Industrials

About M&A Projects From A Product Management Perspective

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<p id="17db" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph=""><strong class="il fz">Introduction</strong></p><p id="9af2" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">Mergers and acquisitions &mdash; or external growth projects &mdash; are widely used by the companies to expand or fortify their businesses. It is believed that in comparison with internal, organic development, M&amp;A are perhaps more expensive, but at the same time, a significantly faster way to grow.</p><p id="ad64" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">The spectrum of motives that encourage top managers&nbsp;<span id="rmm">t</span>o execute mergers and acquisitions is quite broad, and there is some belief that such transactions are not always based on rational reasons. The 1980s even saw the emergence of a &ldquo;hubris hypothesis,&rdquo; according to which the initiators of M&amp;A deals might sometimes be guided by personal ambitions rather than by the interests of shareholders and the company itself. In addition to that, the risks, complexity, and cost of the integration process can cast serious doubt on whether these projects are really justified.</p><p id="aa55" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">Despite this skepticism, mergers and acquisitions are still used and can be an effective tool for strategic business development in cases where a certain synergy can be achieved &mdash; in other words, when the result after the merger is better than the sum of the results achieved by the two companies separately.<br />Financial indicators will inevitably appear among the project objectives, but they are not the only ones to be considered, since success depends on the well-coordinated work of all key corporate functions: financial, marketing (product management), research and development, industrial, human resources, etc. This is probably what makes M&amp;A projects so interesting and rich in multifaceted experiences for all participants.</p><p id="7dc7" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">In most cases, the goal of the merger is formulated in terms of marketing and strategy. It is important to clearly define what exactly the company will gain from the transaction. Will it be access to new technologies, go-to-market in a new country or a different price segment, an image as an industry expert or domestic manufacturer? In this way, marketing leaders play a key role at all stages of the project: from the definition of objectives and selection criteria to the post-merger integration and implementation of projects with synergy.</p><p id="86d4" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">Below we will discuss three examples of acquisitions carried out by Schneider Electric, a French manufacturer of electrical components and solutions, which is an undeniable example of successful growth through acquisitions. Knowing that in 1984 Schneider was declared bankrupt and Didier Pineau-Valencienne, the first CEO of Schneider in its new form, was selling off non-core assets to focus activity on electrical business, it is amazing to see what the company was able to achieve thanks to a well-thought-out M&amp;A policy.</p><p id="83dc" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">The M&amp;A projects selected here are not the most recent ones, as the goal of the article is not to make an update on the newest mergers carried out by Schneider Electric but rather to describe the marketing and strategic approach as well as the logic in each case. Additionally, the time that has passed since these acquisitions makes it possible to describe them in detail without touching on confidential topics.</p><p id="63ad" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph=""><strong class="il fz">Acquisition of Ural Electro in 2001</strong></p><p id="879b" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">Before talking about M&amp;A involving expansive geography and many product lines, let&rsquo;s consider a relatively simple case, where an external growth project was used to gain access to a local market. In this example, we will focus on the Russian market for industrial control components and, more precisely, on the contactors: low voltage devices designed to turn electric motors on/off and to ensure their protection. These devices are widely used in all kinds of electrical panels as well as in various machinery and other industrial equipment. To make the goals of this purchase more understandable, let&rsquo;s make a small historical excursion back to the transformation of the Russian market for contactors in the 1990s.</p><p id="f0d3" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">In Soviet times, this market was dominated by domestic manufacturers. The international (western) vendors occupied only a narrow, isolated niche. Their products were purchased by the state import-export entities, on a centralized basis, either for machines and equipment manufactured for export or as spare parts for the fleet of imported machinery in the USSR.