Challengers Are Going Global Through M&A and Partnership

Challengers Are Going Global Through M&A and Partnership

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Challengers Are Going Global Through M&A and Partnership

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  • In This Article
    • Although the number of M&A deals undertaken by challengers has fallen, the size of those deals is increasing.
    • As global challengers become stronger, they are entering partnerships with multinationals on more equal terms.
    • To succeed, challengers and multinationals alike should learn how to collaborate and partner effectively.

    2013 BCG Global Challengers

    Global challengers—high-growth companies that are from emerging markets and are rapidly expanding overseas—have changed their deal-making strategies in recent years. The number of overseas deals completed by the 2013 challengers fell from 130 in 2007 to 99 in 2011, but the average deal size increased from $484 million in 2007 to nearly $1.1 billion for deals announced in 2012. (See Exhibit 1.)

    Three Different M&A Strategies

    The history of M&A by the 2013 BCG global challengers has three chapters—the two years prior to the September 2008 onset of the financial crisis, the two years during the crisis, and the two subsequent years of turmoil. Companies within the same industries and countries have tended to respond in similar ways to the global economic climate. We describe their movements as expanding in the turmoil, integrating after the crisis, and returning home. (See Exhibit 2.)


    Expanding in the Turmoil. Services companies seized the global financial crisis as an opportunity to build their overseas presence. They increased the total value of their cross-border M&A by 107 percent from 2006 through 2008 and from 2010 to 2012 while reducing the value of domestic deals by 76 percent.

    During that time, VimpelCom became the sixth-largest global telecom company largely through acquisition. Its $6 billion deal to buy Wind Telecom, including a 52 percent stake in Orascom Telecom Holding, added 123 million mobile subscribers.

    Global challengers from China also increased their overseas M&A activity during the financial crisis. The value of their outward-bound M&A deals rose from $7 billion in the two years prior to the crisis to $30 billion in the two following years, before settling at $23 billion in the last two years. Sany Group’s acquisition of Putzmeister is emblematic of this trend.

    Integrating After the Crisis. Many challengers, notably consumer goods and Brazilian companies, increased their outbound M&A activity during the financial crisis and are now digesting those deals. The value of outbound deals by Brazilian deals went from $5 billion before the crisis, to $9 billion during the crisis and immediately afterward, and $2 billion in the most recent period. Godrej Consumer Products has not made any sizeable deals since its acquisition of Indonesia’s Megasari Makmur, its largest ever, in May 2010.

    Returning Home. Some challengers, especially commodity players and Indian companies, were active before the global financial crisis but have pulled back. Commodity companies, especially from Russia, reduced their cross-border deal value by 43 percent between the 2006–2008 pre-crisis periods and the most recent 2010–2012 period. Instead, many of them are doing domestic deals. At the end of 2012, United Company Rusal moved to acquire several Russian aluminum companies.

    The value of outbound deals by Indian challengers has declined from $26 billion in the first two-year period to $3 billion in the third two-year period. They are seeking to augment their capabilities by integrating a series of smaller domestic acquisitions. (See “The Allure of Home.”)

    The Allure of Home

    Not all challengers have found an easy path to profitability overseas. Many challengers—and emerging market countries more broadly—have slowed their overseas investments. Some countries are reducing their foreign-investment exposure and refocusing on domestic markets.

    This movement of capital back home and the inflow of capital from developed economies have helped to level the playing field between mature and emerging markets. Prior to the financial crisis in 2008, mature markets averaged more than $1.1 trillion in inbound investment annually, twice the amount invested in emerging markets. By 2011, parity had almost been reached. Mature markets received $748 billion in inbound investment, while emerging markets received $684 billion. Three macroeconomic trends explain the shift: rising demand for capital, poor overseas demand, and shifting currency values.

    First, the domestic demand for capital in emerging markets—particularly fixed assets—is bringing money back from overseas. Brazil’s Petrobras, for example, announced recently that it was close to finalizing the sale of $6 billion in assets in the Gulf of Mexico to raise funds to develop fields in Brazil.

    Second, the economic crisis in Europe and U.S. has led companies to re-evaluate investments in mature markets. Third, depreciation of local currency, particularly in Latin America, has decreased the purchasing power of many companies overseas.

