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Session 07

Ricardo Abelardo Meja Peralta
April - 2015

Resume Session 05
Types of Globalization.
Globalization's drivers.
Global Industry. World market.
Economies of scale and scope.
Global market characteristics &
strategy. Indicators of its
Multi-domestic strategy.
Drivers of nature or extent to a
potential globalization of industry.

Build? Or Buy? Entry modes

Entrance dilemma 1
So, if there are:
High entrance barriers.
Good local name and intangible assets.
Good customer base.
Foreign market to a near saturation point.

Entrance dilemma 2
So, if there are:
Green field to investment.
Not a suitable target company.
Government-related benefits for FDI.
Mature own market.
Risk of cannibalizing the local existing

Build? or Buy? Common

considerations (1)
Both require similar disciplines in terms of
cost-benefit analysis and careful execution.
Go-to-market timing.
Infrastructure, customer base, cash flow,
inventory, physical plant, distribution network
and supply chain. Vital ingredients.
Process to inherit.
Is it what you want?

Build? or Buy? Common

considerations (2)
Justification to sacrifice your ability to tailor your
Stable management team. Accounting. Topnotch team.
The financial infrastructure is the matter.
Ready to grow?
Problem: A lot of stress on working capital and
ability to measure.

Build or Buy? Common

considerations (3)
Teams strength, infrastructure to support new
customers, solid financial controls and metrics.
But experience at deal-making.
Advisors payment, only for results achieved.
Very fast growth of an industry.
Fit in with the marketplace.
Changes to the market that could affect the
Attention to the underestimation of costs.

Building matters
Costs, equipment costs, tax costs,
inventory costs, changes to accounts
Additional support staff.

Acquisition matters
Outside help, such as lawyers, attorneys,
and other intermediaries. Bounty of fees.
More complex, the larger those fees will
IT and accounting systems.
Economies of scale. Insurances, spaces,
bonuses, promotions, etc.
Be prepare. Potentially costly surprises.

Rules for successful acquisition

Rule 1. Choose a core objective.
Boost market share. Build economies of scale. Recruit top talent.
These corporate objectives are all fine, but they cant -and
shouldnt- collectively color your acquisition strategy. Choose one
goal and tailor your acquisitions accordingly.
At Cisco, we were pretty clear that we wanted to enter new
markets, writes Volpi(*), who is now a partner at Index Ventures.
We fundamentally believed that we could better leverage [our]
distribution channel with a product portfolio that was broader than
what our development organization could produce within the
necessary timeframes. As a result, we bought lots of young
companies with promising technologies or products.
(*) Mike Volpi, former chief strategic officer of CISCO, under Volpis management in the 1990s,
Cisco was an M&A powerhouse (75 acquisitions in seven years)

Rules for successful acquisition

Rule 2. Develop a portfolio.
Technology acquisitions are not standalone events. They
should build an interconnected investment portfolio. Some
of those investments will pan out; others will not.
No matter how good of an acquisition process you
assemble, the odds are stacked against you that any given
deal will succeed, Volpi writes. . . . Its only when you
assume a certain failure rate to be the norm and believe in
the occasional massive success that the probability and
expected value equation begin to work in your favor.

Rules for successful acquisition

Rule 3. Understand that valuation is secondary.
Roughly 20 percent of a firms acquisitions will yield huge
results. You are better off hunting down those two out of 10
outsized returns and paying up to a 30 percent
premium for them than you are trying to finagle the best
Worry less about what you pay and worry more about what
the market is saying about the products and the companys
fit with your organization.

Rules for successful acquisition

Rule 4. Built incentives for the long-term.
These incentives, often tied to revenue, earnings, market
share, or other milestones for the acquired firm, are too
easily gamed. And they create a schism right at the starting
point of the two companies relationship
Simple acquisitions using stock rather than cash are much
more effective. Of course, they help retain the acquired
employees. But most importantly, this aligns the incentives
of both parties: Everyone involved wants the acquirers
stock price to increase in value.

Rules for successful acquisition

Rule 5. Second-best is not enough.
Corporate development teams are often faced with this decision:
Buy an expensive market leader, a relatively cheaper No. 2, or
one of many tier-two competitors. Though the first option appears
the most expensive (and, therefore, not a good deal), leaders
must to think less about price and more about value.
There were many YouTube wannabes in the market, Volpi says.
Google could have acquired any one of them for 1/10 YouTubes
value. Instead, it paid $1.75 billion for the market leader, a
seemingly enormous amount of value for a young company. But
few today would suggest that it was not a good deal. Through that
bold move, Google closed out that market.

Rules for successful acquisition

Rule 6. Match your leverage points with their
The synergies are important. But what does it really means to
align synergies? There are two examples: distribution and
operations. The former places the acquired companys best
product into a large distribution channel of the acquiring company,
and the latter uses the larger companys economies of scale to
procure of services (bandwidth, server, storage) or scale
production for the smaller company.
Volpi also warns against cost-cutting. When acquisitions are
justified by cost-cutting in the acquired company, that should
always raise a skeptical eyebrow.

Strategic entry modes

Direct related to the decision-making process for location,
determined by internal and external factors.
There are six basic entry modes:
1. Agents and distributors.
2. Representative or branch office.
3. Licensing.
4. Join venture.
5. Wholly owned subsidiaries (M&A).
6. Wholly owned subsidiaries (Greenfield).
A company should make a final determination based on
how much power is needed to achieve the original goal.

Timing of market entry

When demand becomes significant and rights of access
are available A window opens!
When competitors have established a strong market
presence or pre-empted available sources The window
is closed!
In such case, only M&A or innovation will enable entrants
to open the window.
Timing of market entry is also restricted by the maturity of
the market.
There are time pressures on MNCs to determine the right
timing of entering the target country.
Finally, external factors and internal factors will have an
important influence to choose the mode of entry.

Timing of entry by maturity of market

In resume
If the managing people, infrastructure and industry
have all to support the expansion strategy cost
Making an acquisition is likely the way to go.
To the methodical type that likes to put their stamp
on every aspects and not handle well the fear of
the unknown.
Build-out strategy is the best course of action