EAMSA 2016 - Paper Proposal.

Title: • The acquisition of (UK) by Nippon Sheet () as a failure of cross-border synergy: could applying co-operative strategies have made a difference?

Authors: i) Keith Jackson: SOAS, University of London & Doshisha University, Kyoto. Email: [email protected] * ii) Shigeru Matsumoto: Doshisha University, Kyoto Email: [email protected]

* Corresponding author.

Abstract This paper highlights, explores and examines the risks and opportunities that arise when two companies that are familiar with each other, and yet differ in relation to size, strategic trajectory and senior management culture, attempt to formalize their strategic co-operation. To this purpose, we develop a case study of the acquisition in 2006 of an established British sheet glass manufacturer (Pilkington) by a Japanese company (Nippon Sheet Glass) that was aggressively seeking to ‘globalise’ by securing sales growth and supplier chain presence overseas. We develop the critical discussion of our case study within the conceptual framework of ‘co-operative strategies’, as defined by Beamish and Lupton (2009, 2016). Applying a ‘co-operative strategy’ framework we examine why and how it was that Nippon Sheet Glass (NSG) failed to achieve the expected synergy by acquiring Pilkington; we also speculate as to whether applying a co- operative strategy might have helped avoid this failure. Finally, we speculate on how the recent 'Brexit’ decision by the United Kingdom in relation to the European Union (EU) might further impact on the course of ‘co-operative strategy’ developments in flows of FDI from Japan to the UK over coming years.

Keywords: Co-operative strategy; cross-border synergy; Japan; mergers and acquisitions; UK

1. Introduction:

This paper highlights, explores and examines the risks and opportunities that arise when two companies that are familiar with each other, and yet differ in relation to size, strategic trajectory and senior management culture, attempt to formalize their strategic co-operation. To this purpose, we develop a case study of the acquisition in 2006 of an established British sheet glass manufacturer (Pilkington) by a Japanese company, Nippon Sheet Glass (henceforth, NSG) that was aggressively seeking to ‘globalise’ by securing sales growth and supplier chain presence overseas. We assess the extent to which this acquisition proved – in IB terms – a ‘failure of synergy’, where synergy is defined as ‘the increase in performance of the combined firm over what the two firms are already expected or required to accomplish as independent firms’ (Sirower, 1997).

There are established measures for assessing the actual and / or perceived impact of such investments in terms (for example) of ‘return on investment (ROI) or ‘value added’: for example, in terms of knowledge and / technology gain (cf. Anand & Khanna, 2000) and / or business network expansion (cf. Gulati, et. al., 1994; Gulati, 1998; Jackson & Matsumoto, 2016). Correspondingly, the sum of synergies – whether deemed currently or retrospectively as ‘failed’ or ‘successful’ – serve to shape the developing structure of the global economy and thereby future expectations and assessments of the business impact of foreign direct invest (FDI) flows (cf. Bartlett & Ghoshal, 1991; Ietto-Gillies, 2012). Against this background, we frame our analysis in reference to evolving conceptualisations of ‘co-operative strategies’ that companies and their managers might be observed to formulate and implement in order to mitigate the inevitable risk and seize the potential business opportunities that outwards flows of FDI generate (Beamish & Lupton, 2009, 2016).

The NSG-Pilkington case study developed in this paper differs from previous such case studies in a number of salient ways. Firstly, we develop our case study within the conceptual framework of ‘co-operative strategies’, as defined from a network relationship perspective by Gulati (1998) and from a dyadic (shared) learning relationship perspective by Anand and Khanna (2000). As Beamish and Lupton emphasise, co-operative strategies or ‘agreements’ evolve over time and in response to and / or as a consequence of ‘the changing needs and motives of their counterparts’ (2016: 163).

A second feature of our paper is the adoption of a long-term performance evaluation approach to the acquisition process measuring movement of share prices from before the public announcement of the business transaction and on through phases of its market impact. As explained subsequently in discussion of the relational aspects of co-operative strategies, we conceptualise acquisitions as processes that maintain their strategic significance through time and across geographical spaces. In making this emphasis we look beyond many acquisition studies that take a short-term transaction-reaction timeframe: for example, the ‘event study’ approaches that emphasise assessments of transaction value as dictated by stock market attention spans. Echoing Porter (1987), this latter approach tends to generate imperfect and unreliable measures. Rather, in order to reliably evaluate and analyse later stage transaction synergies – from a strategic perspective, the key success / failure measure of acquisitions, and especially of cross-border varieties – we have examined ten years performance cycles of NSG from 2006 – the date the deal was formally initiated - until 2016.

A third distinctive feature of our case study design draws on the culture-specific experience and insights that each co-author brings to this paper. Shigeru Matsumoto has over fifteen years of practical experience in investment banking and in analysing and advising on the overseas M&A activities of Japanese companies: his specialist field as a scholar-practitioner and consultant is how and why Japanese overseas acquisitions commonly fail (Matsumoto, 2014). Keith Jackson has recently rehearsed the overseas investments of Japanese multinationals (cf. Hemmert & Jackson, 2015; Hemmert & Jackson, 2016). At Doshisha University, both authors are co-operating towards identifying what appear to be salient patterns of strategic threats and opportunities perceived and experienced by Japanese companies investing overseas (Jackson & Matsumoto, 2016).

2. Methodology

This paper is organised around three thematically connected research questions.

i) To what extent does the acquisition by NSG (Japan) of Pilkington’s UK illustrate a failure in cross-border synergy?

ii) To what extent might applying current conceptualisations of ‘co-operative strategies’ help explain the failure of the NSG – Pilkington acquisition?

iii) To what extent might business failure have been avoided if NSG managers had applied elements of a ‘co-operative strategy’ approach during their acquisition of Pilkington?

