M&A Activities of Companies Based in Developing CountriesThe literature on economic development gives considerable attention to the means of technology transfer between developed and developing counries. There is an instructive case study of one such mechanism in the May issue of the Harvard Business Review.
Nirmalya Kumar, a professor of marketing at the London Business School, writes about how the India aluminum company Hindalco has used cross-border acquisitions to obtain competencies, technology, and knowledge it needs in order to carry out its strategy of becoming a strong global enterprise, manufacturing both basic and value-added products. This competency-driven rationale for acquisitions is a distinct contrast to the synergies-and-cost-reduction rationale that generally lies behind acquisitions made by companies based in developed countries.
Kumar lays out an eight-year timeline of what he calls the "M&A competency stairway" that Hindalco has gradually climbed in order to build the "industry-related skills and M&A techniques" it needed to pursue ever more challenging acquisition targets. The stairway has five steps so far:
- Starting small, Hindalco acquired two Indian companies, Indal and Annapurna Foils, in 2000. Competencies gained:
- How to bid for, negotiate with, and integrate companies in India
- How to manage a large customer-focused, value-added products business
- How to turn around a small Indian company (Annapurna) in receivership
- In 2003, Hindalco acquired the Nifty and Mount Gordon mines in Australia. Competencies gained:
- How to take over, turn around, and operate companies in a developed market
- How to list companies on a stock exchange abroad and manage investor relations
- In 2005, Hindalco acquired the St. Anne Nackawic Pulp Mill in Canada. Competencies gained:
- How to manage a global supply chain as a a buyer and a seller
- How to manage price fluctuations and foreign exchange risks across countries
- In 2006, Hindalco acquired Minacs Worldwide in Canada. Competencies gained:
- How to acquire assimilate, and delist a company in North America
- How to manage a large, HR-intensive multinational operation
- Finally, in 2007, Hindalco acquired Novelis North America, a company more than twice its size. Kumar acknowledges that the jury is out on how this latest acquisition will fare, both because it is so recent and because of the current depressed market conditions that Hindalco, along with everyone else in the aluminum industry, is coping with. In any case, it seems safe to say, as Kumar does, that Hindalco could not have tackled such a large acquisition without the competencies built through previous, smaller-scale acquisitions.
Making aluminum at competitive prices requires economics of scale, process skills, and cheap raw materials. Selling value-added aluminum products demands attention to quality, service, and brands; product development skills; and a knack for forging customer relationships capabilities that Hindalco didn't possess [prior to 2000]. To learn them, it decided to acquire the leading downstream companies: Indal in India and Novelis overseas. The objective was to gain new competencies not to get big fast or to reduce costs.Note that, because the rationale is building competency, acquisition programs like that of Hindalco do not involve wholesale replacement of the management of acquired companies. Also, they have a long-term focus, as opposed to a focus on realizing profits quickly through cost-cutting.