The Hindu Business Line : See acquisition as a growth platform

Indian firms tend to prefer organic growth when it comes to the Indian market, but have looked to acquisitions to enter international markets, observes Bala Chakravarthy, Shell Chair Professor of Sustainable Business Growth, IMD, Switzerland ( www.imd.ch), and author Profit or growth? Why you don’t have to choose (Wharton). He cautions, however, that international acquisitions are expensive and can bring some nasty surprises.

“For example, Dr. Reddy’s faced that with its Betapharm acquisition in Germany. The rules of the game changed soon after that acquisition making it far less attractive in hindsight. Similarly, with hindsight, one can question whether Tata Motors paid too much for Jaguar Land Rover, especially given the precipitous drop in demand for JLR products due to the current economic crisis.”

Yet, Bala is of the view that M&A (merger and acquisition) is necessary; because organic growth is a more tortuous path to enter international markets. “The challenge lies in integrating the acquired businesses effectively.”

Excerpts from an email interaction:

Is the pursuit of both growth and profitability a practical goal in today’s economic condition?

Obviously, this is difficult in today’s environment. Clearly, survival has to be the first priority. That dictates a tilt towards profitability. Strict cost control, reducing the firm’s break-even point, managing cash flows astutely and trimming or postponing investments are all important initiatives. And yet, this storm too shall pass. What next?

Here is where smart competitors will keep at least one eye on long-term growth. Instead of a blanket drive to cut all costs, they will protect some of the expenses that are strategic.

For example, they may ring fence expenses that are targeted at talent development or to fund key R&D projects, albeit at a reduced rate. These initiatives have long lead times and the money saved in the short term may not be worth the time lost in the long run.

Furthermore, companies that have more robust balance sheets may aggressively go after key acquisitions that can strengthen their global market position or expand their capabilities or do both. Witness Ford’s investment in Chrysler or TCS’ purchase of Citigroup Global Services.

Does the aggressive appetite for inorganic growth often lead to overvalued acquisitions?

Yes, indeed. But overvaluation per se is not the issue, if there is a clear strategy to acquire market access or a competence platform that can be leveraged for new opportunities that are many times bigger. Acquisition is not an end in itself; rather it should be seen as a growth platform.

Are there signs of unsustainable profitability or growth that companies can watch out for, as early warning?

Unsustainable growth is easier to track. Growth is about new market opportunities. We know how to analyse the risks here through robust what-if-analysis. Unsustainable profitability is the harder one to track.

Sustained profitability comes from a firm’s distinctive competencies. In the current environment, under the pretext of cutting fat, overzealous management teams can begin to cut the firm’s muscle as well.

For example, outsourcing may be a good way to boost profitability in the short term, but are the savings sustainable when the economy recovers? Can the talent that is shed be easily replenished when needed? Ensuring that a firm’s distinctive competencies are not compromised in any cost-cutting initiative would be a way to sustain profitability.

Your views on the economic downturn and the countermeasures taken by various governments. (A perspective that can be relevant to CEOs.)

Instead of seeking an outright bailout, enlightened CEOs should seek governmental incentives that ride on the back of market forces. Take, for example, German new car sales. It jumped 22 per cent in February, beating the auto industry slump. The gain was explained in large part by government incentives worth 2,500 euros to scrap an old clunker and buy a new car that polluted less.

The governmental incentive was a catalyst to spur purchase, without determining which firm to support. Companies that had the better quality product and better value proposition for the consumer benefited; while others did not.

Do B-schools have to design newer programmes in the context of the financial meltdown?

Not newer programmes per se, but a serious revision to what they do — getting back to basics. The focus has to be once again on creating real value. Risk management is another topic that needs to be emphasised in every course in the curriculum.

Would you like to specify a few global best practices that the Indian B-schools can usefully adopt?

There is need for a candid discourse and debate on the events of the past year. We need to understand. We need to grieve. At schools like ours there are a number of forums for doing that. I would suggest that for starters. I know Harvard is fast tracking a course on economic history.

Courses on business and economic history have either been dropped or short-changed. These need to be revived and taught by the best minds on the faculty. There was also too much of a swing to free market capitalism in our curriculum. Social responsibility and regulation need to be brought back. Some of the leading schools are already doing this.

To passing out grads of B-schools, what is your advice?

Two pieces of advice:

As the analysis of the current disaster shows, there was no grand villain to blame but a lot of willing accomplices. Show courage and don’t become a willing accomplice. If an idea sounds too good to be true, maybe it is. Challenge it.

Be optimistic. This is the bottom (hopefully) of the worst crisis that we have had in decades. Things can only get better from here.

On the involvement of academia in corporate governance, as directors, do you have any views?

Academics, like other talented members from industry and government, can play an effective role in the governance of firms.

The breadth of knowledge that academics bring can complement the specialised knowledge of their other board colleagues. It is important, however, that a consulting relationship is not pursued in parallel with a board appointment. That can create a serious conflict of interest.

D. MURALI
AccountSpeak.blogspot.com

More Stories on : Interview | Mergers & Acquisitions | Account Speak

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Invisible support

Power of attorney transactions decried

Monetary policy at the crossroads

See acquisition as a growth platform

Leveraging info for greater organisational value

Financial products

Board exams