A Tale of Two International Strategies: the Wal-Mart and Carrefour

question 68

Essay

A Tale of Two International Strategies: The Wal-Mart and Carrefour Saga

Integrating foreign target companies and introducing improved operating and governance can be a daunting task.
What works in the acquirer's country may not be transferable to the target's local market.
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Wal-Mart began expanding aggressively outside the United States in the 1990s. Its principal international rival at that time was French retail chain Carrefour. After opening the world's first superstore in 1963, Carrefour spent the next four decades expanding its grocery and general merchandise stores across Europe, South America, and Asia.
While the chain grew rapidly through 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-Mart's $467 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 sales in France. Wal-Mart's operating margins of 7.5% are 2 percentage points higher than comparably defined Carrefour margins. Net income per employee for Wal-Mart 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 $5.8 billion, it fell short in a number of other countries. Since 2000, 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 has shown considerable success in growing its international operations. Having expanded at a more disciplined pace than Carrefour, Wal-Mart enjoyed greater success in expanding in Mexico, South America, and Asia. Unlike Carrefour, Wal-Mart was able to finance its international growth from cash generated 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 also were 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 marked the most significant retrenchment for Wal-Mart since it undertook its 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 eight years, announced a pretax $1 billion loss on the sale. The firm apparently underestimated the ferocity of German competitors, the frugality of German shoppers, and the extent to which regulations, cultural differences, and labor unions would 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. Nestlé SA and Unilever are among the large multinational retailers that had to change the way they do business in Germany. France's Carrefour SA, Wal-Mart's largest competitor worldwide, diligently avoided Germany.
After opening its first store in mainland China in 1996, Wal-Mart faced the daunting challenge of the country's bureaucracy and a distribution system largely closed to foreign firms. In late 2011, Chinese officials required the firm to close 13 stores due to allegations of mislabeling pork as organic. Wal-Mart also has 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 four 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 foreign firms wanting to enter the retail sector, which is currently populated with numerous small merchants. Efforts to implement reforms allowing foreign retailers to own a majority holding in local supermarket chains were halted due to a firestorm of public protest. At the end of 2011, Wal-Mart has no retail presence in the country. Nor does Wal-Mart have a retail presence in Russia, where, unlike in India, foreign retailers are welcome but corruption is rife. The combination of corruption, bureaucracy, and administrative processes has discouraged Wal-Mart from making acquisitions in Russia, even though there have been opportunities to do so.
Despite these missteps, Wal-Mart would appear to be well on its way to diversifying its business from the more mature U.S. market to faster-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-Saharan Africa, a region that has been largely ignored 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 population of 50 million, it provides access to the 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 Massmart 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 a 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.
SABMiller Acquires Australia's Foster's Beer
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Key Points
Properly executed cross-border acquisitions can transform regional businesses into global competitors.
Management must be nimble to exploit opportunistic acquisitions.
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With the end of apartheid in South Africa in 1994, South African Breweries (SAB) moved from a sprawling conglomerate consisting of beer, soda bottling, furniture, apparel, and other businesses to a focus on beverages only. Seeking to expand beyond South Africa's borders, SAB executives studied the global practices of multinational corporations like Unilever and IBM to adopt what they believed were best practices before undertaking strategic acquisitions in Africa and elsewhere. The firm's overarching objective was to create a global brand. After a series of cross-border transactions, SAB's international operations accounted for more than 40% of its annual sales by 2001. In a transformational transaction, SAB bought Miller Brewery from Philip Morris for $5.6 billion in 2002 and renamed the combined companies SABMiller. Since then it has filled out its global portfolio, adding breweries in Latin America, Asia, and Africa.
During the last decade, the global beer industry experienced increasing consolidation. Following InBev's acquisition of Anheuser-Busch for $56 billion in 2008 and Heineken's purchase of Mexico's FEMSA Cerveza in 2010, the top four breweries (i.e., Anheuser-Busch InBev, SABMiller, Heineken, and Carlsberg) controlled more than 50 % of the global beer market, up from 20% in the late 1990s.
In 2011, SABMiller's annual revenue exceeded $31 billion, just behind the industry leader, Anheuser-Busch InBev. About 70% of SABMiller's revenue is in emerging markets. With the number of sizeable independent and profitable breweries declining rapidly, SAB moved to acquire the Foster Group, Australia's largest brewer, with more than 50% of the domestic beer market. SABMiller believed the timing was right because both Anheuser-Busch InBev and Heineken were saddled with too much debt from their recent acquisitions to submit serious bids.
The firm's initial bid on June 21, 2011, valued the target at $9.5 billion in Australian dollars ($9.7 billion in U.S. dollars), or $4.90 Australian dollars per share ($5 U.S.); however, Foster dismissed the offer as too low. On August 17, 2011, SABMiller adopted a hostile strategy when it went directly to Foster's shareholders with a tender offer. To win the backing of its shareholders, Foster's said in late August that it would pay out at least $525 million in Australian dollars ($536 U.S.) to shareholders through a share buyback or dividend. To counter this move, SABMiller said that it would reduce its purchase price by the amount of any dividend paid to shareholders or share buyback undertaken by Foster's.