</p><p id="365a" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">The situation began to change in the 1990s, when the Soviet Union collapsed and international manufacturers &mdash; Schneider Electric among them &mdash; started opening subsidiaries in the country. By the beginning of the 2000s, the market for contactors was composed of two distinct segments with quite different levels of quality: product from international and domestic manufacturers, which marketing specialists called &ldquo;premium&rdquo; and &ldquo;medium&rdquo; segments respectively.</p><figure class="ji jj jk jl jm hv fg fh paragraph-image"><div class="fg fh jh"><img class="w ia ib" role="presentation" src="https://miro.medium.com/max/1070/1*rrZlVf4hpIbdCBMylCta1Q.png" alt="" width="535" height="229" /></div></figure><p id="f587" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">Here are some more nuances to complete the picture:</p><ul class=""><li id="cc82" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg jn jo jp gv" data-selectable-paragraph="">Domestic contactors were approximately four times cheaper than their western equivalents. The Russian factories used old technology &mdash; long since paid off &mdash; and did not make any tangible investments in new products. In a longer term, however, a certain price increase could be expected, since sooner or later the domestic producers would either have to invest in new technologies or sell their business.</li><li id="571a" class="ij ik fy il b im jq io ip iq jr is it iu js iw ix iy jt ja jb jc ju je jf jg jn jo jp gv" data-selectable-paragraph="">The sales channels of the two segments remained quite isolated, with separated distribution networks. The distributors of domestic products showed little interest in their imported analogues due to relatively small sales volumes and unwillingness to spoil relations with local companies.</li><li id="e97a" class="ij ik fy il b im jq io ip iq jr is it iu js iw ix iy jt ja jb jc ju je jf jg jn jo jp gv" data-selectable-paragraph="">Unlike other countries, none of the domestic players produced a full range of contactors. Historically, each plant was given its own limited part of the range, and the distributors had to work with several producers to have a complete catalogue.</li><li id="bcbb" class="ij ik fy il b im jq io ip iq jr is it iu js iw ix iy jt ja jb jc ju je jf jg jn jo jp gv" data-selectable-paragraph="">Despite all the efforts of Western companies, their total market share remained modest, grew rather slowly, and in 2000 accounted for something in the neighborhood of just 10&ndash;15%.</li></ul><p id="4d66" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">One could argue for a long time about the mediocre quality of domestic products, but without direct access to the mass market, it would take years to radically change the ratio between premium and middle segments. To break the existing paradigm, Schneider Electric decided to acquire Ural Electro, one of the leading domestic producers with roughly 25% of the market share.<br />The main interest in this transaction was gaining access to the mass market through the domestic distribution network. As Ural Electro was an exclusive manufacturer for some types of contactors, its products were on the shelves of literally all the distributors in the country.</p><p id="76ed" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">At the same time, the product range itself was completely outdated and uninteresting from a technical standpoint. True, it was the backbone of the company&rsquo;s position in the medium segment, but in a longer run, with new sales channels at hand, it was possible to replace it with another product and even to extend the range to have a full offer and take additional market shares from domestic manufacturers. By the time the acquisition took place, Schneider already had manufacturing facilities in China producing some &ldquo;cost effective&rdquo; ranges of contactors, which were launched in Russia under a local brand with the goal of substituting and extending the existing portfolio.</p><p id="4190" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph=""><strong class="il fz">Acquisition of Digital Electronics in 2002</strong></p><p id="acde" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">In this example, we will examine a transaction that allowed Schneider Electric to acquire a modern product portfolio along with a leadership position in the worldwide market for human-machine interfaces. Despite the obvious global aspect of the deal, there were some local constraints that were occasionally at odds with global objectives, and it is interesting to see how the project team eventually managed to address both.</p><p id="d7af" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">More precisely, this example relates to the market for so-called graphic operator terminals, devices which are installed on different kinds of machines, production lines, and other industrial facilities to ensure visualization and control. In most of the cases, these products are installed along with programmable logic controllers &mdash; the heart of an automation system &mdash; which, in turn, implement the control algorithms.