Beyond Sun and Sea: International Strategy and Entrepreneurship in Caribbean Firms

By Maxine Garvey and Gordon Shirley

Caribbean firms cope with international competition both in their small domestic economies and as they extend their operations outside their home countries. This volume explores their struggles and successes in fifteen case studies developed from interviews with Caribbean firms at key decision points in their internationalizing processes. The cases ask the reader to offer direction; to evaluate choices made or to opine on paths not taken. The cases feature over thirty countries in the Americas, Europe and the Caribbean. These appear as markets, domiciles or hosts of subsidiaries of the internationalizing Caribbean firm. For example, one of the Barbadian cases describes a food caterer operating in ten countries in South, Central and North America.

The cases cover multiple industries including cement manufacturing, supermarkets, shipping, remittances, banking, tourism, rum production, shrimp harvesting, food manufacturing and airline catering, and reflect the conversations with practising managers, who raised such questions as, “How does one define the Caribbean manager?” “How do we exploit our diaspora markets?” “How can small firms scale up?” “Where should we locate headquarters?” “What should be the role of regional governments?” “How do we pick allies and manage alliances?”

The managerial challenges described are diverse: decision-makers from GraceKennedy, Goddard’s Enterprises or Trinidad Cement Group share practical experiences including decisions on marketing (e.g., pricing and retail locations); financing and accounting (e.g., alternative financing options); international strategy (e.g., alliances and take-overs); corporate governance; operations and personnel. All fifteen cases add to understanding emerging market multinationals, particularly those domiciled in small island developing states characterized by tiny internal markets, limited international influence and environmental fragility. They add insight to work on Caribbean entrepreneurship, business and economics and to studies of international business in developing countries.

• Language: English
• Publisher: The University of the West Indies Press
• Release date: Apr 30, 2015
• ISBN: 9789766405342

Maxine Garvey

MAXINE GARVEY is a member of the leadership team at CGIAR Fund Office, World Bank, Washington, DC. Her publications include, most recently, Jamaica’s International Business Performance and Managing Risk and Opportunity: The Governance of Strategic Risk-Taking.

Book preview

1. Beyond Sun and Sea: Internationalization by Caribbean Firms

Sea. Sand. Sun. Sound. For visitors to the region, these calling cards of the Caribbean islands can summon warm memories of the idyllic beach vacations spent lazing in the sun by day and dancing to the region’s rhythms by night. For the citizens of the Caribbean islands, creating these memories is serious business. Each smiling waitperson on the beach is hard at work. Making every visitor’s vacation sing is one of the more reliable ways of earning a living in this region of multiple small island developing states (SIDS). Caribbean tourism is internationally competitive and does well generally. However, many of the region’s other industries and firms continually hustle to survive the vagaries of international competition.

This book explores how Caribbean firms cope with international competition both in their small domestic economies and as they extend outside of their home countries and region. The firms discussed here reach beyond their region’s sun and sea to pursue shareholder value. The authors explore the firms’ struggles in a series of case studies developed from interviews with Caribbean managers actively engaged in internationalization processes. For practitioner readers, the cases map the firms’ successes and failures, seeking to distil pragmatic lessons. For readers with more academic interests, these case studies add to the burgeoning literature on emerging market multinationals (EMNCs). They add to the available material on firms from SIDS, which, outside of work on Asian companies, are almost absent from the literature.

Born from Practice

The authors wrote the majority of the case studies at the request of practising managers and for their use. Things got rolling when Grace, Kennedy and Company (GK/Grace) asked the Mona School of Business (MSB) to design executive training for its divisional general managers. The cohort did not include any of the group’s corporate leadership but included staff identified for grooming as a part of the group’s succession planning. Professor Gordon Shirley, the Harvard-trained head of MSB and lead faculty for the GK programme, thought it best for the participants to be exposed to courses structured around practical challenges that were immediately relevant to their professional lives. GK, a highly decentralized conglomerate, was, at that time, engaged in a group-wide strategic drive to earn significant profit from economies outside its domestic market. A quick survey of the course materials available revealed a dearth of usable cases on internationalizing by firms in small island economies. Shirley, a long-time member of the GK board, proposed a solution to his fellow directors: What would be better for this cohort than cases about GK itself? The board bought into his vision and the writing commenced with Maxine Garvey as lead case writer.

