CHAPTER NINE

Conclusion

As we write this, the world has entered its second major economic crisis in four years. Europe is gripped by a series of sovereign debt crises, and the United States is facing the prospect of a double-dip recession. Last year, 2011, started off strong but finished with a seemingly endless parade of economic, stock, and earnings downgrades. Analysts agree that the United States and Europe will face several years of slow growth.

Amid all the volatility and uncertainty that’s racked the global economy in recent years, one thing is certain: Asia’s star is rising. Asia is no longer a workshop to the world, and the region’s economies are starting to decouple from the West. Asian consumers are driving domestic growth, and that shift is happening at a critical time. Western consumers are struggling, and it will be years before those economies get back to normal.

Companies across the world were homing in on Asia’s consumers before the current crises set in. Asia’s middle class is growing at a frenetic pace, and over the next two decades, the bulge of the world’s middle class will shift from the West to Asia, according to the Brookings Institution. That agency reckons Asia will be home to 66 percent of the world’s middle class by 2030, up from just 28 percent in 2007.

Multinational companies recognize this and are making moves to capitalize on the shift. They’re moving research centers to this region and scaling up investment in Asia-driven research and development (R&D): Novartis, Abbott, Cisco Systems, IBM, and General Electric (GE), to name a few, are pouring millions of dollars into R&D facilities in Asia, bringing innovation closer to tomorrow’s customer base. They’re putting global heads of key divisions, like finance, marketing, and strategy, in Asia, another sign this region will increasingly pilot global growth for many companies. Cisco, for example, created a new position of “chief globalization officer” in 2006 and sited that role in Bangalore. The ongoing global economic crises will add momentum to this trend. Bank of America relocated its global marketing head from Boston to Hong Kong in late 2011. In February 2012, ad agency DDB Worldwide announced it was moving its global creative headquarters to Shanghai. More will follow.

NOW IS THE TIME TO GO ON THE OFFENSIVE

The message is clear: Asia is where it’s at. Asian companies must recognize they don’t need to be on the defensive during this volatile period. To be sure, Asia’s economies are linked to the West and an incidental effect of a global slowdown will occur. The fundamentals in Asia, however, remain strong. We have one message for Asian companies: This is your time. If you want to track Asia’s trajectory, you need to think about inorganic growth.

M&A has not traditionally been part of the corporate mindset of many Asian companies. Multinationals have been the predators in almost every sector, and Asian companies have been too fragmented or too focused on creaming the easy profits from the natural, steady organic growth this region has delivered. Now is the time to turn that around and think about regional or global opportunities. Markets are down, the stock prices of multinationals have been hammered, and valuations are low. Asian executives who put inorganic growth on the annual planning agenda can leverage this opportunity and catapult their organization onto the global stage.

M&A THE ASIAN WAY

Asian companies don’t need to look to the West for signals or lessons on consolidation. Asia is rewriting the M&A rules. Historically, consolidation happens within the country first, and the big players buy other big players and the smaller guys get the squeeze. That doesn’t apply here. It’s fine to pursue cross-border deals before you buy domestically. Asian companies have embraced this strategy because they have to: The heavy weight of the public sector in many local economies and the large presence of family-run firms mean certain industries or companies won’t consolidate in line with free market forces. That’s given rise to a notably higher rate of cross-border activity than you’d theoretically expect, given the state of development of local industries or economies. It’s worked fine so far. We think Asian companies should continue to pursue cross-border deals, rather than wait for the public sector or family companies to ponder the benefit of free market forces.

That said, the public sector would do well to add M&A to its own agenda. Public companies owe it to their shareholders and taxpayers to transform themselves into competitive front-runners. M&A is one of the best tools for the job. Governments can use M&A to help create a more competitive domestic industry that can survive and thrive under the inevitable wave of liberalization that’s sweeping through the region.

Markets or industries don’t need to consolidate fully, in the Western sense. We believe that Asia’s fragmented consumer markets will give rise to local optima, which will derive value from different sub-segments. Asian companies with strong local insights are positioned to emerge as champions in this scenario.

