Global Designs: Tough Challenges For Acquirers : Companies that buy foreign targets to distribute their products at home should determine whether the star in Paris will play in Peoria.

An American company has identified an overseas acquisition candidate with a great compatible product that could be brought across the Atlantic to expand its market reach in the U.S. Extremely popular in Europe, the product is of very high quality, promises great margins, and is nothing like anything available domestically. The price seems good and the company’s financials appear in order. Given that appealing scenario, many companies would jump at the deal. But behind the glittering facade, there may be a dark underside, and in this actual case, there was. The buyer – a very large, respected company – did not do enough homework to discover that the very features that made the product a success in Europe would lead to dismal failure in the U.S. What seemed to be a dazzling opportunity turned out to be a painful disappointment. This experienced buyer stubbed its toe because it failed to take full account of the overseas market conditions and cultural practices that can have enormous impact on the success of a cross-border deal. As is the case with many companies seeking prospects abroad, the saddened buyer did not check out these key environmental factors with the same thoroughness that were accorded internal financials. It acted on false assumptions about the marketplace, with losses running into the millions of dollars. In this case, the U.S. firm, a major manufacturer, acquired a European company whose architectural products were unparalleled in quality and features. On the surface, the acquisition seemed to provide the buyer with a wider product mix that would deepen its penetration of the U.S. industrial market. The move represented the beginning of a major expansion into related product lines that the company had long targeted. When U.S. sales of the product proved disappointing, a closer look at the market turned up some jarring revelations that should have been understood before the deal was completed. Had executives considering the acquisition talked to potential customers in the U.S. and examined their concerns and specification practices, they would have learned that the product line’s quality and features were not as desirable as first believed. American commercial building architects and facilities managers did not consider the products worth the extra cost they would have had to pay and they had to wrestle with added maintenance problems. The acquiring firm was scissored between contrasting ideas about the most important features among dispersed customer bases. Installation of the product, a vandal-proof floor-to-ceiling bathroom partition system, hampered sanitation procedures by making it more difficult to mop floors. In the U.S., the common maintenance practices of daily mopping and navigating in and out of many tiny rooms added significantly to maintenance costs. The product’s vandal-resistance features were important in Europe, less so in the U.S. In American schools, a major potential market for the partition, the vandalism problem is attacked by unionized janitors who are employed on an annual basis and are kept busy during summer months repairing and repainting damaged stalls. The attractiveness, numerous material and color choices, and privacy features of the system simply were not important enough to warrant the system’s higher price. The acquiring company also failed to examine all of the logistics involved in delivering the product to customers. The high cost of shipping the product from a central location to potential buyers throughout the U.S. added still more to the cost. The sad result underscored how acquisition due diligence processes often fail to investigate marketing questions that could dispel unfounded rosy assumptions about the future viability of the target’s markets or distribution channels. This type of inquiry is particularly crucial when the acquisition is driven by the high-risk intent of snapping up and transferring desirable products from one national market to another in this age of globalization. Usage practices or distribution systems that the buyer is unfamiliar with can add obstacles to a product’s market acceptance or hide marketing costs that can spell disaster. Related economic issues may negate the perceived value of a product. Differences in traditions, expectations, buying and specification practices, packaging, logistics, labeling, and legal customs and issues can have a surprisingly profound impact on the postacquisition viability of a target company. Required adjustments may well be prohibitive, and therefore provide cause to reconsider the merger. For these reasons, it’s crucial that any acquisition process include an aggressive search for possible barriers to market acceptance that could nullify the value the deal was intended to produce. Good intelligence, carefully gathered, can stop a buyer from moving too hastily outside of its borders and making a big mistake. For example, a European manufacturer of custom-engineered gear boxes sought a merger with an American firm to facilitate marketing of its products in the U.S. The firm employed a technology that packed more capacity in a smaller package. The $50,000 product yielded a less-expensive alternative to standard speed reducers used in the U.S. by steel mills and other heavy industries. In a thorough analysis of the American marketplace, however, the company discovered a very different set of expectations, customs, and perceptions than it was used to at home. In Europe, manufacturing facilities were rebuilt just after World War II and more compact gear boxes enjoyed