Master Thesis IB&M
Motivations for OFDI of high growth market MNEs in developed markets
By
EDWIN KIKKERT
University of Groningen Faculty of Economics and Business
Korreweg 71a 9714AC Groningen
+31(0)646415110 e.r.kikkert@student.rug.nl
Student number 2221357
2 1. ABSTRACT
Where global investments used to go north – south, recently investment streams turned and showed an increase in outward foreign direct investment (OFDI) performed by high growth market multinational enterprises (MNEs) in developed markets. A phenomenon which is generally recognized both by practitioners as well as academics and that is reshaping the structure of international business. But what are the drivers behind this accelerated rise in outward foreign direct investment (OFDI) of high growth market MNEs in developed markets? And can these changed patterns of global OFDI be explained by traditional OFDI theory or are new theoretical alternatives needed?
This study relates literature on traditional FDI to ‘new’ theory on high growth market MNEs performing OFDI in developed markets. Build upon the Eclectic Paradigm by Dunning (1980, 1988) a theoretical framework is conducted as a foundation for hypotheses. By testing the hypotheses in a case study of the acquisition of the Dutch company Wavin by the Mexican company Mexichem, answer is given on what motivations Mexichem had to perform the acquisition and how these are in line with current theory. Surveys and in-depth questionnaires held on three persons that were directly involved in the acquisition, reveal that motivations of Mexichem to perform the acquisition are; A) consistent with theory with regard to access to technology, increased demand for value added products in the home market, attraction of additional revenue in new markets, and increased global competition; B) inconsistent with theory with regard to access to marketing capabilities, attraction of additional revenue in the developed market, government influence and/or support, and attraction of lower operational costs; C) providing new insights with regard to previous licensee agreements, expected future developments of the market, limited growth opportunities in the home market, governance structure and business culture differences, increased financial possibilities of the high growth market MNE, and integration of business operations. Based on the results, an integrated perspective of the type of motivations, firm characteristics, and market circumstances is suggested in an attempt to better understand the OFDI performed by high growth market MNEs in developed markets.
3 2. CONTENTS 1. ABSTRACT ... 2 2. CONTENTS ... 3 3. PREFACE ... 5 4. INTRODUCTION ... 6
High growth markets ... 7
Case study ... 8
Background: context of subject ... 8
Problem statement ... 8 Research question ... 8 Sub questions ... 9 Research Model ... 9 Relevance of subject ... 10 Structure ... 11
5. LITERATURE ON TRADITIONAL FDI ... 12
Main theories in traditional FDI ... 12
Market – imperfection theory ... 13
Product Life Cycle theory ... 14
Internalization theory ... 15
Eclectic Paradigm ... 16
Motivations for FDI from theories in traditional FDI ... 17
6. LITERATURE ON HIGH GROWTH MARKET MNES OFDI ... 19
Characteristics high growth market MNEs ... 19
Literature on motivations for OFDI by high growth market MNEs in developed markets ... 20
Strategic asset motivations ... 21
Market motivations ... 24
Institutional motivations ... 25
Geo – political motivations ... 26
Enabling circumstances ... 28
Efficiency motivations ... 29
Natural resource motivations ... 29
Motivations for high growth market MNEs to perform OFDI in developed markets ... 30
Relations of traditional and new FDI theory ... 30
4 Analysis ... 33 7. METHODOLOGY ... 36 Case study ... 38 Mexichem ... 38 Wavin... 40
The acquisition in detail... 41
Why Wavin? ... 43
8. DATA ... 45
9. RESULTS ... 46
Hypotheses ... 46
Motivations for Mexichem to acquire Wavin ... 53
10. DISCUSSION ... 55
Strategic asset motivations ... 55
Market motivations ... 56
Institutional motivations ... 59
Geo – political motivations ... 61
Enabling circumstances ... 62
Efficiency motivations ... 62
Natural resource motivations ... 63
Limitations ... 63
11. CONCLUSION ... 65
Recommendations for further research ... 67
12. BIBLIOGRAPHY ... 69
Articles ... 69
Books ... 70
Reports ... 71
Websites ... 72
Other electronic sources ... 72
13. APPENDICES ... 74
Appendix A: Outward FDI from developing and transition economies ... 74
Appendix B: High growth markets 2012 ... 75
Appendix C: Terminology high growth markets ... 76
Appendix D: Mexichem – Wavin geographical presence and market position ... 77
Appendix E: Summary ... 78
Appendix F: In-depth questionnaire – data ... 79
5 3. PREFACE
In the context of the International Business and Management Master program within the faculty of Economics and Business at the University of Groningen I have written this Master thesis. The Master thesis consists of a literature study and a case study.
An introduction to the subject of outward foreign direct investment (OFDI) performed by high growth market multinational enterprises (MNEs) in developed markets will be the first part of this thesis, followed by the research model and research questions. Secondly, a literature study is written focusing on both the main theories in traditional foreign direct investment (FDI) as well as theoretical explanations for high growth market MNEs to perform OFDI in developed markets. In the third chapter, the methodology of this study is given and the case study on Mexichem – Wavin is discussed. Followed by an analysis of the results, discussion and finally a conclusion, an answer on the research question is given.
For me personally it has been a very interesting process looking at the different theories and the case, since high growth markets are of a great interest to me and specifically the OFDI performed by their MNEs in developed markets. Also, looking at this phenomenon more closely within the organization of Mexichem – Wavin has been a great learning experience.
I would like to thank Drs. A. Visscher as my supervisor on behalf of the University of Groningen for his critical view during the process of completing this Master thesis. Secondly, I would like to thank Dr. I. Kalinic as the referent of this Master thesis. Further, I would like to thank Mr. J. Kruse for his constructive feedback during the process of completing this Master thesis and for giving me the opportunity to perform the case study within Mexichem – Wavin. Finally, I wish to thank the employees within the Mexichem – Wavin organization for their input while performing the case study.
6 4. INTRODUCTION
“A new breed of ambitious multinationals is rising on the world scene, presenting both challenges and opportunities for established global players. These new contenders hail from seemingly unlikely places as Brazil, China, Russia, Mexico, India and even Egypt and South Africa. They are shaking up entire industries, from farm equipment and refrigerators to aircraft and telecom services, and changing the rules of competition” (Aulakh, 2007: 235). High growth markets account for an increasing part in global economy; “global foreign direct investment (FDI) patterns have undergone a dramatic shift with developing and transition economies accounting for 43% and 19% of FDI inflows and outflows, respectively” (World Investment Report, 2009). This trend is expected to shift further towards high growth market economies; “by 2050, fast-growth economies are projected to account for 65% of the global economy. In contrast, most developed markets are still struggling to recover after the global recession” (Ernst & Young, 2013).