    Examining the six years altogether, commodities challengers still completed the largest number of cross-borders deals: they closed 34 percent of all deals completed by challengers even though they represent only 20 percent of this group.

    Game-Changing Partnerships

    As the nature of M&A and dealmaking changes, so does the relative importance of partnerships with large, established companies from mature markets. The growing strength of the global challengers means that these partnerships can be negotiated on more equal terms.

    Traditionally, partnerships between global challengers and multinationals have focused on access to resources, brands, markets, technologies, and low costs. These types of collaborations will continue, but challengers and multinationals will increasingly come together to develop new products, exchange—rather than transfer—technology, and enter new markets.

    While reliable statistics on the growth of partnerships are scarce, the nature of many recent partnerships demonstrates how these relationships are evolving to become game changing.

    Technology Exchange. China National Chemical Corporation (ChemChina) and the U.S. company DuPont formed a 50-50 venture in 2012 that combines DuPont’s leading fluoroelastomer technology with ChemChina’s integrated manufacturing. The venture will produce fluoroelastomer gums and precompounds, most likely in a new plant in China.

    New Markets. Indian auto player Bajaj Auto and Kawasaki, a Japanese maker of motorcycles and other vehicles, have entered an alliance to jointly market their products. Bajaj and Kawasaki have been partners in various ventures for about 30 years but have rarely collaborated on marketing or selling. The two companies launched a pilot in the Philippines in 2003 that will be expanded to Indonesia in 2013 and possibly to Brazil.

    New Products. Indian pharmaceutical company Dr. Reddy’s Laboratories has entered into a deal with Germany’s Merck to jointly develop inexpensive versions of cancer therapies that are losing their patent protections. Dr. Reddy’s will take the lead in early product development and testing while Merck will handle manufacturing and late-stage trials. This division of labor represents a reversal of roles. Typically the company from the emerging market has done the manufacturing, while the mature-market company has done the product development, but Dr. Reddy’s has ample experience in developing low-cost medicines.

    New Supplier Relationships. Global challengers are starting to provide expertise, rather than just raw materials, in their supplier relationships with multinationals. Mexichem, the Mexican chemical company, and Occidental Chemical (Oxychem), a U.S. chemicals firm, are exploring the construction of an ethylene plant. Oxychem would convert the ethylene produced by the plant into vinyl chloride monomer (VCM) that it would sell exclusively to Mexichem. VCM is a key ingredient in PVC products, a key product line for Mexichem.

    Of course, like M&A transactions, partnerships have their own challenges. (See “The Dilemmas of Partnership.”)

    The Dilemmas of Partnership

    Partnerships offer many advantages to challengers and established companies, but differing cultures, policies, and growth trajectories can complicate or destroy these arrangements. If managed poorly, a partnership can limit growth of the two companies rather than expand their reach.

    Both sides need to have a firm and consistent understanding of the scope of the partnership, the expectations of all parties, the degree of control of all parties, and an exit strategy. These core elements often get overlooked. (See the exhibit “Questions You Should Answer Before Partnering.”)


    Partnerships often enable one party to enter a new market. But the terms of the deal sometimes constrain one party from making alliances with other entities or entering different markets. Too often allies become adversaries. Companies need to fully understand the second-order and long-term effects of any proposed partnership.

    External stakeholders also play an important role in the dynamics of partnerships. Lawmakers and regulators can make decisions that radically change the economics of a deal. These risks need to be carefully managed.

    Breaking up is also hard to do. The dissolution of a partnership can damage one or both parties beyond the lost business opportunity. A breakup in the Middle East cost each party billions of dollars in anticipated payments.

    Fortunately, well-crafted partnerships, such as the arrangement between Sara Lee and Godrej Consumer Products, can lead to a smooth dissolution. In 2011, Sara Lee (which has since split into two companies) sold its share in its Indian joint venture with Godrej because it no longer fit the U.S. company’s strategic direction. The breakup was uneventful because the original agreement clearly anticipated such an exit.

    Next article: An Action Plan for Challengers, Multinationals, and Governments »

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