Globalisation: more on buying and selling firms
Guyana and the wider world
Let us continue our exploration of globalisation by answering the basic question: what are the major factors driving the present wave of global buying and selling firms, that is, cross-border mergers and acquisitions (M&As)? Technology Among the many possible answers, I would stress three. One is clearly technology. The bias of new technology gives an advantage to global scale firms. One reason for this is the enormous resources required to promote research and development (R&D). In order therefore, to reap the full benefits of any breakthroughs in this area, firms have to be able to market the products of their innovation on a global scale. Indeed, innovation itself has become the primary consideration in firm success these days. This gives firms incentives therefore, to try and corner the market on innovation, in order to keep their competitors at bay. Financial innovation Another factor driving the present wave of M&As is financial innovation. There have been many recent innovations in the way capital is raised. As a result, while trade bank loans continue to be the main source for financing M&As, increasing emphasis is being placed on such techniques as exchange-of-stock options. In this case stocks are swapped and no cash transfers occur. As many as one-quarter of the 109 mega deals that I referred to last week as occurring in 1999 were stock swaps. The significant feature of these techniques is that the firms, not the banks, provide the means of financing the deals. Alongside these debt swaps, there is also an increased resort to the issuance of corporate bonds to finance deals. Policy environment A third factor, and perhaps the most important of all, has been changes in policy direction. These have transformed the regulatory environment in which TNCs operate. This environment now not only paves the way for TNCs to grow, but positively encourages their growth through the particular mechanism of buying and selling firms. In the past, cross-border M&As were tightly regulated, although domestic M&As were permitted. In many countries these restrictions on cross-border M&As no longer apply, thus freeing the way for such M&As. Another supportive regulatory change has been the promotion of economic integration and cooperation arrangements, which permit the free movement of capital within the integration arrangement. It is no coincidence that, overall, the European Union has more cross-border M&As than any other region in the world. Even here in CARICOM, we can see the effects. Firms have moved from Trinidad to Guyana to buy out local firms (e.g., the Republic Bank/NBIC deal). They have also moved from Trinidad and Barbados to buy out firms caught up in the distress in the Jamaican financial markets. Also, Jamaican firms such as the Sandals Resorts Group have also moved to other CARICOM resort areas to acquire hotel properties. Such regulatory developments have encouraged the view, now widespread, that the global buying and selling of firms is here to stay. Outcome From my perspective, this outcome of globalisation is not as surprising as it is to some persons, for a number of reasons. To begin with, there were earlier waves of M&As, particularly in the heyday of "free trade" in the late 19th and early 20th centuries. Further, the historical record has shown a clear tendency for firms in market systems to consolidate. We should not delude ourselves. Firms compete only when they have to. The objective of every firm is to capture the market for itself, by out-competing the others. This monopolistic tendency therefore, coexists with the fact of competition. Firms do not go out of their way to invite competitors into their industry, purely for the sake of competition. To the contrary, they see their own survival as dependent on defeating their competitors. As long as this remains the situation, there will be strong tendencies for firms to consolidate. What form this consolidation will take, depends on the particular stage of development of the firm and the economic environment. Horizontal M&As This point is also evident if we examine the strategic concerns in the different types of M&As. As we saw in earlier articles, horizontal M&As occur when firms acquire or merge with competing firms in the same industry. Here the motive is obviously to secure an advantage in the market. That is, first to reduce competition (by buying out a competitor), and then later hopefully turning this into a competitive advantage for the firm over the others still in the industry. Vertical M&As Vertical M&As occur when a firm purchases another that is either backward or forward in the chain of production. Here also the motives are clear. The objective of the firm is to reduce uncertainty. By buying backward it secures its supplies. By buying forward it secures market outlets. Firms would also expect that such M&As would lead to a reduction of transactions costs and the securing of economies of scale through forward and backward linkages. Conglomerate M&As Conglomerate M&As occur when firms buy other firms in unrelated industries. Here also the motives are obvious, and these have been well documented in the literature. One such motive is to diversify the risk and not to put all the firm's "eggs into one basket". Another motive is that such M&As enhance the prospects of achieving economies of scale, through the acquisition or merger. When United Nations bodies like the United Nations Centre on Transnational Corporations (UNCTC) and UNCTAD poll firms involved in M&As, they frequently find that from the foreign investors perspective, a cross-border M&A offers two advantages compared to greenfield investments. One is the speed or swiftness with which this type of FDI can be concluded. Unlike greenfield investments that require construction of new productive capacity, M&As begin with productive capacity already in place, even though this might have to be re-structured. The process is therefore quicker. The other advantage flows from this. With already installed capacity, the firm immediately acquires properties, assets, goodwill, and a going enterprise. Next week we shall look at the economic impact of M&As.
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