The second batch of cases evolved fortuitously from the first set. One of the reviewers of the GK cases, the late Gordon Draper, started a series of conversations that led to the Trinidad Cement cases. Draper had worked with Shirley and Garvey on a star programme to train promising young talent from all the companies in the Trinidad Cement group. Draper’s interests were competitiveness and human resource strategy, and his conversation with the Trinidad Cement Limited (TCL) human resources executives led to an arrangement for the authors to prepare case studies on TCL’s regionalization and its experiences coping with international competitors in the region. These cases were explicitly prepared for use in the region’s universities and for TCL’s internal training programmes.

At that point, Garvey realized that if GK would agree to the publication of its cases, then what they would have could be the core of a pioneering volume about Caribbean firms. These first two collections of cases featured firms headquartered in Jamaica and Trinidad, which were aggressively regionalizing and internationalizing. TCL’s strategy was driven from its central headquarters, while in the GK conglomerate, each division was internationalizing in separate initiatives with support (e.g., capital and managerial time) from a lean group office. The early cases included firms active in Caribbean banking, remittance services, food retail, shipping, food manufacturing and cement production; they were engaged in regionalization and international expansion mainly into North America and Europe. However, the evolving volume lacked cases about family firms or firms active in tourism, rum or agribusiness; there was no significant reflection of the Caribbean’s international activity in Latin America.

A solid study of internationalization from Caribbean states needed a wider geographical and industry range than the authors had with cases from only Jamaica and Trinidad in hand. James Jimmy Moss-Solomon, GK executive and former president of the Caribbean Association of Industry and Commerce (CAIC),¹ provided the networking to help close the gaps. With Jimmy’s help, Goddard Enterprises Limited (GEL) agreed to interviews for several cases. GEL, a decentralized divisional conglomerate, was active in tourism, rum, agribusiness, food retail and airline catering in nearly twenty countries including South, Central and North America and the Eastern Caribbean island states. GEL was a superb fit to bolster the volume’s geographic and industry coverage.

Nevertheless, constrained geographical scope is one of the flaws of this book. The arc of the Caribbean countries extends southward just off the tip of Florida in North America to the seas northwest of Venezuela in South America. Currently organized into twenty-five territories, the region is made up of close to seven thousand islands, cays and islets. Colonization by the British, Dutch, Spanish, French and Danes left sociocultural and ethnically heterogeneous nations with current population totalling just over thirty-five million. However, given such diversity, and to avoid overreaching, the authors decided to focus on the English-speaking countries that are members of the Caribbean Community (CARICOM).² Within this Commonwealth Caribbean context, Barbados, Trinidad and Tobago, and Jamaica – due to their economic role and political importance – are the countries with dominant coverage.

The cases fervently celebrate Caribbean entrepreneurial success. Each case features a different firm or division (or several firms with one divisional head) coping with international competitors in its home markets, in the Caribbean region or internationally. The firms are at various stages of their internationalizing process – deciding on entries or exits or coping with the operating challenges of established overseas subsidiaries. Table 1.1 provides details on each of the cases and confirms the breadth of managerial and organizational experiences described in this volume. Many of the cases extend beyond being illustrative; the majority feature managers at decision points, and they ask the reader to analyse and offer direction. A few cases describe recent major decisions and ask the reader to evaluate choices made and opine on paths not taken.

Borne on a Rising Tide for Developing Country Multinational Firms

The Caribbean cases are largely set in a renaissance age for multinationals from emerging markets and other developing countries. These new multinationals were borne to prominence upon a wave of growing global interdependence in the period from World War II to the present. This globalization wave crested in the early 2000s, ebbing during the Great Recession of 2008.³ In this period of globalization, developing country multinational firms (DMNCs) emerged as an economic force reshaping international competition and the distribution of global wealth. As a result, policymakers (domestic and multilateral) and the academic community began showing keen interest in the nature, behaviour and economic contributions of these firms.

There is no consensus on the meaning of the term globalization. Some analysts⁴ propose that, from an economic perspective, the term refers to increasing international integration in the commodity, services, capital and labour markets. A useful rule of thumb definition is that whenever world trade is growing more rapidly than world production, one can bet globalization is occurring. The intensive globalization of the 1990s and 2000s was special for DMNCs as this run of integration was mostly about the developing countries⁵ (including the transition economies of the former Soviet bloc), because the industrialized economies were, by then, already deeply integrated.

