Cross border acquisitions and mergers: learning processes of Mexican corporative groups.

SUMMARY

During the recent years, firms have used acquisitions and mergers (A&M) as one of the main mechanisms to expand their operations into international markets. Cross-border acquisitions and mergers are now a distinctive feature of the dynamics of the global economy. Acquisitions and mergers also have been utilized to a great extent by Mexican firms, particularly by the large indigenous business corporations, known as business groups. This mechanism of growth has become a very significant element for the globalization of those business groups. The objective of this paper is to explore some of the issues arising around this phenomenon, particularly those related to technological and organisational learning. The analysis focuses on the learning trajectory of the acquiring firms and the accumulation and integration of capabilities during the A&M process. Two cases of large Mexican business corporations are analysed and contrasted: Cemex and PULSAR-ELM. The main conclusion is that the different learning trajectories they have followed, allowed these companies to accumulate different capabilities at different depths, which seems to explain the different results they have obtained from the execution of cross border A&M: while CEMEX (with a specialised trajectory) has learned to acquire and integrate firms, PULSAR-ELM (with a diversified trajectory) has just been able to complete the first phase.

KEYWORDS

cross-border growth; acquisitions and mergers; technological learning; organisational learning; acquisition trajectory; differential capabilities; firm integration

1. INTRODUCTION

Since the end of the eighties, acquisitions and mergers have become one of the main mechanisms used by the firms to expand their operations to the international markets. As countries' markets become more closely integrated through the process referred to as globalization, cross border acquisitions and mergers, that is, those involving firms from two or more countries, have been increasingly utilized by both, firms from industrialised and late industrializing countries (LICs), as a mechanism through which they seek to increase their market power, enter into new markets or enhance their capabilities (Kang & Johansoon, 2000; Mody & Shoko, 2000).

The 1990s wave of cross-border acquisitions and mergers was in real terms at least five times larger than its predecessor in the 1980s (Evenett, 2003). (1) After the liberalisation of trade and investment implemented by Latin American countries, cross-border A&M have played a significant role within the strategy of large firms from that region. In 1998, A&M involving firms from Latin America were nearly six times larger (nearly 64 thousand US Dollars) than those undertaken in 1990 (Garrido, 2001). Though this mechanism, many Latin American companies have turned into multinational enterprises operating in a diversity of countries and competing with global leaders. That is the case of some large Mexican business corporations such as CEMEX, VITRO, Bimbo, Femsa, Savia-Pulsar, GRUMA, and Penoles. (2) From 1990 to 2000, Large Mexican Corporative Groups carried out more than 250 cross-border acquisitions and mergers. In 50 % of those cases, the Mexican groups got the operational control of the firms acquired or merged, while in other 25% of those transactions they got a minority share of foreign companies which became their technological or trading partners (Garrido, 2001). (3) Corporate acquisitions and mergers have been extensively studied by scholars and analyst in strategic management, finance and economics for a long time (Csiszar y Schweiger, 1994; Zollo, 1997). However, most of the studies are focused on firms from industrialised economies. There are still few analysis on the acquisitions and mergers undertaken by firms from late industrialising countries. Also, the attention devoted to the analysis of technological issues involved in the A&M process is rather limited (Haspeslagh and Jemison, 1991). One of the reasons for this is that, in very few cases, the main motive for A&M seems to be the access to technology per se (James, A. et al. 1998). However, this does not imply that technology is an unimportant dimension of the acquisition process, particularly for firms from LICs.

This paper aims to contribute to this gap. In particular, it focuses on the learning trajectory and the accumulation of technological and organizational capabilities experienced by large corporations from a late industrialising country, through the execution of cross border acquisitions and mergers. The cases of two large Mexican business corporations are analysed and contrasted. The paper explores whether or not the learning trajectories followed by the Mexican business corporations have enable them to accumulate the capabilities required (technological and organizational) for the acquisition (phase I) and integration (phase II) of resources, knowledge and abilities, the two phases of the A&M process framing our analysis. We argue that there are two types of learning trajectories the firms can follow along their growth process: a) a specialised trajectory or b) a diversified trajectory, and that the leaning trajectory followed by the firms prior to the execution or frequent use of A&M as mechanism of expansion, is crucial for the results of the integration process of the firms involved in A&M operations.

There are two questions guiding this work:

1. To what extent the nature of the learning trajectory (specialised or diversified) of the acquiring firms over their lifetime, facilitates or inhibits the completion of the two phases of an A&M process? In other words, is there any relationship between the specialised/diversified learning trajectory of the acquiring firms and the accomplishment of a partial/complete acquisition-integration process?

2. What learning processes have the Mexican firms experienced and what kind of capabilities have they accumulated by acquiring foreign firms?

This study is based on the case of CEMEX and Savia /Pulsar, two large Mexican business corporations. Founded by the early 1900s, the first firm is currently one of the largest cement producers in the world. The second is one of the youngest groups (created in 1983), which by the year 2000 reached a significant presence in the agro-biotechnology business (The criteria for the selection of these cases are explained in section VI).

This article is organized into four sections. The next section briefly reviews the categories for the analysis, and discusses the significance of learning within the A&M process. This part is aimed to create a framework to explore the relationship between learning trajectories and the accumulation and integration of capabilities during the phases of the A&M process. Based on that framework, section three examines and compares the cases of two Mexican groups, CEMEX and SAVIA-PULSAR-ELM. Section four concludes the paper with a discussion of the key findings, deriving some implications for theory and practice. It also advances some ideas for further research.

2. A&M, TECHNOLOGY AND LEARNING: REVIEW OF LITERATURE AND THE METHODOLOGICAL APPROACH

A&M: Conceptual issues and the focus of previous studies

Acquisition refer to the purchasing of assets or stocks of part or all of another firm (or other firms) that result in operational control of the whole or part of the other firm. Mergers describe the case where two separate firms are combined or amalgamated into a single business (Lorange et al., 1987). A merger is mutually desired and instigated. In practice a merger process follows the acquisition of a business company, and it is difficult to differentiate between them. In this work, we use the term 'acquisitions and mergers' to refer indistinctly to any of these processes. Cross-border acquisitions and mergers involve assets and operations of firms belonging to two different countries (UNCTAD, 2000).

There are various reasons why a firm would choose to expand through A&M (Penrose, E., 1959; Jensen and Ruback, 1983; Lorange et al. 1987; Franks et al. 1991). According to Penrose (1959), acquisitions may facilitate entry into new field and to limit competition.. Acquisitions may develop competitive strength, extend the scope of an existing business, increase market power or add to the know-how of the firms (Lorange et al, 1987). There is a generalised view that financial and market issues tend to dominate the firm's decision to undertake A&M, the technological function's influence on that decision remaining rather limited (James et al., 1998). There is for example, an extensive research on the economic performance implications of acquisitions, primarily focused on the question about the ability of acquisitions to create value (Jensen and Ruback, 1983; Franks, et al. 1991). Research has also focused on the product-market characteristics of acquisitions and their performance implications (Haspeslagh and Jemison, 1991). There are also several contributors to the study of post-acquisition management issues, mainly focusing their studies in the negative consequences of post-acquisition integration processes on the organization of the firms (Hogan and Overmyer-Day, 1994).