Lecture 3 Notes on International Business by Shashank M Hiremath

7/23/2019 Lecture 3 Notes on International Business by Shashank M Hiremath

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InternationalBusiness,5th Edition.

› KAswathappa

International Business, Competing inthe GlobalMarketplace,6th Edition.

› CharlesWLHill &Arun Jain

Sha sha nk M Hirem a th



Early Alliances:Responding to Japan IBM’s Initiatives During the 1990s: Rebuilding

Competitiveness

› Motorola

› Apple Computer› Perkins-Elmer, Silicon Valley Group, and Elite Systems

› Toshiba

› Siemens

› Phillips




CurrentStrategic Alliance Initiatives› Electronic commerce

› Telecommunications

› Smarttechnologies

› Health care

› Ongoing relationships




Personal Computers:

Matsushita (low-end PCs).

Ricoh (hand-held PCs).

Telecommunications: NTT(value-added networks).

Motorola (mobile data pets).

Factory Automation:

TexasInstruments.

Sumitomo Metal.

Nippon Kokan.

Nissan Motor.

HealthCare:

Pfizer.

Microsoft.




New products,marketing andsales partners

Channelpartners

(corporate sales)

Barnes & Noble(in-store stores)

Chapters(Canadian bookstores)

United Airlines(in-flight coffee)

Dreyer’s(premium coffee

ice cream)

Pepsico(bottled coffee

beverages)

Alsea(Mexico)

Shinsegne(Korea)

Rustan(Philippines)

Bonvests(Singapore)

Sazaby(Japan)

Westin Hotelsand Resorts

(Coffee servedthroughout hotel)

Host Marriott Services(worldwide airport kiosksand in-hotel coffee cafes)

Geographicexpansion partners

Retail format

partners




Mergers and acquisitions (M & A) is the area of corporatefinances, management and strategy dealing which deals with

purchasing and/or joining withothercompanies. Though the two are often mentioned together, a merger is very

differentfrom an acquisition.

A merger, in a nutshell, involves two corporate entities joiningforcesand becoming a new businessentity,with a newname. It

usually involves two companies of same size and stature joininghands.

An acquisition, on the other hand, involves one biggerbusinesstaking overa smallercompany which may be absorbed into theparent company or run as a subsidiary. The company being

taken over is referred to as the ‘target company’ in thecorporate world.


(Contd.. . )



The huge and most talked about takeover or

acquisition of the year. The seven year oldBangalore based domestic e-retaileracquiredthe online fashion portal for an undisclosedamount in May 2014. Industry analysts andinsiders believe it was a $300 million or Rs

2,000crore deal. Flipkart co-founder Sachin Bansal insisted that

this was a “completely different acquisitionstory” as it was not “driven by distress”,alluding to a plethora of small e-commerce

players either having wound up or beenbought over in the past two years. Together,both company heads claimed, they werescripting “one of the largest e-commercestories”.




Asian paints signed a deal with Ess EssBathroom products Pvt Ltd to acquire its

front end sales business for an undisclosedsum inMay, 2014.

“The company onMay 14, 2014hasenteredinto a binding agreement with Ess Ess

Bathroom Products Pvt. Ltd and itspromoters to acquire its entire front-endsales business including brands, network and salesinfrastructure,”Asian Paintssaid ina filing to the BSEonWednesday.

Ess Ess produces high end products in bathand wash segmentin India and taking themover led to a 3.3% rise in share price forAsian paints.




Reliance Industries Limited (RIL) took over 78% sharesin Network 18 in May 2104forRs4,000crores. Network 18 was founded by Raghav Behl and includesmoneycontrol.com, In.com, IBNLive.com,Firstpost.com, Cricketnext.in, Homeshop18.com,

Bookmyshow.com while TV18 group includes CNBC-TV18, CNN-IBN,Colors, IBN7andCNBC Awaaz.




