrate their acquisitions it is necessary to give a review about what we know on the origin of EM MNCs, their main characteristics, why they are internationalizing through acquisitions and how they integrate and control their acquisitions.

In the first part I outline prior waves of internationalization and describe how MNCs from Europe, the US and Japan show different organizational structures and behavior, yielding both advantages and disadvantages that they have tried to overcome over the years. However, all of them have in common the fact that they internationalized to exploit existing resources developed in their country of origin. In the second part I describe the historical background of EM MNCs. How changes in the industrial

production, especially the outsourcing trend gave rise to a wide range of suppliers that gradually grew into the EM MNCs that are being the object of this analysis. This part is

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divided in two subparts; the first is a brief description of EM MNCs institutional context and the challenges that they must overcome to become global leaders. In the second subpart I outline how this new wave of EM MNCs are challenging long-‐term established MNCs, by putting forward alternative business models of production and distribution. In the third part, I describe the strategic goals that EM MNCS pursue when doing

acquisitions and why they choose acquisitions as entry mode. In the fourth part, I review the literature on integration of acquisitions, which mainly centers on studies of

traditional western MNCs with the exception of Japan. In the last part, I will review recent literature on the integration of EM MNCs acquisitions. However, this field of knowledge is new and is not as deep as prior studies on developed market MNCs.

2.1 Prior waves of internationalization

International Business researchers identify three prior waves of firmsǯ global expansion.

According to Bartlett & Beamish (2011), the first wave were European MNCs whose major international expansion occurred in 1920s and 1930s. This was a period of rising tariffs and discriminatory legislation that forced MNCs to build local production

facilities. In that way, they were able to modify products and marketing approaches to meet local market needs. However, the existing communication barriers limited

ǯs worldwide spread operations, resulting in a multinational comprised of very autonomous national firms that were managed as a portfolio of offshore investments, rather than as international business units. A pitfall of this multinational strategy is that, although decentralized decision-‐making allows local responsiveness, it often leads to reinvention of the wheel caused by a lack of

communication and knowledge integration.

The second wave, characterized by American companies in the 1950s and 1960s, was a

ǯǡ

most technologically advanced market that spread new technologies and management processes (Bartlett and Beamish 2011). The management approach focused on

delegating responsibility while retaining overall control through sophisticated

management systems. Foreign subsidiaries could adapt products and strategies to their local markets, but they were dependant on headquarters in regards to new products,

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processes and ideas. Significant flows of information for coordination allowed headquarters to transfer knowledge and capabilities worldwide. However, foreign subsidiaries were considered only as extensions of domestic operations that adapted and leveraged the capabilities and resources developed at home. The disadvantage of this international strategy was that the amount of information flows to coordinate activities, tight controls and the role of the subsidiaries due to the ethnocentric approach from headquarters, resulted in a less efficient and less responsive

organization. However, this type of organization proved to be successful at that time and was widely adapted by other organizations (Bartlett and Beamish 2011).

Contrary to its predecessors, Japanese companies that expanded in the 1970s and the 1980s, developed a competitive strategy based on cost reduction and quality assurance that required tight control over product development, procurement and manufacturing.

This resulted in a centrally controlled, export-‐based internationalization strategy that moved some assembly operations abroad but kept all major value-‐adding activities at home. With the capabilities and resources kept at home they achieved efficiency. They could exploit economies of scale and they managed to transfer knowledge and

capabilities to its sǡǯs lack of resources and responsibilities undermined their motivation and ability to respond to local market needs. The

drawback of this global strategy was the central groupsǯ lack of understanding of foreign market needs and production realities that consequently affected the level of

responsiveness in the foreign markets (Bartlett and Beamish 2011).

Prior waves of MNCs have shown organizational advantages and disadvantages. All of them developed their competitive advantages at home and their structure and

organization were considered efficient at that time, which made them role models for other MNCs. Nowadays, independent of nationality, every MNC strives for an effective and flexible organizational structure that can manage the integration of capabilities of the foreign subsidiaries to be responsive to the ever changing environment in which they operate.

