Merging and Acquisition of LG

At present for the sake of globalization, liberalization, extremely competitive business environment and technological developments, merging and acquisitions of companies are getting very popular and efficient all around the world. Another commonly used technique is Joint Venture. For achieving the corporate growth, marketers or vendors consider it as a very strong and effective tool.

Attempting to evaluate the strategic analysis such as changing market condition and competitive advantages of the LG Group is the actual purpose of this report. How it is reaching to the target economically and through competitive advantage over competitors by strategic alliance, joint ventures as well as mergers and acquisitions is the main objectives of this study.

The report further describes the causes why those techniques of LG are taken. The success and failure of emerging/developing market is demonstrated here and the reason of Apple being the main threat for LG in 2010 is also discussed in this report.

1.2 Company Background

LG is a worldwide recognized Group. Initially merging of two Korean companies GoldStar and Lucky gave birth to LG where in 1958 the main company GoldStar got established. Electronic products got sold under the brand name GoldStar before altering the corporate name LG whereas only the household products got sold under the brand name Lucky. Electronics, telecommunications, chemicals and services are the working areas/sectors of LG group. Total fifty one companies work within the domain of LG group around the world among which eight in chemical sectors, nine in electronics sectors and thirty four in telecommunication sectors. Merging & Acquisition, Joint Venture & Strategic Alliance are some common and effective tools for the companies which are applied for achieving corporate growth. Why LG group have followed those tools as a development method is the main assessment of this paper. It also attempts to analytically evaluate how the strategies have been fruitful. Key threats for LG faced in 2010 and emerging market analysis have also been discussed thoroughly over here.

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Part 2 Merging and Acquisition of LG

2.1 Introduction

According to Sytse & Hein (2008), “A merger is a combination of two or more firms in which all but one cease to exist and the combined organization continues under the name of the surviving firm”. And “An acquisition occurs when one company takes a controlling ownership interest in another firm”. Because of synergies many companies like to do merging & acquisition which means merger companies work jointly more efficiently rather than they work separately.

By merging & acquisition many companies can enlarge their growth. Through innovative products and design, LG electronics also attempts to draw attention of wide-reaching consumers. LG could attain their goals through the help of merging & acquisition. Some important merging & acquisition of LG are discussed over here.

This type of synergies comes from the mutual capabilities of companies in order to build up their financial scale, eliminate repeated functions, enlarge big amount of capitals and share administrative understanding (Ravenscraft and Scherer 1987). Actually, the reasons of merging are as follows:

Operating financial state

Balancing of financial scale

Growth and diversification

Tax shields utilization

Increase value

Competition elimination and

Financial necessity

2.2 Merging of LG chemical and Kolon’s SAP

LG chemicals are the largest Korean chemical company. It manufactures and sells chemicals, plasticsand household goods. The basic raw materials are PVC, ethylene, synthetic resins and PE petrochemicals. Building materials and industrial materials are also produced. On the other hand, Kolon industries are a Korea-based holding company. SAP produces polymers. These polymers get mostly used to make diapers and sanitary napkins. On December, 2008, LG chemicals acquired the Super Absorbent Polymer (SAP) Operations of Kolon Industries Inc. for 90 billion($86.8m).

2.2.1 Reasons of Merging

Thorough this merging, both LG chemicals and Kolon’s (SAP) are benefited. In order to increase the competitive gain in the petrochemical industry among the international markets this merging helps LG chemicals greatly. For these LG chemicals acrylate production could be increased five times by 2015 and a regular purchaser and user could be managed for their glacial acrylic acid product. Conversely, Kolon also could get a new market for their products.

2.3 Merging of LG telecom Ltd, with LG Powercom Corp and LG Dacom Corp

LG Telecom is a South Korean telecommunications and mobile phone operator. On the other hand, LG Powercom is a telephone and broadband internet provider whereas LG Dacom is a provider of telephone services, internet services, domestic and international network and data communication services.