One of the leading Indian manufacturers, Merck

KGaA took over USbased Sigma-Aldrich Companyfor $17 billion in cash, hoping the deal will helpboostitslab suppliesbusiness.

Sigma is the leading supplier of organic chemicals

and bio chemicals to research laboratories andsupplies groups like Pfizer and Novartis with labsubstances.




Sun Pharmaceutical Industries Limited, a multinationalpharmaceutical company headquartered in Mumbai,Maharashtra which manufactures and sellspharmaceutical formulations and active pharmaceuticalingredients (APIs) primarily in India and the United Statesbought the Ranbaxy Laboratories. The deal is expected tobe completed inDecember,2014.

Ranbaxy shareholders will get 4 shares of Sun Pharma forevery 5 Ranbaxy shares held by them. The deal, worth $4billion, will lead to a 16.4 dilution in the equity capital of SunPharma.




Tata Consultancy Services (TCS),

the $13 billion flagship softwareunit of the Tata Group, hasannounced a merger with thelisted CMC with itself as part of the

group’s renewed efforts toconsolidate its ITbusinesses undera single entity.

At present, CMC employs over

6,000 people and has annualrevenuesworthRs2,000crores. Thedeal was inked a few days back.TCS already held a 51% stake inCMC. Sha sha nk M Hirem a th



India’s largest private power producer, Tata Power,purchased 30% stake in Indonesian coalmanufacturing firm for Rs 47.4 billion. Earlier thisyear, they sold off 5% of its stake in PT ArutminIndonesia (Arutmin) and PTKaltim Prima Coal (KPC)

forRs. 250 billion due to falling coal prices globally.Itplansto sell the remaining 25%stake for$ 1billionsoontoo.




The largestdairy playerin the world, Groupe LactalisSA,acquired the 18 year old Hyderabad based Tirumala

Milk products for a whopping Rs 1750 crore ($275million) in January,2014.

Founded in 1896 by D Brahmanandam, BBrahma Naidu,B Nageswara Rao, Dr N Venkata Rao and R

Satyanarayana, Tirumala is the second largest privatedairy company inSouth India.

Lactalisacquired 100%oftheirshares.




Aditya Birla Nuvo Ltd (ABNL) owned ABNL IT & ITeS Ltd.was sold to a Canadian based technology outsourcing

firm marking Aditya Birla’sexitforthe ITindustry.

The deal waschalked outwith a group ofinvestorsled byCapital Square Partners (CSP) and CX Partners (CXP) for$260million (approximately Rs. 1,600crore).




Billionaire Prem Watsa owned Thomas Cook India boughtthe Sterling Resorts India for Rs 870crores in, marking Thomas Cook’s entry into the

hospitality sector. Thomas Cook had earlieracquired Ikya HumanSolutionsin2013.




The search engine giant, Yahoo, acquired the one yearoldBangalore based startup Bookpad for a little under $15

million, though the exact amount has not been disclosedby either of the two parties concerned. While the dealvalue is relatively small, this was the first acquisition madeby Yahoo, and was much talked about and hence finds amention inourlist.

Bookpad wasfounded by three IITGuwahati passoutsandallowsusersto view, editand annotate documentswithin awebsite oranapp.



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Cognizant Technology on 12 November 2014 acquired Odecee inAustralia

Symphony Teleca Corp (STC) a U.S. based c ompany ac quired

Bangalore based AditiTechnologies. Google has ac quired the maker of high-altitude solar powered

drones, Titan Aerospace to bring deliver internet in the remotestc orners of the world.

Piramal EnterprisesLtd ac quired 20 percent stake in Shriram Capital

Ltd for 20.14 billion rupees. The US software giant, Microsoft c ompleted ac quisition of Nokia’s

mobile handset business exc luding the Nokia’s C hennai fac tory.

HSBC sold its Swiss private banking assets to Liechtenstein’s LGTBank . This dea l c ould have bearing on India’s fight against blac k

money. Swedish telecom gear firm Ericsson on 9 Oc tober 2014 signed a

Long-Term Evolution (LTE) or 4G network dea l with Bharti Airtel.