2.2 The origins of the present wave of EM MNCs

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The 70s and 80s were not only the years of Japanese international expansion, but also the outset of significant changes. First, the world economic scene with lower tariffs and decreasing trade barriers promoted by the World Trade Organization and regional agreements, stimulated economic activity (Child et al. 2003). Second, the fall of transaction cost economies as the only dominant paradigm to explain industrial organization was challenged.

Sturgeon (2002) depicts how the failure of large US corporations to respond effectively to new competition from Asia caught the attention of sociologists and organizational theorists who, by observing alternatives way of organization, helped to build the production network paradigm. They explained how trust, reputation and long-‐term relational contracting could create stable external economies that impede the aggregation of economic activity within the same corporation (Sturgeon 2002). As a result, the traditional way of organizing MNCs characterized by a vertical integrated hierarchical structure transformed into a deverticalized industrial landscape comprised by external ongoing interactions between firms. Sturgeon (2002) argues that a network structure stimulates the development of industries through ǲflexible specializationǳ, allowing firms to reconfigure the production system according to the rapidly changing demand and the rise of new markets. ǲǳ

competences areas that are considered essential to the formation of competitive advantage, such as R&D, marketing and other activities related to brand development (Sturgeon 2002).

However, the deverticalized industrial landscape led to a reversed landscape from the suppliersǯǤ gave place to the rise of specialized suppliers that, in order to meet the growing demand for full-‐service, had to add new competence areas, had to improved quality and increased the scope and scale of their operations (Sturgeon 2002). Countries like Korea, Singapore, China and India among others benefitted

tremendously from inward internationalization at home by serving as suppliers to original equipment manufacturers (OEM) (Sturgeon 2002).

2.2.1 Institutional context and challenges to become global leaders

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Emerging market MNCs are firms that originate in countries that over the past twenty years have adapted free market policies and have experienced rapid economic

development. In the early 90s, these markets were characterized by a domination of state owned enterprises and a lack of international competition due to protectionist barriers. These barriers and a lack of resources made local firms base their strategies on low cost products rather than on competition supported by leading edge technology or product differentiation (Kumar et al. 1981)ǤͻͲǯ, many of these

countries underwent trade liberalization and suddenly local firms were surprised by a wave of multinationals from Western Europe, North America, Japan and South Korea that challenged them. Many of the local companies disappeared or sold off their

businesses. However, those that survived had to restructure their businesses and exploit new opportunities (Elango and Pattnaik 2007)

According to Khanna and Palepu (2006), firms from industrialized countries are well known for efficient innovation processes, management systems, and sophisticated technologies, but they also have access to significant financial resources and talent.

American and European companies can raise large sums of money at a low cost because of fairly well established financial markets. They can hire talent easily because the labor markets on both continents work well and there are plenty of intermediary companies that search and recruit manpower. In contrast, firms from developing markets face from the outset what these authors called institutional voids. Their markets are characterized by an absence of effective regulatory systems and contract-‐enforcing mechanisms. They lack soft infrastructure that makes markets work efficiently. Apart from a few stock exchanges and government-‐ǡǯ

intermediaries like credit rating agencies, merchant bankers or venture capital firms. In addition, most developing countries do not have easy access to a wide variety of

educated people and they lack scientific institutions. Wooldridge (2010) argues that emerging market firms face two big interconnected problems. The first is recruiting and retaining workers at a time of rapid growth. The second is producing a world-‐class work force virtually overnight. He argues that the combination of rapid growth and high staff turnover means that they are always in danger of loosing the skills that made them successful. These are the reasons that explain why emerging market firms lack the required resources to invest in R&D.

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2.2.2 How EM MNCs challenge long-‐term established multinationals

Although EM MNCs have not created their competitive advantage at home and are not characterized for making technological breakthroughs to exploit and gain global leadership, they have developed a distinctive approach to the value chain and a particular way of innovation that have come to be their competitive advantage.

