Questions from text book Mergers, Acquistions and Other Restructuring Activities
ID: 443827 • Letter: Q
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Questions from text book
Mergers, Acquistions and Other Restructuring Activities, 7th Edition
ISBN-13: 9780123854872
Author(s): DePamphilis, Donald
18.2 A tale of Two International Strategies: The Wal-Mart and Carrefour Saga
Key Points
> Integrating foriegn target companies and introducing imporved operating and governance can be daunting task.
> What works in the acquirer's country may not be transferrable to the target's local market
Wal-Mart began expanding aggresively outside the United States in 1990s. Its principal international rival at that time was French retail chain Carrefour. After opening the world's superstore in 1963, Carrefour spent the next 4 decades expanding its grocery and general merchandise stores across Europe, South America and Asia.
While the chain grew rapidly the 1990s, Carrefour has experienced difficult times in recent years. Carrefour shares have plunged more than two-thirds since 2007. Though having about the same number of retail locations (9,667 for Wal-Mart compared to 9,631 for Carrefour). Carrefour fell far behind Wal-Marts $468 billion in fiscal 2011 revenue. Wal-Mart's international sales of $109 billion in 28 countries outside the U.S almost exceed Carrefour's total $114 billion in annual revenue including slaes in France. Wal-Mart's operating margins of 7.5% are 2 percentage points higher than comparably defined Carrefour margins. Net income per employee of Wal-Mart's was $7,804 per employee versus Carrefour's $1,260.
To understand how Carrefour floundered, we need to look at the global strategies of the two firms. Intended to offset sluggish growth in France. Carrefour expanded too rapidly internationally as it entered 24 countries during the 10 years ending in 2004. While it succeeded in China, with annual revenue totaling $5.5 billion, it fell short in number of other countries. Since 2004 Carrefour has sold off operations in 10 countries including Mexico, Russia, Japan and South Korea. The firm also has announced that it will withdraw from other countries.
Wal-Mart's has shown considerable success in growing its international operations. Having expanded at a more disciplined pace than Carrefour, Wal-Mart has enjoyed greater success in expanding in Mexico, South America and Asia. Unlike Carrefour, Wal-Mart was able to finance its international growth from cash gerenarted from its domestic U.S operations. For Carrefour, revenue from its French based stores, which account for 43% of its annual revenue, was largely stagnant. Moreover, sales were also slumping throughout the rest of Europe which contributes about one-third of Carrefour's sales.
This success has not come without considerable challenges. The year 2006 was marked the most significant retrenchment for Wal-Mart since it undertook international expansion in the early 1990s. In May 2006 Wal-Mart announced that it would sell its 16 stores in South Korea. In July 2006, the behemoth announced that it was selling its operations in Germany to German retailer Metro AG. Wal-Mart which had been trying to make its German stores profitable for 8 years, announced a pretax $1 billion loss on the sale. The firm apparently underestimated the ferocity of German comoetitors, the frugality of German shoppers and the extent to which German regulators, cultural differences, and labor unions to impede its ability to apply in Germany what had worked so well in the United States. Wal-Mart has not been alone in finding the German discount market challenging. Nestle SA and Unilever are the among the large multinational retailers that had to change the way they do business in Germany. France's Carrefour SA, Wal-Mart's largest competitior worldwide, diligently avoided Germany.
After opening its first store in mainland China in 1996, Wal-Mart faced the daunting challenge of the country's beauracracy and a distribution system largely closed to foriegn firms. In late 2011, Chinese officials required the firm to close 13 stores due to allegations of mislabeling pork as organic. Wal-Mart has also had difficulty in converting firms used to their own way of doing things to the "Wal-Mart way". Specifically, it has taken the firm more almost for years to integrate the 100-plus stores of Trust-Mart, a Chinese chain it acquired in 2007. Overall, Wal-Mart realized its first profit in 2008, a dozen years after it first entered the country.
