Acquisitions, fusions, and global business strategies

The corporate environment is quite dynamic, and the competition is still fierce. Businesses are under intense pressure to expand and increase revenue in order to ensure shareholder profitability. Businesses are expanding their operations to draw clients from foreign markets in an effort to fulfill this desire of greater revenues. Additionally, businesses are realizing that they need to diversify their business models in order to access new revenue streams. The expansion of global trade has forced businesses to reconsider their corporate and company level strategies in order to improve their competitiveness on a global scale. The strategy is to restructure their operations in a way that improves their competitive advantage over other firms Majority of businesses are engaging in mergers and acquisitions to grow their operations. According to Roberts et al (p.27), most companies engage in Mergers and Acquisitions (M&A) to increase their customer base, synergy, for growth, diversification, and globalization. However, private and public companies use mergers and acquisitions differently in scope and the process involved (Creighton p24). This essay will identify a public company that has engaged in M&A and another that has not and examine their international business level and corporate strategies.

General Electric

General Electric is a public company that is based in Boston, the US that offers products and services in a range of segments. The primary products and services include energy connections, healthcare, financial services, power, aviation, lighting, renewable energy and others (GE 2017). The company was founded by Thomas Edison in 1892. General Electric (GE) is headed by Jeffrey Immelt and publicly traded on the New York Stock Exchange. The company prides itself in providing the best products and services to its customers because of the high level of innovation at the organization. The majority of the top executives at the company have provided exemplary leadership and developed an organizational culture based on creativity and innovation. GE has established itself as an industry leader by pioneering life-changing developments in the fields of aviation, lighting, oil and gas, healthcare, automotive, engineering and renewable energy. According to the company annual reports, it generated revenues more than US $120 billion and net income of over US $8billion (GE p132). The company operates worldwide and tends to tap into new and emerging markets. To expand, internationally, GE has formed strategic alliances and engaged in acquisitions to eliminate competition and diversify. In April 2017, the management of GE confirmed that it had acquired LM Wind Power in the US $1.65 billion (GE renewable energy 2017). The acquisition will see LM Wind Power renamed LM Wind Power GE but as a separate entity within GE renewable energy. LM was founded in 1978 and based in Denmark. The company design, develop and manufactures rotor blades for wind turbines that currently stand at 195,000 (LM Wind Power 2017).

GE has continuously used a vertical acquisition strategy when targeting firms they want to acquire. The approach is backed by the business’s goal of increasing its market share of wind power in the European Union. GE’s differentiated business level strategy aims to utilize its core competencies to gain an advantage over its competitors (Hitt et al p120). Therefore, an acquisition strategy at the corporate level for GE is important in increasing its competitiveness. The company has been outsourcing its rotor blades for the wind turbines it sells which is costly to the firm. Acquisition of LM Wind Power will enable GE renewable energy to increase value to its customers by in-sourcing of blades for wind power (GE 2017). Therefore, I think GE was wise to acquire LM Wind Power. The demand for renewable energy particularly from the wind is increasing at a very high rate and has potential to generate more revenues for GE. Furthermore, this acquisition of LM Wind Power makes GE more competitive because it now ventures into the market of manufacturing rotor blades, unlike the rivals who may outsource it from other suppliers. Moreover, it offers the firm an avenue to diversify into rotor blade manufacturing industry to maximize energy output to meet the growing demand.

Companies venturing into foreign markets have to evaluate their strategies to ensure growth and guarantee profitability. Through acquisitions, GE is advancing its globalization ambition of taking advantage of business opportunities on a global scale (Bucifai p5). Acquisitions are a crucial business level strategy that has enabled GE to eliminate competition, grow revenues, diversify operations and increase its market share internationally. Product diversification is the international trade level strategy used by GE to generate more income and improve their market share (Hitt et al p172). Renewable energy sources such as wind power continue to help the company remain an industrial powerhouse for the sustainable future.GE has been using a global strategy as its international corporate level strategy. A global strategy enables a firm to reduce economies of scale through innovation while offering standardized products and services across different countries (Hitt et al p240). However, this strategy has made the company to neglect business opportunities in local markets and lose new sources of revenue in the process. I recommend that GE adopts a multi-domestic strategy to produce products and services that cater to particular needs of local markets.

Essential Ingredients Inc.

