The New World Order
By Steve Rosenbush
Across the world, companies in emerging markets are acquiring
assets in the U.S., Western Europe, and other developed markets.
What does it all mean?
Just
three
years
ago,
IBM
was
known
for
making
some
of
the
most
coveted laptops
in
the
world.
The
sleek,
black
ThinkPad,
with
its
fold-out
keyboard, was
a
status
symbol
in
corporate
conference
rooms
and
on
the
business
class section of airplanes.
That’s why it was so surprising to some in 2005 when the U.S. tech giant sold its PC business for
$1.75 billion to a relatively obscure Chinese computer maker called Lenovo. Big Western corporations
had come to view China and other parts of the developing world as low-cost sources of manufacturing
and labor. But suddenly a young company from an emerging market was looking to play a vastly different
role, using strategic M&A to carve out a position of global leadership. Lenovo even promised to
open a self-styled Innovation Center in Research Triangle Park, N.C., a sign that the company intended
to lead on a global scale.
Such deals, where a multinational corporation or investment fund in an emerging market acquires
assets in the U.S., Western Europe, and other developed markets, have accelerated sharply during the
last year, and are becoming larger than ever. Consider the following:
- In January, Chinese metal producer Shenzhen Zhongjin offered to pay $4.4 billion for Australian
miner Herald Resources.
- India’s Tata Group in February announced a $1 billion takeover of U.S.-based General Chemical
Properties Inc.
- Brazilian mining company CVRD in November closed an $18.7 billion acquisition of Canadian
mining company Inca Ltd.
- Mexican cement giant Cemex last July closed a $16.7 billion acquisition of Australian
construction company Rinker.
- Saudi investment fund SABIC last May acquired GE’s GE Plastics business for $11.6 billion,
while OAO MMC Norilsk Nickle Group of Russia bought LionOre Mining International Ltd. of
Canada for $6.3 billion.
Wharton alumni from across the globe are involved in every aspect of this new direction in cross-border
M&A. Some are heads of companies making bids for U.S. and European businesses, while others
are working, post-merger, to integrate operating divisions with very different cultures and styles. Others
are assisting from the sidelines as consultants.
“It’s a really big phenomenon. And I think it’s going to change the global economy,” says Mauro F.
Guillén, the Dr. Felix Zandman Professor in International Management and director of the Joseph H. Lauder Institute for Management & International Studies.
The sheer volume of emerging
market acquisitions in the developed
world is soaring. In 2005, the year
of the Lenovo deal, there were 462
such instances, according to market
researcher Dealogic. Those deals had
an aggregate value of just $53 billion.
In 2007, there were 718 such deals,
worth a total of $189 billion. That’s
still just a small fraction of the $4.5
trillion global M&A market, but it
reflects a qualitative change. State-
controlled sovereign wealth funds,
with $2.9 trillion in assets under
management, have likewise invested
$69 billion recently in Citigroup,
Merrill Lynch, and other companies
that need capital to offset losses in
subprime credit.
These new developing country
multinationals are challenging global
economic relationships that go
back to colonial days, when the U.S.
and the great powers of Europe put
down stakes in Asia, Africa, Latin
America, and other regions. Since
this time, the global economy has
largely been divided into clear strata.
It was clear who was on top, and
the rest of the world was playing catch up, at best. Now the boundaries
between the haves and have-nots
are starting to blur. Wealthy nations
such as the U.S. are badly shaken by
the widening crisis in the credit markets,
and it’s not clear how, or even
if, all the damage can be corrected.
At the same time, economies such
as China, India, Mexico, and Brazil
are taking off, closing centuries-old
gaps in standards of living. Western
Europe, Canada and the U.S., and
Japan, known as the triad, controlled
80% of world trade in the 1980s
and 1990s, according to Guillén.
Now their share is down to 60%,
and it will continue to decline.
“Fifty years from now, when we’re
reading world economic history, it’s
conceivable that this period of time,
right now, will be viewed as a watershed
historic event, the beginning
of a shift in financial infrastructure,
to a more global marketplace,” says
Jerry Goldman, WG’74, a tax partner and global vice chairman with Ernst & Young.
The M&A market is helping to shape those global changes.
From China to India and Russia, developing economies
are using M&A to ensure that they have the physical and intellectual
resources they need for the next stage of development.
“Once these developing markets have secured the
necessary resources through M&A, they will start building
more internally,” Goldman says. Some developing markets,
such as Brazil, have already moved on to that next step, upgrading
ports, roads, and other infrastructures, he adds.
While such changes in the global economy aren’t necessarily
a zero-sum game, the net effect is likely to benefit emerging
markets, according to Guillén. As leadership of certain industries
shifts to emerging markets, high-paying decision-making
jobs will move. Over the next 20 or 30 years, that will affect
the standard of living in the U.S. and Europe, as well as the
global standing of cities.
- The Hows and Whys
- Leading Across Cultures
- An Evolving Financial Infrastructure
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