On October 15, 2009 these three companies got merged together. According to the merging agreement LG Telecom demanded 0.742 and 2.149 shares per share of LG Powercom and LG Dacom respectively. After merging, internet speed got increased and as a result the current income is 543.2 billion whereas in the earlier stage it was only 101.2 billion.

2.3.1 Reasons of Merging

This merging benefited LG telecom in combining the retail and marketing distribution of VOIP and IP product in the same platform. LG telecom also got extra benefit because of having optic fiber network coverage all over the world. Because of merging, the companies could strengthen their services having a huge number of customers. Their corporate structure also got simplified and it became a threat to its competitors. As a result, they were able to save 1.5%-2% of their total revenue. It helped them to make total annual revenue of $6,209.99 million which is resulted an expected profit to be around $776.25 million.

2.4 Acquisition of LG-Honam & Hyundai Petrochemical

Honam, LG chemicals is a South Korean chemical company which is engaged in producing electronics, industrial materials and polymers & chemicals. Various products are produced from petrochemicals. On the other hand, Hyundai Petrochemicals is a distributor and exporters of Petrochemicals. Hyundai Petrochemicals is a prior subsidiary of Hyundai Group. It produces and supplies basic raw materials, monomers and polymers and synthetic rubbers. On November, 2003 LG-Honam acquired Hyundai Petrochemicals polyvinyl chloride unit for 1.76 trillion to buyout Hyundai Petrochemical from Hyundai’s creditors having an agreement that each of them would get 50% of Hyundai.

2.4.1 Reasons for Acquisition

As a result of this acquisition Honam LG chemical and Hyundai Petrochemical was able to increase the production of Butadiene, Synthetic Rubber, Ethylene, Propylene and so on. LG chemical also got the chance to produce a huge quantity of petrochemicals. For this production capacity of LG chemicals PVC increased to 900000 tons where initially it was 700000 tons. Because of this LG chemicals was able to satisfy their customers and secured its future enhancement. LG chemical got competitive gains. Ultimately,both Honam & LG were able to strengthen their respective business through this acquisition.

Part 3 Strategic Alliances and Joint Venture

3.1 Introduction

Business competition in twenty first century is very high and a vendor needs a powerful grab of the targeted potential market. This is the basic reason for being joined together in business perspective to create a new dimension of world market.

According to Glover and Wasserman (2004) a joint venture is a contract joining together two business organizations to achieve a specific business prospect. Moreover, it’s defined as a opportunity for the business organizations so that they can contribute their assets, in surrogate for an equity stake for a share in any profit, as well as that their alliance(s) are in agreement between two or more business organizations, or companies to co-operate in a specific business goal.

A strategic alliance is a formal bond between two or more groups to accomplish a set of specified targets or goals. On the other hand, a joint venture is an authorized entity between two or more groups to carry out a financial movement jointly. Strategic alliances and joint ventures are a very proficient and precious part for making an organization. Thorough joint ventures and strategic alliances, organizations can have huge benefits as follows:

a) Reduction of the acquisition cost

b) Expansion of the product

c) Creation of competitive support in the business arena

d) Minimization of the operational costs

3.2 Joint venture of LG- Philips Electronics

Philips gives lead in television tubes whereas LG gives lead in monitor tubes. On the other hand, geographically LG leads in Asia whereas Phillips leads in Europe, China and USA. Moreover, LG’s proficiency is in industrial and manufacturing sectors whereas Phillips proficiency is in worldwide market and technological advancement.

A number of strategic alliance and joint ventures were owned by LG-Philips with different companies in the year 2001 to 2010. Market research says that a definite agreement was signed in 25th of June, 2010(Market Watch report, 2001) to merge their companies Cathode Ray Tubes (CRT) into a new joint venture company.

Both the companies have an agreement of holding a 50% joint venture. They aim to achieve technological control over CRT movement in glass perspective. Actually, their target is to hold a leadership position in CRT having annual sales of $6.5 billion and roughly 36,000 employees as well.

