Wednesday, November 14, 2012

Medtronic’s expensive acquisition of China Kanghui as a part of globalization strategy.


Medtronic acquired China Kanghui Holdings which is a developer, manufacturer and marketer of orthopedic implants in China including the brands Kanghui and Libeier. The deal value was $816 million and the company was valued at $30.75 per share. In a comment on the deal, CEO of the company said that deal is in absolute alignment with the corporate strategies of globalization and economic value and that it represents a significant investment in China. It was also stated that the deal will accelerate Medtronic’s overall globalization strategy due to this partnership with an established value segment distribution network and strong R&D and operational capabilities. The deal forces us to think that why would a giant like Medtronic pay so much to buy a small company at a fairly expensive price. This acquisition of Kanghui is not going to have any big scale impact on Medtronic’s revenues or earnings. In fact it highlights the growth strategy of Medtronic which is acquisition driven and is expected to strengthen the company’s position in an emerging growth market like China.

The news draws my attention to what was discussed in the previous class regarding the effects of globalization on the strategic planning of a company. The article on the impact of globalization on business talks about how much necessary is the ability to conduct business internationally in the current marketplace. However the expansion of business geographically is an expensive as well as risky decision for every company. The article also points out that going global in today’s marketplace is more of a defensive rather than an offensive move. This is mainly because the companies see the future opportunities to be a market leader in the high growth emerging markets like China. Other than that there are many other pluses that moving into a new geography as a first player could bring such as brand recognition, customer loyalty, distribution agreements, etc.

This somewhat explains the motive behind the acquisition of China Kanghui by Medtronic. As we know that the aging population of China is increasing and will further grow in the coming future which means that the market for orthopedic implants is also going to increase at a high rate. Hence the acquisition of China Kanghui makes appropriate sense for Medtronic as the anticipation of future opportunity in that emerging market. The question that remains is that will the return on such an expensive investment be enough to overcome the risks that are involved?

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