Stucchi (2012) found that the number of mergers, acquisitions and other forms of outward foreign direct investment (OFDI) undertaken by high growth market MNEs in developed markets has increased considerably in recent years. Appendix A from UK Trade and Investment (2011) confirms this by illustrating OFDI rates from developing and transition economies in the period 2000-2010. In this timeframe, the share and value of OFDI seen from developing and transition economies has tripled in relation to global OFDI patterns. A phenomenon which is generally recognized both by practitioners as well as academics and that is reshaping the structure of international business; recent years have witnessed an unprecedented rise in FDI from high growth market economies (Gammeltoft et al., 2010). Aulakh (2007) refers to a number of reports from industry consultants (BCG, 2006), business press (Business Week, 2006) and international associations (OECD, 2006) that provide evidence of the extent of internationalization of high growth market MNEs in key industries which were traditionally dominated by MNEs from developed countries.
7 what are the drivers behind the accelerated rise in OFDI of high growth market MNEs in developed markets? Why do high growth markets MNEs expand their business activities to developed markets knowing they face competition which is mostly more mature and in markets which offer less growth potential than their home market in the developing country of origin (Deng, 2012)? Also, the question is whether these changing patterns of global OFDI can be explained by traditional OFDI theory or whether there are new theoretical alternatives that can be developed to enhance our understanding of OFDI by high growth market MNEs in developed markets (Stucchi, 2012)?
The appearance of high growth markets MNEs performing OFDI in developed markets is surprising; knowing these MNEs will face increased competition and have initial late mover disadvantages (Mathews, 2006); these MNEs originate from within a context that is unfavorable for generating significant firm-specific ownership advantages of the traditional kind; their lack of international experience, lack of reputation, etc. put them at a disadvantage relative to the developed, established MNEs (Gammeltoft et al., 2010).
High growth markets
In current literature, several terms are used to define the type of markets that are emerging or showing high economic growth. Since an answer on whether these markets are still emerging or are currently emerged is not given in this study, ‘high growth markets’ will be used to define this type of markets, citations excluded. Moreover, a discussion in current literature is found on what the criteria are for being a high growth market. To clarify this, a map of the high growth markets according to Global Finance (2012) is attached in appendix B. In addition, a classification in terminology with regard to high growth markets is attached in appendix C to clarify what is meant by the term ‘high growth market’. In this study no such distinction is made, concluding that by ‘high growth markets’ any of those markets is meant.
8 OFDI in developed markets by Mathews (2006), Aulakh (2007), Gammeltoft et al. (2010), Stucchi (2012) and Wang (2012).
Case study
The case study is focused on the acquisition of Wavin by Mexichem in 2012; a Dutch stock listed firm and the leading supplier of plastic pipes systems and solutions in Europe that is acquired by the leader in plastic pipe systems and the chemical and petrochemical industry in Latin America (Wavin, 2013). More specifically, the case study is executed to examine the motivations for Mexichem to perform this OFDI in the European market. Mexichem is a representative of a successful company from a high growth market. By executing this case study, it is tested to what extent the motivations in the Mexichem – Wavin case are in line with the literature. More specifically, an answer is given on whether the case study fits in the expected pattern arising from the theory building.
Background: context of subject
The context of this study is within the international business strategy of MNEs from high growth markets, focused on the motivations for performing OFDI in developed markets.
Problem statement
The debate on whether motivations for performing OFDI raised in traditional OFDI theory can explain OFDI performed by high growth market MNEs in developed markets in ongoing. In addition, the debate on whether new theoretical alternatives can be developed, based on different motivations, is ongoing. Therefore the appearance of OFDI requires more research to find the motivations for high growth market MNEs to perform this type of investments in developed markets and how this is in line with current OFDI theory.
Research question
9 Are the motivations for Mexichem to perform OFDI by acquiring Wavin in line with motivations raised in current OFDI theory?
Sub questions
Based upon the research question, there are three sub questions which will be answered in this study:
• What are main theories in traditional FDI and what motivations are raised to perform these investments?
• What are motivations for high growth market MNEs to perform OFDI in developed markets according to current theory?
• What motivations does Mexichem have to perform OFDI by acquiring Wavin?
Research Model
The following model provides insight in how the subject of motivations of high growth market MNEs to perform OFDI in developed markets and specifically, in the case of Mexichem – Wavin, is researched. Further, the model provides insight in the relation between the different research components:
10 The research model should be read as follows; the independent variables are the motivations for the acquisition of Wavin by Mexichem in the case study. Secondly, the independent variables in this study are the motivations for performing OFDI found in literature study. The outcome of this study is the dependent variable. The outcome can either confirm or reject the hypotheses concerning motivations for high growth market MNEs to perform OFDI in developed markets. Secondly, it can lead to new insights in the motivations for high growth market MNEs to perform these investments and by this enrich current theory.
Relevance of subject
“Over the past decade the world has witnessed a new wave of globalization, by way of unprecedented growth in outward foreign direct investment (FDI) from emerging economies” Deng (2012: 318). “With global acquisitions as EMNs’ main international strategy today, it is imperative for both scholars and practicing managers to clearly understand the driving forces behind their accelerated internationalization” Deng (2012: 318).
The papers in the issue of high growth market MNEs performing OFDI provide evidence of the potential and promise of theoretical gains that can be realized through a closer and more careful investigation of context (Gammeltoft et al., 2010). Where researchers recently contended that international business research may be running out of ‘big questions’, this contention can be questioned by the rise of high growth market MNEs, which may infuse fresh life into international business research through a closer and more careful investigation of the context of high growth economies and their MNEs (Gammeltoft et al., 2010; Peng, 2004). “The point of departure is still the MNE and the emerging multinationals are the ‘very different’ challengers as well as future incumbents. Which theoretical gains can be realized by simply shifting the point of departure, and by exploring how the global economy operates form the point of view of what has been called ‘the periphery?” (Gammeltoft et al., 2010).
11 researchers (Aulakh, 2007). Scholars in this stream of research tend to present partial, and sometimes radically opposite, explanations. In other words, no consensus has been reached regarding the motivations for Emerging Market firms’ acquisitions in developed markets (Stucchi, 2012: 279).
This study attempts to contribute to a better understanding of – and provide new insights in - the motivations for high growth market MNEs to perform OFDI in developed markets. Second, it tries to provide a further understanding of whether motivations raised in current literature are correct and all-embracing.
Structure
12 5. LITERATURE ON TRADITIONAL FDI
What are main theories in traditional FDI and what motivations are raised to perform these investments?
