INTERNATIONAL STRATEGY OF HSBC IN CROSS BOARDER M & A. Hong Kong Shanghai Banking Corporation (HSBC)

Transcription

1 INTERNATIONAL STRATEGY OF HSBC IN CROSS BOARDER M & A Hong Kong Shanghai Banking Corporation (HSBC)

2 TABLE OF CONTENT TABLE OF CONTENT A. INTERNATIONAL STRATEGY International Corporate-Level Strategy International Strategy HSBC 2 B. ACQUISITION OF HOUSEHOLD INTERNATIONAL PLC Pre-Acquisition of Household International Post integration process HSBC Household International PLC 9 C. APPENDIX ii D. BIBLIOGRAPHY iii i Page

3 A. INTERNATIONAL STRATEGY A. INTERNATIONAL STRATEGY 1.1. International Corporate-Level Strategy In order to be capable to assess what kind of international strategy HSBC pursues, it is important to be aware about the strategies you could pursue. Prahalad and Doz developed the Global Integration Local Responsiveness Grid to classify an industry or business area in sequence to formulate a company s strategic direction. They identified three different ways of an International Corporate-Level Strategy. Depending on the forces for global integration and local responsiveness, a firm can pursue a global strategy, multidomestic strategy or a hybrid strategy mainly called transnational strategy (see Image 1: I-R Grid). Image 1: I-R Grid (Ireland et al, 2013) MULTIDOMESTIC STRATEGY A multidomestic strategy is an international strategy in which strategic and operating decisions are decentralized to the strategic business units in individual countries or 1 Page

4 A. INTERNATIONAL STRATEGY regions for the purpose of allowing each unit the opportunity to tailor products to the local market (Ireland et al, 2013, page ). GLOBAL STRATEGY A global strategy is an international strategy in which a firm s home office determines the strategies business units are to use in each country or region (Ireland et al, 2013, page 211). TRANSNATIONAL STRATEGY A transnational strategy is an international strategy through which the firm seeks to achieve both global efficiency and local responsiveness (Ireland et al, 2013, p. 212) International Strategy of HSBC The Hong Kong Shanghai Banking Corporation (HSBC) was launched by Thomas Sutherland in 1865 as a bank to finance the trade with China. The company s headquarter was originally located in Hong Kong but since 1993, HSBC s headquarter is situated in London. In 2003, the company employed over 220,000 employees generating revenue of more than $35 billion and earnings before taxes of $7.7 billion (Khanna et al, 2008, p. 139, 142). After World War 2, HSBC dramatically expanded its business worldwide mainly through acquisition. HSBC could be recognised as a company pursuing a multidomestic strategy due to their post-acquisition behaviour and the way the company ran its business. For instance, HSBC s marketing had been highly decentralised before the formulation of a new marketing strategy in A decentralised marketing strategy indicates a locally decision-making unit and therefore, a more multidomestic strategy (Khanna et al, 2008, p. 151). Further evidences that HSBC pursued a multidomestic approach in the past are the undertaken changes after In 1991, the bank tried to share services amongst 11 independent banks which were locally incorporated and their capital was locally domiciled. Before that time, each bank had a local customer base, local management, 2 Page

5 A. INTERNATIONAL STRATEGY and local lending procedures. HSBC acknowledged that a place could not be micromanaged thousands of miles away because the world is a heterogeneous place and consequently, a multidomestic procedure took place (Khanna et al, 2008, p.143, 146). HSBC s acquisition strategy was basically to acquire distressed assets and improve their performance. Before being reorganised as HSBC Holdings in 1991, the company kept the acquired firm as much as independent as possible. This implied a very multinational strategy due to the fact that companies decision making were decentralised. For example, the Hang Seng Bank remained independent with its own brand and retained its managerial autonomy after being acquired by HSBC in 1965 (Khanna et al, 2008, p. 143). From 1991 on, significant transformations were undertaken by the company s management after the establishment of the HSBC Holdings (see Appendix 1). With introducing the new group policy, the company started to move its strategic orientation slowly from being strongly multidomestic to use a more transnational strategy. Only significant functions, such as strategic planning, financing planning, financing control and human resource management were provided by the company s head office in order to promote rapid decision making and local accountability. Furthermore, the IT platform Universal Banking system (HUB) was maintained from London as well as a multifaceted risk and credit control system (Khanna et al, 2008, p.143). At the acquisition of Midland Bank in 1992 HSBC changed its strategic process. The significant delay of the Marine Midland s turnaround by keeping the senior management of the bank in 1987, had led the bank to a different procedure in the postacquisition to overcome a potential delay of the turnaround. The company promptly inserted HSBC managers at the top of Midland Bank and disrupted its previous procedure to keep acquired companies independent as much as possible (Khanna et al, 2008, p.143). 3 Page