Over the years, many of these EM MNCs have benefited from international players that have offshored some of its production in order to reduce costs. The position in the value chain as suppliers have made that, in turn, they also focus on cost reduction in order to be profitable. As a result they have rethought their value chains. Sirkin et al. (2008), point out that contrary to western MNCs that consider rapid developing economies as low-‐cost locations that can only support low-‐cost work; EM MNCs can differentiate the particular advantages from one location to another. They disaggregate and modularize the value chain by finding optimal locations around the world. Some of these choices focus on low cost, some focus on where the right talent and skills can be found and some in being close to customers. This strategy has resulted in significant advantages in terms of cost and scale (Sirkin et al. 2008).

In addition, because EM MNCs have had access to technology by being suppliers of experienced MNCs, they have been able to adapt technological innovations to the emerging market contexts. With the available resources and local knowledge of what people want, need and the limitations constraining their choices, EM MNCs respond

Ǥǲǳǲǳǡ meaning that instead of adding features to a product, they strip the product down to its essential components (Wooldridge 2010). Today some of them are well known as copiers,

simplifiers and adapters of technology, products and services. This way of innovation is different to Western MNCs, which have people in research labs and creative

departments to pursue new ideas, technologies, materials and processes. They keep databases with market knowledge and thousands of patents on file (Sirkin et al. 2008).

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One example of frugal innovation is Haier, a Chinese leader company that compete with Whirlpool, Electrolux and GE in the white goods market. They discovered through

ǡǯ

washing machines to clean vegetables like sweet potatoes. As a response, Haier modified its product to satisfy that need (Liu 2002).

Many EM MNCs have internationalized by being contractors to existing multinationals that after operating in their home markets have subsequently carried them to supply their regional operations across borders (Elango et al. 2007; Mathews 2006). These links with experienced MNCs have, in addition, facilitated the acquisition of technology and foreign markets knowledge needed to implement a rapid internationalization

strategy (Mathews 2006). From a resource base perspective, experienced multinationals have traditionally been cautious when considering partnerships or other contractual alliances because of the risk of spreading technological knowledge and tacit know-‐how, whereas EM MNCs recognize the value of partnerships and other types of alliances in terms of the acquisition of resources, in order to compensate for their deficiencies (Mathews 2006).

The difference in the internationalization patterns of EM MNCs have resulted in a ǳ

ǳǤǳǳǯrnationalization (Dunning 1988; Mathews 2006). One can argue that EM MNCs have developed their competitive advantage through an inward internationalization, facilitated by their ǲǳ

position in the value chain, that has permitted them to benefit from spills of technology and tacit know-‐how that developed market MNCs possess. This has resulted in a

competitive combination of low-‐cost knowledge management and frugal innovation.

2.3 The goals of EM MNCs͛ acquisitive internationalization

According to Bertoni et al. (2008), EM MNCsǯ acquisitions are intended to get access to well-‐established brands, distribution networks, new know-‐how and resources,

especially through horizontal and related acquisitions.

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Other reasons that explain why EM MNCs are expanding through acquisitions are that the less developing countries have been growing at higher rates than industrialized countries, allowing their MNCs to accumulate large amounts of money that permit an international expansion through acquisitions. Dupoux et al. (2011) in a report on ǲglobal challengersǳ (EM MNCs) shows an average annual growth rate of 18 percent between 2000 and 2009. It tripled the average annual growth rate achieved by both ǲglobal peersǳ (MNCs headquartered in developed countries) and the non-‐financial firms among the S&P 500 (capitalization-‐weighted index). The average operating margin (earnings before interest and taxes, or EBIT) ǲ ǳ

was 7 and 6 percent ǲeersǳ and S&P 500 respectively.

Figure 1: Global Challengers Exhibited strong Sales Growth and Margins

Source: BCG 2011

Another advantage that facilitates acquisitions is that ownership is concentrated in business families and founding entrepreneurs, which permits them to make long-‐term bets on growth without having to worry about losing control of their companies when their firmsǯ stock price fall (Kumar 2009).

