This paper will briefly analyze Hydro’s acquisition of Vale in Brazil by using relevant theory. First, the OLI-paradigm will show why they chose a FDI, then we will focus on the type of strategy they follow, and lastly, why they chose an acquisition. Hydro’s acquisition of Vale was a strategic move in order to gain access to primary resources. The acquisition gave Hydro access to alumina and bauxite from the world’s second-largest mining company.
The deal had a mutual outcome; Hydro received majority shares in Vale’s bauxite extraction, alumina refining, and aluminum production, as well as a workforce of 3600 employees, whilst Vale received a cash payment of 6 billion and a 22% ownership stake in Hydro (Hydro website). The eclectic OLI-framework by John Dunning (1977) provides a framework for understanding MNE’s decisions on FDI’s. The decision on extracting and producing bauxite and alumina abroad implies that Hydro had ownership, locational and internalization advantages by acquiring Vale in Brazil.
The ability to achieve lower costs by using transferable assets without reducing their effectiveness, like technological know-how, leads to firm-specific advantages. Location-advantages, such as low-cost factors in Brazil, are essential, whilst internalization advantages implies a cost-benefit analysis of different entry-methods by trading off savings in transactions, hold-up and monitoring costs of a wholly-owned subsidiary, compared to other methods. Thus Hydro found acquisition most appropriate when pursuing a vertical FDI, a resource-seeking investment (Reinert et. al 2009).
Hydro pursues a global strategy, with a high level of globalization and focus on national markets with economies of scale (Harzing 2002:212). Ghemawat (2007) highlights the importance of managing large differences that arises when pursuing a global strategy. By using the proposed AAA-triangle, a firm has three different approaches to a global strategy: aggregation, adaption and arbitrage. The Hydro-vale acquisition can be characterized by both aggregation and arbitrage. By aggregation, a firm is seeking to achieve economies of scale by creating global or regional operations (Ghemawat 2007:3).
In this case, Hydro acquired Vale in order to gain access to primary resources. Vale is the second largest mining company in the world, thus giving access to economies of scale when extracting bauxite and alumina. The largest minefields of bauxite were present in Australia and in Brazil, but due to arbitrage-opportunities and low-cost labor, enabling Hydro to gain supply-chain advantages, they chose to locate in Brazil. If Hydro combine and integrate two of the proposed strategies correctly, it can broaden its perceived opportunities and enhance global performance (Ghemawat 2007:12).
The strategy was a good fit organizationally, giving Hydro direct control over an important part of the value-chain (Hydro lecture). The Hydro-Vale entry mode was an equity-based acquisition. Key explanatory variables for increasing the probability of Hydro choosing acquisition over a Greenfield investment are degree of product diversification, relative size of investment, foreign experience and time of investment (Harzing 2002). Hydro had been present in Brazil for several decades – although not present within bauxite extraction – and had high level of foreign experience due to their international operations.
This was the largest investment made by Hydro, including transfer of 3600 employees, and the process of acquisition was planned over years, thus increasing the probability of an acquisition as an entry mode. According to Hill et al (1990), an acquisition like Hydro’s of Vale is based upon a decision to gain high degree of control over the firm, high resource commitment, and low dissemination risk, in order to gain insight, access, and the lowest cost when extracting bauxite and alumina (Hill et al 1990:120).
Hydro, seeking a global strategy, will prefer high-control entry modes due to the possibility of configuration of the value chain to maximize value at each stage (Hill et al 1990:121). The strategic acquisition introduces Hydro to a field that they previously didn’t have full access to, thus giving strategic value of holding first source of aluminum. However, even though Hill et al proposes a low control and low resource-commitment entry alternative when environmental factors – like country risk and location familiarity – are included, Hydro chose the opposite, an acquisition.
The choice of entry mode is critical of the likelihood of success when the firm pursues opportunities abroad (Hill et al 1990:117). Based on the analysis above, Hydro had several advantages when they decided on a FDI. By considering strategic variables like size of investment and foreign experience, they chose acquisition as entry-mode. Acquisition gives higher degree of control, requires high resource commitment and low dissemination risk, and aggregation and arbitrage was central for Hydro’s strategy.
However, a too theoretical aspect of the acquisition may limit our insight the real world decision-making processes. Sometimes firms like Hydro doesn’t have a choice about different entry modes, and thus have to choose the best amongst those available. The real challenge, however, will start with the post-acquisition integration of the firm. But that’s a whole another story.