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©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 1 - - - - - - - - Chapter 17 - - - - - - - - International Takeovers.

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Presentation on theme: "©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 1 - - - - - - - - Chapter 17 - - - - - - - - International Takeovers."— Presentation transcript:

1 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston Chapter International Takeovers and Restructuring

2 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 2 Background Significant proportion of total takeover activity has an international dimension

3 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 3 Main reasons for large increase in foreign M&A activity –Europe is moving toward a common market –Globalization and increased intensity of international competition –Rapid technological change –Consolidation of major industries

4 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 4 Historical and Empirical Data U.S. acquisitions of foreign businesses Foreign acquisitions of U.S. companies

5 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 5 Dollar values of foreign acquisitions of U.S. targets have exceeded U.S. acquisitions of foreign targets For 25 largest cross border transactions in history completed as of 12/31/99 –Transactions involving U.S. targets amounted to $305.1 billion –Transactions involving U.S. acquirers amounted to $105.4 billion –Transactions involving only foreign companies amounted to $229.6 billion

6 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 6 Major reasons for cross border transactions –Combine complementary capabilities –Strengthen distribution networks –Achieve critical mass required for new approaches to R&D, production, etc. Industry characteristics related to M&A pressures –Telecommunications Technological change Deregulation Efforts to develop a global presence

7 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 7 –Media Technological change in content and delivery Overlap in content of different media outlets Attractive and glamorous industry –Financial Globalization Serve clients globally –Chemicals, pharmaceuticals High amount of R&D Rapid imitation Rapid changes in technology High risks due to competitive pressures

8 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 8 –Autos, oil & gas, industrial machinery Advantage of size — critical mass Global excess capacity Oil price and supply instability –Utilities Deregulation Geographic expansion Broadening of managerial capabilities –Food, retailing Slower growth Seek growth in new international markets –Natural resources, timber Exhausting sources of supply Match raw material supplies with manufacturing capacity

9 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 9 Forces Driving Cross Border Mergers Growth –Most important motive –U.S. highly regarded by foreign markets –U.S. firms have looked abroad to countries in relatively earlier faster-growing stages of life cycle — especially U.S. food companies –Enable medium-sized firms to attain size necessary to improve their competitiveness –Achieve size necessary for economies of scale; for effective global competition

10 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 10 Technology –Impact on international mergers Technologically superior firm may exploit its technological advantage worldwide Technologically inferior firm may acquire technologically superior target to enhance competitive position –Technological superiority tends to be more portable No cultural baggage Acquirer may select technologically inferior target — improve target competitive position and profitability Buy into foreign markets to exploit their technological knowledge advantage

11 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 11 Value increasing acquisitions –Acquiring firm may have an advantage in general management functions such as planning and control or research and development –Specific management functions such as marketing or labor relations tend to be environment specific Not readily transferable May explain predominance of U.K. and Canada as international merger partners of U.S.

12 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 12 Extend advantages in differentiated products –Strong correlation between multinationalization and product differentiation –Firms that have developed a reputation for superior products in domestic market may also find acceptance for their products in foreign markets

13 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 13 Roll-ups — combine firms in fragmented industries Consolidation — adjust to worldwide excess capacity Government policy –Circumvent tariffs and quotas on imports or exports –Avoid restrictions that may protect a large lucrative market –Environmental and other regulations can increase cost of building de novo facilities –Response to changes in government policy and regulations

14 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 14 Exchange rates –Affect prices of foreign acquisitions, cost of doing business abroad –Affect value of repatriated profits to the parent –Exchange rate risk management becomes important

15 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 15 Political/Economic stability –Can alleviate or exacerbate higher risks inherent in operating abroad –Political factors Changes in administrations in power Likelihood of government intervention Risk of expropriation War vs. peace

16 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 16 –Economic factors Low or at least predictable inflation Labor relations climate Stability of exchange rates Depth and breadth of financial markets Transportation and communications networks –U.S. market attractive to foreign investors in terms of political/economic factors

17 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 17 To follow clients –Importance of long-term client relationships –Example: Financial firms expand abroad to retain clients who have expanded abroad Diversification –Provide diversification Product line Geographically –Systematic risk reduction possible if world economies are not perfectly correlated

18 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 18 Premiums Paid Foreign bidders pay higher premiums to acquire U.S. companies than premiums paid in all acquisitions Harris and Ravenscraft (1991) –Sample of companies between –Foreign bidder pays higher premia by 10 percentage points –High foreign currency values led to increased premia

19 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 19 –Foreign buyers concentrate on R&D intensive industries when they buy U.S. firms — intensity is 50% higher than in purely domestic transactions –U.S. bidders earn only normal returns in both domestic and cross-border acquisitions For period , premiums in foreign acquisitions exceeded all acquisitions by about 5 percentage points

20 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 20 Possible reasons –Foreign buyers may offer higher premium to preempt potential domestic bidders –U.S. targets have less knowledge of foreign buyers and need higher premiums to resolve uncertainty –If foreign currencies are strong, can afford to pay more in dollars –If prospective future exchange rate movements favor the U.S. dollar, foreign firms must pay more in dollars

21 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 21 Event Returns General results –Similar results as domestic transactions –Targets receive large abnormal returns –Buyers earn nonsignificant returns