Essential Ingredients is a small public company that has its operations mainly centered in the US. According to the company website, Essential Ingredients was founded in 1996 by Maynard Kris and Gerlach Chris in Atlanta, Georgia (Essential Ingredients 2016). The company is a chemical distributor for industrial and household use, cosmetics, and personal care products. Essential Ingredients chemical products include deformers, emulsifiers, color care additives, preservatives, exfoliants, conditioner’s among others (Bloomberg 2017). The firm is relatively small and operates within all the US and has experienced tremendous growth over the years. The increase of the company has attracted other companies interested in mergers and acquisitions but without success. Essential Ingredients has no history of mergers and acquisitions. The company only has 66 employees but generated revenues totaling to US$79 million. Some of the firm’s clients include Lubrizol and DuPont. It is important for an organization to conduct due diligence on various companies to identify one as a target of acquisition. Essential Ingredients needs to acquire an organization that will help it to expand operations and increases its market share as a chemical distributor. The company needs to engage in related acquisitions to strengthen its competitiveness in the distribution industry. According to Salter & Weinhold (1981), a target company for acquisition should meet the following requirements;

• Earn a considerably high-profit margin on sales.

• Participate in growing markets.

• Have sales more than US$50 million.

• Have potential for return on investments of 10% or more.

• Be involved in specific activities.

About the mentioned acquisition guidelines, I am of the opinion that Essential Ingredients should acquire Lipscomb Chemical Company. The company was founded in 1977 based in Long Beach, California and engages in specialty chemicals (Omya, 2014). This specialty will acquire Essential Ingredients to very profitable. Lipscomb chemicals are part of Omya Group, a multinational specialty chemicals distributor in the world ( Omya, 2014). Furthermore, the firm generated revenues totaling to US$18, 371,236 and had a potential for high investment returns. The acquisition of Lipscomb will enable Essential Ingredients to increase its customer base in the west coast while also diversifying in the distribution of building material chemicals. Moreover, Lipscomb offers laboratory support and custom technical sales services that can provide Essential Ingredients Essential Ingredients does not have a research unit for chemicals but will have an opportunity to make use of Lipscomb’s laboratory support services to offer a greater value for their customers. However, during the acquisition, Essential Ingredients need to allow Lipscomb to operate independently to lower the economies of scale and maintain synergy in the organizational and management structure. Furthermore, Lipscomb being a subsidiary of the multinational company will help Essential Ingredients sell its products on a global scale.

Lipscomb and Essential Ingredients will both experience synergies that is beneficial to both companies. Business level strategies are determined by Porter’s Five Forces of competitive advantage. They include rivalry, bargaining power of suppliers, bargaining power of customers, substitutes and barriers to entry (Hitt et al p120). I propose that Essential Ingredients uses an integrated cost leadership and differentiation business level strategy. Integrated cost leadership and differentiation strategy will allow the company to offer differentiated products at a much lower price (Hitt et al p127). Using integrated cost leadership and differentiation strategy, Essential Ingredients will improve their core competencies by offering distribution services to different customer segments. The strategy will help the firm enter into foreign markets and form joint ventures and strategic alliances with other companies to lower its costs and provide differentiated products (Twaroska & Kakol p4). Integrated cost leadership and differentiation strategy guarantees higher returns on investments and improve competitive advantage. Increased market share and diversification can be achieved by providing differentiated products and reduced prices by lowering economies of scale. Since diversification is the focus of the business, the corporate level strategy I would recommend Essential Ingredients to use is Transnational. According to Hitt et al (p241), transnational strategy helps firms to achieve efficiency and respond to local opportunities in a global market. Using transnational strategy, Essential Ingredients will be able to utilize resources efficiently while taking advantage of opportunities that might arise in local markets. Customers will be able to provide information on the chemicals they need and allow the firm to respond to those demands efficiently.

Conclusion

Many companies are using the mergers and acquisition strategy to expand their operations and steer their growth progression. However, it is important for firms to carefully consider their business level and corporate level strategies before deciding on mergers and acquisitions. Moreover, the shareholders of the acquiring companies seldom benefit from the purchase because most assets are over-valued with no guarantee for returns. This is because not all mergers and acquisitions are successful and some can have the devastating effect on the future growth of the business. Diversification, increasing market share and eliminating competition are the primary reasons for acquisitions. The acquisition of LM Wind Power by General Electric is a profitable one that will see GE diversifies into the manufacturing of rotor blades. Moreover, the company will have the competitive advantage over its rivals, consolidate their market share in Europe. Moreover, GE international business level strategy of offering differentiated products that are unique and innovative increases its competitiveness. However, its global corporate level strategy needs to be eliminated and replaced with multi-domestic strategy. Essential Ingredients should consider engaging in mergers and acquisitions to generate more revenues. Lipscomb provides a perfect target for acquisition by Essential Ingredients because of its high potential for profitability.





















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