international takeovers

8/6/2019 International Takeovers

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International TakeoversInternational Takeoversand Restructuringand Restructuring

1717ChapterChapter


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Chapter 17-2

Patterns of International M&As

1,005

338

749

998

397

979

1,308

478

1,779

846

297

920

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1998 1999 2000 2001

Worldwide M&A Activity ($ Billions)

US only US and Non US Non US only


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Chapter 17-3

Patterns of International M&As

Reasons for recent international M&As Europe is moving toward a common market Globalization and increased intensity of

international competition Rapid technological change Consolidation of major industries

Characteristics Mainly horizontal or consolidating mergers

Concentration in industries influenced by M&Achange forces: telecom (deregulation), media(technology), financial (servicing internationalclients), pharmaceutical (R&D scale), Autos

(excess capacity), etc.


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Chapter 17-4

Examples ofCross- or er Deals

Ford sought to expand economies of scale,distribution network, distinctive brand

Volvo (Swedish) strengthened Fords positionin Europe

UBS (Swiss) wanted to improve worldwideimage and position in US market

PaineWebber had strong distribution combined firm had opportunity and resourcesto target average investor


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Chapter 17-5

Examples ofCross- or er Deals

Orange (UK) was required to be divested fromMannesmann (German) when it was acquiredby Vodafone (UK)

France Telecom sought to strengthen itsEuropean wireless network

Nestle (Swiss) was the largest food company

and sought Ralston Purina to solidify its shareof pet food

Pet food was forecast as one of the fastestgrowing food segments


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Chapter 17-6

Forces Dri ing Cross- or er M&As

Gro th most important force Enable firms to grow beyond domestic market May allow mid-sized firms to attain size

necessary to compete in industries Efficient global competition requires size for

economies of scale Technolog

Ability for technologically superior firm to

exploit tech advantage worldwide Technology is easier to transfer across borders

because of lack of cultural baggage Roll-ups mergers in fragmente in ustries


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Chapter 17-7

Forces Dri ing Cross- or er M&As

Exten a antages in ifferentiate pro ucts omestic reputation ai s acceptance abroa

Consoli ation a just to orl excess capacit Go ernment polic a oi tariffs, quotas, etc. Exchange rates affect relati e prices of

foreign acquisitions an oing business abroa Political/economic stabilit increases

certaint of gaining return on in estment

Follo ing clients ser ice firms gointernational to ser e international clients

Di ersification foreign acquisitions allofirms to i ersif geographicall , etc.


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Chapter 17-8

Premiums Pai

Foreign bi ers ten to pa higher premiumfor U targets

1970-87, foreign higher by 10% partly due tohigh foreign currency values (Harris,Ravenscraft, 1991)

1987-2001, foreign buyers pay 4% higherpremium

Possible reasons for higher premium

US targets less knowledge of foreign buyer Strong foreign currencies or anticipated

favorable exchange rate movement Foreign firm may need to preempt domestic

buyer


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Chapter 17-9

Event Returns

Generall similar results to omestic: large

returns to targets; bu er small, insignificant

Multinational firms gain largest hen foreign

acquisitions iversif in ustr an geography(Doukas, Travlos, )

Japanese takeovers of U firms create ealth

for bi er an target (Kang, )

U acquirers have lo er returns in foreignacquisitions (Moeller, chligemann, )


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Chapter 17-10

Event Returns

Author Year Type Return

Eun et al 1996 US target 37.0%

Cakici et al 1996 Foreign buyer ofUS

US buys US

0.63%

-0.36%

Doukas 1995 US buys foreign (q>1)

US buys foreign (q


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Chapter 17-11

International Joint Ventures

A vantages May be requirement of local government

possibly only way to obtain raw materials, etc. Local partners may reduce risks of operating in

foreign country Different countries may have better and

transferable technology, managerial skills, etc. Disa vantages

Transfers info which may create futurecompetitor

Cultural differences may increase the tensionsinherent in joint ventures


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Chapter 17-12


Principles for management Should involve complementary capabilities Contracts should make it easy to terminate

relationship Control & decision makers should be specified Formulate terms under which one company can

buy out other Activities and information flows should be tied

into normal communications structures Define criteria for evaluation of performance Allocation of rewards and responsibilities under

different outcomes should be considered


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Chapter 17-13


Significant positive returns hen US firmsinvest relatively small amounts in JV resultsinsignificant for large investments (Chen, Hu,Shieh, )

Case stu y of steel JVs (Magnum, Kim,Tallman, )

Most Japan/US, generally successful Tensions from cross-culture differences

Evi ence of ecline in US international JVactivity bet een - better orl i eintegration makes it easier for US firms to o n

% assets (Desai, Foley, Hines, )


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Chapter 17-14

Cost ofCapital International

Cost of ebt relationships International parity relationships assume perfect

and efficient markets Interest rate parity theorem

Ratio of forward and spot rates equalscurrent ratio of foreign and domestic

nominal interest rates Forward parity theorem

Current forward exchange rates should beunbiased predictors of future spot rates

Xfshould equal X1

fd

ff

E

E

R

R

X

X 0

0

0

0 1

1!

!


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Chapter 17-15


Cost of ebt relationships Purchasing power parity theorem

Expresses the law of one price goods andassets must have equal prices worldwide

(after exchange rates, info/transaction costs)

International Fisher relation nominal interest

rates reflect anticipated inflation (real ratesshould be the same across countries

In short-run, many market imperfections; long-run rates tend toward parity theorems

d

f

T

T

X

X!

0

1

TrRn

! )1(1


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Chapter 17-16


Cost of equity an cost of capital Capital asset pricing model (CAPM):

Cost of capital = risk-free rate + (market priceof risk * beta measure of firm/project)

Market definition: moving toward integratedglobal markets (risk measured vs. worldindices) from segmented markets (riskmeasured vs. local indices)

Investors are still biased toward home market(info costs, uncertainty in foreign markets)

If markets not integrated, firms may gain frominternational diversification, multinationalswould differ cost of capital between markets


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Chapter 17-17


Proce ure Cost of equity for a foreign investment in

nominal foreign currency terms should reflectrisk differential above cost of debt borrowing in

that foreign country Cost of capital calculated based on an estimated

leverage ratio and tax rate Cash flows expressed in foreign currency units

(FC) discounted by the FC cost of capital givespresent value expressed in FC

Present value in FC can be converted to dollarsat the spot exchange rate to give net presentvalue of investment in dollars


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Chapter 17-18


Similar alternate proce ure Begin with expected cash flows in FC Adjust expected cash flows by risk factors that

reflect foreign country's risk

Convert risk-adjusted expected FC cash flowsto dollars over time by using expected foreignexchange rates at time t based on interest rateparity and relative inflation rates

Discount dollar cash flows by WACC ofU.S.firm

t

d

f

t

T

TXX

! 0

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