A wide range of factors drove the globalization of the 1990s–2000s epoch, including the following:

• Technological advances in information (i.e., birth of the Internet in 1990 and digitalization), communication (i.e., mobile telephony and satellites), and transportation (i.e., containerization and aviation), providing increased speed and range at a lower cost

• Financial market deregulation, particularly the removal of controls on the foreign exchange markets, banking and capital flows (e.g., foreigners being allowed to invest in domestic firms)

• The rise of economic liberalism and privatization as dominant ideologies after the collapse of the Soviet Union in 1991

• Deregulation of trade and changes in economic governance largely due to World Trade Organization (WTO)⁶ rules and the popularity of regional trade pacts

• Changes in production methods for plastics (i.e., creating new items for trade) and foods (i.e., output expansion in the green revolution)

• The switch by industrialized nations from coal-based energy to oil, which provided vast amounts of cheap power

Table 1.1. Industries and Disciplines in the Volume of Cases

Actors who influenced these factors, including stock and bond traders, computer scientists, multilateral organizations, private firms and governments drove growing integration. The outcome was apparent from the global statistics; by 1999, 25 per cent of world production traded across national borders, compared to only 10 per cent in 1980. International foreign direct investment grew rapidly in 2003–7, until 2008, when it fell 14 per cent.⁷

The impact of developing countries on the globalization seen from World War II to the late 2000s is most clearly seen in the data on outward foreign direct investment (OFDI). The stock of OFDI from developing and transition economies stood at US$1.4 trillion in 2005, up from US$149 billion in 1990.⁸ Despite the global downturn in the 2000s, OFDI from developing countries remained buoyant. In 2012, the worldwide total OFDI was US$1,391 billion, with US$909 billion from developed countries. A record 31 per cent of the worldwide total, US$426 billion, came from developing countries. Of this sum, East and Southeast Asia led the way with US$275 billion, with Latin America and the Caribbean in second place at US$103 billion.⁹

This upsurge of outward foreign direct investment was driven by investment abroad by both transnational corporations and small and medium enterprises (SMEs) from developing countries. OFDI is a reliable measure of internationalization levels by firms in developing countries, but it captures only the tip of the internationalization iceberg. A full accounting of enterprise internationalization from developing countries should also include data on exporting, nonequity modes (i.e., management contracts, licensing, franchising), participation in global value chains (e.g., contract manufacturing) and business linkages, including joint ventures.

From the 1980s to the present, developing country firms such as Samsung, Tata and Lenovo ascended to become global players with globally known brand names. Only nineteen developing country firms could be found in the Fortune 500 in 1990;¹⁰ in 2011 there were ninety-three.¹¹ Not only large firms have been active; SMEs have been surprisingly strong players in internationalization as firms now find it possible to start operating in foreign markets even before expanding within their domestic arenas. New technologies and opportunities provided by globalization and regional integration have accelerated the pace at which firms move from inception to international expansion.

The largest slice of the OFDI from developing countries goes to other developing states, particularly immediate neighbours. East Asia produces the largest number and highest dollar value of internationalizing firms, followed by Latin America and the Caribbean. A significant portion of Chinese overseas investments has been in resource extraction (e.g., oil, minerals and natural gas) in Asia, Africa and Latin America. Chinese firms make few overseas manufacturing efforts but have invested in overseas research and development centres (e.g., Sweden, United Kingdom and United States). In contrast, India has strong overseas interests in manufacturing (e.g., Tata), IT (e.g., Infosys and Wipro), and pharmaceuticals (e.g., Ranbaxy). Indian firms that were beneficiaries of outsourcing (e.g., call centres and business processing) have made their own overseas investments, setting up plants in Mexico and the Philippines. Investment corporations owned by the Singaporean government fund their top overseas investments in shipping, telecommunications and airlines. Singapore and India boast a large number of internationalizing family-owned firms. Brazil is a leading investor in developing countries, primarily through investments in energy and mining, with the state-owned Petrobras as a leading actor. One Argentine firm runs a global manufacturing network (in Canada, Italy, Japan, Romania, Venezuela, Brazil and Mexico) for steel pipes, and other SMEs (including software firms) are active in Latin America. Several Colombian SMEs exploit their brand names, serving several niche markets throughout Latin America. From Africa, mainly South African firms have expanded internationally. Active throughout Africa and involved in precious metals and stones concerns, many of these firms are also listed on the London Stock Exchange and the Canadian stock exchanges. Among the transition states, internationalizing Russian firms have been the most active, especially in mining and natural resources. The entrepreneurs from the Gulf States (e.g., Kuwait, Saudi Arabia, United Arab Emirates and Qatar) have invested in Africa, India and the United States. In addition to these countries, firms from Thailand, Malaysia, Chile, Egypt, Dubai, Mexico and Turkey have made attention-getting OFDIs. However, the firms from Brazil, Russia, India and China have made the biggest waves globally, leading the upsurge of internationalizing firms from developing countries.