6 A. INTERNATIONAL STRATEGY In 1998, HSBC heavily changed its international strategy. With the replacement at the very top of the management from William Purves as chairman to John Bond serious strategic modifications took place at HSBC to become a strong transnational company. First, the company overlapped its customer groups upon its geographic organization. By overlaying its customer groups HSBC can reduce its costs by increasing economies of scale and the efficiency what is a major aspect in international business. The company intended to reach out globally and be more centralized in terms of sharing best practices such as product development, management and marketing. However, HSBC did not ignore the geography of its businesses and was aware of its local responsiveness. Though, by this change the company started thinking about its customers and where the commonalities lie. As an example in terms of product development the director of group corporate affairs pointed out that by sharing best practices the company can now exploit a Sharia-based Islamic finance product for communities in regions such as Britain or Indonesia. This sharing of best practice leads to learning and leveraging worldwide knowledge and shows a transnational arrangement (Khanna et al, 2008, p.147). Second, group lending guidelines on a global basis according to country, sector, line of business, financial instrument, and counterparty bank ratings were developed by the company s risk and credit function. This centralized approach replaced the common procedure in lending money all over the world. The guidelines follow a transnational strategic thinking. All transactions above $50 million were submitted to London to approve if the transaction meet the required conformance with sectorial and company risk and regulatory parameters. In comparison to the competition which allocated risk limits geographically and left local managers decide, HSBC, known as being thrifty and risk-averse, selects investments due to its parameters developed in the guidelines (Khanna et al, 2008, p.147). Third, in 1998, HSBC had realized that they met the limits of their decentralized marketing strategy. Therefore, they formulated a new marketing plan that is more transnational orientated. The global perspective of the new strategy was to use the 4 Page

7 A. INTERNATIONAL STRATEGY acronym of the bank to create a single recognised brand. HSBC took IBM as a wellknown example how the bank ought to be recognised in future. In 2002, HSBC started its campaign The world s local bank. On the one side, they advert with the acronym for a global recognition, but on the other side, they also created placards depicting the typical local meanings of ordinary actions and things to adapt the local needs. This strategic shift in its branding led HSBC being ranked the 37 th most recognisable global brand (Khanna et al, 2008, p.151). Additionally, in 2000, the company s chairman Bond planed that different divisions and main countries work together for its most lucrative customers. Not only should customers be served locally, but also with this transformation the most valuable customers were served globally by changing operational procedures at HSBC. For example, retail banking operations passed their richest customer to private banking to ensure a service as good as possible. Investment bank was integrated into corporate banking to make sure that HSBC can provide 100 percent of their customers business. These combinations of trying to put divisions and important countries together to serve local customers clearly indicate a transnational thinking in HSBC s strategic management (Khanna et al, 2008, p.151). Last, the HSBC International Managers programme has modified over the years to a transnational programme. The programme started with sending bankers from the United Kingdom abroad to gain experience and to create a knowledge sharing throughout the company and among the managers. By 2003, however, the programme has shifted to a high international diversification. Not only London bankers were educated by this programme, but also talented people from all over the world. This can be seen as transnational due to the point that the company educates top managers from all over the world with a standardized education programme. This enhances the knowledge sharing within the company and gaining new ideas from the enrichment of the more diverse programme members and improves the local banking service (Khanna et al, 2008, p ). 5 Page

8 A. INTERNATIONAL STRATEGY HSBC s strategy has clearly changed over the years from a multidomestic strategy to a transnational strategy. Especially the changes from 1998 onwards created a more transnational thinking about the business and its components. The transformation in its branding strategy to get the global perspective and keep the flexibility to adapt to local needs by using local specific adverts indicates a use of a transnational strategy. In addition to this, the change in its customer groups to start sharing best practice in different areas of the company obviously shows that HSBC has transformed its strategy and pursuing a transnational strategy. 6 Page