Those champions don’t need to be big to triumph in the ring. That’s another rule that Asia has thrown out the door. Smaller companies can buy bigger rivals, even dominant, global brands. Look at Tetley Tea or Geely. Your company might be small, but your balance sheet may be healthier, and your leverage lower, than bigger, better-known Western brands. That can help aspiring Asian companies move sharply up the value chain by acquiring a better technology or brand or gaining access to new markets.

Global multinational corporations (MNCs) are getting cheaper as their stock prices fall, and they’re realizing they’ve grown too big. That’s going to create a “starburst” effect, as companies start selling off bits and pieces that aren’t their core business. In 2011, Kraft Foods, ConocoPhillips, Tyco International, and McGraw-Hill announced they would break up their companies to focus on their core operations and maximize shareholder value.1 The pickings will be plentiful for Asian companies that want to grab a business unit or two and extend their reach westward. The ongoing volatility will continue to foster an environment ripe for spin-offs and divestments.

Asian companies should consider entering markets where global players fear to tread. Indian and Chinese oil and gas companies have made bold acquisitions in countries that multinationals have struggled in, like Vietnam, or can’t enter, like Iran. More will follow, sensing opportunity. When the world was gripped by news of Greece’s possible default in October 2011, Japan’s Mizuho Financial Group quietly took a 15 percent stake in Vietnam’s largest listed bank, Vietcombank, for $567 million. The strategic move gives Mizuho a leg up in a fast-growing emerging market that’s opening its financial services sectors to foreign companies.

THE KEY TO SUCCESS: PLANNING AHEAD

There are risks en route. The majority of M&A fail to deliver value, largely due to bad planning. All too often, executives make snap decisions without doing proper due diligence, or they fail to understand the cultural differences between the staff or organizations.

Clashes in corporate culture have mired many post-merger integrations, and Asian companies will increasingly need to navigate the complexities of national culture clashes, too. The business culture, management style, and work-life balance differ around the region and differ between East and West. As more Asian companies buy Western competitors, Asian executives will need to build expertise in bridging these cultural gaps.

They need to build, buy, or hire expertise in the fundamentals of M&A. Asian companies don’t typically build M&A into their annual planning cycle, but they should. Companies need to understand where their industry is on the consolidation curve, and map a strategy to ensure they come out on top. Companies who are successful at M&A plan and execute their acquisitions with an attention to detail. They use a framework to identify and track potential targets for several quarters or years. They buy companies that fit and can deliver value; they don’t buy on impulse.

We are strong advocates of conducting a deep and thorough operational due diligence (ODD) that helps a buyer understand the local subtleties and opportunities for value creation that can be made through operational improvements. M&A are not simply adding a competitor’s revenue to your balance sheet; they mean capturing synergies and finding ways to unlock hidden value.

Planning is as critical as execution. The bulk of failed mergers fall apart during integration. The bankers who made the match have taken their fees and departed. This is where the real work begins. Many Asian companies lack the experience in merging two operations and fail to understand the complexity and detail behind this critical part of the job. An integration program team, composed of top-tier, in-house resources and outside experts, should be put in place and empowered to get the job done. We advocate the use of specific tools to identify, test, execute, and track initiatives to unlock synergies, and techniques to equip and motivate line managers, sales staff, HR teams, and IT departments to support and drive value creation.

THINK GLOBALLY, ACT GLOBALLY

Asian companies have gained stature and prominence over the last 15 years, but by and large, the bulk still run export-oriented operations. Only a few have made moves to become global champions. Now is the time to do that. Asia is at an economic tipping point; not only will Asian consumers drive domestic growth, but Asia will become the engine of growth for the world. A structural shift in the economy has occurred, and a corresponding structural shift needs to occur in the mindset and ambitions of Asian companies if they want to become global champions.

Not every company needs to undertake M&A. Still, inorganic growth should be part of each company’s planning cycle and long-term strategy.

Everyone wants a piece of Asia. Local players will have plenty of competition going forward from multinationals, but for now, those companies face weakness at home, in terms of their stock price if not earnings growth. The odds are stacked in favor of Asian contenders. This is Asia’s time. Make it yours, too.

Notes

1. Ryan Dezember, “Mergers, Acquisitions Fall by the Wayside,” Wall Street Journal—Asia, October 3, 2011, 25.