Union Government ordered merger of National Spot Exchange Ltdwith its holding c ompany Financial TechnologiesIndia Ltd.




Tata Chemicals took over British salt based in UK with a dea l of US $ 13billion. This is one of the most successful rec ent mergers and ac quisitions2010 that made Tata even more powerful with a strong ac c ess to BritishSalt's fac ilities that are known to produce about 800,000 tons of pure whitesalt annually.

Merger of Reliance Powerand Reliance Natural Resources with a deal of US $11 billion is another biggest deal in the Indian industry. This mergerbetween the two made it convenient and easy for the Reliance power tohandle all its power projec ts as it now enjoys easy availability of natural

gas.Airtel acquired Zain in Afric a with an amount of US $ 10.7 billion to setnew benchmarks in the telec om industry. Zain is known to be the thirdlargest player in Africa and being ac quired by Airtel it is deliberatelyincrea sing its base in the international market.ICICI Bank'sacquisition ofBank ofRajasthan at about Rs 3000 C rore is a

great move by IC IC I to enhance its market share ac ross the Indianboundaries especially in northern and western regions.Fortis Healthcare acquired Hong Kong's Quality Healthcare Asia Ltd foraround Rs 882 C rore and is now on move to acquire the largest dentalservic e provider in Australia, the Dental C orp at about Rs 450 C rore.




Daimler/ Chrysler.

RBS / ABN Amro (the other 2 parties of thebuying syndicate are notmentioned here).

AOL/ Time Warner.

NewsCorp / MySpace. Alcatel / Lucent.

Nokia / SiemensNetworks.

Quaker/Snapple. BMW’sacquisitionofRoverback in1994.




Alliances or Cooperative agreements caninvolve joint research efforts, technologysharing, joint use of production facilities,marketing one another’s products, or joiningforces to manufacture componentsorassemblefinished products.

Strategic alliancescan be grouped into 3 broadcategories:

›

Non-equity alliance.› Equity alliance.

› JointVenture (JVs).




Governing mechanisms:› Non-equity alliances:

Based on contracts.

› Equity alliances:

One firm takespartial ownership in the other.

› Jointventures:

Stand-alone organization owned by 2ormore firms.




Nonequity Strategic Alliance – alliance inwhich two or more firms develop a contractualrelationship to share some of their uniqueresources and capabilities to create a

competitive advantage. They are managed through contracts like

supply agreements, distribution agreements,licensing.




Mostcommon formsofcontracts:

› Supply agreements.› Distribution agreements.

› Licensing agreements.

Vertical strategic alliances:

› Firms tend to share e xp lic it k now le d g e

thatare codified.

› Licensing agreements, partners

exchange codified knowledge regularly. Ex:Genentech&Eli Lilly

GenentechR&Dfocused.

EliLilly manufacturing &FDA approvals.






At leastone partnertakespartial ownership position:

›

Strongercommitmenttoward the relationship. Allowthe sharing of ta c it k now ledg e :

› Tacitknowledge concernsthe “knowhow”.

Partners exchange personnel to acquire tacitknowledge:› 1984Toyota +GM =NUMMI

(NewUnited MotorManufacturing Inc.)

› 2010Toyota +Tesla to use the NUMMI plant.

Co rpo ra te ventu re c ap ita l isanotherequity source:

› Established firmsinvestinnew start-ups.

Tendsto produce strongertiesand greatertrust.




Joint Venture – strategic alliance in which twoor more firms create a legally independentcompany to share resources and capabilitiesto develop a competitive advantage.

Cooperative firms form an independent firm inwhichthey invest.

Profits from this independent firm compensatespartnersfortheirinvestments.




Created and owned by two ormore companies:

› Huluowned by NBC, ABC, and Fox.

Long-term commitment:

› Exchange both tacitand explicitknowledge.

