Globalization is creating intense business pressures, and for many firms, the quest to survive and prosper in the global market has become the paramount strategic driver of the accelerating boom in cross-border mergers and acquisitions (M&As), according to the World Investment Report 2000: Cross-border Mergers and Acquisitions and Development (1), published today by the United Nations Conference on Trade and Development (UNCTAD).
Cross-border M&As, particularly those involving large firms, vast sums of money and major restructuring of the activities of firms, are among the most visible faces of globalization. And, as with globalization generally, the impact of M&As on development can be double-edged and uneven. Concerns are voiced in developed and developing countries especially about the market power of transnational corporations (TNCs)(2) and potential anti-competitive implications of M&As. Notes UNCTAD Secretary-General Rubens Ricupero: "A global market for firms may need a global approach to competition policy, an approach that takes the interest and conditions of developing countries fully into account".
The new report examines the impact of cross-border M&As on the structure of global business and discusses the concerns of policy makers. "In many developing countries we see mounting questions as large transnational corporations acquire major local companies", adds Mr. Ricupero. "There are fears that foreign acquisitions can lead to entire industries falling under foreign control, threatening national sovereignty and technological capacity-building. In industries like media and entertainment, for example, the threat to national culture or identity can be a cause for concern. But it is important to note that worries about cross-border M&As are expressed even more vehemently in many developed countries, as we saw recently when, for example, Vodafone AirTouch of the United Kingdom acquired Mannesmann of Germany. It is important that policies be designed to minimize the costs and maximize the benefits of M&As".
The report provides extensive data on the current cross-border M&A boom, noting, for example, that last year there were 109 international M&As with individual transaction values of over $1 billion (see press release TAD/INF/056). UNCTAD expects a higher number this year. M&As are today the dominant form of foreign direct investment (FDI)(3) in developed countries. While FDI into developing countries continues to be dominated by greenfield investments(4), cross-border M&A activity is clearly on the rise there too(5).
Key factors underlying M&As
The current wave of unprecedented global and regional economic restructuring through cross-border M&As reflects a dynamic interaction between the various basic factors motivating firms to undertake M&As and changes in the global economic environment, in the pursuit of strategic corporate objectives, states WIR2000 (figure 1). The basic factors include:
- the search for new markets, increased market power and market dominance;
- access to proprietary assets;
- efficiency gains through synergies;
- greater size;
- diversification (spreading of risks);
- financial motivations; and
- personal (behavioural) motivations.
Following are the principal changes in the global economic environment of relevance to cross-border M&As:
- technological changes (rising costs and risks in R&D, new information technology, etc.);
- changes in the policy and regulatory environment (trade and FDI liberalization, regional integration, deregulation and privatization programmes); and
- changes in capital markets.
The various basic factors motivating firms to undertake M&As combine with the opportunities and pressures of the global economic environment to drive firms to pursue their overarching strategic goal: to defend and develop their competitive market positions.
M&As provide firms with the fastest way of acquiring assets in different countries. WIR2000 states: "M&As allow firms to acquire rapidly a portfolio of locational assets which has become a key source of competitive strength in a globalizing economy. In oligopolistic industries, furthermore, deals may be undertaken in response to the moves or anticipated moves of competitors. Even firms that would not want to jump on the bandwagon may feel that they have to, for fear of becoming targets themselves". The crucial role of speed in today´s business life is illustrated by such quotes from top business executives as "in the new economy in which we live, a year has 50 days" or "speed is our friend, time is our enemy". Survival in an increasingly competitive environment is therefore the overall strategic driver of cross-border M&As, especially as sanctions await those who fail to deliver growth and profits. One such sanction is being taken over; another is that rivals merge, resulting in strategic disadvantages for non-participating firms.
Are greenfield investments better than M&As?
The new UNCTAD report asks to what extent FDI entry through the acquisition of domestic firms is different - in terms of its developmental impact - from entry through the establishment of a new facility (greenfield investment). There is a perception that M&As do not necessarily add productive assets or new jobs to a country. At the heart of the anxieties is the notion that M&As are generally perceived as resulting mainly in a change of ownership and a shifting of control from domestic to foreign hands, thereby increasing the risk of foreign domination of segments of the economy. Moreover, M&As often lead to employment loss and can be used to reduce competition and strengthen market power. They may also lead to the breaking up of the acquired firm and divestment of its individual parts. Such concerns exist in all countries.
