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B School
 
EMERGING NATIONS: A DISADVANTAGE?
Finally, Overcoming The Identity Disadvantage
Managers of Emerging Multinationals, who show The Strength to Acquire Brands bigger than Themselves, are now Faced with an Unusual Paradox. They are Asked, as a Precondition to The Deal, to make Explicit Commitments in order to Preserve The Identity of The Acquired firms.
Issue Date - 12/05/2011
 
High profile, and often expensive, acquisitions of household brands in advanced countries by firms originated in emerging economies are increasing and raising a new set of managerial challenges for their initiators. Tata’s acquisition of Jaguar-Land Rover (JLR) in 2008, and Geely’s takeover of Volvo in 2010 are emblematic of this new trend. The Indian Tata conglomerate paid $2.3 billion for the iconic British brands and added another $1.9 billion to cover losses in the two years following the acquisition. It took the Chinese Geely $1.5 billion to own the no less iconic Swedish auto maker.

There is a widely held opinion that the leaders of emerging multinationals are paying a “national pride premium” or snatching cheap, but ill fated, targets. I will not add my voice to this conversation but rather focus on what happens after the acquisition paper work is completed.

Managers of emerging multinationals are faced with an unusual paradox. In most cases, they are asked, as a precondition to the deal, to make explicit commitments in order to preserve the identity of acquired firms. And also, they have to assume some level of control in the acquired firms if they want to realise the fruits of their investment.

The fact that the leaders of Tata, Geely, and other emerging multinationals are asked to make such commitments reflects an identity disadvantage. Because of who they are, emerging multinationals are suspected of planning to transfer jobs to low cost countries, of “stealing” technologies or, in extreme cases, of threatening national interests of host countries. Emerging multinationals are feared to destroy brand equity as they are usually perceived as less prestigious than the brands they acquire. Finally, emerging multinationals are thought to be less managerially sophisticated and, thus, less able to add value to their acquisitions.

To deal with the identity disadvantage, the leaders of emerging multinationals have to address two related questions. Does an investment require involvement in running the acquired company? If yes, how should we proceed to achieve some level of integration without destroying the value of acquired companies?

Overcoming the identity liability is relatively easy when the answer to the first question is no. In this case, the investors deliberately avoid intervention in acquired firms and are content with a shareholder role. This approach is successfully followed by business magnates and sovereign funds from oil rich countries, for example. These investors prefer to fly below the radar, in advanced countries, and make minority, though sometimes very significant, investments in large firms.

 
When acquisitions are pursued for strategic and operating synergies, managers of the parent company need to ponder over four approaches to identity integration outlined in a book I co-authored with John Kimberly: Assimilation, Metamorphosis, Federation and Confederation.

Assimilation consists of deleting the identity of an acquired firm and bestowing on it the identity of the new parent. This approach is viable when the identity of the new parent is positively valued and is perceived as more desirable by the internal and external stakeholders of the acquired organisation.

Metamorphosis involves deleting the identities of both sides to a merger and crafting a new organisational identity, where the respective stakeholders can feel at home. The approach is recommended when the two sides are perceived as roughly equal. It pre-empts the feeling by either party of being invaded by the other.

Federation is a scenario where the identities of merged organisations are preserved, and managers promote a common identity within which local identities can continue to thrive. This approach is recommended when the preservation of legacy identities is considered as necessary. It is the case, for example, in the luxury industry where a brand’s equity is intimately tied to a unique organisational identity.

The last approach is confederation where managers deliberately refrain from promoting a common identity. Instead, they identify few areas of synergies and set up processes and ground rules for cooperation between otherwise autonomous organisations.

Because of the up-front identity disadvantage in advanced countries, leaders of emerging multinationals should avoid substantive or symbolic initiatives that might be interpreted as a part of a plan to delete the identity of an acquired firm (assimilation or metamorphosis). Federation may be a more realistic target, but only in the medium term as it may take several years for people on both sides (Volvo, Geely or Jaguar, Tata) to feel as parts of the same group where each can thrive in their own way. In the short term, confederation appears as the most feasible option. As has been the case in Renault-Nissan, identifying specific projects for cooperation enables people on both sides to meet, learn about each other, overcome stereotypes, and collaborate in a non-threatening environment.

As the sense of being together on the same boat grows on both sides, managers can gradually shift integration gears and consider melting inherited identities into one (metamorphosis) or wrapping them within a broader identity (federation). With strategic use of time and a gradual approach to integration, leaders of emerging multinationals can cope effectively with the, “you can buy it only if you don’t touch it” paradox, and overcome the identity disadvantage.

          

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