Modes of entry and acquisitions

Accounting Ahead | Original study resource | accountingahead.com.au

Modes of entry and acquisitions

MODULE 4 | 4.6.2 | STUDENT COMPANION

Which entry mode to use depends on how attractive the market is, how much the organisation wants

to invest (limited sales activity, or local assets, skills and production) and how much ownership and

control it needs.

Modes of entry, from least to most commitment

Exporting

Licensing

Franchising

Strategic

alliance

Joint venture

Acquisition or

greenfield

More investment, control, share of profit and risk, and harder to withdraw

Five ways to export

Exporting is often triggered by an unexpected overseas order or by seeing rivals export. It can lift revenue and

margins, but adds transport, distribution and service costs.

Approach Advantages Drawbacks

Agent or trading company (indirect) Little effort or extra resources Growth depends on a third party;

customer feedback is second-hand

Export management organisation Established networks;

economies of scale

Must guarantee supply continuity

Direct: own sales representatives

or international retail chains

More control; can be 'born

global'

Needs supply continuity and careful

pricing across channels

Direct online Quick and cheap to set up Being found, affordable delivery and

returns

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Accounting Ahead | Original study resource | accountingahead.com.au

Approach Advantages Drawbacks

Online marketplaces Easy; the operator brings scale

and search

Competing with sellers worldwide; returns

The export transaction chain

1. Ordering 2. Credit

check

3.

Transport 4. Customs 5. Payment 6.

Distribution 7. Servicing

Typical mistakes: underestimating customs, an unreliable agent, ignoring local standards, untranslated warranty information

Licensing and franchising compared

Franchises that saturate their home market often go abroad, directly or through a master franchisee for a whole

territory; Australian franchises often start with New Zealand.

Licensing Franchising

What is licensed IP such as patents, designs, processes,

trademarks or copyright

The whole business system: brand, product,

layout, equipment and methods

Relationship Rights for a territory and period; exclusive or

non-exclusive

Ongoing support: training, marketing and

advice

Payments Upfront fee for technology transfer plus

royalties

Upfront fee, ongoing fees, and usually

central purchasing

Risks Learns little about the market; technology

leakage

Reputation rides on franchisees; quality

control at a distance

Case note: Krispy Kreme in Australia

Krispy Kreme Doughnuts entered Australia in 2003 through a local franchisee part-owned by the US parent,

opening its first store in Penrith, in Sydney's west, in June 2003 to long queues; the chain grew to about 59

outlets, many of them large stores where customers could watch doughnuts being made. As the novelty faded,

sales per store fell and the big-store format proved expensive. In late 2010 the Australian franchise business

entered voluntary administration, emerging in December after closing 24 of its 59 stores. The US parent bought

the Australian business in 2018. Franchising spreads a brand fast, but the franchisor's reputation rides on the

franchisee's judgement.

Sources: ASIC administration records; Krispy Kreme announcements; Australian business press, 2003-2018.

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Accounting Ahead | Original study resource | accountingahead.com.au

Strategic alliances and joint ventures

Strategic alliance Joint venture

What it is A formal agreement to share or combine

selected resources; partners stay independent

Partners create a new organisation they own

and control together

Why Market access, critical skills, shared cost and

risk, economies of scale

Share entry costs and risks with a local partner

who knows the market, culture and systems;

sometimes required by governments

Watch out Complexity; knowledge leaking to a future

competitor; about half of cross-border alliances

end within about seven years

Unclear objectives, unequal contributions,

clashing cultures, weak early leadership

A joint venture agreement should cover: what each partner contributes; objectives and deadlines;

performance measures; what happens if expectations aren't met; and how the venture ends.

Greenfield or acquisition?

Full ownership makes sense when it's allowed, when the organisation holds vital assets it won't share, when the

market is big and growing, and when it has the capital and appetite for risk.