In order to address the first research question we exploit access to diverse sources of rich IB data and ‘real-life’ insights in order to design a case study. Towards addressing the second research question and, simultaneously, in order to develop a coherent structure for one possible analysis of the NSG-Pilkington case study we then present a selective review of literature relevant to strategic cross-border alliances generally and the formulation and implementation of ‘co- operative strategies’ specifically, drawing in large measure from compendium sources such as Beamish and Lupton (2016). We then present a discussion on the theme of whether the NSG acquisition of Pilkington offers an illustrative example of how working within a ‘co-operative strategies’ framework might help avoid strategic business failure during the investment and negotiation of overseas acquisitions. In doing this, we thereby seek to address the third research question giving structure and direction to this paper.

3. Case study

In May 2016, Nippon Sheet Glass (henceforth, NSG), one of the world largest flat glass suppliers, announced that they ended its fiscal year 2015 with net loss of JPY 49.5billion. (NSG, 2016) This was the sixth time that NSG disappointed its shareholders by reporting net loss since NSG purchased Pilkington in 2006 (See Figure 1). Although NSG`s management explained that slowdowns in the economies of emerging markets such as China, Vietnam Russia and Brazil caused the downturn of business performance, one of NSG’s main rivals, Asahi Glass, reported net profits of JPY 42.9 billion while Central Glass reported a net profit of JPY 10.1 billion in 2015. The continuing poor performance of NSG cannot therefore be explained solely by reference to external economic strategic environments define the industrial sector. Rather, the problem lies inside the company; notably, the failure to generate synergy from Pilkington acquisition. This case study examines the NSG`s post transaction strategy, its 10 years post transaction performance, and what caused failure of synergy they planned.

Figure 1

Source NSG Securities Reports

Strategy The JPY 616 billion acquisition of Pilkington by NSG was seen as a touchstone for a Japanese company’s entry into the global market; notably, because Pilkington’s sales at that time, was more than double that of NSG. Thus, the acquisition can thus be seen as a case of ‘the smaller swallowing the bigger’. NSG had already made a ten per cent capital investment in Pilkington in 2000, before raising its share to twenty per cent in 2001. NSG and Pilkington were in an affiliate relationship by the time of the acquisition in 2006, which suggests that NSG had some degree of understanding of Pilkington’s core operation and their actual and potential strategic value.

According to a Japanese press release of February 27, 2006 (NSG, 2016), senior mangers at NSG cited the following as key strategic motives for the acquisition: • To have the largest share in the global market of industrial sheet glass • To become a global player with economies of scale and technological fusion • To accelerate the realization of the company’s stated vision ‘to be a company with a global presence’ • To make the most of the synergy effect in product development and technology in which Nippon Sheet Glass and Pilkington had accumulated expertise.

According to a financial result report for fiscal 2006, the combined NSG and Pilkington annual sales volume increased from JPY 265billion in 2005 to JPY 681 billion in 2006, thereby becoming equal to Asahi Glass in scale. NSG`s sales outside Japan increased from 17% to 67%, of which European markets accounted for 43% of the total sales after the transaction (see Figures 2 and 3). As combined basis, NSG owned 46 float lines, manufactured in 26 countries, produced 6.4 million tonnes annual output and maintained sales offices in more than 130 countries. The workforce increased to 36,000 worldwide from 12,000 before the acquisition, and the number of global subsidiaries also increased from 52 to 237. It is apparent that strategic considerations of incremental capacity and increased market share in flat glass business were paramount; in other words, extending the scale of NSG business presence was a key element towards justifying the Pilkington transaction.

Figures 2 and 3

Source NSG securities report segment information

NSG management was confident about post-transaction management, because there was little geographical overlap between two companies. NSG operates mainly in Japan and Pilkington has significant presence in Europe, North America and South America. In addition, NSG and Pilkington have maintained relations in the form of a technical alliance for twenty years. NSG had minority shareholdings in Pilkington since 2000. NSG believed both can run the global operation well together. As a result of the acquisition, NSG/Pilkington supplies every major automotive OEM around the world. According to the NSG`s presentation at the acquisition in 2006, they introduced their strategic rationale for NSG as follows: • Substantially enhance geographic spread to mitigate industry cycle and generate stable earnings and cash flow. • Increase presence in emerging markets such as China, South East Asia, South America and Russia. • Distribute NSG`s value-added products outside Japan through Pilkington`s network and access to Pilkington`s European manufacturing process technology.

With this complementation NSG managers predicted to create the synergy amount of JPY10 billion in 2012 and JPY19billion in 2014. The synergy was expected to come from cost improvement by global procurement program, cross selling, and joint production investments. As a result, NSG came to acquire the second largest share in the global market of sheet glass for vehicles and construction, following Asahi Glass. Before the acquisition, more than 80 per cent of the company’s sales came from the domestic market. However, after the acquisition, 40 per cent came from the European market and 30 per cent from the domestic market. This acquisition was also meant to benefit from ‘buying time’ in order to become a global company by acquiring a share in a global market.

Integration In April 2007 NSG announced a new organizational structure designed to integrate Pilkington operations. NSG explained that the objective of the first phase of the integration strategy was to achieve the establishment of an integrated Flat Glass Business, which occupies almost 90 per cent of sales and profit of the operation. NSG established the new global Flat Glass Business, which included all the activities in the NSG and Pilkington, the development, manufacture and sales of NSG flat glass products worldwide. A headline aspect of the restructuring saw Stuart Chambers from Pilkington becoming the Chief Executive Officer of the new global Flat Glass Business product line (see Figures 4 and 5).