</p><p id="589d" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">At the time of the acquisition, Schneider was already a market leader in PLCs, holding something like 20% of the international market. Meanwhile, its market share in the field of operator terminals was a mere 2% at best. Since both products are generally sold through the same sales channel, such a serious gap was explained by the poor technical level of the latter products.</p><figure class="ji jj jk jl jm hv fg fh paragraph-image"><div class="fg fh jv"><div class="ka s ap kb"><div class="kc kd s"><div class="ep jw ef es eo ex w jx jy jz"><img class="ef es eo ex w ke kf af vl" role="presentation" src="https://miro.medium.com/max/60/1*lbkF2hS92JJKYinGI0IPrA.png?q=20" alt="" width="492" height="246" /></div><img class="mh rr ef es eo ex w c" role="presentation" src="https://miro.medium.com/max/492/1*lbkF2hS92JJKYinGI0IPrA.png" sizes="492px" srcset="https://miro.medium.com/max/276/1*lbkF2hS92JJKYinGI0IPrA.png 276w, https://miro.medium.com/max/492/1*lbkF2hS92JJKYinGI0IPrA.png 492w" alt="" width="492" height="246" /></div></div></div></figure><p id="4db2" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">To upgrade its catalogue, Schneider Electric decided to acquire Digital Electronics, a Japanese manufacturer and a world leader with a very attractive and high-performance range of graphic operator terminals. With regard to the objectives of the transaction, it may seem everything was completely simple and clear: one company bought another for the sake of its products, market access, and expert image. Generally speaking, this is true, however, during the preparation of the deal, a number of constraints and contradictions were identified, which ultimately determined the format of integration.</p><ul class=""><li id="d442" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg jn jo jp gv" data-selectable-paragraph="">It was pointed out that &ldquo;direct&rdquo; post-merger integration with a rebranding could hurt the existing business of Digital Electronics, because the company was clearly recognized for its technical expertise, while Schneider Electric was considered as a generalist in the field of industrial automation and power distribution.</li><li id="6b69" class="ij ik fy il b im jq io ip iq jr is it iu js iw ix iy jt ja jb jc ju je jf jg jn jo jp gv" data-selectable-paragraph="">Before the acquisition, Schneider Electric positions in Japan were quite modest, while Digital Electronics was a domestic manufacturer with over 50% of the market in its field as well as a long history of cooperation with the largest Japanese enterprises. The Asian division of Schneider Electric viewed the deal as a good opportunity to strengthen its position and increase sales in the country by leveraging the acquiree&rsquo;s image, brand, and sales channels.</li><li id="4a1f" class="ij ik fy il b im jq io ip iq jr is it iu js iw ix iy jt ja jb jc ju je jf jg jn jo jp gv" data-selectable-paragraph="">Meanwhile, from the worldwide perspective, the main objective was to bring a new product into Schneider&rsquo;s catalogue and to reduce the number of cases where Schneider Electric PLCs were sold with third-party operator terminals.</li></ul><p id="90f4" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">To reconcile these contradictory expectations, the newly acquired company was integrated into the group using &ldquo;double brand policy.&rdquo; In other words, Digital Electronics remained in the market with its own brand and independent sales organization. At the same time, its product ranges were sold via both Schneider Electric and Digital Electronics sales networks, under two separate brands and with some additional customization to ensure their differentiation.</p><p id="5baf" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">This approach allowed an increase of the global market share, while preserving the image of a technical expert and a domestic manufacturer in Japan.</p><p id="bbbe" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph=""><strong class="il fz">Schneider Electric Acquires Leader Harvest Power Technologies (2011)</strong></p><p id="8e61" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">This is another example in which the mosaic of motivations develops a little differently. Unlike previous examples, in this case we are discussing a technically advanced company that was successful in its domestic market but not very well known abroad. Headquartered in Beijing, Leader and Harvest manufactured medium-voltage (MV) variable speed drives and was a leader in this market in China. The term &ldquo;medium voltage&rdquo; is a key element in this example, and we will see why further on.