A range of theoretical perspectives has been produced to explain the traditional FDI flows and the motivations of MNEs to perform these investments. These theoretical perspectives scope from the mainstream economic theories by Hymer (1960), Vernon (1966) and Coase (1937) to the eclectic theory and FDI objectives by Dunning (1980, 1988).
Main theories in traditional FDI
Main FDI theories are drawn upon the mainstream trade theories of absolute cost advantage (Smith, 1776), comparative advantage (Ricardo, 1817), the gravity model of trade (Isard, 1954), the Heckscher-Ohlin model (Heckscher, 1966 and Ohlin, 1952) and competitive advantage (Porter, 1990) (Wall et al., 2010). Pitelis and Sugden (1991) analyze FDI flows at three different levels; macroeconomic, mesoeconomic and microeconomic. In perspective of these different levels of analysis, the writers observe five different main theories to explain FDI; the first two which are based on particular theories of the firm, the third derived from adaptions of the theory of international trade or economic development, the fourth based on theory of oligopolistic competition or technical innovation, and one which is a general all-encompassing framework not needed to be tied to any particular theory of the firm or MNE development. The major theoretical approaches of traditional FDI are described as followed by Pitelis and Sugden (1991);
• Theoretical framework by Hymer (1960), based on the view of the firm as an agent of market power and collusion, also known as the market power approach.
13 • Approaches based on the analysis of competitive interaction in international industries; the Product Life Cycle tradition by Vernon (1974), the oligopolistic market approach of Knickerbocker (1973).
• Macroeconomic development approaches in various forms like the earliest versions of the Product Life Cycle (Vernon, 1966), the investment-development cycle (Dunning, 1982).
• The eclectic paradigm by Dunning (1988), which combines all elements of all the other four theoretical approaches.
This distinction in main theories of traditional FDI is recognized in further literature; Wall et al., (2010) separate three different approaches in theoretical explanations of FDI which are finally resulting in the eclectic theory; ownership - specific advantages, internalization, and location – specific advantages. Theichova et al. (1986) provides a more robust separation in the existence of the theoretical approaches; “there were two roots from which new and more sophisticated theories to explain the existence and character of MNEs developed: first, Hymer’s concept of a monopoly rent to the overseas investment of large firms; second, Vernon’s ‘Product Life Cycle Theory’” (Theichova et al, 1986).
Market – imperfection theory
Most scholars trace the first attempt to systematically explain the activities of firms outside their national boundaries to Stephen Hymer (1960) (Rugman and Brewer, 2011). “The original research by Hymer was the first to draw attention to the firm’s FSAs1 as a source of its distinctive competitive advantage when extending its business activities overseas” (Harrison et al., 2000: 39). Hymer (1960) moved towards an analysis of the MNE explaining FDI as to own and control foreign value-adding activities by posing some specific ownership advantages as access to raw materials, economies of scale and intangible assets such as trade names, sufficient to outweigh the disadvantages of competing with local firms in the country of production, resulting in the market power motive for internationalization (Chryssochoidis et al., 1997). Based on Hymer’s (1960) view, Kindleberger
1
14 (1969) developed the market imperfection model, through which he argued that big firms possess five special assets; access to technology, team specific managerial skills, plant economies of scale, superior marketing skills, and popular brand names (Theichova et al., 1986). Kindleberger (1969) explained FDI of the foreign firm as utilizing these specific advantages to outweigh the disadvantages in comparison with local firms and therefore the market must be imperfect (through natural imperfections or artificial imperfections by tariffs and non-tariff barriers), a view supported by Caves in 1971 (Rugman, 1985). “In Kindleberger’s restatement, the MNE was seen as a function of market structure characterized by monopolistic competition between differentiated products, rather than as an agent involved in oligopolistic interaction with other firms” (Pitelis and Sugden, 1991: 22). In 1971, Caves suggested as a variation of Kindleberger’s formulation, the ability of oligopolistic firms to differentiate either the same product across different regions or to differentiate a wide range of products in one or several regions (Theichova et al., 1986). This theory on FDI became known as the Hymer-Kindleberger-Caves industrial organization approach, also known as the market – imperfection theory (Rugman, 1985).
Product Life Cycle theory
15 Knickerbocker (1973) found that firms tend to follow their competition when performing FDI. In oligopolistic industries, it is normal to expect several firms to establish operations in a given country within a short time (Harrison et al, 2000). “The main reason is that any particular change in the internal and external business environment affecting one firm will affect the others at about the same time and, given their interdependence on each other for decision-making, will induce a similar response” (Harrison et al, 2000: 23).
Internalization theory
16 Eclectic Paradigm
17 • Market seeking: the attraction of additional revenue and profit from new overseas
markets
• Resource seeking: the attraction of access to specific types of (natural) resources • Efficiency seeking: the attraction of lower production costs
• Strategic asset seeking: the attraction of strategic assets (tangible or intangible) critical to their long-term strategy
(Dunning, 1993; Rugman and Brewer, 2003; Wall et al., 2010).
Motivations for FDI from theories in traditional FDI
From the main theoretical approaches that explain traditional FDI, the motivations can be derived to perform this type of investment. “The most fundamental question about FDI activity is why a firm would choose to service a foreign market through affiliate production, rather than other options such as exporting or licensing arrangements” (Blonigen, 2005: 384).
As a concluding paragraph and in an attempt to answer the first sub question of this study, it can be concluded that motivations for performing FDI according to main theories are; to exploit the firm specific advantages as brand names, skills, access to raw materials (Hymer, 1960; Dunning, 1980/1988; Barney, 1991); to extend the (international) product life cycle (Vernon, 1974); to benefit from location specific advantages and have access to sources of specific inputs (Dunning, 1980, 1988; Harrison et al., 2000); to utilize their internalization ability (Dunning, 1980, 1988); to raise efficiency, avoid higher transaction cost when not performing FDI / benefit from lower transaction costs when performing FDI (Coase, 1937; Williamson, 1975; Rugman and Brewer, 2003); to create economies of scale and/or scope (Kindleberger, 1969; Caves, 1971); to avoid natural and artificial protectionist barriers (Kindleberger, 1969; Caves, 1971); to follow competition (Knickerbocker, 1973; Harrison et al., 2000).
18 • Market seeking FDI:
− Extending the international product life cycle − Creating economies of scale and / or scope
− Exploiting the firm specific advantages as brand names, skills, access to raw materials
• Resource seeking FDI:
− Benefitting from location specific advantages and have access to sources of specific inputs
• Efficiency seeking FDI:
− Raising efficiency; avoid higher transaction cost when not performing FDI / benefit from lower transaction costs when performing FDI
− Avoiding natural and artificial protectionist barriers • Strategic asset seeking FDI:
− Following competition
− Benefitting from location specific advantages and have access to sources of specific inputs
It is because of the wide scope of motives that scholars believe there is not just one main theory available in explaining FDI flows. “It now seems generally accepted that, because of the very different motives for FDI, a single predictive theory of international production is just not possible” (Dunning in Theichova et al., 1986: 26). A view that has been recognized by Pitelis and Sugden (1991); “The recognition of this variety of interest has led to a retreat from the search for a general theory of international production” (Pitelis and Sugden, 1991: 44).