› Frequentinteraction ofpersonnel.

Stepping stone toward full integrationofthe partnership.

“Try before youbuy”concept.

Used to enterforeignmarkets.







Costreduction.

Complementary skills. Supplying a range ofproducts.

Joint contributions in marketing &promotioncosts.

Capital and grants.

Required plantand equipment.

Bargaining power.

Cooperation inundertaking training.

Improved performance and efficiency.




Adverse selectionofpartners.

Moral hazard and failure to keep promises.

Hold up due to activity specific investmentsinotherpartnersfirm.

Accessto confidential information. Distributionofearningsand risks.

Potential lossofautonomy.

Changing circumstances may also affectthe viability ofa strategic alliance.




Comprehensive alliances.

Functionalalliances:

› Production alliance.

› Marketing alliance.› Financial alliance.

› R&Dalliance.




Selecta partner. Identify driversofalliance.

Reviewinternal relationships.

Review process with partner & share

information.

Select & Review partnering, & Allianceteammembers.

Discusstechnology requirements. Implement&reviewstrategy actionplan.






Economy ofScope:› NPV (A+B) >NPV (A) +NPV (B)

NPV (A+B) =Net Present Value of Firm ‘A’ & Firm ‘B’assetscombined.

NPV (A) =NetPresentValue ofFirm ‘A’ assetsalone. NPV (B) =NetPresentValue ofFirm ‘B’ assetsalone.

Transaction-CostTheory:

› Alliances are created to eliminate the controlcosts of in-house development & also to avoidthe costs involved ina markettransaction.




R&D. Productassembly inotherplaces.

Very LoworVery HighGrowth Rate.

Following the LeadersAttitude. Preference for Acquisition is more over the

Greenfield investment.

Balancing global and local responsiveness.














Usually a permanent agreement between

neighbouring countries. Complete removal oftariffsongoods.

Member countries are free to levy their ownexternal tariff on goods from outside the freetrade area.

Examples: North American Free TradeAgreement (NAFTA), European Free Trade

Association (EFTA), and ASEAN Free Trade Area(AFTA).








Similar to customs union, but in addition, the

common market removes restrictions on themovement of factors of production (labour,capital and technology)acrossborders.

Common market members must cooperate

closely in monetary, fiscal, and employmentpolicies.

Examples: European Union (EU) since 1990’shas free movement of labour, capital &

technology.






In addition to all the above, more formal politicallinksbetweencountriesexist.

Two or more countries share common decisionmaking bodiesand have commonpolicies.

Examples: Thirteen separate colonies operating

under the Article of Confederation grew into anew country – The USA. India, emerged afterunification of numerous kingdoms. Unification of East & West Germany in 1990. The Soviet Union,

former communist country in eastern Europe &northern Asia, included Russia & 14 otherrepublics was officially dissolved on Dec 31,1991.




Level ofIntegration

No Tariffsand Quotas

CommonTariffs andQuotas

NoRestrictionson Factor

Movements

Harmonized/

Unified Eco.Policies &

Institutions

Unified Eco.& PoliticalPolicies &

Institutions

Free TradeArea

Yes No No No No

Customs

Union

Yes Yes No No No

CommonMarket

Yes Yes Yes No No

Economic

Union Yes Yes Yes Yes No

PoliticalUnion

Yes Yes Yes Yes Yes




380 Regional Trading Agreements (RTA’s) have

beennotified by WTO (2007).

Countries are enthusiastic aboutbilateral tradeagreements.

Free Trade Agreements (FTA’s) accountfor70%ofall trading blocks.

Chile hassigned 54trade agreementstill now.

All the membersofWTO are bound to notify the

trading blocksinwhichthey participate.




Trade Creation &Trade Diversion. Prices&Competition.

Dynamic Effects.

EconomiesofScale.