The Flat Glass Business consists of a Global Building Products Business Line, which led by Stuart Chambers and a Global Automotive Business Line, led by Pat Zito, who also came from Pilkington. At the same time, a Global Headquarters (GHQ) was established by reorganizing the existing corporate staff and is to work as a head office and support function for the combined group. With this new structure which invited Pilkington management to head key operation, NSG and Pilkington started implement their co-operative strategy to create a synergy they promised to the stakeholders (see Figures 4 and 5).

Figures 4 and 5

*Organization Structure right after the transaction in 2006

*New organization announced in April 2007 and following appointments Pilkington management occupied half of the NSG board seats in 2008

Stuart Chambers, former CEO of Pilkington became President of NSG in 2008

Pilkington management became a head combined Building Products and Automotive Flat Glass business in 2007

Source: NSG Press release, January 15, 2007

Business performance post-transaction Running the business turned out to be difficult after the acquisition. NSG reported an increase in income and profit in 2007, immediately after the acquisition; however, for the following two years NSG reported a deficit. From 2011 NSG reported a net loss for three years in a row, as production facilities and employees inherited from Pilkington became burdensome owing to the then European debt crisis. Total sales amounts of NSG decreased to JPY629billion in 2015 from JPY 866 billion at the peak in 2007 (see Figure 6).

Figure 6

Acquisition of Pilkington in 2006

Source NSG Securities Reports

NSG came to acquire the second largest share in the global market of sheet glass for vehicles and construction, following Asahi Glass. After the acquisition, 40 per cent of sales came from the European market. However, owning a large share of a regional market makes a company susceptible to changes in the region’s business environment. Production facilities and employees obtained through the acquisition quickly became excess capacity, owing to the economic slowdown brought about by the European debt crisis. When European sales halved NSG had to manage their resources by restructuring Pilkington. In all, 5,800 jobs were cut in 2009, followed by a further 3,500 job losses in 2012. The expected multiplier effect and the reduction in costs failed to materialize. In addition, when a company needs to restructure a purchased company, the benefit of buying time disappears. Due to the insufficient operating cash flows, NSG has been constrained to make proper investment activities but had to focus on its restructuring last 10 years. NSG acquired the scale and global presence they wished but that actually caused a decade consecutive poor performance (see Figure 7).

Figure 7

Source NSG Securities Reports

In terms of the strategic integration effort, NSG tried hard to make the most of Pilkington’s human resources. In 2008, two years after the acquisition, Stewart Chambers, the president of Pilkington, was appointed president-cum-CEO of Nippon Sheet Glass HQ, and tasked with transforming the company into ‘a world number one glass manufacturer in business size, profit, and financial performance’ (source?). At the time, four of the eight executive directors (excluding outside executive directors) of NSG were from Pilkington. Katsuji Fujimoto, the then President of Nippon Sheet Glass, explained that ‘Nippon Sheet Glass is no longer the Japan-focused NSG of the past. It is natural to have western CEO to lead global organization’ (Nikkei April, 24 2008)

However, this did not turn out as hoped or expected. Upon assuming the position of president Stewart Chambers replaced half the executive officers of NSG with non-Japanese appointments, and decided to reduce the company’s production capacity and number of employees. However, he then left the position within a year - reportedly for family reasons. Chambers had joined Pilkington in 1996, and served as group chief executive from 2002 to 2006. He had an impeccable business record; however, he appears not to have had much loyalty to NSG, the new owner. Later, a vice president of DuPont, an American chemical company, was appointed as a new and second non-Japanese president. However, the new president only lasted two years.

The acquisition of Pilkington also appeared directly to damage NSG`s balance sheet. The transaction brought the company into a highly leveraged financial position. NSG`s interest bearing debt remains around JPY 400billion and the company had to ask its partner banks for the additional commitment line of JPY 25 billion in 2013 due to the continuing poor performance of Pilkington business. NSG`s debt/equity ratio became 4.15 times; for comparison, the Asahi Glass debt/equity ratio was only 0.43 times. NSG paid JPY 18billion for interest and other debt related expense in 2015. NSG`s recent credit rating became assessed at BB+; Asahi Glass was rated A-. The NSG operation continues to be highly leveraged, which is unusual among major manufacturing companies in Japan (see Figure 8).

Figure 8

Acquisition of Pilkington in 2006

Source NSG securities Reports and Asahi Glass securities Reports

4. The NSG-Pilkington acquisition as a failure of synergy

The notion of ‘synergy’ was introduced in management literature to explain the additive value created in M&A (Anzoff, 1965; Garzella & Fiorentino, 2014). In context for international business (IB), synergy is generally defined as ‘the increase in performance of the combined firm over what the two firms are already expected or required to accomplish as independent firms” (Sirower, 1997). Although, Japanese and Chinese companies have been active in cross- border acquisitions in UK and Europe for the growth strategy recent years, they often encounter difficulty to creating value by planned synergy. The study said that UK acquisitions have an adverse impact on acquirer’s wealth. (Gregory & O’Donohoe, 2013) By taking NSG`s acquisition case, we will examine and identify what could cause the failure of synergy.

Applying models of synergy The strategic angle of Pilkington acquisition can be categorized as roll ups which acquirer consolidating business in maturing industry. The objective of this type, horizontal integration, is to improve current performance by acquiring resources to lower the cost. The acquirer integrates business they bought into the existing model, and shut down, laying off, or selling redundant resources. By using the target`s resources, the scale economics drives down operating fix costs and that boost the performance.