Academia Pays Attention

Garvey studied at Stern Business School, New York University, starting her doctoral programme in 1992. Then (as now), Stern boasted one of the world’s best international business (IB) departments. When the time came for Garvey to select her dissertation topic, she floated the idea of studying internationalization of firms from developing markets. (At the time, it was the Japanese multinationals and the exporting push from the Asian tigers¹² that dominated the IB discourse.) Her fellow students joked that this topic would result in a very small thesis. The much wiser faculty empathized but guided her to study export behaviour, a topic with more literature available. In contrast, a student today would have no such literature constraints – academic inquiry on internationalization of firms from developing countries flourished in the 2000s.

Garvey’s thesis idea had fallen upon fallow ground due to the poor timing. Her search for a dissertation topic was undertaken in the gap period between two upwellings of academic research on internationalization of firms from emerging markets. The first significant spurt of writing on what was then called the Third World Multinationals (TWMNCs) came from a series of publications featuring significant contributions from noted scholars¹³ in an edited volume.¹⁴ This wavelet of research on TWMNCs petered out by the end of the 1980s.

The 1980s discussion of TWMNCs concluded that these firms could never be large global competitors.¹⁵ Many of these studies focused on firms from Argentina, Mauritius, Brazil, Mexico, Malaysia, Hong Kong, Taiwan and the Philippines that internationalized in the 1960s and 1970s. In this literature, unlike in the OFDI data, which is highly aggregated, the academics focused on firms with employees outside of their home countries.¹⁶ These studies included work on wholly owned subsidiaries, joint ventures and overseas branches, but it excluded exporting or licensing abroad. In this early wave of internationalization, the firms invested mainly in neighbouring developing countries, motivated by cost efficiencies and markets.¹⁷ In expanding, these TWMNCs deployed risk management capabilities by showing skill in coping with peculiar political, regulatory and cultural environments. Many exploited existing product and process technologies by adapting them for use in small-scale production by unskilled low-cost labour. However, in the 1960s, 1970s and 1980s, these TWMNCs showed no sustained signs of being able to create and exploit internal capabilities and resources to dominate the world markets.

A Breed Apart

In the late 1990s and 2000s, news of developing country firms hit worldwide headlines as they made international market inroads, particularly through acquisitions of well-known developed country competitors. China’s Lenovo bought the IBM PC business in 2004. India’s Tata Motors acquired English brands Tetley (in 2000) and Jaguar Range Rover (in 2008). In 2006, London-based but Indian-owned Mittal Steel made a successful hostile bid for European steel maker Arcelor with staff in France, Spain and Luxembourg. Brazilian regional jet manufacturer Embraer confronted Canada’s Bombardier in worldwide markets, establishing a duopoly, with both firms arguing at the WTO about unfair competition.¹⁸ By 2004, after a rapid chain of acquisitions, Mexico’s Cemex was one of the world’s largest cement companies. In 2005, Dubai Ports triggered xenophobic hysteria in the United States when it paid US$6.8 billion to acquire the British P&O, thus acquiring control of a global network of ports, including six in the United States.¹⁹ In 2006, Hong Kong’s Hutchinson Whampoa acquired France’s largest chain of perfumeries, Marionnaud. Perhaps because of the splashes of publicity generated from such deal making, the academic mainstream (which is largely based in the Organisation for Economic Co-operation and Development [OECD] countries) turned its slow-moving attention to the new breed of internationalizing firms from developing countries, the DMNCs.²⁰ Unlike the TWMNCs, the DMNCs were agile, aggressive global competitors, moving swiftly into industrialized markets, fearlessly competing with well-resourced firms from much richer countries.

