A CQUISITION OF AN EXISTING COMPANY

In the theory part acquisitions and Greenfield investments were presented as methods for establishing a wholly owned subsidiary in the target market. When considering Greenfield investment, it means that all the operations should be built from the beginning, which of course requires huge amount of time and resources, as well as financial investments. Especially in Russia, where the personal relationships are very important, building a new business from scratch would be very time consuming and costly. To enable fast and fluent market entry an acquisition of an existing company is recognized to be a suitable market entry method.

Acquiring an existing company provides a fast access to markets with existing customer base and infrastructure including premises, employees and existing relationships with necessary institutions and other parties.

Just like building the Partner Network, also preparing an acquisition requires preparing and commitment of resources. Particular market knowledge and to some extent built relationships at the Russian market are important factors that should be obtained already beforehand before the acquisition to enable more efficient processes. The actual model for executing the acquisition and risks related to this are discussed next.

5.2.1 Actual model for executing the acquisition

Implementing an acquisition starts from recognizing the potential company to be acquired. For this purpose, similar analysis tools that were presented for recognizing potential Partners can be used. This process helps to build relationships that are more personal with the candidate companies. After recognizing the most potential companies or a company, a thorough due diligence –process is very important to conduct especially in Russia. For the due diligence – process, especially financial and juridical views are important, to examine the actual financial status, actual ownerships and all the obligations and existing contracts of the company.

Conducting a thorough due diligence –process decreases the perceived risks related to acquisition and supports the valuation of the company.

In Russia, the business is very often affected by personal relationships. The personal relationships have effect for example on customer relationships as well as on employees of the company. Russia scores 93 at Hofstede Centre’s (2015) cultural dimension of Power distance, which means that the status symbols and clear hierarchy structures are important in Russian business culture. Taking the special implications of Russian culture into account, it is important that the current leaders or managers of the acquired company are committed to management and development of the business. The committing of the leaders of the company could be done through minority shares of the company. This will increase the probability of successful takeover in the acquisition. However, it is important that the acquiring company acquires a major share of the company, to enable full decision-making authority for the business. To protect the mother company in Finland, it is recommended to establish a juridical daughter company in Finland that would then acquire the company in Russia. This will protect the mother company from potential risks that may emerge from legal issues in the future. An identified model for organizing the ownerships of the acquired company, which includes the minority share for the original Russian owners and leaders of the company, is presented in figure 11.

Figure 11. Organizing the ownerships when acquiring a company.

To ensure fluent takeover and continuity of business after actual acquisition, it is important to prepare the business plan for the acquired company beforehand. Especially when entering Russian market with plan to serve also international customers, several factors should be taken into account. As was mentioned, in Russia personal relationships are important, and the culture is different compared to Finland. For this reason, it should be beneficial that the Country Manager or the Chief Operating Officer of the acquired company would be Russian person, preferably one of the original owners. This ensures the hierarchy at the company and also eases maintaining the organization culture and existing relationships at the market.

5.2.2 Risks related to acquisition and operating the business

It is obvious that the risks related to the acquisition of an existing company are much higher compared to operating through Partner Network. However, there exist also methods to decrease the probability of the risks so that the overall perceived risk would not be too high for this particular market entry method. As was presented already in chapter 4, the unstable market situation sets challenges for forecasting and operating the business in Russia. Though, when

acquiring an existing company, this risk is less remarkable because of the existing customer base. Besides the existing customer base, acquiring new customers can be challenging and demand certain commitment, but as mentioned earlier, active presence during the financial crisis can be seen as a trust-building factor among potential customers. A crucial factor related to customers is also the overall quality of the provided services. In the worst scenario, the quality issues may affect the overall reliability and status of the company, which is why certain attention should be given for ensuring the quality. In order to improve the offering and perceived quality by the customers, continuous training should be organized for the employees.

Other issues that may show up when operating the business in Russia are of course corruption, bureaucracy and legal issues, which were already discussed in the fourth chapter. Strict and thorough control over the business is the simplest way to reduce the risk arising from these factors. Basically, simple zero-tolerance with corruption and operating according to laws ensures that any big problems should not arise. Of course some risks such as failed recruiting of staff may occur, but the preparing for these already beforehand decreases the actual effect.

The risks of an acquisition are presented based on their probability and potential consequences for the business in table 6.

Table 6. Probability and Consequences of the risks of an acquisition.

Probability Consequences

Small

(Insignificant) Minor Moderate Major Catastrophic Almost

5.3 Defining the most suitable market entry mode and internationalization process