Contrary to firms in Japan and Korea, which became global through organic growth because they had a reputation of technological innovation and quality products at affordable prices, EM MNCs facing constantly increasing competition, acknowledge that in order to become truly global, and to be able to compete in foreign and domestic

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markets with global players, their competitive advantage can no longer rely only on cost advantages. They need to be competitive based on quality and innovation as well.

Aguiar et al. (2006) in the first report on the ǲǳǡ show that 57 percent of EM MNCsǯ M&A activity was directed to mature markets whereas 43 percent to developing countries. Interestingly, China and India, which are above the average, directed around 75 percent of their acquisitions to developed countries. One example of an EM MNC that has expanded through acquisitions is the ǡǯrgest and oldest business group. This group has been taking active steps to establish itself as a global MNC. In 1907 the group set up its first overseas representative office (Tata Ltd) in London. After the Second World War it opened an office in New York. However, they

ǯͳͻ͹Ͳ, when they begun expanding in countries less developed than India. However, in recent years, ǯ

overseas investments have taken place in advanced industrialized economies. Of the 29 destinations of foreign investment reported between 2003 and 2007 only six were done in developing countries (Goldstein ʹͲͲͺǣͶʹȌǤǯ

countries centers on acquisitions of well know foreign brands such as Corus, the

commercial truck operation of Daewoo, Tetley Tea, Jaguar and Land Rover. According to Goldstein (2008), these acquisitions had four aims. The first is accessing new markets (business products outsourcing BPO, steel, cars and trucks). The second is integrating the value chain (steel). The third is brand control of tea and cars and the fourth is technology acquisitions (Goldstein 2008). Another example of the need to acquire technology to become a global leader is the Chinese MNC Haier that despite ranking number one of all Chinese enterprises still remains very dependent on foreign firms for key components and technology, including high performance compressors and sensors (Duysters et al. 2009).

In sum, EM MNCs prefer acquisitions not only because they have money, but also

because they can, in a short period of time, gain access to the strategic assets mentioned above. Otherwise, developing superior capabilities and building brands, although viable, may take long time and much effort.

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However, emerging market MNCs have to weight the cost of internalization. There are direct costs of doing business in advanced markets; wages are far higher than in

developing countries, they have to deal with different institutional systems, culture and language, among others. The major challenge of overseas acquisitions is to integrate the acquisitions with existing operations, which can be a slow and costly process.

2.4 Developed market firms͛ integration and control of acquisitions

Prior research on acquisitions of developed market enterprises shows that they have increasingly served as a strategy for rapid foreign expansion. Companies have expanded across national borders in a race with rivals to get to new foreign regions and countries (Ghoshal 1987). The advantages of international acquisitions are that they have the potential of enhancing firm performance, by providing access to a valuable pool of critical routines previously not available to the firm (Ghoshal 1987). They help foreign companies gain market power (Barton and Sherman 1984), redeploy assets into more productive uses, and exploit and acquire technological knowledge (Capron 1998).

Child et al. (2003) argue that acquisitions offer the acquiring company the option of whether or not to introduce changes in management practice. Prior research on integration and control focuses particularly on the control mechanisms used by MNCs, by looking at the role of expatriates and transfer of managers (Harzing 1999, cited in Child et al. 2003). Others analyze instead the degree of centralization according to where the most significant decisions are taken (Brooke and Remmers 1972, cited in Child et al. 2003). The degree of integration is critical not only because more or less integration yield better or worse performance but also because an inappropriate level of integration due to cultural factors may result in sub-‐optimal solutions (Child et al.

2003).