Since the 2000s, researchers have spent more time studying the nature, motives and impact of, and obstacles faced by, this new breed of multinationals from developing countries (i.e., the DMNCs). Among other features, the DMNCs appeared to differ from the traditional multinational corporations (MNCs) in their (1) accelerated speed of internationalization, (2) seemingly weak competitive advantages at the time of their internationalization, (3) strong political capabilities, (4) tendency to internationalize early in their life cycle, (5) simultaneous entry into developed and developing countries, (6) use of acquisitions and alliances as their default entry modes and (7) high organizational adaptability.²¹ The growing grasp of these differences led academics to revisit the theoretical perspectives on internationalization on which the community previously relied to explain overseas forays of firms from industrialized countries. The new literature stream adapted or extended the well-accepted approaches (including the product life cycle, incremental internationalization, the OLI²² and the resource-based approaches) to explain the behaviour of the DMNCs.²³ Abandoning adaptation and arguing instead for new theories based on analysing the DMNCs solely, several authors offered new approaches including the linkage-leverage-learning²⁴ and springboard²⁵ models. Further, the venturing out by firms from developing countries provided new grist for research by scholars interested in international entrepreneurship and strategic entrepreneurship.²⁶

The Power of Place

A vigorous line of research findings established the influence of the home nation environment and home market operations on the timing, targeted host nations, and scale of the internationalization choices made by DMNCs. The home market environment includes the institutional environment, income level, pattern of emigration (and, thus, their related diaspora and ethnic networks) and level of market protection. Previous corporate diversification by conglomerates and the role of state enterprises are market operation features that also flavour the flow of overseas investments by DMNCs.

The overseas expansion of firms from Latin America and the Caribbean (LAC) reflects the history and institutional reforms in that region, particularly the history of import substitution, state subsidies and then liberalization. In the 1960s and 1970s, LAC was the home base for a greater number of multinationals than Asia. Firms from Argentina, Uruguay and Venezuela led the way among internationalizing firms from developing countries. After a series of domestic macroeconomic shocks, the era of the international firm from LAC faded. In the 1990s, many LAC countries started macroeconomic and political reforms, which triggered a wave of privatizations and lowered trade barriers, leading to a wave of imported goods. Many LAC firms that survived the heavy new wave of import competition restructured and looked to overseas expansion. Some of these firms were now able to compete abroad, based on their superior knowledge of operating in newly liberalized markets.²⁷ The internationalizing firms from LAC tended to be family owned, regionally focused and active in a wide range of industries; they were expanding aggressively by way of acquisition.²⁸

Although LAC includes the Caribbean islands, there is very little in the literature on the experiences of the firms from these small islands. Large countries such as Brazil, Argentina, Chile and Venezuela have distinctly different home markets from those existing in Antigua, St Lucia, Barbados and the other tiny island states. One should reasonably expect their internationalizing firms to differ, at least in the respects driven by size and institutional structure of home markets.

Each Caribbean country is characterized by smallness, remoteness, vulnerability to natural disasters, a small internal market and environmental fragility.²⁹ Thus all internationalizing firms from the Caribbean region are extending outwards from a particular set of challenging circumstances. Table 1.2 summarizes the economic and social conditions in the region at about the midpoint of the period covered in these cases.

However, there is little in the literature on the overseas ventures from these SIDS. This book of cases recounts practical experiences that will help readers understand the behaviours of internationalizing entrepreneurial firms from this LAC subregion.

In contrast to the sturdy growth of LAC nations, such as Brazil and Chile, the Caribbean region’s economic performance over the last three decades has been mixed. The diverse economies in this region can be grouped as either commodity exporters or service economies. Commodity exporters such as Belize, Trinidad and Tobago, and Guyana have had good growth, but generally, economic growth in the other countries has been poor. In particular, Jamaica has experienced long periods of stagnation and negative growth.

While some progress has been made in diversifying their economies, production and exports are still relatively concentrated in a limited number of sectors. Agriculture and mining remain important in many countries, but the structure of production over the last three decades has shifted more heavily towards services, particularly tourism.

