Crédit Agricole’s International Expansion
- Which of the four basic strategies (within the global-integration versus national-responsiveness framework) do you think Crédit Agricole is most likely pursuing and why?
Crédit Agricole will use the localization strategy. In localization, businesses customize their products to meet the specific needs of a target market ((Stevenson, 2014). This method will enable Crédit Agricole to provide services that meet the particular needs of the German population. Additionally, the company will be able to package its financial services in a manner that is targeted to this market, by considering their language, culture, and prevailing trade conditions.
- How would the acquisition of Commerzbank likely fit into Crédit Agricole’s strategy?
The acquisition of Commerzbank will enable Crédit Agricole to have more capital for its operations. Currently, Crédit Agricole has a weak capital position. On the converse, Commerzbank has a relatively strong capital (a 13 percent core equity tier one ratio). Further, the company is undervalued, and it is trading at only half the tangible book value of its net assets (Keegan & Green, 2015). Therefore, this acquisition will enable Crédit Agricole to increase its capital base since it would be purchasing 100% Commerzbank net capital (Assets-Liabilities) at almost half its price.
- What are the benefits and challenges that arise from the fact that Crédit Agricole specifically chooses acquisition as their entry mode into the German banking market?
The main benefits of Crédit Agricole acquisition are as follows:
- The company will be able to enjoy economies of scale brought by the increase in its size. The acquisition of Commerzbank will increase the size of Crédit Agricole, which will enable it to reduce its fixed costs (Hitt, Ireland, & Hoskisson, 2016). For example, the company will reduce its average consultancy fees since the hired experts will advise a now larger bank (Commerzbank + Crédit Agricole) while considering its larger size, risks, and diverse markets.
- The acquisition will also help Crédit Agricole to have a broader The acquisition will, in particular, enable the bank to expand its reach to Germany. Additionally, the acquisition will result in the bank owning customers who are already in Commerzbank (Hitt, Ireland, & Hoskisson, 2016). Similarly, it will have acquired the right to use Commerzbank brand, which will enable it to penetrate the German market.
- The acquisition can also have a positive tax implication on Crédit Agricole. Given that Commerzbank has been making losses, the purchase will make Crédit Agricole reduce its tax liability. In fact, the Crédit Agricole tax obligations will be less since part of the company’s profits will be reduced by Commerzbank’s losses and acquisition expenses (Hitt, Ireland, & Hoskisson, 2016). Simply, instead of paying taxes, Crédit Agricole will use its finances to acquire Commerzbank.
- Crédit Agricole will find structures and management systems that have already been set up by Commerzbank (Hitt, Ireland, & Hoskisson, 2016). Therefore, the acquisition will enable the Crédit Agricole to penetrate the German market easily. Additionally, it will avoid the tedious process of negotiating with landlords and county officers when establishing banking halls since Commerzbank has already settled these issues.
The main challenges of using the acquisition method are as follows:
- Crédit Agricole will have to struggle with the language and cultural barrier in Germany. Since the bank has a different management approach, it will have to change the systems established by Commerzbank or struggle to learn these methods ((Stevenson, 2014). Additionally, some of Crédit Agricole senior management, who may be relocated to manage Commerzbank, will experience a serious language barrier.
- The acquisition can also reduce the company’s goodwill and result in a loss of customers. Crédit Agricole may be forced to retrench some redundant employees to avoid duplications of work ((Stevenson, 2014). These terminations may make the company lose its goodwill in the German market.
- The acquisition may be costly and fail to realize the targeted objectives. Crédit Agricole aims at turning Commerzbank into profitability after the purchase. Unfortunately, restrictive German financial regulations may make the bank not accomplish its goals ((Stevenson, 2014). Further, Crédit Agricole may not increase its market since the cross-border advantages brought by the banks’ ability to connect customers in the Eurozone may fail to benefit many local customers and investors.
- In what way do governmental entities play a role in this scenario?
Government entities play a significant role in regulating the acquisition process by protecting the interest of all stakeholders. The most outright stakeholders are the shareholders, customers, employees, creditors, and debtors of Commerzbank. The government has a duty of ensuring there are honest commercial practices during the acquisition.
Among shareholders, the government has the responsibility of ensuring that the acquired interest of both major and minor shareholders is fully paid. Similarly, the government’s agents have a duty of protecting the employees of Commerzbank. In this case, they must ensure there is no forceful or unfair termination of contracts. Further, even where employees are fired to avoid duplication of duties, they have an oversight duty of checking that all their dues are fully paid. The government also has the role of checking that Commerzbank’s customers’ savings, deposits, and cheques are protected during and after the acquisition. Similarly, it has a duty of ensuring that creditors and debtors’ interest with Commerzbank are fully transferred to Crédit Agricole. Also, they must ensure that the terms of contracts are not affected.
- What is your assessment of the macro/micro political risk environment for Crédit Agricole’s potential acquisition of Commerzbank?
Political risks happen when a government suddenly changes its policies and implements regulations that negatively affect a foreign business. In this case, governments may introduce tariffs and quotas. Normally, these types of policies reduce the attractiveness of a region as an investment destination and lead to little foreign direct investment.
The political risks for Crédit Agricole acquisition of Commerzbank are low. Both Germany and France are primary members of the Eurozone and are interested in strengthening this trade union. Accordingly, both of these countries aim to reduce their trade barriers through more partnerships in the Eurozone. Despite the current Brexit issues, where the United Kingdom is seeking to exit the European Union trade union, the global “mood” is in the formation of economic unions and strengthening those that already exist. In this regard, there are very few political risks that Crédit Agricole faces in its acquisition of Commerzbank.