WIR2000 suggests that, especially at the time of entry and in the short term, M&As (as compared to greenfield investment) may involve, in some respects, smaller benefits or larger negative impacts from the perspective of host-country development. UNCTAD summarizes:
- Although both modes of FDI entry bring foreign capital to a host country, the financial resources provided through M&As do not always add to the capital stock, while in the case of greenfield FDI they do. Hence a given amount of FDI through M&As may correspond to a smaller productive investment than the same amount of greenfield FDI, or to none at all. However, when the only realistic alternative for a local firm is closure, cross-border merger or acquisition can serve as a "life preserver".
- FDI through M&As is less likely to transfer new or better technologies or skills than greenfield FDI, at least at the time of entry. M&As may lead directly to the downgrading or closure of local production or functional activities (e.g. R&D), or to their relocation in line with the acquirer´s corporate strategy.
- FDI through M&As does not generate employment when it enters a country. It may lead to lay-offs, although in the case of a firm which would have gone bankrupt if it have not been acquired, it can also maintain employment. Greenfield FDI, by contrast, necessarily creates new employment at entry.
- FDI through M&As can increase concentration and lead to anti-competitive results. It can also, however, prevent concentration from increasing when takeovers help preserve local firms that might otherwise have gone under. Greenfield FDI, by definition, increases the number of firms in existence and does not increase market concentration upon entry.
UNCTAD notes that most of the shortcomings of FDI through M&As, as opposed to greenfield FDI, relate to effects at entry or soon thereafter. In the longer term, when both direct and indirect effects are taken into account, many differences between the impacts of the two modes diminish or disappear. For example, cross-border M&As are often followed by sequential investments by the foreign acquirers; thus, over time, FDI through M&As can lead to enhanced investment in production just as greenfield FDI does. Similarly, cross-border M&As can be followed by transfers of new or better technology, especially when acquired firms are restructured to increase the efficiency of their operations. Differences between the two modes as regards employment generation tend to diminish over time and depend more on the motivation for entry than on the mode of entry.
In sum, UNCTAD concludes, host-country impacts of FDI are difficult to distinguish by mode of entry after a few years - with the possible exception of impact on market structure and competition.
UNCTAD also observes that there are broader policy concerns regarding the weakening of the national enterprise sector, loss of control over the direction of economic development, and the pursuit of social, cultural and political goals resulting from the activities of TNCs. The basic question here is what role foreign firms should play in an economy, regardless of whether they enter through greenfield investment or cross-border M&As. States WIR2000: "Each country needs to make its own judgement in the light of its conditions and needs and in the framework of its broader development objectives. It also needs to be aware of - and to assess - the trade-offs involved, whether related to efficiency, output growth, the distribution of income, access to markets or various non-economic objectives. And it needs to note as well that some of these concerns are raised by all FDI, although the specific nature of M&As may exacerbate them. Trade-offs between economic objectives and broader, non-economic ones, in particular, require value judgements that only countries alone can make".
M&As in normal and exceptional circumstances
WIR2000 concludes that, under normal circumstances, greenfield FDI is more useful, in terms of its developmental impact, to host countries than cross-border M&As. However, under exceptional circumstances - such as an economic crisis or major privatizations - cross-border M&As can play a useful role, which greenfield FDI may not be able to play, at least within the desired time-frame.
The need for rapid restructuring under intense competitive pressures or overcapacity in global markets may also make host countries find the option of FDI through cross-border acquisitions useful. The advantage of M&As in such conditions is that they restructure existing capacities that would otherwise risk downsizing or closure, the report says.
Competition policy crucial
Regardless of circumstances, WIR2000 stresses, the effects of cross-border M&As can be influenced by policies. Policy matters especially when it comes to the risks and negative effects of cross-border M&As.
For UNCTAD, the most important policy concern is competition policy. The principal reason is that M&As can pose threats to competition, both at the time of entry and subsequently. As FDI restrictions are liberalized worldwide, it becomes all the more important that regulatory barriers to FDI are not replaced by anti-competitive practices of firms. Efforts to attract FDI need to be complemented by policies that review the anti-competitive implications of M&As.
The report concludes: "Competition policy can no longer be pursued effectively through national action alone. The very nature of cross-border M&As - indeed the emergence of a global market for firms - puts the phenomenon into the international sphere. This means that competition authorities need to have in place, and to strengthen, cooperation mechanisms among themselves at the bilateral, regional and multilateral levels, in order to respond effectively to M&As and anti-competitive practices of firms that affect their countries. International action is particularly important when dealing with cross-border M&As with global dimensions, especially for smaller countries that lack the resources to mount and enforce such policies on their own".