The economies of the region are open.³⁰ The United States, Europe and other CARICOM countries are the principal export markets. Exports are concentrated in mining products and agricultural crops. Imports are mainly manufactured, especially consumer goods. Due to small-scale production, the region’s agricultural exports are characterized by high production costs, and for decades, the region’s farmers relied heavily on a system of preferential access to markets for commodities, such as bananas and sugar. As the World Trade Organization has driven increased liberalization of markets, the agricultural sector has lost much of its preferential treatment.

Table 1.2. Summary of the Economic and Social Conditions in the Region

Several countries have substantial and persistent trade and current account deficits, despite significant current transfers and, in some cases, remittances. These deficits have been financed by private capital inflows including loans, foreign direct investment and a limited contribution by official grants. Because of these persistent deficits, several countries have onerous debt burdens. For example, Jamaica’s debt to gross domestic product is persistently one of the world’s highest ratios. It reached 140 per cent in 2012. Between 2010 and 2014, Antigua, Belize, Jamaica, St Kitts and Grenada were all forced into restructuring their sovereign debts (i.e., technical defaults).³¹

Caribbean countries remain vulnerable in at least three ways: (1) exogenous changes have strong impact because of the relative openness of these microeconomies as well as the concentration on a small range of export products; (2) their exports face a progressive erosion of preferential trading arrangements; and (3) the region is prone to natural disasters, such as hurricanes and earthquakes, which have the potential to cause serious setbacks, particularly through their impact on tourism.

International Entrepreneurship by Caribbean Firms: Why, Who, What, When, Where and How?

The two authors began their professional collaboration in the early 1990s. They met at a time when their trajectories moved in opposite directions across Jamaica’s national borders. Shirley had recently returned from his doctoral studies at Harvard and was well on the way to a stellar career as a professor, manager, board member and diplomat. Garvey was heading off to New York to study and would later work in consulting in New York and Toronto, teach in Jamaica and work internationally at the World Bank Group.

Over the years, a mutual interest in Caribbean firms led to exchanges on how the private sector could flourish and contribute to better livelihoods for Caribbean citizens. Perhaps because their own career paths frequently took them across national borders, they became increasingly attuned to doing business internationally and to how international affairs impinged on economic matters in small island economies such as Jamaica, their home country.

This mutual interest in doing business across international borders led to their joint creation of the Business in a Global Environment (BIGE) course at the Mona School of Business (MSB) and then to the case studies in this book. The BIGE course for graduate students was added to the MSB syllabus in 2002, with the intention of engaging participants in discussions of how firms in developing countries coped with the vagaries of international competition. They divided the content into two segments. The smaller segment explored the impact of import competition on firms in their domestic markets. Students explored how international governance arrangements (e.g., WTO trade rules) and national government policy affected firm strategy. The second BIGE segment explored how firms engaged the international markets, whether by exporting or by operating enterprises overseas. However, in teaching this course, the colleagues found it difficult to identify useful cases from developing countries, particularly from small island states.

The book provides cases relevant to many of the issues discussed in the BIGE course as well as courses on Caribbean business, Caribbean entrepreneurship, Caribbean economic history and, on a wider scale, international business courses taught in developing countries. In addition to the impact of the international environment on firm strategy, the fifteen cases will shed light on (1) the obstacles faced by firms as they internationalize or regionalize; (2) the drivers, motivation and benefits to firms of this risk-taking strategy; (3) the selection of entry mode and host nation; (4) the managing of multinational enterprises, particularly the structural and personnel decisions; and (5) how national policies help or hinder firms in their overseas endeavours.

A Note from the Authors

As we explored these issues in our conversations with the managers who provided the details for these cases, our musings took on a Caribbean perspective. One CEO challenged us with the question How does one define the Caribbean manager? Other questions were as evocative: How do we exploit our diaspora in the United States and England? Why is it so difficult for Jamaican firms to expand in the region? How do Caribbean firms succeed at postmerger integration when they enter Europe and North America? How can our small firms scale up? How do we create legitimacy in overseas markets? Should we have our headquarters in the region or in Miami? How do we finance international expansion? What should be the role of the regional governments? How do we pick regional allies and manage these alliances?

The cases do not answer every question of interest, but they help the reader to explore multiple issues as the managers depicted face the day-to-day matters arising in their companies. Each case posits an international entrepreneurial experience or challenge and asks the reader to analyse, opine, learn and perhaps even empathize.

We hope each reader learns and enjoys analysing these cases as much as we learned and enjoyed the process of interviewing the participating managers and converting their stories into cases for this book. Enjoy!

