Strategy in Alliance, Joint Venture, Merger or Acquisition- Essay solved

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Strategy in Alliance, Joint Venture, Merger or Acquisition

(4287 words)

 

Introduction to Mergers

Majority of the industries which execute alliances or joint venture have been able to do a reasonably better job sizing up both the financial and economic characters.  Classically, this alliance is being initiated by the industries’ top management, including some executives, lawyers, investment bankers and other third parties who can be considered as close to one or another party of the said industries. Herein, the main or principal interest is in line with financial and legal matters, the worth of the industry to be acquired or merged with, the terms and conditions to be negotiated, the overall structure of the agreement, as well as the regulators of the said transaction. In addition, the merger or acquisition also considers the scrutinizing of the balance, the assessment of the forecasts of the demands and capability. It also gives emphasis on the requirements of the cost-cutting. In this regard, almost all of this assessment focuses on the financial aspects and valuation of the said transaction.

Primarily, the main goal of this paper is to determine an alliance for HSBC to be globally competitive. This will also identify the most appropriate business strategy to be used in having a partnership with other company. In addition, this paper will also provide insightful details regarding the changes that might be encountered during the partnership.

 

Company Profile

HSBC China

The Hong Kong and Shanghai Banking Corporation (HSBC) Ltd was instituted in the country of Hong Kong in 1865. It is the founding member of the HSBC group which is considered as one of the world market’s banking and financial services industries.  HSBC has a continuous and sustainable position in the mainland China. The head office of HSBC in China is located in Pudong, Shanghai. Being one of the boosters of China’s economy, the company is expanding its financial and banking services and network in cooperation with the economic development of China and supporting the demands of the customers in the Chinese market.

HSBC China is also noted to be one of the largest investors in many foreign banks within the mainland. It has been claimed that HSBC invested more that US$5 billion in selected mainland financial services industries and in the development of its own operations such as an 8% stake in the Bank of Shanghai, shares of 19.9% in both Ping An Insurance and Bank of Communications.            HSBC’s current channels in mainland China is consisted of 35 outlets with 14 branches all over China. Having one of the largest networks of any international bank in Chinese market, HSBC is distinctively place to provide their customers business with a full level of specialised financial and banking services in the market. HSBC has also 10, 0000 offices in approximately 82 nations and boundaries which enables HSBC to provide a true global market reach to its extensive domestic strength and intelligence in mainland China.

 

Choice of Business Alliance Strategy: Merger

In the rapidly changing and improving companies and businesses, the management of companies is being challenged in terms of demonstrating their capacity to think and act strategically. As the business wants to expand abroad, there are certain tasks that need to perform. Accordingly, most organisations develop in two different manners. The first one is through the natural or the organic ways or simply by merging with other organisation. It can be said that the route of the merger is suitable if and only if the development in conventional goods/services and the market environment is confined because of the size or share of the market. Merger is also appropriate when a more advanced degree of growth and development in terms of turnover is demanded, for whatever motive there is. However, acquiring, merging or starting up a company on the external part of the diversification of the market environment and products can be considered as an outstanding approach to strengthen the competitiveness of an organisation (1983).

The process of merger and acquisitions in the banking and financial divisions has been noted to be one of the foremost vehicles in line with the transformation of a key set of economic activities that stand at the center of the national and global capital allocation and payments system. Hence, it can be agreed upon that that the result or outcome of the merger and acquisition process in terms of the structure, conduct, and performance of the financial sector has a disproportionate impact on the economy as a whole.

As a company who wants to be globally competitive, the company should realize and understand some possible strategy. For HSBC to be more competitive and both in the local and worldwide market and to gain competitive position the company must use the concept of merger. According to  (1989) merger is has been regarded as a combination or consolidation of two industries into a single company. On the other hand, acquisition is defined as the purchase of a specific industry by another industry in which the acquirer or the purchaser preserves power and domination. In this process, the management of both companies aims of having a “strategic fit”. Strategic fit means having a similarity in the industry’s strategies or harmonizing the strategies of both organisation and setting the industry for having potential strategic and deliberated synergy. However, it is unfortunate that there is no clear evidence supporting the value of strategic fit in mergers (1992).