Greenfield Acquisition

Advantages Fresh start: new people, latest technology, no

customer preconceptions

Faster; existing systems, people and local

knowledge

Drawbacks Slow to build; large investment; little local

knowledge

Finding a good business for sale; blending

cultures and systems; may inherit dated

assets

Horizontal and vertical integration

Horizontal Vertical

Meaning Buy or merge with a competitor Move along the value chain: backward to

suppliers, forward to distribution or customers

Benefits Fast growth; less competition (regulators

may object)

Control of supply, quality and costs

Risks Competition law; integration Different capabilities at each stage; more

volatility; lazy internal suppliers; locked into old

technology or channels

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Accounting Ahead | Original study resource | accountingahead.com.au

Five sources of value in mergers and acquisitions (Lasserre)

A deal creates value only if the combined business is worth more than the parts. Short-term, one-off value (tax,

asset sales, quick savings) matters less than lasting competitive advantage.

Source Imagined example

Consolidation Two regional cement makers merge to cut overlapping costs

Global reach An Australian software firm buys a Canadian rival to enter North America

Vertical integration A winery buys the bottling plant it relies on

Diversification A building products company buys a solar installer

Options A bank buys a small fintech to learn a new technology

Does the deal create value?

Buyer's value on its own $800m

Target's value on its own $200m

Value of the two separately $1,000m

Value of the combined business $1,150m

Synergy created $150m

Premium paid above the target's value $250m

Gain or loss to the buyer's shareholders -$100m

A deal creates value for the buyer only if synergies exceed the premium it pays

Case note: eBay and Skype

In 2005 eBay paid about US$2.6 billion for the internet calling service Skype, expecting buyers and sellers to talk

to each other through it. They mostly didn't. Two years later eBay wrote down the value of Skype by about

US$1.4 billion, and in 2009 it sold a majority stake to a group of investors. In 2011 Microsoft bought Skype for

US$8.5 billion: Skype had real value, just not the synergies eBay had paid for.

Sources: eBay and Microsoft announcements and annual reports, 2005-2011.

What successful acquirers do: stay focused on the strategic motive; check that cultures are compatible;

plan for the change in size; examine every stakeholder's view; estimate the full cost; accept and manage

uncertainty; and decide carefully how fast to integrate each part.

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Practice questions

MODULE 4 | 4.6.2 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Choose an entry mode

Imagined organisation Recommended mode and why

(a) A Tasmanian craft gin distillery with $300,000 to

spend, wanting to test the Japanese market

(b) A Sydney software firm with a patented scheduling

engine and little capital, targeting Germany

(c) A Gold Coast fitness franchise with 80 studios in

Australia, wanting to enter Indonesia

Question 2 - Joint venture terms

Mallee Solar Pumps (imagined) plans a joint venture with a Vietnamese irrigation company: Mallee supplies

pump technology and training; the partner supplies its farm customers, distribution and local approvals. List the

key terms their agreement should cover, with a short note on each.

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Accounting Ahead | Original study resource | accountingahead.com.au

Question 3 - Did the acquisition create value?

Calculate the gain or loss to Harbour Foods' shareholders as expected and as achieved, and suggest two

reasons the synergies may have fallen short.

Item Imagined: Harbour Foods buys Coastal Snacks

Harbour Foods' value on its own $600 million

Coastal Snacks' value on its own $150 million

Price paid for Coastal Snacks $210 million

Synergies expected at the time $90 million

Synergies actually achieved $40 million

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 4 | 4.6.2 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Entry modes

Organisation Answer

(a) Gin distillery Exporting through a specialist importer or distributor: low cost, quick, tests demand

with little risk

(b) Software firm Licensing (or an alliance) with a German software company: earns royalties without

capital; protect the patent and limit leakage

(c) Fitness franchise Master franchise with a well-connected local partner (or a joint venture): fast growth

using local knowledge; strong quality controls

Question 2 - Joint venture terms

Term Note

Contributions Technology, training, customers, distribution and approvals, valued and timed

Objectives and deadlines Sales, market share and milestones, and by when

Governance Board seats, decision rights, dispute resolution

Performance measures How results are measured and reported

Intellectual property Who owns the pump technology and any improvements

Profit sharing and funding Shares of profits, losses and future capital

Exit and termination Triggers, buy-out terms, what happens to customers and IP

Question 3 - Harbour Foods

Expected Achieved

Premium paid ($210m - $150m) $60m $60m

Synergies $90m $40m

Gain or loss to shareholders +$30m -$20m

Possible reasons: cultures or systems were hard to combine; customers or key staff were lost; savings were

overestimated in the rush to win the deal.

GLOBAL STRATEGY AND LEADERSHIP | M4 | 4.6.2 | WORKED ANSWERS

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