The acrimonious takeover battle came to an end on September 1, 2012, as SABMiller offered to raise its cash bid by 20 cents to $5.10 in Australian dollars ($5.20 U.S.). As part of the deal, Foster's made a one-time payment of $.43 per share ($.44 U.S.) to its shareholders. The total value, including the value of assumed debt, was $11.5 billion in Australian dollars ($11.7 U.S.). SABMiller now holds about 12% of the global beer market, second to Anheuser-Busch InBev's 25%. Foster's has one of the highest profit margins of any large brewery worldwide, reflecting its greater-than-50% market share in Australia. While synergies would appear to be limited, SABMiller's reputation for aggressive cost cutting could result in profit improvements. SABMiller also received tax loss carryforwards totaling $817 million Australian ($833 million U.S.) resulting from the spin-off by the Foster Group of its wine operations in 2010. The acquisition is expected to be accretive after the first full year of operation.
Overcoming Political Risk in Cross-Border Transactions:
China's CNOOC Invests in Chesapeake Energy
Cross-border transactions often are subject to considerable political risk. In emerging countries, this may reflect the potential for expropriation of property or disruption of commerce due to a breakdown in civil order. However, as Chinese efforts to secure energy supplies in recent years have shown, foreign firms have to be highly sensitive to political and cultural issues in any host country, developed or otherwise.
In addition to a desire to satisfy future energy needs, the Chinese government has been under pressure to tap its domestic shale gas deposits due to the clean burning nature of such fuels to reduce its dependence on coal, the nation's primary source of power. However, China does not currently have the technology for recovering gas and oil from shale. In an effort to gain access to the needed technology and to U.S. shale gas and oil reserves, China National Offshore Oil Corporation Ltd. in October 2010 agreed to invest up to $2.16 billion in selected reserves of U.S. oil and gas producer Chesapeake Energy Corp. Chesapeake is a leader in shale extraction technologies and an owner of substantial oil and gas shale reserves, principally in the southwestern United States.
The deal grants CNOOC the option of buying up to a third of any other fields Chesapeake acquires in the general proximity of the fields the firm currently owns. The terms of the deal call for CNOOC to pay Chesapeake $1.08 billion for a one-third stake in a South Texas oil and gas field. CNOOC could spend an additional $1.08 billion to cover 75 percent of the costs of developing the 600,000 acres included in this field. Chesapeake will be the operator of the JV project in Texas, handling all leasing and drilling operations, as well as selling the oil and gas production. The project is expected to produce as much as 500,000 barrels of oil daily within the next decade, about 2.5 percent of the current U.S. daily oil consumption.
Having been forced in 2005 to withdraw what appeared to be a winning bid for U.S. oil company Unocal, CNOOC stayed out of the U.S. energy market until 2010. The firm's new strategy includes becoming a significant partner in joint ventures to develop largely untapped reserves. The investment had significant appeal to U.S. interests because it represented an opportunity to develop nontraditional sources of energy while creating thousands of domestic jobs and millions of dollars in tax revenue. This investment was particularly well timed, as it coincided with a nearly double-digit U.S. jobless rate; yawning federal, state, and local budget deficits; and an ongoing national desire for energy independence. The deal makes sense for debt-laden Chesapeake, since it lacked the financial resources to develop its shale reserves.
In contrast to the Chesapeake transaction, CNNOC tried to take control of Unocal, triggering what may be the most politicized takeover battle in U.S. history. Chevron, a large U.S. oil and gas firm, had made an all-stock $16 billion offer (subsequently raised to $16.5 billion) for Unocal, which was later trumped by an all-cash $18.5 billion bid by CNOOC. About three-fourths of CNOOC's all-cash offer was financed through below-market-rate loans provided by its primary shareholder: the Chinese government.
CNOOC's all-cash offer sparked instant opposition from members of Congress, who demanded a lengthy review and introduced legislation to place even more hurdles in CNOOC's way. Hoping to allay fears, CNOOC offered to sell Unocal's U.S. assets and promised to retain all of Unocal's workers, something Chevron was not prone to do. U.S. lawmakers expressed concern that Unocal's oil drilling technology might have military applications and CNOOC's ownership structure (i.e., 70 percent owned by the Chinese government) would enable the firm to secure low-cost financing that was unavailable to Chevron. The final blow to CNOOC's bid was an amendment to an energy bill passed in July requiring the Departments of Energy, Defense, and Homeland Security to spend four months studying the proposed takeover before granting federal approval.
Perhaps somewhat naively, the Chinese government viewed the low-cost loans as a way to "recycle" a portion of the huge accumulation of dollars it was experiencing. While the Chinese remained largely silent through the political maelstrom, CNOOC's management appeared to be greatly surprised and embarrassed by the public criticism in the United States about the proposed takeover of a major U.S. company. Up to that point, the only other major U.S. firm acquired by a Chinese firm was the 2004 acquisition of IBM's personal computer business by Lenovo, the largest PC manufacturer in China.
Many foreign firms desirous of learning how to tap shale deposits from U.S. firms like Chesapeake and to gain access to such reserves have invested in U.S. projects, providing a much-needed cash infusion. In mid-2010, Indian conglomerate Reliance Industries acquired a 45 percent stake in Pioneer Natural Resources Company's Texas natural gas assets and has negotiated deals totaling $2 billion for minority stakes in projects in the eastern United States. Norwegian oil producer Statoil announced in late 2010 that it would team up with Norwegian oil producer Talisman Energy to buy $1.3 billion worth of assets in the Eagle Ford fields, the same shale deposit being developed by Chesapeake and CNOOC.
-What real options (see Chapter 8) might be implicit in CNNOC's investment in Chesapeake? Be specific.

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Definitions:

Nonverbal Behavior

Communication methods other than spoken or written language, such as gestures, facial expressions, and posture.

Intuition

An ability to understand or know something immediately based on instinctive feelings rather than conscious reasoning.

Curiosity

A strong desire to know or learn something.

Workaround

An alternative method of accomplishing a task or solving a problem when the usual process is ineffective or unavailable.