- Which responses to this risk assessment might Monsieur Brassac consider?
Although there is minimal exposure on Crédit Agricole due to political risks, the banks can still minimize its risks by purchasing futures, forwards, or options in the money market (Slack & Lewis, 2017). Futures are contracts that compel either a buyer or a seller to trade a specific item at a predetermined price in a given date in the future. A currency forward is simply a foreign exchange market contract which requires an individual to purchase or sell currency at a predetermined rate in a specified future date (Slack & Lewis, 2017). In forwards, individuals are not required to make purchases of the currency in advance (Slack & Lewis, 2017). The main benefit of these contracts is that parties to this agreement can walk away if the “lock-in” price appears to be adverse. An option, on the other hand, is a contract sold by a writer to a holder (Slack & Lewis, 2017). The holder gets the right to buy or sell a financial asset or security at a specified price and pre-determined price in the future. In addition to these methods, a Crédit Agricole can take a political risk insurance to protect its equity.
- If the acquisition was successful, how should Crédit Agricole structure its decision-making and control structures with regards to Commerzbank and why?
Crédit Agricole should create a flattened organization that is less hierarchical. Similarly, they prefer less centralized decision-making structures. This structure will enable smooth flow of information between departments that previously operated autonomously (Keegan & Green, 2015). Accordingly, the organization will be able to make its decisions promptly and react to market changes faster. Further, this structure will make the company to offer better customer service to its clients through quick exchange and response to any issues.
- Which role might cultural differences play in this regard?
The cultural differences between France, where Crédit Agricole is located, and Germany, where Commerzbank operates can affect the entire management of the organization. In particular, they may affect the communication, workplace etiquette, and hierarchy (Hitt, Ireland, & Hoskisson, 2016). With regards to communication, the differences between how people in German communicate, both verbal and non-verbal communication, should be considered by Crédit Agricole. In this case, the company must learn the acceptable verbal communication in Germany. Further, it must learn the appropriate non-verbal communication such as a kiss, hug, smile, eye contact, or shaking hands that is acceptable in the German society. This knowledge will help it to establish appropriate communication in its Commerzbank.
Workplace etiquette differs significantly depending on a person’s culture. In some countries, people prefer being called using their surnames, whereas they prefer their first name in others. Similarly, some societies have different perspectives when it comes to time management. Some consider arriving for a meeting a few minutes before it starts as being punctual, while other find those who have arrived a few minutes after the start of the meeting as being punctual. In this regard, an understanding of the German’s workplace etiquette is essential for Crédit Agricole to operate in Germany successfully.
Finally, the understanding of workplace hierarchy will be essential when Crédit Agricole is developing its business structure. In some countries, such as Japan, there is always a tradition of valuing hierarchy. Accordingly, people with higher status are usually treated with more respect. On the contrast, Scandinavian countries such as Norway prefer a more social and inclusive workplace (Rodrigues, 2008). In this regard, people in these regions prefer flattened organization that are less hierarchical. Therefore, an understanding of the culture of Germans will determine the hierarchy of the organization that Crédit Agricole will establish.
- Based on your analysis, would you recommend that Monsieur Brassac pursue the acquisition of Commerzbank from a strategic standpoint? If yes, what are the main challenges Monsieur Brassac would need to watch out for to make sure this acquisition does not turn into a failure?
From my analysis, Monsieur Brassac should pursue the acquisition of Commerzbank. Commerzbank is in Germany, the largest economy in the Eurozone. Therefore, the purchase of this bank will enable Crédit Agricole to enter one of the most lucrative markets in Europe. Also, the continued increase in globalization and establishment of trade unions will create a greater need for multinational banks ((Stevenson, 2014). Accordingly, Crédit Agricole purchase of Commerzbank will have a positive impact on its customers who have business interests in Germany and France. Furthermore, the acquisition will increase Crédit Agricole capital since it will be purchasing Commerzbank at a price that is less than its verifiable book value.
Monsieur Brassac must check the consistency of German’s government policy to minimize Crédit Agricole exposure to political risks. The consistency of policies enables a multinational company to predict the expected returns from investments (Keegan & Green, 2015). Also, he must conduct an audit of Commerzbank so that he can verify the bank’s book value. This information will enable him to evaluate if the acquisition will indeed increase Crédit Agricole net capital. Finally, he must carry out a feasibility study of the German market and the Eurozone to assess whether the purchase can make Commerzbank profitable.
- If not, what alternatives would you suggest to Monsieur Brassac when it comes to pursuing Crédit Agricole’s international expansion?
Monsieur Brassac can also establish a merger with Commerzbank when pursuing Crédit Agricole international expansion plan. This method will enable the new company to have a larger reach within the Eurozone (Stevenson, 2014). Additionally, the new company will be able to enjoy economies of scale, which will make it to reduce its operating costs.
Hitt, M., Ireland, R., & Hoskisson, R. (2016). Strategic management: Concepts and cases: Competitive and globalization (12th ed.). New York, NY: South-Western College Pub.
Keegan, W., & Green, M. (2015). Global marketing (8th ed.). London, UK: Pearson.
Rodrigues, C. (2008). International management: A cultural approach (3rd ed.). Los Angeles, CA: SAGE Publications, Inc.
Slack, N., & Lewis, M. (2017). Operation strategy (5th ed.). London, UK: Pearson.
Stevenson, W. (2014). Operations management (12th ed.). New York, NY: McGraw-Hill.