19 6. LITERATURE ON HIGH GROWTH MARKET MNES OFDI
What are motivations for high growth market MNEs to perform OFDI in developed markets according to current theory?
The accelerated rise in OFDI from high growth markets (UK Trade and Investment Report, 2011) and the recognition by industry consultants, business press and international associations in the rise of high growth market MNEs performing OFDI globally (Aulakh, 2007; Gammeltoft et al., 2010), caused a range of theoretical perspectives being produced to explain these investments in developed markets. Research on OFDI by high growth market MNEs in developed markets draws upon traditional theories on FDI regarding the resource-based view (Barney, 1991), industry – market based view (Porter, 1979) and institutional view (North, 1991) (Wang et al., 2012, Stucchi, 2012). Where theories on motivations to perform OFDI by Kindleberger (1969) and Dunning (1980) are applied to Western developed market MNEs performing FDI around the globe, the question is whether these are applicable in explaining this changing pattern of global OFDI. Consequently of different firm characteristics and market circumstances, the question is whether there are contradictive and/or additional motivations for high growth market MNEs to perform OFDI in developed markets.
Characteristics high growth market MNEs
20 OFDI is characterized by accelerated internationalization and only after establishing a strong position in their home market.
Deng (2012) focused on how these characteristics influence the internationalization path of high growth market MNEs and recognizes a dual international expansion path. High growth market MNEs expand into developing countries so that their home grown competitive advantages may apply to the resource situation in similar institutional settings. On the other hand, these MNEs are forced to enter developed economies to develop new resources and capabilities. In other words, facing global competition, high growth market MNEs are increasingly embarking on accelerated internationalization as the fundamental corporate strategic transformation, so that they are able to develop new capabilities while protecting their strengths (Deng, 2012). A view that has been recognized in other literature; “emerging market MNEs exploit firm specific advantages as they move forward to become global firms, and tend to develop firm specific advantages related to their countries disadvantages” (Da Silva et al., 2009: 100).
Another important characteristic according to literature is the involvement and influence of the state in the business activities of high growth market MNEs. Internationalizing state-owned or controlled companies can operate according to somewhat different logics than conventional commercial ones (Gammeltoft et al., 2010). Further, as also mentioned in the introduction of this study, the global market circumstances are somewhat contradictive for high growth market MNE to perform OFDI in a developed market (Deng, 2012; Mathews, 2006; Gammeltoft et al., 2010).
Literature on motivations for OFDI by high growth market MNEs in developed markets
Stucchi (2012) found that looking at the theory on high growth market MNEs that perform OFDI in developed markets, the motivations raised are inconsistent and widespread. It should be noted that the different motivations found in literature centers around the asset seeking versus asset exploitations story that is recognized by Aulakh (2007) and Deng (2012). “For many EMNCs2 rapid overseas expansion may be driven by the search for resources and other critical assets available in
2
21 global markets, rather than exploiting their existing sources developed at home” (Deng, 2012: 320). Deng (2012) also relates this to developed market MNEs; “Unlike established MNEs, international expansion by EMNCs is based less on prior accumulation of ownership advantages, but more on the intent to acquire and build such advantages abroad, and in particular in advanced countries” (Deng, 2012: 321). The grouping of motivations is based on the Eclectic Paradigm and the four main objectives of FDI by Dunning (1980, 1988), and on the different motivations that were found in newer theory on high growth market MNEs performing OFDI in developed markets. The following types of motivations are distinguished;
• Strategic asset motivations; the attraction of strategic assets (tangible or intangible) critical to their long-term strategy.
• Market motivations; the attraction of additional revenue and profit from new overseas markets.
• Institutional motivations; benefiting of home institutional experience or escaping institutional violations at home.
• Geo – political motivations; Motivations that are politically driven, resulting from state influence in the MNE and business groups.
• Enabling circumstances; circumstances of being a MNE in a high growth market that are the main drivers of OFDI.
• Efficiency motivations; the attraction of lower costs when doing business abroad. • Natural resource motivations; the attraction of natural resource needed for business
activities.
Based on the motivations found in literature and based on the researchers’ perceptions on the case, hypotheses are developed, and these will be tested through the data.
Strategic asset motivations
22 motivation for high growth market MNEs entering developed economies is to develop their exploratory strategies for learning and access to strategic assets. From a strategic asset-seeking perspective, foreign acquisitions by high growth market MNEs could be regarded as means to acquire strategic capabilities (Deng, 2012). Similarly the springboard perspective regarded international expansion of high growth market MNEs as a platform for acquiring strategic resources that allow them to catch up with the competitiveness of advanced MNEs (Deng, 2012). “Asset seeking emerging market MNEs enter developed markets with the intention of “catching up” (Da Silva et al., 2009: 102).
Gammeltoft et al. (2010) found that high growth market MNEs perform OFDI in order to acquire strategic resources abroad, something which is also recognized by Luo and Tung (2007). A motivation that is in line of these strategic resources is according to Gammeltoft (2010) that developed markets are further up the technological ladder and these acquisitions offer an enhanced and faster opportunity for learning. “Emerging economy firms acquire for the purposes of learning and catch-up with their more established competitors, motivation and incentive to preserve the target so as to learn from it” (Gammeltoft et al, 2010: 101). High growth market firms, which generally have weaker technological and marketing advantages (Dunning, Kim, & Park, 2008; Duysters et al., 2009), may prefer acquisitions as they allow these firms to quickly cover the gap between their capabilities and those of developed market firms (Stucchi, 2012). Stucchi (2012) also find the motive of quick access to some of the developed market firm capabilities, while denying direct competitors access to those capabilities. Also, Stucchi (2012) states that these types of acquisitions resolve the need to build credibility to attract skilled employees and suppliers. The strategic asset motive is supported by Luo and Rui (2009) who, based on Rui and Yip (2008) raise the strategic intent view on outward investment by high growth market MNEs, suggesting it is a proactive pursuit in search of strategic assets that redress their competence deficiencies.
