Multinational enterprises from emerging economies (EMNEs) have recently emerged as a new breed of acquirers around the world. In comparison with acquirers from developed economies, two unique and interesting patterns have emerged. First, during the pre-acquisition phase, EMNEs often bid higher for certain assets, especially those in developed economies. Second, during the post-acquisition phase, EMNEs tend to allow acquired targets in developed economies significant autonomy as opposed to centralized, tight integration. However, when venturing to other emerging economies, EMNEs do not typically bid higher and do not generally grant significant autonomy to acquired targets. As a result, two puzzles have emerged:

(1) Why do EMNEs often bid higher for acquisition targets in developed economies? 

(2) Why do they often grant significant autonomy to such targets?

Eagerness to tap into strong complementarity is likely to motivate emerging multinationals to bid higher. Tata Motors’ 2008 acquisition of Jaguar Land Rover (JLR) from Ford is a case in point. At $2.3 billion, the all-cash deal was costly—one of the top five largest cross-border acquisitions undertaken by Indian firms. While Tata Motors had a leading position in lowend vehicles in India, JLR’s two iconic brands and advanced technology complemented Tata Motors’ strengths. Such strong complementarity is typical between acquirers from emerging economies and targets from developed economies.

During the preacquisition phase, a number of stakeholders in the host country can jeopardize the deal.

Externally, politicians can weaponize the issue under the cloak of nationalism, the media can cause an uproar against “foreign takeover,” and regulators can scuttle the deal citing elusive criteria such as national security concerns. For example, in 2006, Vale of Brazil met severe resistance when attempting to take over Inco, one of Canada’s largest mining companies. This acquisition, according to local politicians critical of the deal, would allegedly “undermine Canada’s status as a force in the mining industry,” resulting in “the hollowing out of Canadian mining.”

Internally, target firm managers and shareholders need to be convinced that EMNEs are the most suitable acquirers.

Although bidding prices are important, target firm managers and shareholders often carefully weigh the match of the combination potential and organizational rapport between targets and acquirers. If emerging acquirers’ skills are viewed as too poor and legitimacy aspects as too low, they are not likely to get the nod.

To overcome such resistance, emerging multinationals typically deploy two tactics. The first is to provide a more lucrative offer by enhancing the acquisition premium. In the Vale-Inco case, Vale proposed an all-cash offer of $18 billion and the assumption of $1 billion in debt, totaling a whopping $19 billion. In 2016, China’s electronics giant Midea offered to buy Kuka, one of Germany’s most innovative engineering companies, for $5 billion, a premium close to 60%. The primary goal was to gain access to Kuka’s robotics technology—technology so advanced that Germany’s deputy chancellor made a rare public appeal for alternative German and European bidders so that the technology would be kept out of Chinese hands. However, with a premium so high, no one else came forward.

Second, granting targets significant autonomy is part of a crucial effort to soften target resistance and eventually reap benefits from these deals. Many emerging acquirers embark on a “high road” strategy in which acquirers deliberately allow acquired target companies to retain autonomy, keep the top management intact, and then gradually encourage interaction between the two sides. The high road obviously facilitates more rapport between the two sides. Many acquirers from developed economies use the “low road” (fast, aggressive integration), which often results in poor post-acquisition performance. Therefore, many emerging acquirers’ high road approach is preferred by targets.

How much autonomy to grant acquired targets is correlated with how high the bidding prices are. Higher bidding prices intensify the need to reduce targets’ resistance by offering them significant autonomy. Take the case of the largest cross-border acquisition undertaken by a Chinese firm: ChemChina’s $43 billion takeover of Syngenta of Switzerland in 2017. This deal is almost three times the second-largest one undertaken by a Chinese multinational, which was CNOOC’s $15 billion takeover of Nexen of Canada in 2013. Syngenta is one of the world’s largest providers of agricultural chemicals and seeds. At such a high bidding price, ChemChina simply needed to offer sufficient autonomy to Syngenta to ensure joint value creation. When announcing the deal, ChemChina’s chairman promised that “the running of Syngenta would remain in Swiss hands,” and Syngenta’s chairman (who would become vice chairman of the new combined group) assured all stakeholders that the deal “would minimize operational disruption.” In fact, Syngenta rejected a similar offer from Monsanto and chose to be acquired by ChemChina.

One reason was the autonomy that ChemChina would respect but that Monsanto would not. Finally, the goal for acquisitions is crucial in determining the magnitude of autonomy. If a primary goal is to gain access to knowledge assets (such as advanced technologies, strong brands, and superb talents), then a high road approach is advisable.

Otherwise, knowledge assets may simply dissipate. In a worst-case scenario, knowledge workers may leave and some may join competitors, causing the original rosy projections for the acquisition to collapse. In terms of the two puzzles, bidding higher and offering autonomy seem to be “two sides of the same coin.” As relatively inexperienced acquirers globally, emerging multinationals have to pay a higher price (literally) to win the nod from target firm managers and shareholders as well as host country governments and stakeholders. Having paid a higher premium, offering significant autonomy to acquired targets becomes one of the most effective means to ensure joint value creation. Taking the high road is not merely being overly kind or naïve, but is driven by a strong need to enhance the odds for acquisition success. In other words, the high road is not only politically smart and psychologically appealing, but also financially prudent.

CASE DISCUSSION QUESTIONS

1. Why do firms from emerging economies often pay higher premiums for targets in developed economies?
2. Why do they often grant significant autonomy to acquired targets in developed economies?
3. ON ETHICS: What are the benefits and drawbacks of their high road approach to post acquisition integration in developed economies?