2. Escaping Cemex’s Embrace: Trinidad Cement Limited Evades Takeover

Arun Goyal, general manager of Trinidad Cement Limited (TCL), the largest cement manufacturer in the English-speaking Caribbean, quickly scanned the pages of the local newspaper. This was his usual morning routine before making the trip to the firm’s Claxton Bay plant in southern Trinidad. Today, he read more quickly than usual because he had an early meeting with the TCL Group CEO, Rollin Bertrand, to discuss rumours swirling in the local investment community that Cemex, a Mexican multinational, wished to buy TCL. However, to his knowledge, no formal talks were going on between the two firms.

Goyal’s brisk review stopped at a short notice carried in the business news section. It was a Cemex press release announcing its intention to make an offer to acquire all TCL’s issued share capital. Goyal closed the paper, dialled Bertrand on his mobile phone and headed out to his car.

Background

Trinidad Cement Limited

In 1954, at the behest of the Trinidadian government, TCL was set up by Rugby Portland Cement Company, a major British cement manufacturer. The firm continued in private hands until 1976, when the Trinidadian government took ownership. In 1984, the state completed a major plant expansion that modernized all aspects of TCL’s operations. Despite the modernization, TCL lost money each year between 1976 and 1987. Up to 1984, the people of Trinidad provided support through government subsidies. After that year, the plant fended for itself, continuing to haemorrhage money until 1987.

In 1987, the recently appointed CEO, Richard Jackman, decided to take a radical break from the past. During a breakthrough strategy retreat, he challenged the management team to commit to returning the plant to profitability. Following his charge, an energized team undertook an aggressive all-round reorganization. It worked. In 1988, the firm showed its first operating profit of TT$8.46 million and paid its shareholders an end-of-year dividend.

By 1989, the Trinidadian government decided to exit the cement business and put TCL up for sale. To meet public policy objectives, the initial share offering was structured to promote widespread ownership by the Trinidadian people. The government sold the shares on a phased basis with a provision written into the articles stating that no single shareholder could hold more than 10 per cent of the shares. In 1994, the Mexican giant Cemex S.A. de C.V. bought a 20 per cent block after a special shareholder vote to raise the limit to 20 per cent. Cemex became the single largest equity holder and subsequently entered into a strategic alliance agreement with TCL, covering various areas of technical assistance. Finally, in 1998, the Government of Trinidad and Tobago exited, selling its last tranche (9.11 per cent) to the National Insurance Board (NIB), a state pension fund, the Trinidad and Tobago Unit Trust Corporation (a mutual fund), and the Trinidad Cement Employee Share Ownership Plan. TCL was finally fully privatized.

Until 2002, TCL operated profitably, diversifying its operations and extending its geographic scope. In a 1991 joint venture with Swiss firm Dipeco, TCL established TCL Packaging. In a second venture in 1995, TCL Ponsa Manufacturing was established in partnership with Industrias Ponsa of Spain. An entry into the premixed cement sector was next, achieved by acquiring Readymix (West Indies).

At its landmark strategy retreat in 1987, Jackman had also laid out a dream for geographic expansion. By 2002, the TCL Group’s motto was One Caribbean . . . One Company. In 1994, TCL entered Barbados by acquiring the only cement manufacturer in the small island, Arawak Cement Company Limited. Jamaica was next, as in April 1999, TCL outbid Cemex and Rugby to purchase Jamaica’s sole cement plant, Caribbean Cement Company Limited (CCCL), the largest cement operation in the English-speaking Caribbean.

When Cemex’s bid arrived in 2002, TCL employed approximately one thousand persons throughout the region, and the company had eight operating companies in Trinidad, Barbados, Jamaica and Anguilla (see exhibit 2.1). In 2002, the group’s operations were coordinated through a group corporate office, TCL Holdings (TCLH), headed by Bertrand; each major regional operation was headed by a general manager.

However, TCL’s rapid growth strained its balance sheet because of the considerable debt they had taken on to finance the acquisitions (see exhibit 2.2). The market’s reaction to the purchase of the much larger but unprofitable Jamaican operation was initially negative. However, within a year, the Jamaican operations began to report better results. Analysts were just beginning to warm to the massive merger when CCCL was forced to seek antidumping protection in the face of import competition. In June 2002, the protection was yet to be secured, and TCL’s stock price had started to slip. When Arun Goyal read the small notice, TCL’s share price was close to its five-year low.