However, the synergy model NSG adopted was one whereby they kept Pilkington`s operation as a whole and increase its production scale as worldwide without consolidation. The primary objective of NSG management was “to be a company with a global presence;” rather than creating financial profits by consolidating target operation at least in short time of period. As discussed earlier, NSG demonstrated their friendly approach by inviting Pilkington managements to the board members and also having Pilkington`s senior management head global combined flat glass business units. According to the study, acquirers react to perceived complementarity in target by granting high levels of authority with moderate integration find more difficult to realize value compared to leverage similarities. (Zaheer, Cstaner & Souder, 2011)

In fact, NSG did not start shutting down and reducing workforce until they had faced serious financial problem in 2009. The flat glass business is cyclical business and NSG leveraged its operation by this acquisition at the downturn of the cycle in 2006. NSG did conduct restructuring the Pilkington operation, for example, they reduced the number of major float lines from 34 to 26 since the acquisition, but it took about 10 years. That was too slow and it was a retroactive move to their poor performance rather than proactive decisions to create synergy. NSG still maintains 199 subsidiaries, although they only had 53 before the acquisition. They have reduced total workforce by 24% since 2006, but the sales declined by 28% for the same period of time (see Figure 9). This implies that NSG had not been even keeping up with change of external business environment. Those restructuring work, NSG has done so far was just an adjustment to the shrining demands (that was not good enough for that objective either by the way) instead of creating synergy. As a result, NSG management has been damaging its return on assets as well as its return equity for the previous ten years (see Figure 10). NSG`s synergy model, which retains scale with global presence, appears to have been failing thus far. They have not been using the acquired assets to drive down operating fix costs. NSG`s 10 years post transaction performance shows that for horizontal integration type of transaction, especially in matured cyclical sector, the delay of consolidation work, in other words, retaining higher fixed cost could damage acquirers business long time.

Figure 9

Source NSG Securities Reports

Figure 10

Acquisition of Pilkington in 2006

Source NSG Securities Reports

Synergy specific to cross-border acquisitions When companies decide invest in acquiring another - and, perhaps, rival - company, management often explains that they spend billions of dollars for the acquisition because they can “buy time” to enter the market, “increase global market shares” to become top three, and “utilize target talents and resources” to complement existing operations. These plausible reasons for the acquisition sound reasonable, but those reasons can become traps soon after the transaction; as a result, the expected synergy can appear elusive, and – as we later discuss – perhaps illusory.

At the transaction stage, NSG said that they bought time to become a global player by acquiring Pilkington. Also, NSG expected Pilkington`s management to paly significant roles to lead the operations together. That was not avoidable since Pilkington`s operation was twice as big as NSG`s original operation in terms of sales and workforce. NSG did buy time to increase production capacities around the world by the acquisition and became a world number two player in terms of sales. But, one ley objective of acquisition investments is to deliver greater and sustainable profit growth by creating synergy shortly after the transaction, since the acquisition process itself sucks in considerable financial resources, including premium payments.

An alternative strategy towards achieving post-deal synergy is to embark (‘go green’) with a step-by-step approach. Here, the real meaning of ‘buying time’ for management and stakeholders involves asking whether a company could accelerate profit growth with acquisition, rather than just adding assets and market shares. A company can acquire assets and market share as long as a company can afford to pay what seller agrees to, but a company can`t deliver future sustainable profit growth just by acquisition. The profit growth is depends on whether a company can actually create synergy after the transaction. Adding asset and delivering profit growth are totally different but management can get confused especially when their competitor becomes available for sale and then end up losing money after the acquisition. NSG management became caught up in this trap by sticking with the aforementioned objective of expanding scale.

A further relevant factor here is the insight that acquisitions commonly rely on local management after the transaction especially when they purchased business in overseas. That is simply because local managements know more about their business in the region. However, it is often the case that managements of target finds difficult to motivate them to work hard after their parent company is bought out. For example, most of the Chrysler management in the United States left the company after the merger with Daimler although Daimler emphasized it was ‘a merger of equals’. While paying due attention to expected differences in organizational cultures, Daimler managers impressed on the business and national political media that their planned synergy included cost reduction, cross selling and joint product development; at least this is how the hoped-for synergy was defined at the official announcement of the deal; in the event, Daimler exited the relationship with Chrysler after only six years.

As previously mentioned, NSG invited Stuart Chambers from Pilkington to become president of NSG headquarters in Japan; however, he resigned only one year after this – in Japanese business contexts - headline-making appointment. This is another trap that acquiring companies commonly fall in to. As mentioned previously, a major element of the strategic post-deal integration process is driving down operating fixed cost by using target assets to deliver profit growth. It is not always appropriate to leave the hard restructuring work to target (‘acquired’) management cadres because no one is likely to be motivated by shutting down the business which he or she used to own and has built up but over which she or he no longer exerts full strategic control.

NSG decided to replace CEO position with a ‘home-grown’ Japanese appointee in 2012, but a recovery in business performance remained absent. Managing and integrating larger scale business into existing smaller operation creates complexity. Mr Yoshikawa, who succeeded as CEO 2012, claimed publicly that ‘NSG simply did not have capability to control the larger operations like Pilkington and that caused all the poor performance in the past’ (Nikkei, 2012)

According to recent M&A research specific to Japanese companies, when acquirers do not have scale advantage at the acquisition (‘deal’) stage, either in sales or production capacity against target, the investment is more likely to result in failure than in success. To illustrate, between the years 1985 and 2012, a total of 51 out of 116 Japanese outbound transactions worth US$100miilion and above have resulted with the acquirer exiting the purchased business with a loss. Among these 51 failed transactions, more than 60 per cent did not have scale advantage at the transaction or initial deal stage (Matsumoto 2014).

In summary, NSG`s failure to achieve synergy through the acquisition of Pilkington appears, in retrospect, inevitable. Senior NSG management appears to have bought into all the expected benefits of acquisition without paying sufficient attention to the downside of rapidly adding scale. They kept the complementation approach and remained a higher fixed cost operation; their systematic attempts at horizontal integration in what was a highly matured global business sector required more consolidation in order to generate any real or lasting synergy. Overall, NSG appeared incapable of managing larger scale operation on an international scale and therefore had to rely on managing to specific and pre-ordained targets - as it turned out, without much success. Failure to think and act strategically beyond such targets delayed the restructuring of both the target and the parent businesses and caused consecutive losses from 2006 to 2016.

