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Advantages And Disadvantages Of Aquring Soe

1687 words - 7 pages

C. Advantages and disadvantages of acquiring SOEs
When a manager is assessing profitability of acquiring a state owned enterprise, it is crucial to identify the advantages and disadvantages. By doing this, the company will be able to make effective and strategic decisions, especially when entering a company in the volatile MENA region.
Several driving factors may serve as incentives for managers, which include the fact that acquisition could be seen as a strategic move that provides local brands, increases distribution channels, therefore leading to higher levels of efficiency. Despite these claims, Ayoubi argues that privatization in the MENA is not linked with managerial efficiency of SOE ...view middle of the document...

The negotiation process during privatization may be difficult as many actors are involved such as governments, management and workers’ councils and agents. The plurality of actors results in diverse multiple objectives which may influence the negotiation outcome. It can be argued that SOEs clouded objectives are not compatible with profit-oriented investors. The lengthy negotiation process also contributes to the potentiality of missing the opportunity to enter the market and decrease the value of the firm’s assets due to lack of investment.

On the other hand, such a lengthy process combined with an underdeveloped stock market results in the undervaluation of firms, which are attractive to the purchasing firm. For this reason, it is vital that continuous assessment is made before acquisition is finalized. Although firms may be undervalued, and have improved efficiency as a result of increased competition, transaction costs need to be accounted for.

Sappington and Stiglitz (1987) argue that privatization affects the transactions costs of government intervention. For example, governments generally give subsidies to inefficient enterprises that are under public ownership. This highlights the link between the firm and the government (Vickers and Yarrow: 1991:114). Another concern the acquiring company needs to bear in mind is public opinion of privatization. Without the general public support, privatization would ultimately encounter obstacles during implementation, especially if the fear of job security and stability were prevalent.

A main challenge of entering a market through acquiring an SOE is the conflict of corporate culture (Shehata, 2003). The need to enhance and exchange skills, entrepreneurs need to be willing to undertake risks and accept responsibility. Foreign investors have an advantage in executing such upgrades, as they can transfer technical and financial resources internally. Restructuring is a component that needs to be taken into consideration as privatization aims to break ties between government and firms. Although these bonds are difficult to break because political officials take an interest in formerly state owned enterprises and influence public opinion, reform is vital. Freedom from governmental agenda, as well as increased competition, enhanced financial and human resources, and innovative learning processes throughout the firm are all advantages for the acquiring firm.

The literature also suggests that investors empowering the local organization to learn and to absorb, integrate and apply new capabilities in the local context will be more successful than those that transfer processes directly and un-adapted to the transition context. For these reasons, managers must bear in mind that potential conflicts may arise during privatization. Influence of policies, public opinion and potential takeovers are key factors that need to be taken into consideration in order to ease privatization process. The political and social...

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