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Global business strategies

Swallow or be swallowed

Introduction

Over recent years there has been a significant expansion of global businesses in nearly all industries and in most major markets of the world. This tutorial examines the expansion strategies employed by two Australian companies in two distinctly different industries.

This tutorial was written by Michael Lembach, HSIE Project Officer, Curriculum Support Directorate.

Outcomes
Overview
Revision
More

Outcomes

HSC Topic 5: Global Business is covered in the Board of Studies NSW Stage 6 Business Studies Syllabus (June 1999) on pages 34-36. The specific outcomes for this tutorial are:

H1.2	critically analyses the role of business in Australia
H3.3	analyses the impact of management decision making on stakeholders
H4.2	evaluates management strategies in response to internal and external factors.

Overview

1. Reasons international businesses need to expand
   
   International businesses need to need to continually grow and increase profits, in order to survive, or to avoid being taken over by their competitors. When the markets they are in become saturated and no longer allow them the room to grow, they must seek new markets or combine forces (merge) with other businesses. They virtually need to swallow or be swallowed.
   
   Mergers between two international businesses operating in the same domestic market are becoming more common, e.g. Australian wine producer Rosemont and Australian wine producer Southcorp. They give the new merged business a larger share of their domestic market and insulate both businesses from takeover threats by larger overseas competitors.
   
   International business owners and managers are also concerned with growing their business’s share in the total global market, staying abreast of competition and providing the best returns to shareholders.
   
   
2. A dilemma for Australian owned international businesses
   
   Australia offers attractive possibilities for larger overseas international businesses including a stable political climate, a skilled English speaking work force, a mild climate, excellent communications systems and a location close to the growing markets of Asia.
   
   Australia would be a good place for a global business to have a branch office.
   
   Foreign competitors trading in American dollars, British pounds or other strong currencies are keen to seize opportunities for low cost entries to the Australian market. When there is a decline in the Australian dollar small international businesses become more vulnerable to take over .
   
   
3. Merging for survival and expansion in the Australian wine market
   
   As global consumer spending on wine has increased rapidly in recent years, some Australian wine producers have expanded into a variety of international markets. For example, Australian brands Rosemont and Southcorp are both competitive and well recognised in the global market place.
   
   In February 2001, private company Rosemont, and larger public company Southcorp, merged in an illustration of the swallow or be swallowed expansion model.
   
   These two smaller (in global dimensions) businesses merged to save Southcorp from the threat of foreign takeover according to Ivor Ries writing in the 3-4 March 2001 Weekend Edition of the Australian Financial Review.

   “The powerful forces of global competition scouring Australia for wine acquisitions have not diminished. For that reason only the swift and skilful implementation of the Rosemont-Southcorp merger - and the extraction of the merger’s powerful synergies - will guarantee the company’s Australian ownership.”

   Mr. Ries earlier expressed the view in the 22-23 September 2000 edition of the same newspaper that:

   “Southcorp was a sitting duck for foreign buyers because the company’s owners; local institutions, had lost faith in management’s ability to obtain adequate returns for its wine operations.”

   In other words, Southcorp was not increasing profits enough to produce the best returns to shareholders. Southcorp was a good candidate to be swallowed.
   
   
4. There was no local strategy for CSL
   
   Commonwealth Serum Laboratories (CSL) was formerly an Australian government owned producer of vaccines (medications). It has now been privatised, restructured, and turned into a modern international pharmaceutical business.
   
   More than 60 per cent of its revenue comes from overseas and 50 per cent of its production is outside of Australia. The company recently moved its management headquarters to Los Angeles.
   
   In June 2000 CSL took the bold step of bidding for, and eventually acquiring, a Swiss bio-technology company several times its own size. The deal has since nearly doubled the value of CSL shares traded on the Australian Stock Exchange.
   
   Managing Director Brian McNamee said in an interview with Business Review Weekly:
   
   

   “There was no local strategy we could have followed that would have enabled us to survive in the long term. The challenge was to find the niches and to be internationally competitive. If you can’t do that, it is a matter of when, not if, you sell your business.”

Revision

• In hindsight the CSL decision to swallow a larger global business has proved to be a good one. Now that CSL is in a stronger international position, in a growing industry. will they need to seek further acquisitions or mergers? Why or why not? (Outcome H4.2)
  
  
• CSL Managing Director Brian McNamee recently moved from Melbourne to Los Angeles. In Business Review Weekly he says “I don’t believe you can run a global business from Australia. You need to be where the market is.” What is your response to his statement? Support your opinion with examples of real life situations. (Outcome H1.2 and Outcome H3.3)
  
  
• Some analysts have suggested that the Oatley family, owners of Rosemont Wines, accepted a lower than full market value offer for the value of their business when they agreed to merger terms with Southcorp. Discuss why they might have decided on such a course of action. (Outcome H1.2, Outcome H3.3 and Outcome H4.2)
  
  
• The rush for Australian businesses to merge and acquire related businesses, or to be acquired by overseas businesses, shows no signs of slowing down. Scan the business pages of any metropolitan newspaper to keep up-to-date. Major deals involving BHP and Cable and Wireless Optus are additional examples of the global trend to swallow or be swallowed in 2001. (Outcome H4.2)

More

• Southcorp has an excellent web site that includes reports on recent acquisitions, mergers and takeovers. .
  
  
• CSL also has an outstanding web site.