3.2.1 Reasons behind the Joint Venture

The reasons behind the joint venture are as follows:

To become a global leader in CRT.

To create an innovative CRT by combining the technology from both the companies.

To achieve competitive advantages over other competitors in the market using the relationship between them.

To improve the complementary strength and synergy potential for both LG and Philips.

Joint venture made them more beneficial than merging or acquisition as the procurement became easy.

3.3 Nortel-LG electronics Joint Venture

In November 3, 2005, Korean company LG Electronics and Canadian company Nortel Network Corporation established a new joint venture company named LG-Nortel Co. Ltd of $295 million on which Nortel holds 50% partnership to develop the telecommunication equipment and world class Network (!!!!!!Telecom News Digest, 11 December, 2006).

LG and Nortel both have their individual strength respectively LG can provide a huge electronics products like wireless hand set and on the contrary The Nortel company can provide the telecommunication and networking solution through wire line, wireless, Optical.

At the beginning they have a target for South Korea but in the long run it came to dominant the world wide with of whole Asian market. At the end of 2006, Their combined sales was around $570 million and the employee was around 14000.

3.3.1 Reasons behind this method

The reasons behind the joint venture are as follows :

To deal the edge communication all over the world and network solution in the field of wire line , wireless, optical and enterprise market.

To capture the whole Asian market.

The aim is to introduce the next generation for the advantage of service provider and end user.

The Company’s revenue will be increased.

To find out research criteria and development process.

3.4 Viking Range Corporation and LG Electronics Strategic Alliance

A manufactures company Viking Corporation and LG electronics company Inc declared and entered in to a strategic alliance where about the finance was not mentioned.

According to terms and agreement, LG have a plan to take over the USA consumer and The Viking USA distribution which will make the best LG appliances. On the other hand, Viking decided to enlarge its international distribution channel mainly in Asia and Asian pacific market through their strategic alliances. In the beginning of 2010 Viking proposed to LG for the strategic alliances. (!!!!!!—–http://www.m2.com, accessed on 16/09/2010).

3.4.1 Reasons behind this method

Based on the following reasons both the company LG Electronics and Viking Range Corporation and Electronics build up a strategic alliances. This is as follows:

To expand their market research and distribution channel.

This will increase their service resources.

Plan to reach more USA consumers Viking USA distribution .

To collaboration product cross-sourcing and joint procurement opportunities.

Sharing the research and development for the both.

Finally it can be seen that during last 10 years, LG has created a huge joint venture and strategic alliances which made LG to expand its business and business markets and for this reason it could create innovative products, increase revenue and compete with world wide market.

Part 4 Emerging Market of LG

4.1 An Analysis of New Emerging Market

Internal and external growth is very important for any organization. In order to invest any organization needs to choose a country. Again for choosing a country, the organization is to consider the things like- economy of the country, local culture, tastes and preferences and political stability as well. Expanding the new established country markets as well as the development of its product quality and services as per the targeted peoples particular requirements and wants is the main goal of internal growth. On the other hand, creation of more competent distributor, licensing conformity or joint venture with foreign country is the main target of external growth (!!!!!!!!!!!!–Thomson & J, 2009).

According to Kay (!!!!!!!–1990), any organisation needs to consider the following international corporate strategies for development.

International strategies for marketing along with finance

Organizational arrangement

Issues related to people and culture

4.2 An Analysis to Indian Market of LG Electronics

4.2.1 LG’s success in INDIA

After getting succession in Korean market, LG got entrance in huge countries of the globe. In 1997, LG helped India in establishing as a completely supplementary of LG. In the area of colour TV, microwave oven, washer and air-conditioner, its current position is the market share no. 1 internationally (Park, 2009). Moreover, LG controls manufacturing facilities at three main cities in India like- New Delhi, Noida and Pune in Mumbai. Mainly, refrigerators, air conditioners, GSM mobile phones, colour TV and washers are produced by the second factory of Pune in Mumbai. Now production capacity of LG is getting increased. As a result, LG is widening its target market to south-west region of India whereas the present market region is north-east of India. Again, India owned no. 1 market position in home appliances in respect of refrigerators, air-conditioners, DVD player, Colour TV and mobile phone (!!!!!- Maeil Business Newspaper, 2009.3.24).