great popularity as state-of-the-art technology. Materials were scarce and energy efficiency was crucial; lighter, smaller equipment often was preferred. However, in the U.S., where the gear boxes are overdesigned, bulkier, and less-efficient, but rarely break down, the European technology was seen as unnecessarily avant garde. Essentially, the product filled a need that U.S. customers thought they didn’t have. The significantly lower cost of buying the gear box was not considered great enough to warrant the risk of adopting the product. Since the gear boxes would be used at facilities that operate around the clock, there was no practical way for potential customers to test the new technology in advance of buying it. Because the product was untested in the U.S. and lacked the absolute confidence of the marketplace, customers regarded the risk of lost production time as not being worth the promised savings. For a variety of reasons, the European firm chose not to enter the U.S. market after its studies determined that there would be a chilly reception. It saved considerable time and money by taking the extra investigative steps. In another case, an American firm considered the acquisition of an overseas maker of an electrical wire fitting that was widely used throughout Europe. The firm believed that globalization of manufacturing standards ultimately could stimulate U.S. demand. However, conversations with potential customers here indicated that the device was viewed as an unnecessary expense because it added a step to the assembly of electrical products while offering no clear added value for the extra work. A comprehensive evaluation suggested that engineers trained overseas and U.S. subsidiaries of European companies may continue to use the product because of their customary practices. But growth potential and securing of new U.S. customers would most likely be extremely limited without an extensive marketing or education program to sell the value of the product. The cost was deemed to be prohibitive. In another in-bound situation, a European manufacturer with a large market share in a line of industrial construction products aborted a plan to broaden operations in the U.S. after investigating its target audience. Because of differences in U.S. construction methods and consumers’ expectations, it discovered it had, at best, prospects for only a limited share of a niche market here. Moreover, U.S. distributors told the firm that one U.S. company, whose brand name was synonymous with the product category, dominated the American market. The technical or generic name of the specialty product was virtually unknown to the target base. Since the U.S. market was far smaller than the European market, the cost of challenging the entrenched brand was not worth the potential gain. In general, a foreign market is literally another world. It should be considered that way in a business work-up, and international acquirers should avoid assumptions based on the business culture they are most familiar with or on the results that a product – either the buyer’s or target’s – has achieved in its home country. The best way to examine an acquisition candidate’s market potential is to actively probe for the “hidden” problems, obstacles, and issues that are not readily apparent in the typical deal. Certainly, transferability of a product or technology from one remote market to another is high on the list. This checklist can provide considerable guidance in conducting in-depth investigations of cross-border acquisitions driven by the goal of widening product markets to international scale. Gauge Cultural Differences in the Businesses Realize that any business exists in a particular climate that includes unique procurement, specification, distribution, marketing, usage, and maintenance practices that have evolved over time. Some cultures may be far more fluid and open to change than others, thereby easing in-bound product introductions. But elsewhere, established practices and expectations may represent enormous obstacles to a new product that enjoys great value in another culture. An Asian manufacturer of a line of generators discovered that the distribution channel aimed at commercial and industrial customers that it dominated in Asia was tiny in North America. The heaviest volume for the same product here was in the mass consumer market, where sales were made through sophisticated promotional and sophisticated point-of-purchase programs at home centers and warehouse clubs. In the industrial channels, in which the Asian company felt most comfortable, the North American market was small and crowded, the product was seen as an extension of other products that determined brand position in the channel, and customers were quite satisfied with established brands. Because there was no way to differentiate a new brand, the Asian firm determined that the costs of penetrating the market were not worth the potential revenues. Challenge Success Don’t assume that the target company’s products will work in a new geographical market the same way they do in indigenous markets, regardless of their success. Look at the system in which the product will be used in the new market. Determine whether modifications may be necessary to make the product succeed in another market and calculate whether the costs, effort, and time are worth the returns. Hidden Costs Be on the lookout for hidden costs in marketing and adapting the product. These are expenses that may not be readily apparent after a first-cut inquiry but may impact the acquirer in making, selling, or transporting the product or affect customers in purchasing or using the product. A prime example is the previously cited cost of evaluating or adapting