(2000) have a studied in two viewpoints the wave of merger and acquisition in Japan following the country’s economic crisis. They stated that one of the most obvious influences of the said crisis is the elevation of merger activities in all types of industries. Herein, the bankrupt and weak organisations are being pushed to find partners and alliances, mainly from international organisation, so as to survive in the market place ( 2000). With the viewpoint in line with the theoretical assessment of these merging and acquisitions activities, and in accordance with the implications economy of Japan,  (2000) concluded that the country has prevented externalized market for business and commercial control. The strategy of Japan was basically to survive the economic recession because they are confident in the support that shareholders will give to them.  (2000) stated, “What we are seeing is the emergence of a market for corporate control, in which the acquiring company must satisfy its shareholders of the benefits of the investment.” (). With this, it can be easily stated and noted that some corporate acquisitions and merging is a process of survival for many industries. In addition, it can also be considered that in this new market setting, the ownership of the companies must be emphasised and executive control including decision-making roots from impartiality position before relational ties.

According to  (1994) a merger will likely to occur when the mergence (two industries) combine and integrate their business practices which must result in gaining a new section of expertise among the firms. With this, the expected outcome should be wider range of products/services portfolio and talents/skills for the customers of the merged industries.

 

Choice of Company

Herein, the company that HSBC should merge with is the Citigroup Inc. and Citicorp and Travelers Group. Citigroup Inc. is known as one of the finest financial services corporation. The company has approximately 200 million customer accounts with its branches in more than 100 countries.  The history of the company dates back to the founding of Citibank, Bank Handlowy, Smith Barney, Banmex and Solomon Brothers in 1812, 1870, 1873, 1884 and 1910 respectively.   Citigroup is also recognised as the first financial and banking services industry to combine together insurance services, banking and financial services and investments in one company. The company has many products and services to offer and the most common brand names under the company’s trademark red umbrella comprises of Citi Cards, CitiMortgage, CitiFinancial, Primerica, CitiInsurance, Diners Club, CitiCapital and Private Bank.

On the other hand, Citicorp had assets of about $700 billion. It was a global bank with branches in 40 countries and the world’s largest issuer of credit cards, with more than 60 million credit cards. Travelers Group, known mainly for its life and property casualty insurance activities, also owned Salomon, Smith Barney (investments), Salomon, Smith Barney Asset Management, Primerica Financial Services (consumer finance), and Commercial Credit (business finance). Travelers group is known to be a diversified, integrated financial services corporation which is engage in asset management, investment services, property casualty insurance, life insurance and consumer lending the company’s operating industries include Salomon Smith Barney Asset Management, Salomon Smith Barney, Primerica Financial Services, Travelers Life & Annuity, Commercial Credit and Travelers Property Casualty Corp.

These two companies are being selected because of the core competencies and capabilities of the two companies, specifically in providing financial and insurance services in the international market. These three companies will be analysed using SWOT Analysis.

Ø  Strengths

 

  • High Potentials for Growth and Development
  • Capabilities to incorporate new and innovative products and services to offer in the Chinese Market
  • Intensive focus on products development and upgrading.

 

Ø  Weaknesses

  • Fluctuation of International Price
  • Huge number of Workforce which results in high labor cost.

 

Ø  Opportunities

 

  • Rising potential in the worldwide market.
  • Use of advanced technology
  • Use of e-marketing as a channel of distribution.

Ø  Threats

  • Strict and meticulous international standards for financial and insurance products/services
  • Inability to meet the needs of the target market
  • Threats of new entrants

 

Internal and External Drivers of the Merger

The merger of these two companies (HSBC and Citigroup) has been initiated, primarily because of the internal factors and external factors that push each firm to continue the merging.    As mentioned earlier, merging of two firms is regarded as the combination or integration of two industries into one organization. Accordingly, both companies are trying to have a strategic partnership (1988) to gain strategic and well planned synergy. With this, it can be noted that one of the inner aspects or reasons that pushes HSBC to merge with Citigroup is to establish a strategic management approach by combining the strengths as well as the business practice of Citigroup and HSBC group into single and competent management system.