The European Union (EU)is a politico-economic

union of 28 memberstates that are locatedprimarily in Europe.Through successive

enlargements, the Unionhas grown from the sixfounding states —Belgium, France, West

Germany, Italy,Luxembourg, and theNetherlands — to thecurrent28.








Economic Council.

EuropeanCommission.

Council ofMinisters.

EuropeanParliamentCommittee.

CourtofJustice.

Monetary Committee.

Economic and Social Committee.






The European Free TradeAssociation (EFTA) is a freetrade organisation betweenfour European countriesIceland, Liechtenstein,

Norway, and Switzerlandthat operates in parallel with– and is linked to – theEuropeanUnion (EU).

EFTA & EU have togetherformed European EconomicArea (EEA).






Mercosur (Spanish) &

Mercosul (Portuguese) isa sub-regional block comprising Argentina,Brazil, Paraguay,

Uruguay and Venezuela.Its associate countriesare Chile, Bolivia,Colombia, Ecuador and

Peru. Observer countriesare New Zealand andMexico.




It was established in 1989 in response to the

growing interdependence of Asia-Pacificeconomies and the advent of regional tradeblocsinotherpartsofthe world.

Comprisesof21 countries thataccount forabouthalfofthe totalworld’soutput.




Formed in 1969

(Originally AndeanPact) a customsunion comprisingthe South Americancountries located inthe Andes Mountainrange – Bolivia,

Colombia, Ecuador,and Peru.








Regional, inter-

governmental, politicaland economic unionconsisting of all Arabstates of the Persian Gulf,exceptforIraq.

Its 6 member states arethe Islamic monarchies of Bahrain, Kuwait, Oman,Qatar, Saudi Arabia, and

the United Arab Emirates(UAE).






On January 1st, 2012a newtrading block emerged,a Common Economic Space comprising of Russia,

Kazakhstan and Belarus. CES represents customsunion, which isthe 2nd stage of integration.








An international organization and economic cartel whosemission is to coordinate the policies of the oil-producingcountries. The goal is to secure a steady income to themember states and to collude in influencing world oil pricesthrougheconomic means.

OPEC is an intergovernmental organization that was createdat the Baghdad Conference on 10–14 September1960. OPECisheadquartered Vienna, Austria.

OPEC has twelve member countries: six in the Middle East,fourinAfrica, and two inSouthAmerica.

Members: Iraq, Kuwait, Iran, Saudi Arabia, Venezuela, Libya,United Arab Emirates, Qatar, Indonesia, Algeria, Nigeria,Ecuador,Angola, Gabon,Switzerland,and Austria.




The World Trade Organization is an organizationthat intends to supervise and liberalizeinternational trade.

The organization officially commenced on 1st

January 1995 under the Marrakech Agreement,replacing the General Agreementon Tariffs andTrade (GATT),whichcommenced in1948.

The headquarters of the WTO is in Geneva,

Switzerland.









Ministerial Conference – apex level.

General Council.

Councils:

› Council forTrade inGoods.

› Council forTrade inServices.

›

Council for Trade related aspects of IntellectualProperty Rights.

Committees:

› Committee ofTrade and Development.

›

Committee onBalance ofPayments.› Committee on Budget, Finance and Administration.

ManagementBodies– plurilateral agreements.






Integration?

Trade BlocksorRegional Trading Blocks? EuropeanUnion?

NAFTA?

Mercosur? APEC?

ASEAN?

SAARC? Commodity Agreements?




Trade Related Intellectual Property Rights

(TRIPS)? General Agreement on Tariffs & Trade

(GATT)?

World Trade Organization (WTO)? Impact and outcome of integration

betweencountries?

Levelsof integration between countries?

India’s role in the emerging issues of liberalization oftrade?




Organization structure ofEuropeanUnion?

Procedure of international strategicalliances?

Licensing?

Franchising? ContractManufacturing?

JointVenture?

ImplicationofWTO forIndia?




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Lecture 3 Notes on International Business by Shashank M Hiremath

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