Academic journal article Journal of Business Strategies

International Acquisitions from a Network Perspective and Market Based Competencies

Academic journal article Journal of Business Strategies

International Acquisitions from a Network Perspective and Market Based Competencies

Article excerpt

Abstract

Trillions of dollars are spent annually on international acquisitions and often these acquisitions are considered a failure in regard to performance. The importance of valuation of an international target firm cannot be underestimated, especially in the global market where networks of strategic alliances are required to compete. For international acquisitions--the value of the firm is often its network of relationships. Thus, the valuation by the acquiring firm takes on new--more complex--dimensions than simply reviewing the Balance Sheet and Income Statement results. This manuscript explores the valuation of international target acquisitions when the intangible value is its network of strategic alliances. Additionally, the manuscript employs theory and grounded examples to develop a theoretical model for future examination.

Introduction

The market for international expansion is certainly a complex one for managers to navigate. The complexity is increasing as domestic markets continue to become more concentrated, economic barriers to trade continue to fall, transportation and technological advances lower physical barriers to trade, and international trade blocks continue to form. Yet each of these complexities can also be considered a motivation as, now more than ever, firms are encouraged to enter the global marketplace. One popular choice of international market entry, international acquisition, continues to be a course taken by many firms.

In 1984, in the United States alone, nearly $36 billion was spent in acquiring 241 firms. In ! 998 it was estimated that over $1 trillion was spent in international acquisition activity (Business Week, 1998). In 1999, in the United States alone, $1.75 trillion in mergers and acquisitions were announced and $3.4 trillion was spent worldwide (Hitt, Harrison and Ireland, 2001). Recent examples of this strategy are Petro-Canada's $3.2 billion acquisition of Verba Oil and Gas GMbH (January, 02), China National OffShore Oil Co.'s $598 million purchase of Repsol-Yepeo (December, 01), Tyco International's $650 million purchase of Paragon trade brands (December, 01), and Baxter International's $470 million purchase of Asta Medica Onkologie GMbH & Co Kg (SEC filings, 2001, 2002).

In 2002, over 5,400 deals worth more than $346 billion were announced through September 30 (Business Week, 2002). The managerial importance of the international acquisition phenomena is made apparent by the size of these figures alone. Subsequently, expansion through acquisition continues to be a viable international strategy utilized by firms. As these numbers grow--so grows the importance of the correct valuations of a target firm. Managers will no doubt be forced to access both the traditionally tangible assets and the often more important intangible market based assets to arrive at an appropriate valuation of an international acquisition.

Increasingly the question becomes how to value potential international acquisitions. Numerous answers, that are often conflicting, have been proposed. Most of these focus on valuation with disregard to one of the true values of the target firm: its network of relationships. This manuscript suggests the potential value of a target firm's intangible assets (such as the firm's network or relationships) is much greater than the value of the tangible assets (Lusch, Harvey, and Speier, 1998). Specifically, this manuscript focuses on the determinants of value of an acquisition when its value is its network.

Researchers have investigated the logic behind the acquisition/ownership decision for years. The Transaction Cost Theory (Williamson, 1975) rationale for acquisition rests with minimizing the sum of production and transaction costs. The Resource-Based View (Wernerfelt, 1984) suggests that through acquisition a firm can maximize value by gaining access to the target firm's valuable resources (Madhok, 1997; Ramanathan, et. …

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