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 / Spring 2007 / Issue 46(originally published by Booz & Company)


The Flatbread Factor

Tuning In to the M&A Signal
by Gerald Adolph and Alonso Martinez

One of the strongest indicators of an emerging nation’s transition to a more robust economy is the merger and acquisition (M&A) activity of the companies headquartered within its boundaries. But executives can also tune in to an earlier signal by analyzing the relative economic value of vertical and horizontal integration within a targeted market sector. In other words, the potential value of M&A activity is itself a leading indicator of when a market is ripe for entry. This indicator can also provide insight about where on a value chain to place investment bets.

Mergers and acquisitions are increasingly popular among multinational firms from developing countries. Typically, these companies seek to migrate up the value chain (moving from just manufacturing to conducting their own R&D, and then to marketing and branding their own products), and they can accomplish this by merging with counterparts in other emerging countries — and in industrialized nations as well.

In 2005, the overall value of cross-border M&A deals increased by 88 percent, to US$716 billion — and the number of deals increased 20 percent, to 6,134. More and more of the parent companies in these deals come from emerging markets. The total number of companies with corporate parents based in Brazil, China, Hong Kong, India, or the Republic of Korea has grown almost five times since 1993, from less than 2,700 to more than 14,800.

But don’t expect all cross-border mergers to be successful. An increase in cross-border activity brings substantial risks for the merging companies. There are a number of reasons that such acquisitions can fail. First, few emerging-market companies have the experience of managing a complicated integration process. Second, complexity increases when transacting firms add affiliates in more locations. Third, cultural, social, and institutional differences lead to higher managerial, governance, and transaction costs. Fourth, managerial capacity is spread thin during integration and coordination activities. Finally, greater geographical breadth means new external risks — such as foreign exchange fluctuations and perhaps political uncertainty — that will have to be managed.

Some of the most successful companies from developing countries — including Haier (China), Lenovo (China), Arcelik (Turkey), Ingenuity Solutions (Malaysia), and the pharmaceutical firms Bionova (Mexico) and Cordlife (Singapore) — moved slowly and deliberately, acquiring the capabilities for successful M&A bit by bit. They learned how to manage the integration of new assets through local country partnerships or R&D facilities located in developed countries before they made any substantial acquisitions. They used small steps to increase their presence in a foreign market, and they tended to expand into nearby markets that they already knew. Developing the organizational capabilities for cross-border acquisitions seems to slow things down at first, but the most successful companies have learned that it allows them to move more quickly in the long run, because they don’t have to waste time undoing the damage of a hastily conducted deal.

Gerald Adolph ([email protected]) is a senior vice president in Booz Allen Hamilton’s New York office, where he specializes in mergers, restructuring, and integration.

Alonso Martinez is coauthor of “The Flatbread Factor.” 

Reprint No. 07106

Author Profiles:

Alonso Martinez ([email protected]), a senior vice president with Booz Allen Hamilton based in New York, works with global multinationals and leading Latin American companies, particularly in the consumer products industry. He advises companies on transformation and growth strategies.

Ronald Haddock ([email protected]) is a vice president and director of Booz Allen Hamilton in Greater China. He works with consumer goods and industrial companies from around the world on strategies for growth and operational effectiveness in the Asia Pacific markets.

Also contributing to this article were Booz Allen Hamilton Senior Associate Andrew Sambrook and Michael Sisk. 
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  1. “Carmaking in India: A Different Route,” Economist, December 13, 2006: Tata Motors plots a $3,000 car. Click here
  2. Stewart Brand, “City Planet,” s+b, Spring 2006: Describes the demographic shifts driving many of these market life cycles, and former Unilever executive R. Gopalakrishnan recounts the RIN story. Click here
  3. Guillermo D’Andrea, Leticia Costa, and Fernando Fernandes, “Successful Retail Innovation in Emerging Markets: Latin American Companies Translate Smart Ideas into Profitable Businesses,” Booz Allen Hamilton white paper, January 2007: A study for the Coca-Cola Retailing Research Council shows how breakthrough retailing makes a difference in Latin America’s maturing consumer market. PDF download
  4. Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (Basic Books, 2000): Explains how to undo the bureaucratic factors that constrain market life cycles.
  5. Jean Kinsey and Min Xue, “Supermarket Development in China,” paper presented at the China Workshop of the Worcester Polytechnic Institute, June 16–17, 2005: Fascinating preliminary study from two researchers at the Food Industry Center, University of Minnesota, of grocery evolution in China over the last two decades. PDF download
  6. “Looking Forward, Acting Now,” 2005 Annual Report, Gruma SA de CV: An unusually comprehensive annual report lays out the company’s global approach to markets and customers. Click here
  7. Alonso Martinez, Ivan De Souza, and Francis Liu, “Multinationals vs. Multilatinas: Latin America’s Great Race,” s+b, Fall 2003: Explicates the nature of corporate competition in emerging markets. Click here
  8. Norihiko Shirouzu and Stephen Power, Unthrilling but Inexpensive, the Logan Boosts Renault in Emerging Markets,” Wall Street Journal, October 4, 2006: Chronicle of a $10,000 car for developing markets.
  9. Michael Sisk and Andrew Sambrook, editors, The Whole Deal: Fulfilling the Promise of Acquisitions and Mergers (strategy+business Books, 2006): Shows how a more effective acquisition process makes all the difference in implementing a successful two-platform strategy, particularly when a company is entering emerging markets.
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