Profit from Global Capital Flows

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BY: PETER S. COHAN AND SRINIVASA RANGAN

INDUSTRIAL MANAGEMENT NOVEMBER/DECEMBER 2010

Managers face significant challenges these days. Economic growth is slow, but investors want to buy stock in companies that boost profit growth. If that growth does not come from rising revenues, managers respond by cutting costs. To sustain future profit growth, they’ll need to boost revenues as well. But how to achieve that revenue growth? One answer could be to use their hoards of cash alongside the torrents of global capital flows to make acquisitions that will enable these companies to profit by applying their skills in more rapidly growing markets.

In some global acquisition can represent a logical way to extend a firm’s corporate strategy. Deals that make the most strategic sense target large, rapidly growing markets and assemble a a set of capabilities that enables the combined company to take significant share in those growing markets. In the other cases, a acquisition are a mistake because the availability of private equity and bank debt enables deals that otherwise do not make strategic sense. Deals driven primarily by the availability of capital, rather than sound strategy, tend to fall apart once the appetite for such financing switches off.

Managers in established industries should use a formal methodology o figure out how to use acquisitions in growth markets to revive a company. There are six-step methodology that will help managers exploit the opportunities of global mergers and acquisitions to revive a moribund company in an existing industry.

Step 1: Pinpoint large countries growing fast with industries in which your company competes.

Step 2: Identify risks and opportunities in the country’s regulations regarding foreign ownership and other corporate governance matters, its capital markets, its human capital and its intellectual property regime.

Step 3: Identify companies in those countries/industries that could be acquisition candidates.

Step 4: Rank the companies based on their fit with your company’s skills and their potential for an attractive investment return.

Step 5: Complete the acquisition and integration of the company that best fits these criteria

Revenue growth is a powerful imperative for managers in existing industries. Due to the rising tide of global capital flows, acquisitions are a means of achieving such growth. But these acquisitions are fraught with both opportunity and risk.