5. The NSG-Pilkington acquisition through the lens of ‘co-operative strategy’

In this section we develop a brief and selective review of literature designed to give shape to evolving IB conceptualisations of ‘co-operative strategies’. Drawing on prior research by (for example) Gulati (1998) and Anannd and Khanna (2000), Beamish and Lupton define these strategies as ‘agreements’ that evolve over time and in response to and / or as a consequence of ‘the changing needs and motives of their counterparts’ (2016:163). As the NSG-Pilkington case study amply illustrates, the ‘agreement’ that evolved between these two companies took many forms, as any IB practitioner or researcher would expect. It would be easier at this stage to suggest that a ‘clash’ or ‘conflict’ of business and / or corporate ‘cultures’ was the primary reason why the sought-after ‘synergy’ failed to fully materialise; or, at least, fulfilling the measures that key NSG stakeholders believed were relevant towards assessing this synergy in business and (primarily) financial terms. However, before rushing to such conclusions and invoking (for example) models and explanations from the ’national culture’ literature in order to explain this failure, we propose instead to use the real life NSG-Pilkington case study as an opportunity to delve more deeply and critically into what we might understand as ‘co-operative strategy’ generally and specifically in relation to the Japan-UK example at the core of our current discussion.

Conceptualising international business strategies

Paraphrasing from Porter (1980), managers in business organisations visualise, formulate and attempt to implement ‘strategies’ in order to appear ‘different’ – which is to say, be perceived by key organisational stakeholders along with actors in competitive markets to be comparatively attractive, worthy of investment, and trusted as a provider of services and / or products that consumers might want or need. Senior managers as formulators and implementers of strategies should put themselves in positions from which they can reliably and over time measures the positive and / or negative business impact of their organisation’s ‘differences’, as perceived across competitive markets. It is worth emphasising here this conceptualisation of ‘strategy’ as appearing competitive through the medium of perceived difference. For, traditionally organisations such as public sector bureaucracies that lacked competition through their (perhaps) monopolistic status in any given market and thereby had no need to make profit in competitive rent-seeking markets beyond satisfying the conditions set by governments and other political institutions. However, and as Drucker (1995) predicted, over time managers and executives in public sector organisations recognised the need to develop ‘strategies’ as the services they offered became exposed to ‘for-profit’ competition: one thinks here of how the iconic National Health Service (NHS) has become re-interpreted as a series of ‘services’ that UK government agencies might put out to competitive tender.

This topical example reminds us firstly that boundaries of business sectors and of the organisations that interact to form markets are becoming increasingly ‘fuzzy’. Correspondingly, attempting to trace the boundaries of organisations that are managed to form strategic alliances such as joint ventures and / or as merged or acquired business entities causes us to ask questions about which aspects of the ‘strategies’ or - re-invoking Porter (1980) - aspirations to appear ‘different’ brought by each entity to the alliance might need to be reformulated, modified, or even abandoned in order to facilitate the success of the hybrid strategy that inevitably emerges during the course of negotiating the alliance. For NSG, the attraction to be different was to appear ‘bigger’ and with a wider global reach in comparison with direct rivals. It was furthermore motivated by an attempt to remain relevant and trusted to established business partner: for example, as a trusted supplier of glass to production centres in the UK and Europe. Echoing Beamish and Lupton (2009, 2016), it is for these reasons that highlighting and emphasising the fluid ‘relational’ aspects of strategy formulation and implementation appear appropriate in this particular case.

Familiar to IB practitioners and researchers are the three ‘generic’ strategies proposed by Porter (1985). Variously formulated in terms of cost leadership, cost focus and / or differentiation focus, we have an opportunity here to ask whether current conceptualisations of ‘co-operative’ strategy might similarly be worthy of ‘generic’ status: in other words, which elements of the ‘co-operative strategy’ concept might serve to make NSG (for example) appear positively ‘different’ across global markets for industrial glass supply though stages of their acquisition of Pilkington? In order to address such questions of applied conceptual thinking we might first examine the ‘co-operative’ element of this strategy type and subsequently assess the extent to which applying current conceptualisations of ‘co-operative strategies’ might help explain the failure of the NSG–Pilkington acquisition. In doing this we might begin to answer the second of our three research questions.

Conceptualising ‘co-operative strategies’ as relationships

Before focussing on the ‘co-operative’ label, it is worth emphasising a common feature of all strategic alliances and, by extension, of social-economic relationships generally. To illustrate, Gulati (1998) describes a timeline that might be conceptualised as progressing sequentially through stages or phases: ‘the decision to enter an alliance, the choice of an appropriate partner, the choice of structure for the alliance, and the dynamic evolution of the alliance as the relationship develops over time’ (Gulati, 1998:293-4). Given that each party to the evolving alliance relationship is making ‘choices’, each (we assume) corresponding to their own perceived interests and in reference to the information they perceive to be available to them, the nature of the relationship (‘label’) might be open to interpretation: for example, one party’s assessment of an ‘open’ or ‘healthy’ relationship might not – when made explicit – concord with the assessment or expectation of another party; as threats to party-specific interests become manifest, conflict might ensue. This is the scenario common to many case studies of cross-cultural conflict (cf. Jackson & Rasheed, 2016). The conflict effect might appear exacerbated – or even assessed as being more likely - when differing and / or competing ‘communication cultures’ are observed to be in play: for example, when managers or executives accustomed to so-called ‘low context’ communication cultures (as in the UK) experience or interpret misperceptions of intent with alliance partners with perceptions and professional expectations shaped by experience of business communication in so-called ‘high-context’ cultures such as Japan (cf. Hall, 1976; Avruch, 2002). As we saw in the NSG-Pilkington case, the movement of executive positions during the restructuring should in objective terms have predictable chances of success: for example, the appointment of Stuart Chambers from Pilkington to the position of CEO of the new global Flat Glass Business product line. We can infer from the case study that key players and stakeholders perceived something in the re-configured NSG-Pilkington relationship as less manageable than had appeared within the old structure of the strategic alliance.

