Merger & Acquisitions
What drives it?
Gijs van Maasakkers
Mergers and acquisitions (M&A) are not new to business nowadays anymore, but it is a phenomenon which is gaining popularity at companies and scholars last decades. Not without a reason of course, it is also becoming a necessity within current economies. Businesses are popping up, the world population is growing, and the world’s middle class is consuming more and more. Many companies have grown to leading ships in our economy, and are giving direction to the world’s development. Decreasing economies of scale, decreased market share, shortages in strategic assets and many other reasons are boosting revenues down. The choice for these firms is too slim down or to join operations with a competitor or strategically chosen firm. Especially the last couple of decades we have seen big transactions up to 183 billion dollars, especially outside national borders. Everyday newspapers are full of stories about merging companies, take overs or acquisitions. Although these M&A are meant to keep our economy healthy and boost our western economic development even more, the development of the western world is slowly shifting towards countries which have benefited a lot from our consumption society, like China. Over the years many companies have invested in China due to strategic reasons and to get benefits of the low wages and high resources, or like Barney (1991) said, to ‘get access to a set of difficult to trade and imitate, scarce resources and capabilities’. But China has also benefited from this and learned a lot about the Western way of doing business. Some of the largest multinationals are Chinese nowadays, and have grown to important players in the market. The western world starts worrying, because M&A deals are more and more coming from Chinese the Chinese side. After the financial crisis, Chinese companies made a record number of 298 cross border acquisitions alone (Economist Intelligence Unit, 2010). The question that therefore will be answered in this paper is: what drives these outbound M&A? 2. Theoretical framework
Within International management there are two theories that explain the success and failure of firms around the glove very well. These two are the 1) institutional theory and the 2) resource-based view. 1) Institutional theory: with the institutional theory one means the rules of the game. These rules can mean all formal (laws) and informal (norms, values) rules of a specific country. When doing business in a specific country, a company works has to live with the institutional framework of this country (Peng, 2012). These rules can be quiet different per country. For example, Hong Kong is quiet considered as open for newcomers, while China is makes direct investment only possible via a joint venture structure. 2) Resource-based view: Although institutional theory focuses especially on the external environment, the resource-based view focuses on the internal resources and capabilities of a firm. In times that external environment is not preferable for doing business, there are always companies who survive and even flourish in those times. These firms possess some internal capabilities which are not possessed by their competitors. A capability must be valuable, rare, inimitable and organized well enough to gain a strategic advantage, also known as the VRIO model (Peng, 2012). An foreign company must overcome the liability of foreignness, which is the disadvantage a firm has because of their non-native status. OLI Framework
Many scholars have tried to explain the success of firms in the past with those two models and have done this very successful. A theory which has integrated both theories, after revision of its earliest theory, is the eclectic paradigm of John Dunning (Dunning, 2008). This paradigm describes the ownership, location and...