Should You Consider Buying a Company to Expand Internationally?
Successful international expansion offers promising opportunities, but how to enter those markets is key to your success.
There are seven basic approaches to reaching new foreign customers, each offering advantages and disadvantages: ecommerce, distributors, strategic alliances, licensing, new foreign office, joint venture, and acquisition.
In this article, we look at buying another company as a path to new markets.
If you’re looking to grow sales in a new country quickly, you might consider an acquisition because you’re buying a business that is already established. You could buy a local company in a specific country, or you could acquire a larger company that already has local offices in one or more countries. More and more companies are choosing this route: according to KPMG, crossborder acquisitions now represent more than 35 percent of all acquisitions worldwide.
Advantages of acquisitions
Acquisitions have many advantages. You don’t need to share the sales growth with a partner or other third party, so you get an instant sales boost if you’re the acquirer. And there is no need to constantly negotiate with a local partner—you have full control over branding, product positioning, customer interactions, and growth strategies.
Successful acquisitions depend on finding the right target company, so good pre-purchase investigation (called due diligence) is essential, especially when evaluating businesses in countries you are not familiar with. You will need to look at all the normal financial, legal and business aspects, but must also be adept at assessing your acquisition target’s culture and business practices. And post-acquisition, your integration strategy is critical so that you maximize the combined value of the two companies.
Disadvantages of acquisitions
No doubt about it: acquisitions are a high-risk strategy. First, they are expensive: there is not only the purchase price to buy the company, but effective crossborder due diligence and contract negotiations are costly as well. And after the deal has closed, many companies underestimate the time and money required for effective integration.
The data varies, but in general, well over half of crossborder acquisitions fail to meet their financial and business objectives. It is challenging to balance the need for control and uniformity to streamline operations and minimize risk without destroying value in the company you acquired.
For example, which corporate policies (such as those dealing with ethics and financial controls) should be pushed through to the new organization, and how quickly? How quickly should IT/data integration occur? Significant talent is often lost during integration efforts, as existing management and employees may not be comfortable with the new corporate culture. Replacing lost talent is particularly difficult if you don’t yet understand the complexities of doing business locally. Acquisition integration is an art form, and many companies do not execute well domestically. Layering on crossborder complexities increases the degree of difficulty.
When evaluating an acquisition strategy, be sure to consider any local laws that restrict foreign ownership. While China and Saudi Arabia are two countries known for these laws, even the United States restricts foreign ownership of media, technology, and transportation companies.
When to consider a foreign acquisition
You should consider a foreign acquisition if: (1) you need quick access to a new foreign market with high potential, perhaps because of competitor activities, industry consolidation, or need for scale; (2) you already have seen success in a local market and are looking to grow even faster; (3) you have identified one or more high-potential companies open to acquisition; (4) you seek a high degree of control over the customer experience or your intellectual property; (5) you already have substantial international expansion experience; (6) your target company is located in a country where the currency differential allows you to buy at an attractive price; and (7) perhaps most importantly, you have a past track record of business integration success, and are willing to devote the necessary capital and resources to extend that success on a crossborder basis.
Now that we’ve looked at each of the seven major models, we’ll look how different companies have used them to successfully reach new international customers.
Doris Nagel is CEO of Globalocity, and has over 25 years of hands-on global experience, focusing on strategic partnering, indirect sales channel management, and market entry. She’s a frequent speaker and author, and is currently working on a book on international distributor networks. Check out Globalocity’s free infographic summarizing the seven international expansion models discussed in this series.