Management Articles


Accelerating Growth Through Inorganic Means
Lessons from the Asian Region

By: Prof. Surinder Pal Singh

Surinder Pal Singh is currently Professor at , New Delhi. Prior to joining Rai Business School, he was associated with the corporate world for over a decade. He is a frequent speaker on the topics of B2B Marketing, Retail Marketing, Brand Management, Entrepreneurship, & Corporate Governance. He also contributes regularly to referred and non-referred journals in India. He can be contacted at


The majority of Asian economies have continued to benefit from strong economic growth which has filtered into the M&A markets, with little sign of this momentum ceasing in the near future. This paper discusses the rationale behind the M&A activity in the Asian region and the benefits for adopting this route. It concludes with some comments on the ways & means to achieve success in the M&A activity.

Why is the M & A activity growing in the Asian Region ?

Easing of regulations: Historically, regulations governing mergers in Asia were restrictive but with the economic liberalization in the area, deregulation has speeden-up. In India - a country largely untouched by financial problems that have hit other economies - foreign companies are now allowed to acquire controlling stakes in publicly listed Indian companies. In Thailand, it is now easy for foreigners to buy majority stakes in any of the country's commercial banks and finance companies. This superseded an earlier ruling that foreigners could take majority shareholdings only in troubled institutions and that their bids would be considered case by case. Similarly, South Korea has raised the limit on foreign ownership in local companies to 55% as part of an attempt to attract foreign capital to help it overcome its debt crisis.

Restructuring of family-owned businesses: Family-owned businesses have long played an important role in many Asian economies. In South Korea, the top ten chaebol contribute almost two-thirds of GDP. In India, seven of the top ten private companies are family-owned, and the top 50 family-owned business groups account for 30% of total industry turnover. These businesses once thrived in a protected environment where political connections mattered more than business acumen. But, this resulted in markets dominated by networks of privileged companies, many of which were not able to face competition from overseas. The outcome of this impacted the entire region which started witnessing an increasing trend of local governments introducing incentives to stimulate M&A activity in their countries. Sale of state-owned companies: State-owned companies account for a large proportion of most Asian economies. Generally, their performance has lagged behind that of private sector counterparts and they have rarely returned their cost of capital. In China, over 40% are said to be losing money where as in India, the estimate is half.

Privatisation is being seen as a way of raising performance as well as government funds. Aggressive privatization programmes are under way in several Asian countries. For example, Pakistan announced plans to offer stakes to foreign companies in the Water & Power Development Authority, Pakistan State Oil, Habib Bank and Pakistan telecommunications. Even in India, where privatization activity had been relatively limited, the government has sold stakes in more than 40 companies. In South Korea, stakes in state-run companies including Pohang Iron & Steel Company, Korea Telecom, Korea Gas Corporation and Korea Heavy Industries & Construction Company are up for sale.

Although most governments prefer to find local buyers for national assets, some have little choice but to accept foreign investors.

Overcapacity: Booming demand from an increasingly affluent Asian middle class has attracted foreign investment of more than $500 billion into the region. The 20% annual growth rate of this incoming capital outstripped GDP growth, had led to severe over-capacity in many industries. This excess capacity has prompted struggling companies to consider sell-outs and offer acquisitive companies a relatively cheap way to buy in. For example, Honda acquired Peugeot's 22% equity stake in a loss making manufacturing plant in Guangzhou province, Southern China, for less than half of the investment required to build an identical 50,000 car capacity plant from scratch. Honda believes it will fare better than Peugeot because it has a network of local suppliers, and has gained production and sales experience in China through previous joint ventures such as that with Wuyang-Honda, a manufacturer of engines for motorcycles.

De-regulation of fragmented industries: Many industries across Asia are highly fragmented and uneconomic in scale. For instance, the average Chinese paper company is a mere one-fifteenth of the size of its US counterpart. China's consumer goods and pharmaceutical industries are similarly fragmented.

These small companies have survived in markets shielded from open competition, but as Asia's economies integrate with the global economy and multi-nationals enter local markets, their future is threatened. To give them a fighting chance, Asian governments have been encouraging and sometimes forcing smaller companies to merge.

Sometime back, Malaysia introduced a scheme to encourage mergers among banks, in the run-up to the situation when the banking industry would be opened to foreign institutions in line with WTO directives. The message was clear: merge or die.


What value-creation does the M&A route provide to the companies in the Asian Region ?

Improved operating performance: Research shows that operating performance in several Asian countries is far weaker than it is in the West. Even in countries like India and China, it is estimated to be as low as 5 percent of US levels. This poor operating performance means that there are opportunities for companies with strong core operating capabilities to buy poor performers, cut costs, improve processes, and raise product and service quality.

GE Capital, the financial services arm of the General Electric Company, has used this approach to expand its business rapidly over the past ten years. In Asia, its targets have included United Merchants Finance of Hong Kong, SRF Finance of India, PT Astra Finance of Indonesia and GS Capital Corporation of Thailand. By improving systems and processes, lowering the cost of funds by virtue of its superior credit rating, and introducing a strong performance ethnic, GE Capital swiftly improved results. Most of these acquisitions were privately owned, making performance figures hard to come by. However, it is recognized that GE Capital has turned around the performance of many of its Asian targets, and that several have already won leadership positions in their markets.

Haier, China's largest white goods company, has completed more than 13 acquisitions since 1991 using the same strategy, and today boasts sales of about two and a half times greater than those of its nearest rival. Haier typically buys loss-making companies with fundamentally sound products, then applies its operating and brand management skills to enable it to charge premium prices. A strong distribution network in all China's leading cities and some 7000 sales points abroad, increases its product reach.