Citigroup, Citicorp and Travelers Group and HSBC are known to be global industries, which mean that such organizations must consider the implementation of strategic management to make sure that it will stay in the global competition. Both companies consider merging as important aspects to achieve such objective. Consequently, the major motivating factors that influenced the merging of implemented by these companies are to establish banking and financial company which has the capability of adapting with the globalisation changes in line with the economic and financial sectors.

Furthermore, the inner driver or reasons for the merger of these large financial industries is to enhance the profitability and productivity of the industry. This can be done by merging with another firm’s products, business practice, market segments, customer base, assets company efficiencies, and R&D facilities, or by merely removing or reducing business competitors. The merging is hoping that the mergence will enhance business operations and performances of the industries involved, in this case HSBC and Citigroup.

Another aspect that pushed Citigroup, Citicorp and Travelers and HSBC Group to merge is to be able to strengthen their competencies in the worldwide market. Through mergers the company may develop new and innovative products/services to be offered to a huge number of customers. Hence, if the company would merge together, the company may be able to provide more new products/services which may enable the organisation to achieve efficiency and competitiveness than their rival companies.

Other than internal factors, the merger of these industries is also implemented because of some external reasons in the present banking and financial market. These external drivers include the concept customization and trends of globalisation, the emergence of information technology and information system as well as the increased market segments sophistication. These factors have brought major changes in the financial and banking industries. When HSBC and Citigroup, Citicorp and Travelers will consider merging, it was clearly driven that this is not mainly because of cost deal. This merging is because of revenue-driven agreement. Having a relatively constrained overlap in procedures, markets, the merger resulted to have less replication and, as an output, the there is a minimal occurrence of cost takeouts. Indeed, Citigroup, Citicorp and Travelers Group and his counterpart at HSBC must not emphasize cost cutting and plan on encouraging their share of resources through cross-selling between mergence’s customers and HSBC’s clients. Analysts may estimate that the major benefits in cross-selling must go with HSBC that will allow integration of the information of the account of the customers which may include banking accounts, insurance and credit cards, onto one account statement.

(2000) said that for banks like HSBC considering entry into the insurance market, HSBC need to carefully do research in line with opportunities in insurance investments. Some investors have predicted that anticipate that banking industries will gain the standard rate of return but not large profit margin as insurance companies do. On the other hand, for insurance industries, the limitless entry of bank is likely to enhance the current and potential competitors. Moreover, the threat of market entry, if not the actual entry of a specific banks, will direct to more reasonable pricing and/or lower sales volumes.

Nonetheless, those insurance companies like Citigroup will guarantee the sales of the new bank market channel are anticipated to be beneficial. In addition, Technological innovations and other business forces have destabilized bank markets. Technology widens the gap between winners and losers, reflecting the concept of diverging returns first noted in the Profit Impact of Market Strategy (PIMS) study, and it reduces the average profitability of the banking sector as a whole.

The new entrants exploit the fact that bank value chains are being broken up into their constituent parts and the separate activities of relationship management, processing and IT infrastructure, and distribution and risk are likely to be managed across a network of organizations with distinctive skills and competencies. The next wave of competition is likely to come from retail e-commerce organisations like that of AOL and Amazon.

The companies that offer non-financial services, gain strong benefits over banking companies because the database of the marketing context as well as the interconnect management information technology systems allows them to have more prospective into the demands of the consumers and requirements than the information system of the banking companies systems allow. Although Citigroup has been well-established and able to exploit the data or information about the clients to allow market segmentation including data about on assets, information of payments, and even clients’ investments, they sometimes do not have enough knowledge about their clients in accordance with purchasing habits and aspirations.

(1993) proposes that most of the merging process since the mid-70s have been influenced by the technological alterations and supply shocks, which have been resulted in excess productive capabilities in different industries.  Accordingly,  (1993) believes that the merging and acquisition of companies can be considered as an effective and efficient way of eliminating these overload and overwork capacity, as faulty inner domination mechanisms inhibit industries from lessening themselves.