2.4.1 Expected problems

There is extensive research that emphasizes the challenges and difficulties of realizing the potential of acquisitions. According to Haspeslagh and Jemison (1991), one of the reasons that explain failure in acquisitions is that managers may make over-‐optimistic estimates of a proposed acquisition value. Additionally, their research suggests that

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there are problems that can be expected after the negotiation. One of them is referred to as determinism, which implies not reacting to unexpected events. Often pre-‐acquisition estimated value is translated into specific performance expectations that become targets. However, post acquisition reality is very different from pre-‐acquisition analysis no matter how careful this analysis was. Frequently, after the acquisition has taken place, additional information becomes available because of unexpected events arise such as changes in the industry, technology, the competitors reactions, changes in other parts of the parent firm or problems related to different ideology of the integrated firms.

Determinism is hence a label for when managers ignore those changes and hold the original justification instead of trying to adapt to them. Other possible problems are the impact of the acquisition on individual managers and employees and a lack of leadership to conduct the combined firm towards a new or common purpose (Haspeslagh and Jemison 1991).

2.4.2 Acquisition integration

Prior research on post acquisition integration of related firms shows that this process varies substantially between organizations. Haspeslagh and Jemison (1991) identify two key dimensions that provide a basis for choosing a particular approach to post-‐

acquisition integration. The first is the need for strategic interdependence to secure value creation that would not exist if the firms operated separately and is commonly

ǳǳǤ

between both firms. The second concerns the need for organizational autonomy, referred as well to as the need to preserve the organizational culture, or ǲ

organiǳǡ

acquired should have. ǲStrategic ǳ ǲǳ point in different directions. On the one hand value creation requires a strategic fit to transfer capabilities and overcome possible resistance, whereas the need for organizational autonomy in practical terms needs to question whether autonomy is essential to preserve the strategic capability that motivated the acquisition.

A study done by Child et al. (2003) on foreign acquisitions in the UK, found some differences in the acquisition decisions and integration processes among American,

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Japanese and other European countriesǯ firms. For the study, they adopted Haspeslagh

ǯȋͳͻͻͳȌost acquisition integration.

Absorption involves a high need for strategic interdependence in order to create the expected value, and a low need for organizational autonomy to achieve good results.

Preservation refers to a low need for strategic interdependence between the two firms, but a high need for organizational autonomy. The management intends to preserve the source of the acquired benefits intact.

Symbiotic involves a high need for strategic interdependence and a high need for organizational autonomy because the acquired capabilities need to be preserved

ǯǤ

The main differences were found in that American acquirers generally ensure that their acquisitions are profitable at the time of purchase. They are interested in quick returns rather than in gaining a new asset that has the potential to pay off only in the longer term. They tend to absorb the acquired into the parent company systems and to demand rapid achievement of high financial performance. This philosophy is applied in a

considerably consistent and ruthlessness way, often leading to the achievement of high performance (Child et al. 2003).

Contrary to Americans, Japanese companies were less concerned to buy companies that were making a profit at the time of purchase, which reflects a more long-‐term oriented approach. Rather than assuming the role of the controlling owner through new senior managers, they appoint advisers to monitor events in the new subsidiaries. With this acquisition strategy they achieve as good results as Americans and get more

acknowledgement given the fact that not all their acquisitions performed well at the time of the purchase. The Japanese fit somewhere in between the preservation and symbiotic approach.

In general, all the nationalities reported little post-‐acquisition change in terms of job rotation of managers, employment policy, marketing decisions, emphasis on managing the total supply chain, degree of outsourcing and range of suppliers (Child et al. 2003:

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78). Areas of major change in all nationalities involved change in strategy, R&D, training, reward systems, IT integration, cost control and operations.

2.4.3 Control

In terms of control, Child et al. (2003) used a distinction between ǲstrategicǳ and ǲoperationalǳ control. The first refers to larger long-‐term issues of concern to senior management, such as final approval for the subsidiaryǯs budget, capital expenditure, appointment/termination of senior personnel, acquisition/divestment, formation of new alliances, changes in the direction of the company and the introduction of new products. Operational control refers to daily operations concerning mainly subsidiarǯ management, such as operational decision-‐making, planning, the degree of cost control exercised, and the use of financial control systems. The study found that 72 percent of the acquiring companies tended to take over many key decisions (Child et al. 2003).