In order to understand and perhaps even predict such events of negative or destructive conflict, the name given to the aspired-to form of relationship is important. In practice, implicitly and/or explicitly naming and re-naming the strategic relationship can serve to moderate each party’s expectations of the other as the relationship evolves through the stages identified by Gulati (1998). As IB researchers, we can apply labels to such strategic relationships in order to arrive at a common term of reference that should support research reliability, validity and comparability as we each apply shared conceptualisations of what is it is we are purporting to observe and measure: in this case, research conceptualisations of ‘co-operative strategies’.

In general relational terms, therefore, the term ‘co-operation’ can be interpreted as an ‘action’ or series of observable behavioural choices that seek the association of other people with the intention of achieving something of mutual benefit (Merriam-Webster, 2016): ‘co-operative’ is a descriptor derived from this observation of human choices. The economic activity emphasis given towards describing and explaining the dynamic of relationships is well established in sociological theory: for example, in Weber’s ‘The Economic Relationships of Organized Groups’ (Weber, 1978). This sociological approach can be taken to define distinctly ordered relationships such as ‘the family’ and, within and beyond this socio-economic unit, peer relationships among i) equals and non- equals: for example, in terms of each relationship partner's attributed social status and / or perceived social influence (cf. Giddens, 2010; Sugimoto, 2014). The ‘relationship’ becomes observable in the dynamic that appears to link individual social actors together towards a variety of shared purposes - not least, the basic strategic imperative of ‘survival’ (cf. Jackson, 2013). We saw in the allusion to the Daimler-Chrysler ‘merger’ how failing to resolve expectations and perceptions of relative ‘equality’ and ‘status’ can lead to an erosion and ultimate collapse of cross-border business alliances.

Here it is worth noting how the ‘-ation’ suffix of the term ‘co-operation’ suggests an investment of time and other rich and often complex resources associated with socially, economically and legally defined relationships including experience, expectation, trust, and so on (cf. Cullen, et. al. 2000). As such, the process suggests an evolution and negotiation of perceptions and expectations through time, much in the manner described by Gulati (1998). By extension, the structure and dynamic of the process can be both visualised and conceptualised as a ‘relationship’ As a cross-border alliance, the NSG-Pilkington relationship needed to be negotiated across geographical spaces in the ‘now’ time frame. Historical time-spaces also feature, as expressed in the respective histories or identity-specific ‘autobiographies’ of each company (cf. Giddens, 1991; Jackson, 2016).

Conceptualising ‘co-operative strategies’ as learning opportunities

Echoing both the NSG-Pilkington acquisition along with the Daimler-Chrysler purported ‘merger of equals’, Anand and Khanna (2000) recognize that strategic alliances are likely to be ‘difficult to manage’. One source of difficulty is likely to occur in processes of exchanging from the funds of ‘tacit knowledge’ that each partner brings to the relationship, and especially where this relationship stretches from ‘intrafirm’ to 'interfirm' – in the NSG case, across national political, economic and technological and socio-economic borders. Over time, one measure of successful synergy can be applied to observations of how each party to the relationship manages to operationalize benefits from making such knowledge explicit and thereby serve towards the business success of the respective (parent) business entities and, more immediately, in the newly formed alliance business entity (cf. Dyer & Singh, 1998; Nonaka & Takeuchi, 1995).

Attempts to interpreting the formulation and implementation of ‘co-operative strategies’ as distinct learning opportunities can find relevant theoretical a foundation in the learning theory generally (cf. Kolb, 1984) and in developmental psychology specifically. For example, the extent to which the alliance relationship is set up and managed ‘co-operatively’ as a source of socially contingent learning and knowledge acquisition can be found in the work of Vygotsky (1986), where the concept of ‘family’ might be extended to include a cadre of managers motivated to pool their knowledge and experience in a trusting manner and without fear of censure towards synergistically cementing the strategic alliance – and concept of strategic time and space definition evident in the distinctly Japanese concept of ba (cf. Takeuchi & Nonaka, 2004). It is apparent in the case study that senior managers of NSG appeared not to understand this opportunity to consolidate the learning relationship and, ideally, boost business performance during the period of the alliance: in other words, recognising the potential of the strategic agreements as a string of learning opportunities that, over time, inform ever more effective responses - or even predictors of - ‘the changing needs and motives of their counterparts’ (Beamish & Lupton, 2016:163). To illustrate, the ‘import’ of non-Japanese executives to Board-level positions in Japan (see Figures 4 and 5) appears in retrospect to have been in terms of business performance effect more a token political gesture than a systematic attempt to foster and consolidate mutual and explicitly understanding along with a shared sense of strategic mission. In this sense, managers at NSG and the acquired Pilkington might have achieved a strategy that (echoing Porter) would appear ‘different’ in a more positive sense than as a memorable IB ‘failure’.

6. The NSG-Pilkington acquisition re-visited

As vehicles of potential knowledge creating and sharing, case studies allow for the critical testing of (for examples) answers to questions such as: Who? What? Why? Why not? What-if? As business case studies tend to be located in past times and places, there can be no clear or ‘factual’ answer to such questions. In the spirit of multi-perspective triangulation (Denzin & Lincoln, 2005) we take the case study ‘as is’ and attempt to develop reliable insights by invoking two further perspectives: business consultant and learning and development (L&D) consultant, each corresponding to a co-author’s professional expertise.

