Inorganic growth strategies such as acquisitions help firms access resources to enter new markets, expand customer base, and grow in size quickly. Historically, companies from the developed markets used acquisitions as a strategic tool to enter emerging markets such as India and China. However, recently, firms from emerging markets are increasingly acquiring brands from the developed markets and creating a global presence.
For example, in 2007, Tata Steel acquired the European Steel Company, Corus Group Plc for $12.02 billion, and the acquisition helped Tata Steel to become one of the largest steel manufacturers in the world. This acquisition also gave confidence to other Indian firms to acquire foreign brands and quickly expand to global markets. According to the World Investment Report 2014, acquisitions made by firms based in emerging markets contribute to about 37% of the world’s total value of cross-border acquisitions.
So, what is the rationale behind emerging market firms acquiring developed market brands? To understand the fundamental drivers of developed market brand acquisitions by emerging market firms, we have applied a natural language processing (NLP) method called topic modelling that helped us discover the latent themes or topics of the acquisition announcements by emerging market firms during 2007-12. Our analysis suggests that the emerging market firms acquire developed market brands for a variety of reasons. They acquire developed market brands primarily to gain access to complementary resources such as technologies, products, brands, distribution networks, global management practices, and new markets.
Enhance brand equity
Emerging market firms acquire developed market firms to rapidly expand into global markets and to secure global brands. In 2005, Lenovo acquired IBM’s ThinkPad for $1.75 bn to build a strong brand in the largest market of the US. Lenovo gained access to IBM’s brand and technological capabilities and strengthened its brand equity in the global market.
Innovation and new product development
By acquiring developed market brands, emerging market firms can generate tremendous post-acquisition growth through gaining access to superior technology and products. For example, Geely, a Chinese automobile manufacturer acquired Volvo Car Corporation in 2010 for $1.8 billion and went on to become a global brand. Geely used Volvo’s technology and design capabilities to improve the quality of its own cars. Once known for its cheaper cars, Geely has now moved up the value ladder by launching new cars for the premium segment.
Access global markets and distribution networks
Acquiring developed market brands not only helps emerging market firms access technological capabilities but also the existing distribution networks of the developed market firms. For example, in 2015, Cheetah Mobile, a China-based mobile internet company acquired MobPartner, a France-based mobile advertising network to set up a prominent international mobile advertisement platform, which allowed them to reach out to new customer and markets.
Learn global management practices and processes
Developed market firms, in general, are more organised and have systematic management practices and processes when compared to emerging market firms. Emerging market firms can obtain access to global business processes through acquiring developed market firms. Tata Consulting Services (TCS) acquired Citigroup Global Services Limited (CGSL) for all cash consideration of approximately $505 million in 2008. The acquisition handed TCS with unique capabilities in the banking domain.
Capitalize on luxury markets
The luxury industry is growing rapidly. According to Bain & Company, the luxury market grew 5% in 2018, to an estimated $1.3 trillion globally. Emerging markets are also continuously increasing their contribution to the global luxury market. This growth is primarily driven by the new-middle class and new age luxury consumers in emerging markets. It is estimated that the spending power of the new-middle class consumers is expected to reach $20 bn by 2025. These consumers express an increasing level of confidence in attaining life aspirations as their income levels steadily increase, and they often overindulge on aspirational expenditures. Emerging market firms are focusing on acquiring developed market brands to quickly capitalize on luxury market opportunity. For example, Shandong Ruyi Group, a Chinese Textile giant acquired Swiss luxury shoe and accessories brand, Bally in 2018. Similarly, in 2008, Tata Motors acquired luxury car maker Jaguar Land Rover for $2.3 billion.
Emerging market firms are increasingly focusing on acquiring brands from the developed markets. The main rationale behind this strategy is to expand aggressively and rapidly into global markets. In addition, these acquisitions are helping emerging market firms obtain access to unique capabilities. By acquiring developed market firms, emerging market firms can gain ready access to strategic resources such as technologies, products, brands, management processes, distribution networks, and global markets.
Views are personal.
Kiran Pedada is an assistant professor of marketing and Surbhi Gupta is a research intern at the Indian School of Business.