Cemex S.A. de C.V.

In 2002, Cemex was the world’s third largest cement multinational with worldwide operations. Cemex was founded in Mexico as Cementos Hidalgo in 1906. In 1932, Cementos Hidalgo merged with a competitor, Cementos Portland Monterrey, which had opened in 1920. The merged entity, Cementos Mexicanos, would eventually evolve into the firm called Cemex.

Cemex grew rapidly in Mexico – mostly by merging – and, in 1976, listed on the Mexican stock exchange. (In 1999, Cemex raised more money on the New York Stock Exchange.) Two major additional acquisitions in 1976, along with continued plant construction, soon made Cemex Mexico’s largest cement manufacturer.

As early as 1970, Cemex started international operations, exporting to the United States. By the 1980s, Cemex put in its own limited US distribution facilities (sea and rail terminals) and even invested in sand, gravel and ready-mix operations in Arizona and Texas. Cemex’s first major international cement plant acquisition was in Spain in 1992. This was the start of what would prove an extremely successful and prolonged international expansion strategy (see exhibit 2.3).

It was in the early 1990s that Cemex first turned its attention to the Caribbean. Over the next ten years, Cemex purchased shares (majority or minority percentages) in plants and shipping facilities in Panama, Trinidad, Jamaica, Venezuela and Cuba. In 1993, Cemex got started in the region with a US$23 million acquisition of Scancem Industries. Scancem operated six Caribbean shipping facilities (two in Haiti, two in Bahamas, one in Bermuda and one in Cayman) and held a minority share in Jamaica’s CCCL. In 1994, Cemex purchased Venecemos, Venezuela’s largest plant. Venezuela’s plants were well placed in major port towns, thus facilitating exports to the Caribbean. In July that same year, Cemex paid the Trinidadian government US$10 million for a 20 per cent share of TCL and took up two seats on the TCL board. Panama was next, with Cemex acquiring the newly privatized Cementos Bayamo. The growing multinational sought ownership of a facility in the Honduras but was twice rebuffed. Cemex next moved into Cuba, running a plant in Mariel.

Cemex’s rapid growth to become a leading developing country multinational (DMNC) was built on both organic growth and its attention-grabbing acquisitions. Success in acquisition-driven growth drew on its well-honed skills in target identification, astute due diligence, and comprehensive and rapid postacquisition integration. Lorenzo Zambrano, its lead executive since the early 1990s, had invested heavily in information technology, including early investments in satellite capabilities. This facilitated rapid integration and communication with the firm’s nerve centre in Mexico.

Cemex used a quantitative model to assess each target. The size and growth of the local cement market, political risk and current cement consumption levels were factors in this calculation. However, Cemex did not look at countries individually; instead, it assessed geographies in terms of regional blocks. Specifically, Cemex paid attention to opportunities to restructure the regional market. Cemex was particularly interested in the high-growth emerging markets of the Caribbean and Asia.

Each potential acquisition was thoroughly examined – usually for about two weeks – by a team of which at least half of the members were experienced in mergers and acquisitions. The standardized due diligence report was usually reviewed by the executive vice president of planning and finance, Hector Medina. If the purchase was made, the postmerger integration (PMI) team was activated. The PMI process involved integration in three modes: (1) improving the newly acquired plant, (2) sharing cultural beliefs and (3) inculcating management principles. Integration frequently entailed major labour reductions, particularly among the managerial ranks of the newly acquired plant. Often, several members of Cemex’s PMI team would stay on as the new senior managers.

By 2001, Cemex had cement operations on five continents in more than thirty countries and had an annual production capacity of seventy-nine million tonnes. Cemex was the third largest producer of grey Portland cement, the largest producer of white cement (a specialty cement), the world’s largest trader of cement and a leading producer of aggregates and clinker. It had more than fifty production plants and several hundred ready-mix operations worldwide. The rapid international growth had not compromised its bottom line, and Cemex remained profitable; the sales revenues for 2001 exceeded US$5 billion, and in the 1990s, its earnings before interest, taxes, depreciation and amortization (EBITDA) to sales ranged from 30 to 40 per cent (see exhibit 2.4).

Cemex Offers to Buy TCL

The press