Business consultant perspectives

According to one group of IB consultants, it is relevant to note that mergers and acquisitions among Japanese companies domestically remain rare by international comparison: for example, in the UK and across Europe (Vaubel & Herbes, 2007). According to a consultant specialising in Japanese business: ‘Since 2000, domestic M&As have decreased, but cross border M&As have soared for Japanese companies, with a pause after the Lehman Shock in 2009-2011. Of the 15 M&As noted by the Nikkei [Japan’s leading financial newspaper] from March 2011 to October 2013, 14 were cross border, and the majority were deals of over $1bn’ (Rudlin, 2014).

It is difficult to offer precise suggestions as to why this might be so. One reason is probably the distinctive institutional contexts for strategic alliances across domestic Japanese business sectors and networks (cf. Lechevalier, 2014; Jackson & Matsumoto, 2016). Another reason might be the national memory of having pre-World War 2 business networks (zaibatsu) forcibly broken up and re- merged by the United States Occupation Forces after 1945 (Gerlach, 1992). Another influencing factor might have been the shockwaves reverberating across international business thinking in Japan after the sudden and unexpected collapse of the -Rover alliance in 1994 - discussed in more detail below. This occurred during a period of decline in IB confidence as Japan’s so-called ‘Lost Decade’ was gathering pace and leading IB scholars both within and outside Japan to question whether Japanese companies might ever again be able to compete effectively in global markets (cf. Porter et. al., 2000). Given the impact that such events are likely to have exerted on the psyche of managers and on management education in Japan, it is likely that NSG managers sought security in acquiring Pilkington – as risky as this clearly was in financial and reputational terms – as opposed to seeking co-operation though an alternative ownership structure such as a merger or joint venture.

The boldness of the NSG investment decision can be understood when one views the acquisition though the lens of ‘typical’ Japanese manufacturing company. Firstly, such companies tend not to have a separate purchasing section: purchasing is operationally and strategically linked to production. Correspondingly, companies such as NSG who move from a majority of domestic market positioning to a majority of overseas marketing positioning invariably find their stable and trusted supplier lines stretched: thus, senior managers involved in cross-border acquisitions are making decisions informed by predominantly domestic and closed network experience (Vaubel & Herbes, 2007; Trevor, 2012). Specific to NSG’s acquisition of Pilkington, the UK company operated a standardized ‘Global HRM’ policies and practices – including sales operations - that overrode consideration to local differences in overseas operations (Rudlin, 2014). The overwhelmingly Japan-oriented polices and practices embedded at NSG appeared to be destined to follow a collision course with such core strategic polices and practices, and especially under periods of financial duress – a phenomenon we discuss in more detail below.

From an IB consultant perspective, one key lesson to be learned from NSG- Pilkington case is that an ‘acquisition’ is not a ‘strategic alliance’, even though the terms commonly overlap in the ‘co-operative strategy’ literature. Paraphrasing from Todeva and Knoke (2005), alliances function as ‘incomplete contracts’ between partner companies and allow for equality of initial status perceived being further detailed through on-going interactions and negotiations until the ‘alliance’ settles into a strategic ‘joint venture’ or ‘merger’ mind-set among senior managers of each partner company. In contrast, an acquisition settles the ownership structure and (potentially) answers the relative status question from the initial formalization of the transaction (Hennart & Reddy, 1997; Matsumoto, 2014).

At several critical points during the acquisition process, senior managers at NSG appear to have acted post-acquisition in the spirit of a ‘strategic alliance’ while choosing to under-emphasise the ‘acquisition’ fact. This is likely to have led to the establishment of a risk-laden mis-match of expectation in respect of synergy achievement between the still separately defined NSG and Pilkington entities. According to consultants Vaubel and Herbes (2007) effectively managing processes of strategic integration are deemed to be vital towards achieving synergy and ultimately business success in post-acquisition relationships. As we have seen starkly in the case study, the expressed attitude and behaviours of senior managers at NSG appeared designed to express both ‘acquisition-as-fact’ and ‘alliance-as-aspiration’ – as we shall see, a consistently ambiguous signal that both failed to convince their Pilkington counterparts during the course of the acquisition and left the relationship vulnerable to sudden and heavy economic and political shocks.

L&D consultant perspectives

Of generalizable relevance to the NSG-Pilkington case is the Honda-Rover- BMW shock of the 1990s, notably in terms of the ‘shock waves’ it sent out to business investors and politicians in Japan and in the UK. Since the 1960s, Rover had been part of a UK automobile manufacturing group that had resulted from a series of various government-sponsored mergers among UK manufacturers. During the 1970s, the Group appeared perennially overstaffed and low in production performance, until a deal was signed with Honda of Japan to accept cars for assembly in kit form. Slowly, manufacturers such as Rover began introducing Japanese–style production systems. Eventually, Honda took a twenty per cent stake in Rover and began producing market leader such as the Honda Accord in the UK as the US American market shrank; in a balancing act of collaboration, Rover took twenty per cent share in Honda UK. According to Bowen (1994), Honda valued Rover as an ‘independent partner’, much in the manner that NSG appeared to regard Pilkington.

As sales of the Honda Accord fell during the early 1990s, Rover and its Group needed cash. They opened negotiations with Honda for an increased equity share; Honda hesitated. A third party intervened, Germany’s BMW was cash-rich at the time and made its move, offering to buy out the eighty per cent of Rover not held by Honda. Rover’s CEO flew to and asked Honda to take a majority share; again, Honda hesitated. Over ten days in January 1994 Rover sold its shares to BMW and ‘the last British motor company of any size passed into foreign ownership’ (Bowen, 1994:1). The reaction of senior Honda executives was reported publicly as being ‘disappointed’, meaning that privately they were ‘outraged’; while a headline in the English Language Japan Times newspaper asked: “What is the point of cultivating the kind of close intercorporate ties across national boundaries if, in the end, such effort counts for so little, and receives such shabby treatment?” (Bowen, 2014:8).