However, the study found that not only national background of acquirers influence post acquisition policy. Other factors such as size, workforce competencies, culture and competitive environment influenced the post acquisition process.

2.5 Integration and control of EM MNCs͛ acquisitions

In a study done at Hindalco, an Indian steel company, Kumar (2009) found that the acquirer didǯemphasize on cutting costs through synergies, greater efficiency and lower head count, because they connected their acquisitions into their low-‐cost production machinery at home. For them it was more important to acquire the skills, brands and distribution channels that would allow them to build a global value chain and to become world-‐class companies. Kumar (2009) argues that EM MNCs acquire only to meet strategic goals; Hindalco didǯǤ

planning takeovers and evaluating results they didǯ-‐term results, they were content to realize the benefits from acquisitions over time. In addition, the management developed a simple four-‐step process to help meet its initial objectives.

These steps were standard ones, related to finance, organizational issues, business processes and markets.

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In the organizational integration, they didǯement structure systems or people unless necessary. However they sent experts from their main divisions to support the integration processes temporally. In regards to financial integration, they unified the reporting systems because they wanted the acquired and acquirer to speak the same financial language, see the same reports, and set similar benchmarks. In terms of business process integration, they moved the processes that could be managed abroad and in which cost reduction could be achieved to low-‐cost locations. In terms of acquiring capabilities, when they found that an acquired had better processes, they encouraged the subsidiary to implement similar processes in other subsidiaries. For example, the management of Hindalco found out that Novelis, a company acquired in the U.S., relied on value-‐based management systems, so it engaged Novelisǯ managers to develop similar processes in all its units in India. In terms of market integration, since they are based in fast-‐growing home markets, they could use their foreign subsidiaries to supply the growing demand at home (Kumar 2009).

Based on this specific literature, several expectations may be expressed regarding the internationalization and the integration and control of acquisitions done by EM MNCs, such as Bharat Forge Ltd.

2.6 Expectations on Bharat Forge Ltd

The first expectation is in regards to the reasons for internationalization and the

benefits expected from the acquisitions. A rapid internationalization process is expected, facilitated by sufficient financial resources and a strategic supplier position in the value chain that needs to be protected and improved. The internationalization is probably motivated by the need to acquire strategic assets, such as access to new markets, technology, management capabilities, and brands. In sum, strategic issues that make possible a global leadership position. The benefits expected from the acquisitions arise from the differences between developed market MNCs and EM MNCs. They differ in their origin and internationalization strategies and therefore I expect an aspiration to combine the better of two worlds. On the one hand, the target companies might be superior in terms of technology and know-‐how required to operate in advanced markets. Western Europe and the US are known worldwide for being leaders in

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the other hand, EM MNCs are used to operating in turbulent but growing economies. In addition, EM MNCs have different innovative ideas in terms of production, distribution systems and they are experts in identifying possible cost reductions due to the fact that they operate at a greater scale, and are headquartered in low-‐cost countries.

The subsequent expectations are related to integration and control of the subsidiaries, the question here is to answer to what extent prior theories on control and integration of developed market enterprises will help to analyze EM MNCs integration and control.

The second expectation focuses on organizational integration. ǯ

management turnover, because EM MNCs typically ǯǡ

due to a lack of managers with experience in a global context. Moreover, if acquisitions are intended to acquire skills, not major changes are expected in order to identify potential skills that benefit other subsidiaries. However, because of cost considerations, some of the production might be relocated to low-‐cost countries and consequently the number of workers involved in those processes may be reduced. The third expectation relates to marketing integration. ǯct much interference from the acquirer, because the local subsidiaries are expected to have more knowledge than headquarters about their home and closest markets. The fourth expectation concerns financial integration. Since operating in developed countries imply higher costs, I expect tight financial controls in regards to cost management to keep the production costs as low as possible. The fifth expectation is related to integration and control. Applying Haspeslagh

ǯȋͳͻͻͳȌ integration typology, I expect a symbiotic relationship with both a high need for strategic interdependence due to the need for acquiring and transferring of capabilities and a high need for organizational autonomy, because the organizational culture might be different to the ǯǤIn terms of control, I expect headquarters to take over strategic decisions that affect the long-‐term performance of the firm and low influence in the daily operations due to differences in the institutional and economic context.