Actually Indian consumer market was achieved by the leadership experience of Mr. Kim. According to Mr. Kim following are the three key points of gaining success in Indian consumer market.

Production of best quality of product

Providing localization policy

Powerful network distribution in remote areas

Among three factors mentioned above, providing localization policy is bit critical. LG India is exclusively having marketing practice with the right products suitable for Indian market constraint (!!!!!SERI, 2007).

4.2.2 Major Problem and Competition Faced LG in India

Besides attaining success in India, LG faced some problems which are given below.

Policy of the government

Cultural problem

Bi-lingual problem

Competition with other multi-national companies

From the very beginning, local regulation was the main hindrance in making independent investment for multi-national business organizations. But the government made withdraws of the policy in 1998. Moreover, due to the unstable power supply in India LG suffered a lot. Again LG faced a severe problem in the credit crunch. Because their prime target was the middle class people whereas the credit crunch also targeted the middle class citizens of that country. Furthermore, LG had no HINDI key pad along with English key pad in their mobile phone. On the other hand, Motorola, Nokia, Sony-Ericson used the HINDI key pad and got the control of the market. Initially, because of bi-lingual problem, LG had to pass a very hard time with their employees. At last they got the consideration on religious and cultural factors of the products and employees as well.

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4.2.3 Market Share of LG in India

As per the market research survey it is very clear that 7500 crore revenue was achieved by the Korean gigantic company LG whereas 6300 crore revenue was achieved Samsung which was jointly equivalent to market share of around 40% in the 2009-2010 fiscal years. Similarly, Rs.6129 Crore were achieved by LG whereas Rs. 5126 Crore were achieved by Samsung with the combined market share in the year 2008-2009. Moreover, LG gained market share of 21% on refrigerator, 17% on microwave woven and 15% on mobile phone market in the year ending 2009. LG is planning to get 35% share of electronic market of India in the year 2012. (Source: http://economictimes.indiatimes.com/ Accessed on 02/09/2010).

Table 3.1: April 2010 ending quarterly Average market share in India:

Brands

Installed base*

GSM

CDMA

Total

(GSM + CDMA)

LG

6.4%

47.6%

15.4%

Motorola

7.8%

5.4%

7.2%

Nokia

62.6%

24.3%

53.7%

Samsung

9.0%

11.2%

9.5%

Sony-Ericsson

8.9%

6.8%

[Source: http://www.marketresearch.com/browse.asp?categoryid=1224]

The above table is showing the market share of different mobile companies in India where LG is in a leading position.

Part 5 Key Threats for LG in 2010

5.1 Key Threats for LG in 2010

Each and every organization wants to approach new policy and present new products with gorgeous features in the competitive market strategy. In the world of electronics, LG is a very popular and trustworthy brand name. Laptops, latest mobile phones, LCD monitors, TV sets are being provided by LG. on the other hand, Apple brand has achieved the top most position in the above mentioned sectors. Apple Macbook Pro Laptop & Apple Cinema Display LCD Monitor, iPhone mobile sets, iPod etc. are being provided by Apple. Launching of iPad & iPhone 3GS, iPhone 4G have already been introduced in the market. So without any hesitation it can be said that Apple is the key threat for LG in 2010.

Reason of the Treats

Apple is an innovative and diversified company, no doubt at all. Strategies of simplicity, quality and constant development have been adopted effectively or successfully by Apple in the world market. Again they have been able to achieve a huge volume of trustworthy customers all over the world. Some electronics products have been introduced by this company and as a result of which the industries have got changed and has helped it to hold the leading position in the world market. If we go for comparison between LG & Apple products with detailed features, we will be clear why Apple is the key threat for LG.