23 this stock of existing know-how / ownership advantages), high growth market MNEs need to acquire technological and scientific knowhow so as to be able to offer products to more advanced needs. A combination of these motivations has been recognized by Chittoor and Ray (2007). In other words; the OFDI performed by high growth market MNEs is also motivated by learning objectives that allow these firms to overcome the initial hurdles arising due to technological gaps and late mover disadvantages (Aulakh, 2007).
In line of the strategic asset motivations above, Stucchi (2012) argues that building up a competitive brand and undertaking R&D investments are time-consuming and uncertain activities for high growth market firms, and for these reasons they undertake upmarket acquisitions to seek skills and resources. “As EM firms typically undertake upmarket acquisitions to add value to their business activities (Budhwar, Varma, Katou, & Narayan, 2009), they are likely to focus on acquisition strategies that feature highly value-adding technological and/or marketing advantages. Technological advantages are defined in this case as skills in undertaking R&D, producing patents and developing proprietary technology. In contrast, marketing advantages are defined in terms of distribution and servicing skills, attention to customers, and the ability to enhance brand loyalty” (Stucchi, 2012: 281). Surprisingly, Wang et al. (2012) found no support for their statement that the level of OFDI is positively related to acquiring R&D capabilities and advertising resources and/or marketing capabilities. The role of strategic assets in driving OFDI is often weak (Wang et al., 2012). Something
that contradicts with other scholars mentioned earlier.
24 Based on the motivations found in the literature and the researchers’ perceptions on the case, the following hypotheses are defined;
Hypothesis 1: OFDI performed by high growth market MNEs in developed markets is driven by the need for a) tangible R&D capabilities and b) intangible technological knowhow.
Hypothesis 2: OFDI performed by high growth market MNEs in developed markets is driven by the need for marketing capabilities related to the developed market.
Market motivations
Market seeking motivations are recognized in current literature with regard to high growth market MNEs that perform OFDI in developed markets. Deng (2012) found that a central motivation for high growth market MNEs entering developed economies is likely to expose themselves to sophisticated, cutting edge demand. While Gammeltoft et al. (2010) state that high growth market MNEs’ OFDI decisions are influenced by other MNEs’ decisions to perform OFDI. Gammeltoft et al., (2010) found that this influence is larger from firms originally from the same home market. A view that is based on Knickerbocker (1973) and found in Harrison et al. (2000) that argues that firms follow competition or follow the leader, and the leader is not the firm with the richest internal resources but the one most similar to the investing high growth market MNE.
Aulakh (2007) argues that developing economy firms perform OFDI in order to exploit their home country advantages. Domestic dominance and product diversification act as drivers for the accelerated globalization of emerging market firms (Aulakh, 2007). Further, according to Da Silva et al. (2009), most high growth market MNEs would follow market- or resource seeking motivations. Market saturation, reduction of demand, and defensive strategies against an increased global competition in the high growth market MNEs’ domestic market are a few of many reasons why these firms would internationalize (Da Silva et al., 2009).
25 Hypothesis 3: OFDI performed by high growth market MNEs in developed markets is driven by a demand for higher added value products in the home market.
Hypothesis 4: OFDI performed by high growth market MNEs in developed markets is driven by the expected future developments in a) the home market and b) the developed market.
Hypothesis 5: The attraction of additional revenue and profit in a) the developed market and in b) new markets are drivers for OFDI performed by high growth market MNEs.
Hypothesis 6: OFDI performed by high growth market MNEs in developed markets is driven by an increased global competition.
Institutional motivations
According to Gammeltoft et al. (2010), motivations for high growth market MNEs to perform OFDI in developed countries are also institutional driven; the investments are efforts to escape bureaucratic restrictions or volatility at home. “Domestic violations in institutions and policies have been a strong driving force for OFDI. Uncertainty in the home economy is an important driver and is driving businesses to look for safety nests’ in more stable countries” (Gammeltoft, 2010: 103). A view supported by Luo and Rui (2009) who state that high growth market MNEs go global to avoid poor institutional environments at home. It is Deng (2012) who recognizes this as the home environment being characterized by institutional and competitive voids that are driven by domestic macroeconomic and political volatility. It is because of the institutional voids - the absence of specialized intermediaries, regulatory systems, and contract enforcing mechanisms - high growth market MNEs cannot access capital or talent as easily as Western MNEs. Therefore we see the efforts to escape institutional restraints or voids at home play critical role in OFDI from high growth market economies. Further, where state-owned enterprises are most likely to get speedy governmental approval and favorable state support, private enterprises that decide to venture abroad are more likely to transcend domestic institutional restraints and market imperfection residuals, since they face SOEs3 in certain sectors and state intervention in industrial policy (Deng, 2012).
3
26 Where weak home institutions are drivers for OFDI, dealing with them can benefit the high growth market firm when performing the OFDI. Stucchi (2012) found that high growth market firms develop resources to compensate through concentrated ownership and relationships with other firms and governmental authorities. Deng (2012) doesn’t only focus on the weak home institutions being drivers for OFDI by high growth market MNEs but also recognizes the possession and exploitation of relational capability (a high growth market MNEs’ ability to manage in difficult institutional conditions and to build close business – government ties) being a driver for accelerated international expansion in developed markets. Also, Deng (2012) found that organizational arrangement such as business groups that may have evolved as a way of dealing with problems of underdeveloped institutions and market imperfections can also be an important driver for the rapid FDI expansion of high growth market MNEs. In contrast, Wang et al. (2012) found that the institutional body, former communist’ ownership and institutional infrastructure still have impact on OFDI behavior, but because of economic and political reforms in high growth markets, the impact on OFDI behavior is weakened.
Based on the motivations found in the literature and the researchers’ perceptions on the case, the following hypotheses are defined;
Hypothesis 7: Differences in governance structures between high growth market and developed market MNEs are obstacles when OFDI is performed by high growth market MNEs in developed markets.
Hypothesis 8: Differences with regard to a) risk perceptions, b) action driven attitude and c) the speed of executing business activities are drivers for OFDI performed by high growth market MNEs in developed markets.
Geo – political motivations
27 internationalize in order to strengthen their global competitiveness” (Deng, 2012: 323). According to Deng (2012) there are diverse supportive government policies from many emerging economies that serve as another important incentive to stimulate EMNCs4 to undertake outward FDI quickly. Gammeltoft et al. (2010) state that because of the great influence of the state in strategic decision making in high growth MNEs in comparison to Western MNEs, it is often the government that is the main driver behind internationalization of the MNE in order to strengthen international competitiveness. In line of this, Wang et al. (2012) found support for the prediction that government involvement, especially government policy in the home countries, shapes the internationalization behavior of high growth market MNEs. It shows that firms with high state-ownership / influence are more likely to perform OFDI and expand overseas (Wang et al., 2012).