3. Methodology

3.1 Research design

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This paper takes an interest in how EM MNCs integrate and control their acquisitions in order to sustain and advance their international competitiveness. The ambition is therefore to describe a phenomenon, which, it was argued in the introduction, has been poorly covered in prior research. In order to describe such a vast phenomenon as multinational companies from emerging markets, one strategy could have been to conduct an extensive analysis of many samples that would say something about the entire population. However in this study, emphasis is rather on the processes of integration and control, which calls for a more intensive, descriptive, analysis (Yin 1994). At the outset the intention was to conduct a comparative analysis for which reason I contacted three companies, however only receiving one positive answer. I will therefore conduct a single case study that arguably is representative of the population.

Teorell and Svensson (2007: 222) suggest four criteria for selecting strategic cases to study. The first is to choose relevant and meaningful cases; the second criterion is cases with variation; the third cases that can be generalizable, and the last criterion cases that complement extensive results. I consider the chosen case a relevant case because BFL is an important global player. It is a firm that from the outset has tried to overcome

institutional voids, such as the lack of a qualified work force and technological

capabilities that normally characterize small and large firms from emerging markets.

Therefore one can argue that BFL is somehow representative of emerging market firms.

On the one hand, by adaptation BFL has become a leading EM MNC, in that sense it is comparable to EM MNCs such as Tata, Haier, Hindalco and others that have overcome their voids. On the other hand, if we say that most emerging market firms lack a qualified work force and are weak in terms of R&D, then BFL is not representative.

However, it can be taken as an example of what emerging market firms need to do, to become successful MNCs. Additionally, the fact that BFL has pursued an acquisitive internationalization in advanced markets makes its process of integration and control interesting in their own right. This case is selected because I consider it a relevant case for all emerging market firms and generalizable to successful EM MNCs.

According to Yin (1994), one of the criticisms of case studies is that they provide little basis for generalization, however he argues that case studies are generalizable to theoretical propositions and not to empirical populations or universes. The case study

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does not represent a sample and my goal is to expand and generalize theories (analytic generalization) and not to enumerate frequencies (statistical generalization).

The ambition is not to test an existing theory with the case study, in the sense that I will be able to falsify it. I will rather describe a phenomenon by way of consuming theory;

probe the usefulness of a theoretical framework. It is therefore a ǲdisciplined

ǳȋand Bennett 2004: 74), which means that theory will guide data collection and analysis. There are no previous theories developed specifically for M&A of EM MNCs. I therefore decided to use existing theory developed for M&A generally, presented in the literature review. The data collection and classification is based on two similar studies, which were published in 1991 and in 2003 respectively, on advanced market MNCs. Both studies are more profound in scale and scope than this one since they are a combination of surveys and case studies. Both projects took around five years and covered more issues apart from acquisition integration. The researchers conducted about two interviews on each case and used archives as well. However, the fact that for profit organizations are constantly searching for more effective ways to operate and that organizational patterns have changed dramatically since the outset of the disaggregated value chain structure, I considered it interesting to investigate more about these changes within the context of emerging market MNCs.

3.2 Data collection: sources and source criticism

This section gives an account of the empirical material used for the case study. I have examined secondary data, such as reports and articles published on Bharat Forgeǯ

Ǥǯ, B. Kalyani, published in 2006. As primary data I did one interview at Bharat Forge Kilsta Sweden, with the production manager. All sources are derived from the company itself, which makes it likely to be biased. As a measure to reduce the bias to some extent, I chose to interview a person that had been with the company before the acquisition. The interview, which was recorded, was conducted in a semi-‐structured way. It followed prepared questions (appendix 1), but the interviewee was also allowed to flesh out his arguments. After the interview, I compared the information obtained with secondary data, which allowed me

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to generalize, to some extent, in regards to the other subsidiaries acquired by BFL. This comparison also served to triangulate different sources on the same questions.