Alternative to Apple iPod, an eight GB HDD based music player ‘MF JM53’ has been launched by LG having TOUCH-SENSITIVE OLED screen of 128 x 160 resolution and 260.000 colors. It has also 1.77 inches display screen and dimensions (L x W x H): 48 x 14 x 101 mm as well. Digital audio standard formats including WMA, WAV, MPEG 2 AUDIO, MPEG 2.5 AUDIO, ASF, AVI, MP3, ADPCM, OGG VORBIS, MPEG 1 AUDIO, protected WMA (DRM) and MPEG standards video file formats are supported by this music player. (Source: Error! Hyperlink reference not valid.).

But in the recent times, iPad has been introduced by Apple which is comparatively an updated and modified version of iPod with many more added and eye-catching features. Actually, iPad is a tablet computer which has been designed and marketed by Apple. Again it has been developed as a new means of device between Smartphone and laptops. Apple launched iPad in April 2010. Till 3rd May 2010, Apple sold 1 million iPads. For a small time it presents the highest number of operators gained. Within very short period of time it has been able to bring about an evolutionary change in the world market. More than twelve million apps have been downloaded from App store and also 1.5 million e-books from iBookstore. Though it is very alike to iPod & iPhone touch, it operates a modified operating system organized by multi-touch LCD. It is very much sensitive to fingertips where gadgets of e-book readers are included. Any software and necessary gadget from App store can be easily allowed to download. Website can be easily browsed. It is very friendly to the users. They can easily send and receive e-mails, enjoy music and videos, share photos, get e-books etc. They can enjoy high quality graphics on large screen. Moreover, it is very lighter and thinner than any laptop or notebook. It has also more than 10 hours battery support and 64 GB data storage as well. (source: http://www.apple.com & http://en.wikipedia.org)

LG has introduced some latest mobile sets such as LG Voyager, LG Ally, LG ARENA GT950 etc. But they are not compatible with Apple iPhone 3GS. Next generation iPhone 4G is also going to be launched soon having additional features of dual core processor, OLED screen, OLED screen, Removable Battery, iChat camera. Hi definition camera will also be launched with Camcorder, Messaging light, LED Flash, True GPS built in and Touch sensitive outer catching which is very similar to Apple Magic Mouse.(source: www.Error! Hyperlink reference not valid.)

Without using iTunes and Apple store no one can collect any videos, games, music or photos because all of the Apple products are totally different from others since their software and operating system are different.

Therefore from the above comparison and discussion, it is very much clear that no one but Apple is the key threat for LG in 2010.

Part 6 Recommendations and Conclusion

From the above discussion it is very much clear how merging and acquisition is important for any company to be emerged. To increase international business competition, reduce complexity of regulatory oversight, adding up shareholders value, merger and acquisition for LG are economically fruitful. In terms of upgraded functional effectiveness, larger market share, higher industrial capability and equity appraisal merging & acquisition is successful.

In order to lessen the cost of product extension, acquisition and competitive benefits, a number of strategic alliances and joint ventures have been done since the establishment of LG in the worldwide markets. It has helped LG in increasing its reputation, enhancing revenues and becoming a global leader. Now opponent’s strengths and weakness should be analyzed and synthesized before going to joint venture. Before grabbing an international market, LG also should give emphasis on people’s lifestyle, cultural beliefs and religion issues for finding out the main competitors.

From company’s perspective, it is very important to detect the threats for effectiveness and future enhancement. Also at the same time, company should take proper steps to get recovery from the threats immediately. Recently it is found that Apple is the key threat for LG, so without any delay LG authority should take quick necessary steps through effective business tools.

Some successful merging and acquisition, joint ventures and strategic alliances as well as reasons of applying these procedures have already been discussed in this report. As per the realistic study on these procedures, it can be decided that merging and acquisition and joint ventures are very effective tools for any business. These tools get used to enhance shareholders worth and efficiency. This is also used to access different resources and enlarge market and supplementary products. The success and failure of emerging market and the main threats for LG in 2010 have been demonstrated in this report.