Concerning political motivations it is Deng (2012) who focuses on the financial stimulant that governments of high growth markets bring in and states that the large scale acquisitions are also possible due to the powerful financial resources of their governments. The increasing financial sources of emerging country governments serve the foundation for launching institutional incentives for OFDI (Deng, 2012). As a clearly institutional incentive for OFDI, emerging economies have established some of the world most well-known sovereign wealth funds (SWFs). They act as special-purpose investment funds or arrangements to undertake OFDI worldwide. Further, besides business-government ties, social network ties and business group affiliations may be especially important for EMNCs in making their international strategic decisions according to Deng (2012).
Based on the motivations found in the literature and the researchers’ perceptions on the case, the following hypothesis is defined;
Hypothesis 9: Governments are involved in the strategic decision making process of and/or give support to high growth market MNEs to perform OFDI in developed markets.
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28 Enabling circumstances
Firms need a balance between global reach and technology upgrading to enjoy the benefits of both learning and economies of scale. MNEs from high growth markets went through a process of inward internationalization, especially through tie-ups with foreign firms at home (Chittoor and Ray, 2007). As learning occurred and they gradually built up their competitiveness and knowledge base, these firms also become more able to benefit from investments not just at home but also in other developing countries and advanced economies (Gammeltoft et al., 2010). In contrast, Wang et al (2012) found that the foreign presence in a home industry is negatively related to the degree of a high growth market MNEs’ OFDI. “It appears that when Chinese firms can acquire strategic resources by collaborating with foreign firms that operate in China, they avoid investing abroad as this tends to be more costly, risky and resource-intensive” (Wang et al., 2012: 434). But it should be noted that the relationship between inward and outward FDI may differ across emerging economies (Wang et al., 2012).
When focusing at enabling circumstances and the results that these consequences have on the OFDI by high growth market MNEs, Deng (2012) finds that the rapid growth of emerging economies has bolstered the confidence of their firms to go across borders with relatively bold investments, resulting in a spate of bold and aggressive acquisitions, particularly in advanced countries. It is this confidence that has also its influence on corporate entrepreneurship, in response to the challenges and opportunities presented by globalization and domestic institutional transformation (Deng, 2012). In other words, they initiate internationalization as a strategic choice and an enabling mechanism in pursuit of growth opportunities. For many high growth market MNEs, corporate entrepreneurship is well shown in that their top managers are able to use proactive planned and unplanned strategies simultaneously (Deng, 2012).
29 (2010) recognize that the circumstance of high growth market MNE’s latecomer position is used to their advantage through repeated applications of a process of ‘linkage, leverage and learning’.
Based on the motivations found in the literature and the researchers’ perceptions on the case, the following hypothesis is defined;
Hypothesis 10: OFDI performed in developed markets is driven by the increased financial possibilities of the high growth market MNE.
Efficiency motivations
Efficiency motivations are not highly recognized in current literature on high growth market MNEs performing OFDI in developed markets. Da Silva et al. (2009) found that after market seeking and resource seeking, high growth market MNEs will tend to move to asset seeking or efficiency seeking FDI. “Efficiency seeking motives are associated with the desire to reduce costs such as transportation, communications, or other intermediate costs, as well as the costs of resources and assets, or to preempt barriers and take of opportunities created” (Da Silva et al., 2009: 103). Wang et al. (2012) found that high growth market MNEs are in a strong position to follow a cost leadership strategy but within this strategy, advantages associated with cost leadership is not a driver of OFDI to developed markets.
Based on the motivations found in the literature and the researchers’ perceptions on the case, the following hypothesis is defined;
Hypothesis 11: The attraction of lower operational costs is a motivation for high growth market MNEs to perform OFDI in developed markets.
Natural resource motivations
30 for emerging market governments to acquire scarce natural resources needed for economic and social development of their home countries. In this study is found that, contradicted to acquiring scarce natural resources for economic and social development of the home economy, high growth market MNEs (and their economies) are in possession abundant natural resources in the home market.
Based on the motivations found in the literature and the researchers’ perceptions on the case, the following hypothesis is defined;
Hypothesis 12: High growth market MNEs perform OFDI in developed markets in order to integrate upstream and downstream business operations.
Motivations for high growth market MNEs to perform OFDI in developed markets
From the literature on high growth market MNEs performing OFDI in developed markets, the motivations are derived to perform these types of investments. As a conclusion and in an attempt to answer the second sub question, it can be concluded that motivations for high growth market MNEs to perform OFDI in developed markets according to current theory are;
• strategic asset motivations • market motivations • institutional motivations • geo - political motivations • enabling circumstances • efficiency motivations • natural resource motivations
Relations of traditional and new FDI theory
31 Further, an answer to how these two types of literature do relate can be given. Are these 2 types of theories overlapping or complementary with regard to the motivations for OFDI?
Argument for this analysis is the ongoing debate on changed OFDI patterns, motivations for performing these investments and whether traditional and/ or new FDI theory is sufficient in explaining this. While many researchers hypothesize that the classic determinants of market seeking, resource seeking and strategic asset seeking explain much of the behavior of these new global players, others are convinced that these determinants do not fully capture these motives
(Sauvant et al., 2011). “The mainstream literature on MNEs does not provide sufficient empirical
evidence for an understanding of the recent phenomenon of the internationalization of firms from emerging markets, nor is it based on any dominant theory” (Da Silva et al., 2009: 97). Deng (2012) also states that through the accelerated internationalization of many high growth market MNEs which have become global players in a diverse array of industries and at a rapid pace, the traditional views of internationalization of firms and FDI are being challenged.
To see what the relations are between theories in traditional FDI and theory on motivations for OFDI by high growth market MNEs in developed markets, two matrixes are produced (figures 2 and 3). The first matrix consists of the main theories on traditional FDI related to the motivations found for high growth market MNEs to perform OFDI in developed markets. The second matrix consists of the theories on OFDI by high growth market MNEs performed in developed markets related to the motivations found in the literature on motivations for high growth market MNEs to perform OFDI in developed markets. The theories are ordered up on the year of publication.