a product, which may be greater than the additional value to the customer. Talk to the Customers Seek out the people who comprise the product’s customer base. Actively listen to their concerns to discover the truly hidden barriers to market acceptance. Why do they like the products they are using now? Is there anything they aren’t happy with? Is there a chance to convert them to a new product? How does the price/value relationship of the new product compare with what is already on the market? Are there large costs in adapting the product for the new market? Keep an open ear and a willingness to learn things you may not want to know. Tallying All the Costs Some costs of tailoring the product to a new market may be inevitable. The risk comes when the added costs raise the hurdle too high for real profitability. If the product must be modified to make it viable, what are the exact costs? Are these costs manageable, or prohibitive? Checking Out the Competition Find out how similar products are made and marketed in the newly targeted country. The way business is done may provide opportunities or reveal impenetrable barriers. Field research work by an off-shore player in the industrial hardware field looking at the U.S. found that the leading competitor enjoyed a major position in its marketplace because it offered a comprehensive specification service. The American company recognized the amount of work involved in specifying its product for major new construction projects and differentiated its wares from competitors’ by providing a service that allowed architects and engineers to delegate that tedious task. The firm’s sales representatives preempted the competition by making themselves available for selecting and specifying appropriate hardware within the customers’ guidelines, including quantities, sizes, etc., throughout a project. This relieved project managers and general contractors of a burdensome task. The potential market entrant decided that this value-added service was too strong to battle. Market-Launch Costs Evaluate existing sales forces from the standpoints of both effectiveness and cost. Is the American sales force capable of quickly adding a foreign-made product to its order book or can the U.S. product be handed off to the overseas sales group without a hitch? If not, what are the costs of conditioning the existing sales force or hiring a new group? In addition, the acquirer must determine whether the new product is a “stand-alone” item or must be bundled with others. Distributors and sales reps for some products function merely as order-takers. Marketing of a new product line may require that the sales people acquire a new “mind-set” or be provided with extensive training to develop skills in innovation, develop customer relationships, or sell packages. A sales force accustomed to selling mechanical products that fulfill an established need may not be up to selling a more complex electronic product or software program that requires sales people to be entrepreneurial in seeking opportunities in a customer’s business. Automated mailing equipment, once consisting of simple mechanical devices, for example, has become extremely sophisticated, with recent generations allowing end users to transform invoices into sales tools that contain specific marketing offers targeted to a particular customer’s buying habits. A sales person experienced in selling traditional office equipment may not have the ability to emphasize the revenue-generating potential of the more sophisticated equipment or appreciate how an office tool that was once seen as an expense has become a profit-generator. Certainly, a mere order-taker would not have these skills. Educated Customers Determine what customers must do to accept and use the new product. What changes in services or production methods are required of customers? Will engineering drawings have to be changed? Marketers often don’t consider all of the costs or changes involved by their customers in adopting a product. Yet, it is critical to think in terms of making it easy for customers to pick up the product. An Asian maker of motion-control products scored well by plugging into customer needs before getting started. It discovered that to compete effectively in the U.S., it would have to change its componentry to what was standard here. That freed customers of having to maintain two separate inventories of spare parts. The Extra Mile Determine early on what additional tools are needed to support market acceptance. Special services, free trials, and cost advantages can impress customers with the added value they will reap. Inappropriate tools can backfire. Realize that there are many different “consumers” within the customer company. Identify who will actually use – or influence the use of – the product and single out these people for marketing attention. A European manufacturer selling to U.S. automotive and appliances firms discovered that most of the customer manufacturing facilities once concentrated in the Great Lakes region had moved to the Southwest. As a result, many Spanish-speaking workers were the end users of the products. Bilingual training, manuals, and service technicians were required for the company to compete successfully. Beyond the Obvious Use rigorous investigation to determine what is really necessary for the transferred product line to succeed in the new market. Examine the second-tier and third-tier players as well as the primary brands in the market. It could be cost-prohibitive to compete with a long-established brand leader. If the new entrant can only be as successful as a secondary or tertiary company, it is essential to determine whether the potential is large enough to warrant the investment.