9 B. ACQUISITION OF HOUSEHOLD INTERNATIONAL B. ACQUISITION OF HOUSEHOLD INTERNATIONAL PLC. 1.1 Pre-Acquisition of Household International PLC Before being acquired by HSBC for a total amount of $14 billion, Household International PLC was the second-largest U. S. consumer finance firm behind the Citigroup s CitiFinancial with revenue over $11 billion in Household provides several types of credit cards such as cobranded cards or private-label credit cards, mortgage financing, and auto loans (Khanna et al, 2008, p.153). The acquisition of Household International had several rationales to HSBC which provided benefits and also risks. With this acquisition HSBC could improve its geographical diversification. HSBC s lack in presence on the American market could neither been solved by acquiring Marine Midland Bank nor Republic Bank of New York in the past. By acquiring Household, a rationale of HSBC was that the group obtain access to the U. S. market and boost its pre-tax earnings significantly from 15.7 percent to 30 percent in North America and therefore strengthen its competitiveness in the American market. To HSBC, this increase of its earnings in America has formed a three-legged geographical spread which created a regional risk redundancy of its businesses (Khanna et al, 2008, p.138). Household s 13-year database of consumer behaviour to generate risk profiles was an essential aspect and capability at Household International. With this database Household uses computer programmes that assimilate, adapt, and learn from past patterns of consumer behaviour. Household uses 300 variables in its system to evaluate the credibility of a first mortgage. In comparison to this, most banks use 15 variables for lending. Furthermore, for maintenance and improvements in the system Household employed about 150 Ph.D.s on an analytic staff of 250 (Khanna et al, 2008, p.153). An additional rationale for both, HSBC and Household, was the expansion in emerging markets by using Household s lending procedures. Emerging markets are raising economies where the people and the society become wealthier in general and buy cars and houses. HSBC intended to launch the Household model quickly in emerging 7 Page

10 B. ACQUISITION OF HOUSEHOLD INTERNATIONAL countries such as Brazil, India or China. With Household s experience in the consumer financing business HSBC could provide a substantial finance service to these potential customers (Khanna et al, 2008, p.155). However, this expansion plan could be considered critically at the same time. The plan of expanding into emerging markets by using the Household model created external and internal barriers. Only a few economies aggregated the same quality and quantity of credit and demographic data that Household relied on in the United States. There is even a substantial variation of credit data. For instance, the Fair Isaac measures work only with data from the U. S., the UK, and South Africa. The company needs to develop consumer data in these markets itself. HSBC hoped to overcome this challenge by partnering with the local subsidiaries of existing corporate clients and by cross-selling financial products (Khanna et al, 2008, p.155). Besides, analysts claimed that the risk outweigh the rewards for HSBC. Household International loans consist of subprime loans up to 40 percent with inadequate customer credit records. HSBC is well known for its low level of bad debts as well as their thrifty and risk-averse behaviour. Though, Household tripled HSBC s provisions for bad and doubtful debts from $715 million to $2.4 billion. On the one hand, the subprime loans could lead to higher margin and above-average income due to its high interest rates. On the other hand, HSBC s credit default risk enlarged due to the risk of doubtful debts (Khanna et al, 2008, p.138, 154). A further risk for HSBC was the loss in reputation. Household and its infamous lending practices with its high interest rates, fees and penalties caused serious problems in the past. For example, Household settled a court case to do with extraordinary high interest rates for over $484 million in October Investors might have been worried if those practices would continue after acquisition and harm HSBC s image. To avoid this potential venture, HSBC kept Household and its subsidiary brands separate from the main bank brand and spent an enormous amount of money for compliance, training, and monitoring (Khanna et al, 2008, p ). 8 Page

11 B. ACQUISITION OF HOUSEHOLD INTERNATIONAL Another threat to HSBC is its lack of experience in consumer finance using the empirically generated analytics. HSBC must rely on the management of Household and its skills in order to gain knowledge in this market and to execute its expanding plans to implement the Household model to emerging countries. The lack of experience could demonstrate a certain threat for a successful turnaround of the business and this required a smooth integration and training across both companies to overcome this drawback (Khanna et al, 2008, p.155). 1.2 Post integration process HSBC Household International PLC The post-acquisition phase is considered to be the most important and most crucial source of success or failure by consultants and academic and needs to be executed accurately with the purpose of having a successful integration at the end. The post-phase can be arranged into three different approaches for integration depending on the degree of the requirements of operational interdependencies and organisational autonomy (see Image 2) (Laserre, 2007). - The preservation mode of integration - The absorption mode of integration - The symbiotic mode of integration 9 Page