32 Matrixes Motivations --- Theories Strategic asset
Market Institutional Geo Political Enabling circumstances Efficiency Natural resource Hymer (1960) Y Y N N N Y Y Vernon (1966) N Y N N N Y N Kindleberger (1969) Y Y Y N N Y N Caves (1971) Y Y Y N N Y N Knickerbocker (1973) N Y N N N Y N Williamson (1975) Y Y Y N N Y N Dunning (1980, 1988) Y Y N N N Y Y Barney (1991) Y Y N N N Y Y
Figure 2: matrix 1; theories on traditional FDI related to motivations for OFDI by high growth markets in developed markets. Motivations --- Theories Strategic asset
Market Institutional Geo Political Enabling circumstances Efficiency Natural resource Aulakh (2007) Y Y Y Y Y N N
Luo and Rui
(2009) Y Y Y Y Y N Y Da Silva et al. (2009) Y Y N N Y Y N Chittoor and Ray (2009) Y Y Y N Y Y N Gammeltoft et al. (2010) Y Y Y Y Y N N Deng (2012) Y Y Y Y Y N Y Stucchi (2012) Y Y Y Y Y N N Wang et al (2012) Y Y Y Y Y Y N
33 Index:
N = the type of motivation has not been recognized, mentioned in the theory and/or seen as a motivation for OFDI.
Y = the type of motivation has been recognized, mentioned in the theory and/or seen as a motivation for OFDI.
Analysis
Matrix 1 shows that theories on traditional FDI all recognized the market and efficiency motivation for OFDI. An explanation here is that the traditional FDI theories are built up on the mainstream trade theories of absolute cost advantage (Smith, 1776), comparative advantage (Ricardo, 1817), the gravity model of trade (Isard, 1954), in which the attraction of lower costs and of additional revenue are central motivations for trading. Institutional motivations for OFDI have been partly recognized, by Kindleberger (1969), Caves (1971) and Williamson (1975). A possible explanation is that these theories are drawn up on the market imperfection theory, a theory in which formal institutions (regulations) are directly driving MNEs to perform OFDI.
A third finding while analyzing the matrixes is that geo political motivations and enabling circumstances of being an MNE in a certain market are both not seen as motivations for OFDI in matrix 1. A possible explanation is that the role of the state in Western MNEs in the 1950s till 1990s (on which the traditional FDI built up on) has not been as in evidence as nowadays with high growth market MNEs. Although not recognized in traditional theory on OFDI, in practice the influence of the state on OFDI decisions of MNEs was there in the 1950s till 1990s. For example, Asian but also Western MNEs, of which OFDI decisions were closed linked with the governments’ interests.
34 circumstances in which the MNE is acting can be made. This might result in a closer view on enabling circumstances to be motivations for performing OFDI.
Matrix 2 shows that efficiency motivations are not recognized as being motivations for OFDI by high growth market MNEs. A possible explanation here is that high growth market MNEs are already benefiting from low costs strategies and it is not something they need to perform OFDI for. Further, by analyzing the second matrix in relation to the first, what stands out is that natural resources are not highly recognized in matrix 2 while this is part of Dunning’s Eclectic Paradigm, a very well recognized theory on traditional FDI. A possible explanation might be that attraction of natural resources is not a motivation for many high growth market MNEs since many of these MNEs are from countries in which natural resources are abundant.
Also, geo political motivations are highly recognized in matrix 2. An explanation here is the influence of the state which is high in many high growth market MNEs and influences directly their OFDI decisions. Practical example is the OFDI by Chinese MNEs in Africa, of which many are directly driven or influenced by the Chinese state. Strategic asset motivations are recognized by all literature in matrix 2. An explanation here is the ‘springboard perspective’ (Luo and Tung, 2007) which states that high growth market MNEs companies perform OFDI in order to catch up with competitors from developed countries. These types of motivations are also recognized by most theories on traditional FDI, except for Vernon (1960) and Knickerbocker (1973). Vernon (1960) and Knickerbocker (1973) view OFDI as exploiting a firms ownership advantages abroad along the Product Life Cycle. While, unlike established MNCs5, international expansion by high growth market MNCs is based less on prior accumulation of ownership advantages, but more on the intent to acquire and build such advantages abroad, and in particular in advanced countries (Deng, 2012).
Taken collectively and in an attempt to answer the two questions at the beginning of this section; theory in traditional FDI is not sufficient in explaining the OFDI performed by high growth market MNEs. Argument here for is matrix 1 that shows that enabling circumstances and geo political motivations have not been mentioned or recognized as motivations for OFDI in literature on
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36 7. METHODOLOGY
The research methodology in this study is explanatory research in which a survey and in-depth questionnaire are held within a single case study; Mexichem – Wavin. The focus is on finding the motivations for a high growth market MNE to perform OFDI in a developed market.
The data sample is based on the concepts of motivations raised in current literature on traditional FDI theories and literature on OFDI motivations of high growth market MNEs in developed markets. In literature, several motivations for high growth market MNEs to perform OFDI in developed countries are raised and it is tested to what extent they occur in the Mexichem – Wavin case. The motivations rose in the literature are grouped and together with the researcher’s perceptions foundations for the hypotheses. The hypotheses are base for the survey and in-depth questionnaire questions. The data from the survey and in-depth questionnaire are held in the light of current theory to see whether the hypotheses can either be confirmed or rejected in an attempt to answer the main research question.
The survey and in-depth questionnaire are focusing on testing the hypotheses and find the motivations for high growth MNEs to perform OFDI in developed markets. The survey is quantitative while the in-depth questionnaire is qualitative. According to Eisenhardt (1989) the combination of these data types can be highly synergetic; “quantitative evidence can indicate relationships which may not be salient to the researcher. It also can keep researchers from being carried away by vivid, but false, impressions in qualitative data, and it can bolster findings when it corroborates those findings from qualitative evidence” (Eisenhardt, 1989: 538).
37 a case study is alive with tension between divergence into new ways of understanding the data and convergence onto a single theoretical framework (Eisenhardt, 1989).
Kathleen M. Eisenhardt has been looking more closely at the process of performing case studies in her paper ‘Building Theories from Case Research’ (1989). Eisenhardt (1989) states that strength of theory building from cases is its likelihood of generating novel theory. The attempts to reconcile evidence between cases and literature increase the likelihood of creative reframing into a new theoretical vision (Eisenhardt, 1989). Also, the emergent theory is likely to be testable with constructs that can be readily measured and hypotheses that can be proven false. The hypotheses have already undergone repeated verification during the theory building process, while theory which is generated apart from direct evidence may have testability problems (Eisenhardt, 1989). Moreover, Eisenhardt (1989) states that the resultant theory is likely to be empirically valid because the theory-building process is so intimately tied with evidence.
“However, some characteristics that leads to strengths in theory building from case studies also lead to weaknesses” (Eisenhardt, 1989: 547). An example is that the intensive use of empirical evidence can result in theory which is very complex, which, according to Eisenhardt, can result in theory which is very rich in detail, but lacks the simplicity of overall perspective. “Another weakness is that building theory from cases may result in narrow and idiosyncratic theory” (Eisenhardt, 1989: 547). Eisenhardt states that case study theory building is a bottom up approach such that the specifics of data produce the generalizations of theory. She recognizes that the risks are that the theory describes a very idiosyncratic phenomenon or that the researcher is unable to raise the level of generality of the theory.