In India, Wal-Mart is still waiting for the government to ease restrictions on foriegn firms wanting to enter the retail store, which is currently populated with numerous small merchants. Efforts to implement reforms allowing foriegn retailers to own a majority holding in local supermarket chains were halted due to firmstorm of public protest. At the end of 2011, Wal-Mart has not retail presence in the country. Nor does Wal-Mart have a retail presence in Russia, where, unline in India, foriegn retailers are welcome but coruption is rife. The combination of corruption, bureacracy and administrative processes has discouraged Wal-Mart from making acquisitions in Russia, even though there have opportunities to do so.
Despite these missteps, Wal-Mart would appear to be well on its way diversifying its business from the more mature U.S market to fatser growing emerging markets. With the announcement in late 2010 of its controlling interest in South African retailer Massmart Holdings, more than one-half of all Wal-Mart stores are now located outside of the United States. Massmart gives Wal-Mart entry into sub-Sahanran Africa, a region that has been largelyignored by the firm's primary international competitors, France's Carrefour SA, Germany's Metro AG, and the United Kingdom's Tesco PLC. South Africa has embraced shopping malls for years, and an increasingly affluent middle class has emerged since the demise of apartheid. South Africa also has little regulatory oversight. Furthermore, there is an established infrastructure of roads, ports, and warehouses, as well as effective banking and telecommunications systems. While the country has a relatively small popluation of 50 million, it provides access to the entire regions. However, the country entire region. However, the country is not without challenges, including well-organized and sometimes violent labor unions, a high crime rate , and a 25% unemployment rate.
Wal-Mart's past mistakes have taught it to make adequate allowances for significant cultural differences. With respect to Massmart Holdings, there appears to be no immediate plans to rebrand the chain. The first changes customers will see will be the introduction of new products, including private-label goods and the sale of more food in the stores. Wal-Mart also has publicly committed to honoring current union agreements and to work constructively with the unions in the future. Current Massmart management also will remain in place.
Its decision to buy less than 100% of Massmart's outstanding shares reflected a desire by institutional investors in Masmart to retain exposure to the region and by the South African government to continue to have Massmart listed on the South African stock exchange. As one of the nation's largest companies, it provides significant name recognition for investors and sense of national pride. Wal-Mart has a history of structuring its international operations to meet the demands of each region. For example, Wal-Mart owns 100% of its Asda operations in the United Kingdom and 68% of Wal-Mart de Mexico.
Discussion Questions:
1: Wal-Mart's missteps in Germany may represent an example of the limitations of introducing what works in one market into another. To what extent do you believe that Wal-Mart's failure represented a strategic error? To what extent did the firm's lack of success represent an implementation error?
2: In what ways does the Massmart acquisition reflect lessons learned by Wal-Mart from its previous international market entries? Be specific
3: Given the challenges of international market entry and the probable substantial delay in experiencing a return on investment, do you believe that Wal-Mart should slow its pace of international expansion or even avoid it altogether? Explain your answer.
4: In your judgment, what criteria should Wal-Mart employ in selecting, other foriegn markets to enter? Be specific
Explanation / Answer
Ans:
1)
. Wal-Mart’s failure was a mostly a strategic error rather than an implementation error because the company was only interested in becoming the number one retailer in the world and didn’t do its research on Germany. Wal-Mart did not know the German culture, “they did not know what they were selling or to whom they were selling it to” (Williams, 2008). Once in operation, Wal-Mart did not try to learn about the culture; in the first four years of operation none of the CEOs spoke German, meaning that English was the only language used for communication (Williams, 2008). Had Wal-Mart done its research, I believe the company would have been successful.
The lack of success can also be seen as part implementation error because “they tried to implement the same management techniques as the U.S. Wal-Marts. It has been stated that the American CEO during the first year enforced American style management principles on the entire company” (Williams, 2008). Wal-Mart did not know the employment laws and got into trouble with the Union for requiring long working hours and for passing a “no flirting among employees” rule. Additionally, Wal-Mart also did not know the government rules and laws and broke several laws on competition (Williams, 2008). If the research had been done prior to implementation, these errors could have been prevented.
2)
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