More distinctively, the activities of merging permits mergence to go through new products/services and even entrants in international markets this will also permits acquiring the revenue sources, and perspective clients/customers; it allow acquiring or obtaining  modern technologies in accordance with the given objective of merging. Such activity will permit cost reduction, throughout economies of scope and scale. Moreover, merging will also enhance the in the operational effectiveness and prevents from becoming a target for unwanted acquisition or unwanted merger. Lastly, this will also extend domestic or national exchange carriers or accept international carriers the provisional economic power of chief regional or local exchanges to the expansion of finances.

(1992) stated that alliances involve co-operative agreements between enterprises in which the parties co-operate on an equal footing, such collaboration requires a pooling of human, technological, productive, informational, or financial resources leading to a mutual commitment.

The expansion of business in international level in cooperation with the strategic alliances globally has helped in pressuring some industries to have a connection with other industries. In addition, it has also allows many competitors seeking looking for strategies to follow their clients all over the world and provide globally-available products/services to their diversified clients/customers. According to  (1995) a strategic alliance through mergers is able to provide a “trading partnership that enhances the effectiveness of the competitive strategies of the participating firms by providing a mutually beneficial trade in technology, skills and/ or products”.

In addition, merger and acquisition allows previously not related industries to achieve synergies and scale of economies.  Under the theoretical framework of economy, entities, when combined or been merged may be worth more than if they had remained independent.  Such argument is specifically truthful where a merging industry permits the organisation to either reduce or eliminate excessive cost even eliminate or decrease transaction costs between mergence.  In this regard, the unified firm may decrease costs, enhanced quality, and motivate outcome.  Synergies also result where the combined enterprises is less risky than the constituent corporations. The theoretical frameworks of finance, states that mergers happens in the expectation of positive synergistically influences, with various management citing arguments synergistically so as to justify the reasons why they merged.

In addition, strategic alliances and partnerships using the context of mergers provided an especially interesting avenue for the financial sectors, since the international organisations will be able to combine various communications segments rapidly, obtain a more advanced customer/client base, combines smaller niches, disregard competitors and avoid competition, and level-up the utilisation of new and innovative technologies with integrated and consolidated resources. Merger became the governing and principal approach of integration having the main purpose of controlling assets (assets during those days were the newly invented machinery and equipment, and plants and productive capacity since the economic driver was scale and efficiency of production) and the most effective manner to control it is to own such assets for real (Freidheim, 1998).

 

Possible Changes that might be encountered

            When a company (HSBC) decided to merged with other company (Citigroup), there is a great possibility that the company will face changes. One of the changes that it will encounter is the changes in the management system.  According to  (2002) merging of companies will quickly affect and alters the industry with changes in terms of ideology, ownership and consequently in business practice.  When HSBC merged with Citigroup, Citicorp and Travelers group  the company must be able to change the management. Herein, the two companies may choose which among them would manage certain department or levels of the merged companies. In addition, changes will also occur in terms of expansion.

Expansion of the business is an important and interesting changes that needs to emphasize, it is significant for the industry to satisfy and meet the needs and demands with an sufficient supply of products/goods and services.  Such objective can be done using a suitable distribution/marketing channels and effective strategies in marketing. This can also be done by reducing the costs implicated in establishing, positioning and marketing, the industry, less expensive and can be more profitable financial products/services can be produced.  Efficiency and uniqueness can be treated as one factor in the expansion this might create or enforced a tight budget and an expected high returns in the future and might be able to allow the company to generate less expensive but still competitive financial services and products.