38 sense or the findings in a theory-testing suggest the need for a new perspective (Eisenhardt, 1989). Some characteristics which have also been recognized in the case of high growth market OFDI performed in developed markets (Aulakh, 2007; Gammeltoft et al., 2010; Stucchi, 2012). “In these situations, theory building from case study research is particularly appropriate because theory building from case studies does not rely on previous literature or prior empirical evidence” (Eisenhardt, 1989: 548).
Case study
“The unit of analysis describes the level at which the research is performed and which objects are researched” (Blumberg et al., 2011: 166). The units of analysis in the case study of Mexichem – Wavin are both the acquired as the acquiring firm at a higher level. At a lower level, the units of analysis in this case study are the strategic management decisions to perform the OFDI (Blumberg et al., 2011). The survey and in-depth questionnaire are held up on four key persons that were directly involved in the acquisition of Wavin by Mexichem in 2012; two from the Mexichem organization and two from the Wavin organization. Argumentation for this small number of participants, is the few persons were directly involved in the acquisition. The following persons will be questioned on the motivations for the acquisition of Wavin by Mexichem;
• Ricardo Gutiérez Muñoz; President of the Executive Committee Mexichem • Henk ten Hove; former CEO Wavin at the time of the acquisition
• André Capdepón; former CFO Kaluz (family trust company and 60% owner of Mexichem) and now CFO Wavin
• Jan Kruse; Corporate Director Strategy / Mergers & Acquisitions Wavin
Mexichem
39 present in Latin America, North America, Europe and Asia, has an annual turnover of approximately € 2.7 billion and operating income of approximately € 400 million (Wavin, 2012).
Mexichem is a 100% Mexican group, comprised of chemical and petrochemical companies that are leaders in the Latin American market. Mexichem had its origins in a company known as Cables Mexicanos, founded in 1953. In 1978, the Grupo Industrial Camesa holding company was created, which originally held equity control of Cables Mexicanos. In that same year, the company began to trade on the Bolsa Mexicana de Valores, the Mexican Stock Exchange. In 1986, it incorporated Companía Minera Las Cuevas, a company that produced fluorite. In December 2003, it increased its equity stake in Subsidiaria Mexichem, previously owned by the French company Grupo Total, from 50.4% to 93.79% (Sauvant, 2011).
“The company has developed an expansion strategy that integrates its operations vertically and horizontally” (Sauvant, 2011: 261). The period 2003 - 2012 has been characterized by a high amount of mergers and acquisitions in the domestic and foreign markets (US, Brazil, Argentina, Colombia, Peru) and across different products (chemicals, plastic – PVC, vinyl resins, fluorine, water management, fluids). Beside expansion in markets and products, these OFDIs created a further integration of its business segments (Mexichem, 2013).
“Mexichem is now the main producer of PVC resin in Latin America (40% of the market) and PVC pipes (30% of the market)” (Sauvant, 2011: 261). With now more than 10,000 employees throughout the entire American continent, the company actively contributes to the development of the countries through products with a wide market in the most dynamic growth sectors including construction, housing, drinking water and urban sewage in Mexico, the United States and Latin America (Wavin, 2012). The large number of acquisitions has resulted in three business divisions:
• Integral solutions chain; Piping Systems (100%)
40 • Fluorine chain; Fluor carbons (46%), Hydrofluoric Acid (27%), Fluorspar (22%), Aluminum
Fluoride (5%) (Mexichem, 2013).
It can be recognized that the characteristics of Mexichem are in line with the characteristics of high growth market MNEs raised by Da Silva et al. (2009) and Deng (2012), page 19-20 of this study.
Wavin
Wavin is the leading supplier of plastic pipe systems in Europe. The company provides reliable solutions that are essential for tap water, surface heating and cooling, rain-and storm water, water and gas distribution and telecommunications applications. The headquarters of Wavin is based in Zwolle, The Netherlands (Wavin, 2013).
Wavin was founded in 1955 by the Local Dutch water Authority WMO and created production facilities in the Netherlands, Germany, Denmark already in the late 1950’s, followed by a further expansion in Western Europe in the 1960s accompanied with a period of product diversification. Where Royal Dutch Shell took a 50% participation in Wavin by Royal Dutch Shell in 1962, the company sold its shares 37 years later in 1999 to CVC Capital Partners, a leading independent equity provider in Europe. During the ‘Shell period’, the focus of Wavin was expanded to R&D, technology and innovation, along with further geographical presence for central overseas export activities in the 1970’s. A more emphasis on systems and above ground applications in the 1980’s (25% of sales where other than pipe systems) was followed by a re-alignment of activities, a focus on core competences and further expansion to Eastern Europe in the 1990’s. While WMO sells its stake in Wavin in 2005 and the company becomes stock listed in 2006, it did a number of successful acquisitions in the UK (2005) and Turkey (2008) and expanded its expertise to water management and surface heating and cooling in the last decade (Corporate Presentation Wavin, 2012).
41 The acquisition in detail
Mexichem has acquired Wavin in May 2012 by offering € 10,50 per share Wavin, which represents a premium of 177% over the closing price on November 18, 2011 for 100% of the outstanding shares of Wavin. The price per share resulted in a total acquiring amount of approximately € 531 million for the shares (Wavin, 2012). Approximately two percent of the issued and outstanding Wavin shares were held by Mexichem already. Mexichem financed the offer for the other approximately 98% of the issued and outstanding Wavin shares (approximately € 520 million) with cash on its balance sheet and existing committed credit facilities (Wavin, 2012). It should be noted that in these types of investments in which one company is buying all the shares of the other company, the ‘enterprise value’ is used to determine the real amount that is paid (Platt et al., 2010). The ‘enterprise value’ is used to value a company and is used as a more comprehensive alternative to market capitalization. The enterprise value can be calculated by using formula 1;
Enterprise value = market value of equity + total debt - cash & cash equivalents Market value of equity = total amount of shares × price per share
Total debt = current and non-current interest bearing liabilities
(Platt et al., 2010). Investors use ‘enterprise value’ because it provides a clearer picture of the real value of a company opposed to simply considering the market capitalization. Looking at the figures in the financial reports of Wavin in 2011, the following can be concluded;
Number of shares = 50,782,132
Price per share = € 10,50
Total debt = € 304,484,000 6
Cash & cash equivalents = € 76,633,000 7
Recognizing this, the ‘enterprise value’ of Wavin is;
50,782,132 × €10,50 = € 533,212,386 + 304,484,000 - 76,633,000 = € 761,063,386
6 Based on Wavin Annual Report 2011. 7