4. Bharat Forge Limited

Bharat Forge Limited (BFL) is an Indian global multinational that manufactures various forged and machined engine and chassis for the automotive and non-‐automotive sector.

Since the beginning in 1961, BFL has done significant achievements, rising to a leading position in the merchant forging industry in its 50 years of existence. Today BFL is the leading supplier to almost all manufacturers of passenger cars and commercial vehicles, of components that are critical for the safety and performance of automobiles.

4.1 Company history

Bharat Forge Limited is the 50-‐year-‐old flagship of the $ 2.4 billion Kalyani Group. It came into existence in 1961, at a time when policy favored self-‐sufficient indigenous industry because there was an urgent need for it. By 1965, BFL had set up forging

facilities; however there was no technology base available in India and BFL had to obtain it by itself.

In the early 80s, BFL started exporting crankshafts and crack links to the USSR and by 1985, BFL had achieved a leadership position in India. However, despite a long-‐decade of concerted efforts to enter Western markets, quality-‐conscious Europe and the US rejected. In an interview with Janve et al. (2011), Kalyani says, ǲNobody believed that they could produce to the required quality and consistency, anǳ.

However, Bharat Forge took this challenge seriously and in the late 1980s invested in modernizing their facilities and in leapfrogging technologies. The technology was so advanced that they had to struggle to master it; they had to replace low skilled

workforce with skilled staff (with at least a degree in engineering). After turning around the company they learnt to master the technology. They achieved a far more reliable process and consistent output, and soon the potential customers realized that BFL could supply technological complex products in a highly cost-‐effective way (Janve et al. 2011).

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Such proactive investments in state-‐of-‐the-‐art technologies have, in fact, been BFLǯ

driving force. Today, BFL does not only provide a high technology production platform, but it offers a high level of customization with the support of its own machining

facilities, which enable high product quality and delivering in very low cycle times.

4.2 Internationalization and growth

Exports boomed throughout the 90s, and in 2001, BFL set the goal to become one of the top global players in the automotive forging industry within five years. To achieve this goal they had to expand to markets of North America, Europe and Asia, with an

emphasis on Europe because they considered that all the technological developments in the field happened there. Therefore, in order to become more responsive to conditions of rapid change, high innovation costs, and the scramble for strategic positioning in many sectors, BFL started thinking in terms of inorganic growth. The goal was to be in the passenger cars, chassis business, trucks, crankshafts and front axles (Thomas 2006).

In an interview with Thomas (2006), B Kalyani explained that two reasons motivated the acquisitions in developed markets. The first was that OEMs, especially European companies, preferred to use vendors in their proximity for a certain set of products where they could afford to trade-‐off cost disadvantages. The second reason was that existing companies came with contacts, networks and relationships. He added that although it is possible to replicate that, it takes time. BFL targeted and acquired systematically enterprises with superior technology that supplied parts to passenger-‐

car makers or made forged products for the truck industry that lay outside its offerings.

In less than five years, BFL made a number of acquisitions, raising its consolidated revenue from $112 million in 2001 to over $700 million in 2006 (Kalyani 2006).

Since Bharat Forge was good at chassis components, they focused on Carl Dan

Peddinghaus GmbH (CDP) the second largest forging company in Germany, which was the best-‐known and most respected company in the chassis component business. The company was in trouble and immediately after it went into bankruptcy Bharat Forge Ltd. started bidding for it. At the end of 2003 BFL acquired CDP for $50 million. Then, by the end of 2004, BFL acquired CDP Aluminiumtechnik, a company that manufactures aluminium components for automotive applications, for $8 million. Both companies

Acquisitions in Developed Markets: