Mergers and Acquisitions as a Mode of Entry

Topics: Mergers and acquisitions, Merger integration, Due diligence Pages: 10 (3447 words) Published: September 20, 2012
Introduction: Entry Modes: How are Mergers and Acquisitions different? The mode of entry is a fundamental decision a firm makes when it enters a new market. The mode of entry affects how a firm faces the challenges of entering a new country and deploying new skills to produce and/or market its products successfully. A firm entering a foreign market faces an array of choices to serve the market. According to Johnson and Tellis 2008 the entry mode choices can be grouped in 5 classifications: 1. Export: a firm’s sales of goods/services produced in the home market and sold in the host country through an entity in the host country. 2. License and franchise: a formal permission or right offered to a firm or agent located in a host country to use a home firm’s proprietary technology or other knowledge resources in return for payment. 3. Alliance: agreement and collaboration between a firm in the home market and a firm located in a host country to share activities in the host country. 4. Joint venture: shared ownership of an entity located in a host country by two partners, one located in the home country and the other located in the host country. 5. Ownership based entry modes: partial or complete ownership of an entity located in a host country by a firm located in the home country to manufacture or perform value addition or sell goods/services in the host country. Examples of this mode of entry are Mergers and Acquisitions –M&As-. The key attribute that distinguishes the different modes of entry is the degree to which they give a firm control over its key marketing resources. At one end of the spectrum is the export of goods, which has the lowest degree of control. Licenses, franchises, and various forms of joint venture provide a progressively increasing degree of control for the firm; at the other end of the spectrum, ownership-based entries, such as wholly owned subsidiaries, afford the highest control Johnson and TellisI, 1). Two opposing theories suggest alternative outcomes as control increases: the resourcebased view and the transactions cost view. The resource-based view holds that as the degree of control increases, the firm’s chances of success increase because the firm can deploy key resources that are essential to success. The transaction cost view holds that costs increase with increasing control of the mode of entry. Transaction cost theory suggests that the higher the resource commitment and desired control of an entry mode, the higher is the cost (Ibid, 2) Johnson and Tellis (2008) identify three firm-level variables (mode of entry, timing of entry, and firm size) and four country level variables (economic distance, cultural 1

distance, country risk, and country openness) that can affect the success or failure of a firm entering a new market. (page 6). Corporate M & As as an entry mode have become more popular across the globe during the last two decades; thanks to globalization, liberalization, technological developments and intensely competitive business environment. Merger and Acquisitions have evolved in five stages with the first wave starting as early as 1897 and lasting to 1904. These M & As took place between companies which enjoyed monopoly over their lines of production like railroads, electricity etc. The 5th Wave Merger started 1992 and was inspired by globalization, stock market boom and deregulation. The 5th Wave Merger took place mainly in the banking and telecommunications industries. They were mostly equity financed rather than debt financed. The mergers were driven long term rather than short term profit motives. The 5th Wave Merger was harshly affected by the burst in the stock market bubble (EconomyWatch, 17 July, 2010).

Although M & As are different legal transactions, they are treated synonymously in the literature, primarily because in practice a” merger is rarely a marriage of equals. ”( Horwitz et al.1). A merger is the joining or integration of two previously discrete entities. It...
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