A merger is a pivotal occurrence for the financial and banking industries and other companies. In this regard, both management of the company are hoping to obtain benefits from the superior competence and strength that can be seen in the merged company. After the merging of HSBC and the companies mentioned above, strategies changes and as an output, the company’s product portfolios are being expanded, intensified, or refocused. In this regard, the company’s management systems and human resources also changed because of the combination of the management systems of both industries. Aside from these changes, HSBC and other mergence may also likely to encounter changes in terms of levels and development of rates of industry’s profits. There is a greater possibility that with the global reached of both industries; more profits may be obtained from billions of customers all over the world. However, in many incidents, one company or both of the merged companies, lose substantial amounts of costs. The costs of the merger which includes the direct costs of different personnel who will handle the mergers can be considered as considerable or significant, though these personnels do not occupy a large percentage of the merger’s value.  With this, the following tips are recommended:

  1. Financial and banking industries should provide importance on the IT Systems to support new services in order to meet increasing customer demand this could be a big help on merger.
  2.  In merging it is better to seek on the effectively manage growth and innovation through changing company processes and activities so as to meet the needs of the merged industries.
  3. This recommended for those financial and banking companies that are planning to merge just in order to grow.  A merger is not always the best way to grow. A company can achieve internal expansion through investment in projects generated within the company itself. By doing so, efficiency may be improved, existing activities may be expanded, and new products may be introduced.
  4. Industries not only financial and banking industries should know that merger is a financial decisions that should be consistent with, any goals and objectives financial analysis should be part of acquisitions.  On my observations many acquisitions that fail, in the sense that they do not add value to the acquiring company, do so because they were motivated by wishful thinking rather than sound and thorough financial analysis.
  5. Another thing is that acquisition is a strategic decision that should be consistent with the mission of the acquiring company and fit into its overall strategic plan.  Financial and banking industries (HSBC) involving in merger should be aware on the strategic decision that they will be made it should be consistent.
  6. Mergers cause enormous pain and complexity for banking and financial industries.   Upon completion of a merger, network infrastructure, internal systems, and financial infrastructure must be combined to create a single vision of the operations.

Through the effective used of merger, HSBC might be able to gain competitive advantage among its competitors. Competitive advantage only arises from establishing differentiation.  According to  (2002) more competing companies risk their ability to think strategically upon being the lesser price producer or offering the products/services with highest quality, In this, the more they begin to look similar in the market environment, tends to thus decline the company’s competitive edge over its rival.  This means that, competitive advantage occurs out of a significant differentiation from one competitor in the business arena.  It is best to comprehend that establishing strategic and effective approaches in standard market cycle are proven to be significantly simple for other competitors.

Conversely, looking at it in simple manner, an industry may tend to choose an approach which can be too restricted or too broad depending on the other aspects of selecting a strategy. The company must identify which needs and demands of clients must be satisfied may be affected also when selecting incorrect marketing and management approach and thus, may reduce competitive advantage. Hence, with the merger of Citigroup Inc and HSBC, the company might be able to generate distinctive and innovative products/services in line with insurances and financial factors that fit the requirements and needs of their prospective clients/consumers.   In addition, by merging with other company, HSBC can gain a competitive position by allowing their products/services to be readily available in various parts of the world and making it different compared to other offerings of their rivals.

Since the company, had gain various ideologies on different types of financial and insurance products/services needed by their clients, the management of the company may also been able to expand its products/services and produced better brands which are mentioned above. Herein, It can therefore be noted that successful merger is the vital aspects for the success of HSBC.  The company’s merger and acquisitions strategy permits the whole organisation to have a better performance in the business world.

The merger between Citigroup, Citicorp and Travelers Group and HSBC may also already create large amounts by management restructuring, products/services management. In particular, as a result of the merger, it can be stated that one of the changes that HSBC will face is in terms of organizational culture, business level strategy, project management, financial resources, human resource, and procurement.

 

Conclusion

The context of merger as one of organisational strategies may be assessed in two underlying factors. The first is in terms of the financial aspects as well as the profits and benefits to the industry. Second, is in line with the employment a matter it produces generates, more especially, the current employees and human resources of the industry before the merging activity. The predictability of merging in the setting the increasing financial competition boost a bulk of documents which addresses the situation and considerations that industries must focus onto before entering a merger.                In the case of HSBC, the company can use merger to stay in the competitive market and perform better within the marketplace, by providing innovative and new products in terms line with insurance and financial services through the ideas that the management gain because of merging with other companies. It shows that without such strategy, the company may not be able to expand its business portfolio and reach more and more customers from local to international market.                 It can be concluded that merging, along with the con