</p><p id="6b30" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">Widely used in different machines and industries, variable speed drives are power electronic devices that control (vary) the speed of asynchronous motors. Schneider had been in this business from the very beginning when, in the 1990s, driven by a new generation of more reliable and more easily configured power electronic components, variable speed drives experienced rapid and significant development. When used to control pumps and fans in different industrial applications, these devices provide substantial energy savings, which was one of the advantages that drove the growth of this market for many years. Schneider started with &ldquo;organic&rdquo; development of its own product lines, and later continued with an external growth approach: JV with Toshiba in Japan, acquisition of Elin in Austria, etc.</p><p id="b19f" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">There was, however, a slight nuance. The above-mentioned power electronic components made it possible to make robust and affordable drives only for low-voltage motors, while industries also had a large park of medium-voltage motors, particularly for pumps and fans, with an untapped energy saving potential. Initially, this was not an issue for Schneider Electric, as the company was focused on the machine building segment and, therefore, on relatively small low-voltage motors.</p><p id="5f69" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">The MV drives, with comparable levels of performances, appeared in the market later, thanks to another technological breakthrough.<br />By the time this technology was available, Schneider had a strong offer and expertise in low-voltage drives. However, entering the new market by developing a medium-voltage product from scratch still seemed like a risky option &mdash; a kind of chicken and egg dilemma. Despite obvious synergy with low voltage, the MV was a new specific area, requiring significant investments, with its own nuances and pitfalls, where no one was immune from mistakes. On top of this, in terms of the number of units, the MV market was significantly smaller, and no one could guarantee a sales volume for a newly developed product.</p><p id="0505" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">In other words, an acquisition seemed to be a good option, hence Schneider&rsquo;s interest in Leader and Harvest, a Chinese manufacturer of MV drives holding a large part of the domestic market.</p><figure class="ji jj jk jl jm hv fg fh paragraph-image"><div class="fg fh kh"><div class="ka s ap kb"><div class="ki kd s"><div class="ep jw ef es eo ex w jx jy jz"><img class="ef es eo ex w ke kf af vl" role="presentation" src="https://miro.medium.com/max/60/1*qjLs0ly82JxR85ZbZ7UKzw.png?q=20" alt="" width="448" height="297" /></div><img class="mh rr ef es eo ex w c" role="presentation" src="https://miro.medium.com/max/448/1*qjLs0ly82JxR85ZbZ7UKzw.png" sizes="448px" srcset="https://miro.medium.com/max/276/1*qjLs0ly82JxR85ZbZ7UKzw.png 276w, https://miro.medium.com/max/448/1*qjLs0ly82JxR85ZbZ7UKzw.png 448w" alt="" width="448" height="297" /></div></div></div></figure><p id="a9b7" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">This acquisition obviously strengthened Schneider&rsquo;s position in China, but the deal was, above all, an opportunity to take market share in the global market, with the benefit of L&amp;H&rsquo;s product range and Schneider&rsquo;s sales channels worldwide.</p><p id="5f9f" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph=""><strong class="il fz">In conclusion&hellip;</strong></p><p id="4f31" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">The above examples show that mergers and acquisitions are an effective tool to change up the status quo in the market by purchasing the missing elements of the marketing mix. Instead of developing sales channels or product lines &ldquo;organically,&rdquo; they can be bought from another market player. The acquisition of new sales channels would make it possible to sell existing products in new market segments, while the newly acquired product ranges allow the Buyer company to increase its market share by leveraging the existing distribution network.</p><p id="1e78" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">At the same time, it is clear that the acquisition and integration of enterprises is a very multifaceted topic. Specifically, there are global and local interests, which may contradict one another. Therefore, at the stage of post-merger integration, additional marketing tools may be needed, such as the double brand policy.</p><p id="ec31" class="ij ik fy il b im in io ip iq ir is it iu iv iw ix iy iz ja jb jc jd je jf jg dn gv" data-selectable-paragraph="">And finally, we can see that, thanks to such deals, companies can enter new markets and expand the geographic reach of their sales. Today, many companies that have already achieved success in their home countries are considering entering international markets, and, in fact, the methods used by Schneider Electric could also be used by them. I would be pleased if my article gave them some ideas on how to develop their presence abroad.</p>
KR Expert - Oleg Viter