12 B. ACQUISITION OF HOUSEHOLD INTERNATIONAL Image 2: Contingent integration modes (Laserre, 2007) With reference to the initial position of HSBC and Household International PLC it is recommended that the company should pursue the symbiotic mode of integration due to the critical factors. Three critical factors were identified as being most important to proceed with the right integration mode, the credit risk of Household, the lack of experience of HSBC in this particular consumer finance area, and the different company cultures are the critical objectives that either add value or destroy value to the company. Proceeding with just the preservation mode of integration Household could cause a potential risk of damaging HSBC s image and value by continuing to pursue with Household s high interest rate lending strategy which already occurred serious damages in the past. The preservation mode of integration keeps the businesses separate. Household is negatively well-known for its questionable lending terms and settled a lawsuit by accepting a payment for extraordinary high interest rates. Going on with this kind of integration, Household International would continue with its lending strategy 10 Page

13 B. ACQUISITION OF HOUSEHOLD INTERNATIONAL although Household could benefit from HSBC which is generally well-known for being risk-averse. In addition to this, many analysts are worried about how well the Household CEO would fit into the HSBC culture of collegial conservatism. This concern, as well as the fact that HSBC could depend on the management of Household due to the company s lack of experience on consumer finance using empirically generated analytics demands a careful and smooth integration of Household. The two company cultures are highly oppositional in terms of risk and profit orientation. HSBC and its collegial conservatism culture is known for being risk-averse, thrifty, cautious, and disciplined. Household tends to be more open to take risks, even unforeseeable risks due to its high percentage of subprime loans in its assets. Additionally, in comparison to HSBC which emphasised the benefits of caution Household International pursued high return politics. By using the symbiotic mode of integration the company could gain benefits from developing a common company culture. A healthy combination of both, risk and return, could lead to a more balanced situation, can add value to the company and prevent the company against future damages. To be able to combine both, the company needs to develop one common culture to use both sources of potential synergies. This recommends following a symbiotic approach in general. The lack of experience at HSBC doing business in consumer finance can be considered as a critical aspect. In order to pursue the company s strategy with emerging markets the company relies on the management and skills of Household. An absorption mode of integration would pursue a quick consolidation of the company with a potential risk of losing the skills and by that losing the possibility to create additional value. A successful turnaround requires a smooth integration starting with the preservation mode in order to find out sources of synergies and giving HSBC the opportunity to gain deeper knowledge in this particular area. After a certain period of time a full integration can be proceed. This process specifies a symbiotic mode of integration in the postacquisition sector. These reasons underline why HSBC should approach the symbiotic mode of integration to be able to add value to the company and create one company culture. These 11 Page

14 B. ACQUISITION OF HOUSEHOLD INTERNATIONAL procedures lead to cost savings and economies of scale by finding synergies, eliminating duplicated functions within the organizations, and to a successful turnaround. It is crucial to accurately integrate Household by starting with the preservation mode to learn and identify sources that could be synergised and integrate Household in the HSBC Group. Otherwise, there will be no adding value but destroying value for both HSBC and Household International PLC. 12 Page

15 C. APPENDIX C. APPENDIX Appendix 1: Timeline HSBC Incidents ii Page

16 D. BIBLIOGRAPHY D. BIBLIOGRAPHY Ireland, R.D.; Hoskisson, R.E.; Hitt, M. A., (2013) Management of Strategy: Concepts and Cases, 10 th Edition, South-Western Cengage Learning. Khanna, T.; Lane, D. (2008) Case 2-3: HSBC Holdings from Bartlett, Christopher A., Ghoshal, Sumantra and Beamish Paul, Transnational management: text, cases, and readings in cross-border management pp , London: McGraw-Hill. Laserre, P. (2007) Chapter 5: Global mergers and acquisitions from Laserre, Philippe, Global Strategic Management pp , Basingstoke: Palgrave Macmillian. From: Shahid Mahmood Researcher at EFT iii Page