Economies of Scale: As industries such as pharmaceuticals and banking that could exploit scale economies have long failed to do so in several Asian markets, there is tremendous potential for buyers to create value by acquiring small companies and consolidating manufacturing, distribution and selling.

Rashid Hussain Bank of Malaysia has created value in this way. In 1990, when it was still a broking house, it acquired a controlling 20 percent stake in DCB Bank. In 1996, it pulled off the country's biggest ever banking merger by combining DCB Bank with Kwong Yik Bank to create Rashid Hussain Bank. The resulting scale won the new entity "tier 1" status under Malaysia's new banking scheme, and synergies across its businesses.

Restructured industry: Lack of competition has enabled local companies to thrive despite poor products and services. Therefore, there are opportunities for buyers to acquire these companies with the principal aim of not only improving existing businesses or capturing synergies, but of building entirely new business models.

Hindustan Lever Ltd. is changing the face of India's ice-cream in this way. A few years ago, the market was the preserve of small regional ice-cream makers. After acquiring them, Hindustan Lever now boasts a market share of about 70 per cent and is expanding its product range, investing heavily in advertisement and promotion to build stronger brands, and improving refrigerated transportation and retail cold storage facilities to increase product shelf-life and market penetration. What used to be a slow-growing, fragmented market, is now expanding by more than 20 percent a year.

Although Hindustan Lever is creating some value by improving the acquired businesses and capturing scale economies, most of which will be derived from [a] the way the company transforms the industry [b] creating a market for a higher-quality product & a broader product range [c] boosting demand to new levels.

Which resources are required by companies in the Asian Region to achieve success in their M & A efforts ?

Funds are an obvious requirement for would be buyers. Raising them may not be a problem for multi-nationals able to tap resources at home, but for local companies, finance is likely to be the single biggest obstacle to an acquisition. Financial institutions in some Asian markets are banned from lending for takeovers, and debt markets are small and illiquid, deterring investors who fear they might not be able to sell their holdings at a later date. The credit squeeze and the depressed state of many Asian markets has only made an already difficult situation worse.

However, apart from funds, a successful M&A growth strategy must be supported by three capabilities :- (a) deep local networks (b) ability to manage uncertainty (c) skill to distinguish worthwhile targets

  1. Local networks - As doing business in Asia is still driven by relationships, only companies with local market networks, will hear about the best deals and those that have a personal relationship with the seller, will be invited to bid for merger. Relationships that deliver these kinds of privileges are often the product of networks developed over decades and give companies that enjoy them an undeniable lead over foreigners in these markets. But less fortunate companies cannot afford to throw up their hands in despair and try to manage without it.

    One way to go about the task is to hire and develop a high-performing team of local managers who have ready-made insider networks. Another option is for companies to choose private equity partners who have the required insider capabilities. In return for their investment, knowledge and experience of the local business environment, private equity partners are likely to seek a high investment return.
  2. Management of uncertainty - To manage the high degree of uncertainty that currently exists in some Asian countries, buyers must define and monitor specific indicators to get an early warning of the scenarios that might unfold, then develop contingency plans that allow them to protect themselves in worst case scenarios, but to maximize any possible gains.
  3. Assessment of quality of potential targets - It is necessary that a company should be worth the price which a buyer is ready to pay for it. But assessing companies in Asia can be fraught with problems and unfortunately, several deals have gone bad as buyers failed to dig deeply enough. Concealed high debt levels and deferred contingent liabilities have resulted in large deals destroying value. In those cases where buyers have undertaken detailed due diligence, they have been able to negotiate prices as low as half the initial figure.

Due diligence is often difficult because disclosure practices are poor and companies often lack the information which buyers need. Most Asian conglomerates still do not present consolidated financial statements, leaving the possibility that sales and profit figures might be bloated by transactions between affiliated companies. The financial records that are available are often unreliable, with different projections made by different departments within the same company and different projections made for different audiences.

The economic climate has made things even worse as some companies desperately conceal liabilities or grossly overstate assets in a way that is hard for outsiders to detect. Moreover, seeking recourse under the local judicial system is likely to be slow and frustrating. Therefore, the best solution is prevention i.e. taking more time over due diligence than it is likely to be normal elsewhere. For example, GE Capital had to spend more than three months on due diligence for an acquisition in Asia whereas in the West, this process would have taken no more than a few weeks. Further, buyers should complement their own efforts with those of local experts especially in the areas of tax, accounting and compliance. Accounting items particularly debt, inter-company advances, payments due to creditors and contingent liabilities, need to be probed in greater detail. For this purpose, detailed interviews with customers, suppliers and financiers can be valuable sources of information to validate data from the target company. In short, it is better to spend time and resources on checks at the outset than face surprises and huge losses later on.

Concluding Remarks

The Asian region is characterized by a diversity of cultures, business practices and regulatory environments. Executing successful M&A transactions in this market requires a combination of in-depth knowledge of the region's long term potential, the courage to move quickly in the unknown & turbulent waters and finally, have the staying power.


© Copyright 2009, Prof. Surinder Pal Singh

The author assumes full responsibility for the contents of this article and retains all of its property rights. ManagerWise publishes it here with the permission of the author. ManagerWise assumes no responsibility for the article's contents.


Place "+" (without the quotes) in front of words that must appear; "-" to exclude articles with certain words; and put double quotes around phrases. For example, fantastic search will find all case studies with either the word "fantastic" or "search" (or both). On the other hand, +fantastic +search will find only case studies with the words "fantastic" and "search". "fantastic search" will find only case studies that with the phrase "fantastic search". Note: Searches will not find words, such as 'management', that appear in more than half of the articles or words less than five letters long.


Would you like us to consider your own articles for publication? Please review our submission and editorial guidelines by clicking here.