One threat hanging over managers at NSG was the market comparison with Japanese rivals such as Asahi Glass, who contemporaneous to NSG’s acquisition of Pilkington had undertaken comparative Europe-based acquisitions such as Saint Gobain. This perceived threat would be influenced by the calculations over time of financial loss which, in return, could be seen to reinforce perceptions of reputation risk: for example, a collective fear (perhaps) among senior NSG managers and other stakeholders of losing a hard-earned trusted supplier status relationship with major clients such as Toyota. Under such conditions, it is likely that managers at NSG might begin to act ‘out of character’ or, quite simply, make poor strategic decisions – several of which we identified and / or implied in the case study discussion. These include the decision post ‘Lehman Shock’ in 2008 to offer senior positions on the NSG Board to long-time Pilkington executives – prominently, Stuart Chambers. As Rudlin (2014) concludes: ‘where quick and decisive action was needed. Pilkington may well have expected NSG to take the lead, whereas NSG was expecting Pilkington to have the global experience to provide the guidance for what to do in such extreme circumstances’. Against this background, the decision in 2008 to re-locate Stuart Chambers and his colleagues to NSG HQ in might appear – in retrospect – as a rather ‘knee- jerk’ decision and with little clear prospect of stabilising an increasingly rocky ship. Alternatively, one interpretation might be that ‘prompting’ non-Japanese to senior executive positions in Japan offered their Japanese counterparts the opportunity to ‘blame the foreigners’ if business performance did not improve.

7. Postscript - the ‘post –Brexit’ environment for Japan-sourced FDI

On 23rd June 2016, a large majority of people living and working in the region surrounding the Pilkington Special Glass plant in North Wales voted strongly for the UK to leave the EU – a political and economic ‘divorce’ that has become known as ‘Brexit’. Political commentators have noted that, regionally across the UK, one major ‘swing vote’ towards ‘Brexit’ occurred in Sunderland, an urban region that suffered badly when traditional industries such as coal mining and shipbuilding went into decline. In contrast, this region has benefitted greatly over many years from growing investment by – a consistency of flow that has motivated a succession of UK politicians to hail the UK as a ‘good place to invest and do business in’. The benefits to Sunderland have been substantial: employment, education, training, infrastructure development, apprenticeships, and social mobility for younger people, connection to global supply lines, and connection to a global economy. Consequently, broader performance measures of ‘success’ relevant to strategies differentiated as ‘co- operative’ extend to regional economies as well as local communities – an insight that could lead researchers to extend their scope for interpreting co-operative strategies to include exploration of performance measures linked to social and economic impact, CSR and sustainability.

Specific to the case study discussed in this paper, we can see how NSG`s stock price lost 30% of its value on the Nikkei Index when the UK announced the result of the Brexit referendum. NSG is one of the Japanese companies that appears most sensitive to economic developments in the UK specifically because of its exposure through Pilkington.

The current balance of Japanese investment in UK is about JPY 10 trillion and UK has been the largest destination of all Japanese investment in Europe since 2010. The major investment from Japan comes automotive sector that creates jobs in regions and companies like Toyota and Nissan likely to stay in the UK. However, whether the UK can continue to attract foreign investment is contingent on future industrial policies developed under a new Prime Minister, who claims a ‘free hand’ to negotiate in exchange for the previously free access to EU markets.

Looking ahead, it is impossible to forecast future opportunities and flows for FDI between Japan and the UK. It is our current view that economic policy incentives such as pushing for a lower exchange for the British Pound Sterling – analogous to one of the key pillars of ‘Abe-nomics’ in respect of the Japanese Yen - appear unlikely given the volatility that currently pervades the UK’s political landscape. It is possible to envisage a UK decoupled from the EU seeing ever-larger flows of inward FDI sourced in China, India and the GCC economies of the Middle East. However, the range of extended benefits listed above do not (yet) appear so readily discernible in response to flows of FDI sourced in these regions or, indeed, in East Asian economies generally.

As we wait for events and trends to unfold, we should recognise that Japanese companies such as Toyota – a key (albeit ‘low-key’) strategic player in the NSG- Pilkington story – have long hedged their investments across currency zones: for example, between the British Pound and the Euro. The outcome of Brexit further complicates this risk management environment by foregrounding political, legal / regulatory factors as a substantial piece of the ‘common (EU) market’ jigsaw looks set to detach itself. Result: uncertain times for some, exciting times for IB researchers!

8. Summary

This paper has addressed three thematically connected research questions. As we have illustrated with our case study, the answer to the first question is a ‘yes’: the financial data make a strong case for this conclusion. The answer to our second is questions is a qualified ‘yes’, drawing on the combined academic, consultant and participant stakeholder perspectives. We have indicated areas where applying conceptualisations of ‘co-operative strategies’ illustrate weakness in NSG's strategic management of the acquisition and thus, in retrospect, might have signalled sources of business failure. Having said this, we echo the case made comprehensively by Beamish and Lupton (2016) that there remain numerous gaps for more precise definition of the ‘co-operative strategies’ concept. By extension, our answer to the third research question must remain rather speculative for now.

Overall, we hope that with this paper and the responses it might draw from reviewers and other participants at EAMSA 2016, we are hopeful of making a more finally honed contribution to this emerging field of IB research such that the relative success and failure of future cross-border M&As and strategic alliances relevant to Europe and Asia might be better identified, explained and (where feasible) predicted.

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