Dec. 04, 2018
M&A is the central as well as an essential means for Japanese companies aiming to achieve growth in the global market. On the other hand, since global expansion through overseas M&A is completely different from the conventional organic way of development (independent development through existing management resources), it is often heard that even pioneers with a long record of acquisitions struggle to achieve the expected results. In many cases, the issue is to find a way to deal with the environmental differences, such as the difference in languages, business practices and legal systems.
However, it seems that these technical issues are not the only factors that determine the outcome. The difference between the companies that successfully use overseas M&A to enable business growth and the ones that are not able to do so seems to be in the viewpoint of treating acquisitions as either a one-off event or a starting line for long-term growth.
A long-term growth story is important to link overseas M&A to business growth
Needless to say, an acquisition is only the starting line for growth. Considering the premium included in the purchase price, it can be considered as a start from minus. In order to recover the minus portion and to deal with the competition, it is necessary to continue to take various steps in a timely manner over the next 5-10 years instead of taking a breather once the acquisition is completed. To execute these steps consistently in a sustainable manner, a ‘growth story’ is required that depicts the company’s position 10 years after the acquisition and the path leading up to it.
The creation of the growth story starts with visualizing specific goals for 5-year and 10-year time horizon. A rough example would be, “The company will continuously expand its scale to become one of the top 10 players in the market by the end of 5 years. It will then gradually expand its services and eat into the market share of the top 5 companies in the major industries to gain recognition in the market as a true Tier-1 player.” Setting such goals allows clarification with regards to what needs to be done and by when.
For example, additional acquisitions would be necessary as soon as possible for rapidly expanding the scale of sales. It is better for a company to acquire additional companies for a merger with the originally acquired company and shift to a management system that can take full advantage of the strengths of both. If we look at the broader picture, a review of the local management team might be necessary around the fifth year of repeated mergers and acquisitions since the required management style would be different. Business collaboration with Japanese headquarters and alignment of corporate governance should proceed slowly when focusing on rapid growth and move one step ahead when reviewing the management team. Many things can be understood by creating this kind of a long-term growth story. Actively sharing such a story with the stakeholders might align them and get them to work towards a common goal.
A committed attitude maintains consistency and sustainability of the growth story
In order to ensure that this growth story doesn’t end up as a failure, execution skills are also required. More specifically, it refers to the establishment of an incentive for the management of the acquired company and a continuous commitment from the company which is taking over. In general, the management team of the acquired company should be allowed to continue for a few years post acquisition in order to maintain business continuity. However, persisting with the conventional management style cannot be expected to lead to a higher growth rate. It is useful to introduce a new long-term incentive system in order to change the consciousness of the current management team and motivate them to realize the growth story. For example, it can be done by setting a multi-year KPI (Key Performance Indicator) linked to the growth story and giving a reasonable reward upon its achievement. Such kind of compensation design for the executives should be considered at the pre-acquisition stage and agreed upon with the management at the time of acquisition.
On the other hand, it is also important for the acquiring company to maintain a consistently committed stance. It is not possible to have consistency and persistence for the execution of the planned growth story if the person in charge changes in a short period of time at each stage, i.e., before the acquisition, during integration phase at the time of acquisition and subsequent business operations. It is essential for the acquiring company to maintain consistent commitment at least till the time the acquired company moves to a stable growth trajectory.
Under its vision “V2022”, Nomura Research Institute (NRI) aims to expand its global sales to \100 billion by 2022, and to realize this, it has so far acquired local firms in the US and Australia. Although NRI is in the midst of change at present, it hopes to evolve into a company that can contribute to the global growth of its customers through its own global growth.
NRI Research Paper Knowledge Creation and Integration October, 2018