Siah Hwee Ang: More than one way to reach a market

Selecting your target carefully before making an offer is of prime importance. Photo / AP

Opinion

Is making an acquisition a better way to win Asian customers?

While collaboration is known to provide a quick avenue into the Asian markets, it comes with the complexities of managing a partnership.

Acquisitions, on the other hand, are a way to avoid dealing with a partner. This is possible in contexts where acquisitions are permitted and when acquisition targets are available.

Collaboration provides benefits - increased market power, access to new markets and opportunities, lowered costs, sharing risks, boosting innovation and technological developments, facilitating growth and overcoming trade barriers, to name a few - and acquisition presents similar advantages.

So what are the advantages of acquisitions, beyond not having to negotiate with a partner? While many forms of collaboration do not allow control over the local market operation, acquisitions allow full or majority control, if you own the majority of the target organisation. This control can be crucial when operating in Asian markets. Usually, acquisitions conducted in Asian markets are majority-owned as opposed to full ownership, such as wholly owned subsidiaries, as local knowledge is still important and required.

With ownership comes the ability to make adjustments to local operations as needed. This is sometimes important as a foreign company may bring with it a unique system or proposition that needs to be integrated with local operations.

What's the catch? Making an acquisition can be challenging, given that many industries in Asian markets are still regulated. Most of these industries allow collaboration instead, which, of course, generates more value for the host country as the local partner learns from the process and receives tangible benefits from the collaboration.

Some of the reasons for the non-performance and failure of acquisitions relate to the target organisation - paying too much, inadequate evaluation of the target in the due diligence process, and difficulty in adding value and achieving synergy to cover the added costs and complexities.

Acquisitions are also known to fail when key managers in the target organisation leave for fear of redundancies or if there is a mismatch between the management styles of the acquiring and acquired organisations.

Before anything else, the careful selection of acquisition targets is of prime importance. Acquisition targets may not be readily available. Successful local market players are unlikely to be easy targets. They are more likely to be the ones that will persist with their business models and operations instead of opting for a change in ownership.

It is important to watch for local market players that are queuing up to get a bailout from the acquiring organisation. Turning around a company's fortunes is a tough business, and while it is widely believed that it is easier to turn around an ailing organisation than to build one from scratch, the statistics are stacked against this claim.

This makes the middle group of local market players the most realistic targets for acquisition.

A due diligence process that recognises the possible pitfalls and failure trigger points of acquisitions is then needed to narrow down target organisations.

Finally, failure to integrate, be it structure or systems, is a major issue in acquisition. A perfect integration with full ownership will result in the creation of a wholly owned subsidiary. On the other hand, a good integration with partial ownership will turn into a well-oiled collaborative venture.

Professor Siah Hwee Ang is BNZ Chair in Business in Asia, at Victoria University of Wellington.