22 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 22 Doukas and Travlos (1988) –Positive abnormal returns for U.S. multinational enterprises with no previous operation in target firm's country –Positive but not significant when U.S. firms expand internationally for first time –Negative but not significant for U.S. firms that have already been operating in target's home country –Greatest benefits from foreign acquisitions when there is simultaneous diversification across industry and geography

23 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 23 Harris and Ravenscraft (1991) –Sample of 1,273 U.S. firms acquired in –75% of cross-border transactions, buyer and seller not in related industries –Takeovers more frequent in R&D intensive industries than are domestic transactions –Percentage gain to U.S. targets of foreign buyers significantly higher than targets of U.S. buyers –Cross-border effects positively related to weakness of U.S. dollar

24 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 24 Kang (1993) –Japanese takeovers of U.S. firms –Significant wealth gains for both Japanese bidders and U.S. targets –Returns increase with Leverage of bidder Bidder's ties to financial institutions Depreciation of dollar in relation to Japanese yen

25 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 25 Dewenter (1995) –Controls for relative corporate wealth and levels of investments in different countries –Finds no significant relationship between exchange rate levels and foreign investment relative to domestic investments in U.S. chemical and retail industries

26 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 26 Eun, Kolodny, and Scheraga (1996) –225 foreign acquisitions of U.S. firms during –For eleven-day window, [-5,+5], CAR was a positive 37.02% and significant for whole sample of U.S. targets –Firms acquired by firms from other countries than Japan had CARs between 35% and 37%

27 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 27 Cakici, Hessel, and Tandon (1996) –195 foreign acquisitions of U.S. firms during –Sample compared to 112 U.S. acquisitions of foreign firms –Foreign acquiring firms experienced positive and significant CARs of 0.63% for event period [0,+1] and 1.96% for period [-10,+10] –U.S. acquirers had negative but not significant CARs of -0.36% for event period [0,+1] and -0.25% for period [-10,+10]

28 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 28 Doukas (1995) –234 U.S. bidding firms involved in 463 international acquisitions during –Study relationship between bidders' gains and its q ratios –Value maximizing firms (q ratios > 1), CAR was positive and significant 0.41% for window [-1,0] –Overinvested firms (q ratio < 1), CAR was negative and insignificant -0.18% –Negative relationship between dollar exchange rate and level of foreign direct investment –Method of payment and industry relatedness not significant

29 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 29 Seth, Song, and Pettit (1999) –100 cross-border acquisitions of U.S. targets during –For event window [-10,+10], CAR for acquirers was an insignificant 0.11%, CAR for targets was significant 38.3%

30 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 30 International Joint Ventures Advantages –May be only feasible method of obtaining raw materials –May involve different capabilities and link together complementary skills –Local partners may reduce risks involved in operating in foreign country –May be necessary to overcome foreign government restrictions

31 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 31 –May enhance advantages found in domestic joint ventures such as economies of scale and may provide basis for faster growth rate –Knowledge acquisition potentials can be substantial Disadvantages –Provide information which makes partner a future competitor –Different cultures may increase tensions normally found in joint ventures

32 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 32 Principles for management of successful collaborations –Should involve complementary capabilities –Contracts should make it easy to terminate relationship –Control and ultimate 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

33 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 33 –Criteria for evaluation of performance should be defined –Allocation of rewards and responsibilities under different types of outcomes should be considered

34 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 34 Chen, Hu, and Shieh (1991) –Sample of 88 international joint ventures –Significant positive portfolio excess returns when U.S. firms invest relatively small amounts in joint venture –Excess returns no longer significant when firms make relatively large investments

35 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 35 Mangum, Kim, and Tallman (1996) –Summary data on investments by 7 foreign steel makers in U.S. joint ventures –In-depth case studies of 7 joint ventures Foreign partners mainly form Japan Initial motive was availability of foreign capital for modernizing U.S. steel industry Another main objective was transfer superior process technologies of Asian partners to American plants Tension from cross-cultural differences Joint ventures generally successful Only joint venture that experienced great difficulties — NKK of Japan and National Steel Corporation of the U.S.

36 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 36 Cost of Capital in Foreign Acquisitions and Investments Main concepts –Fundamental international parity or equilibrium relationships — related to cost of debt of domestic and foreign firm –Issues of whether global capital markets are integrated or segmented — related to cost of equity capital in different countries

37 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 37 Cost of Debt Relationships –International parity relationships assume perfect and efficient markets Financial markets are perfect Goods market are perfect Future is known with certainty Markets are in equilibrium

38 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 38 –Interest rate parity theorem (IRPT) Ratio of forward and spot exchange rates equal current ratio of foreign and domestic nominal interest rates whereX f =current forward exchange rate expressed as number of foreign currency units (FC) per dollar X 0 =current spot exchange rate expressed as FC per dollar R f0 =current foreign nominal interest rate R d0 =current domestic nominal interest rate E f =current forward exchange rate expressed as dollars per FC E 0 =current spot exchange rate expressed as dollars per FC

39 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 39 –Forward parity theorem (FPT) Current forward foreign exchange rates should be unbiased predictors of future spot rates Current forward rate, X f, should equal future spot rate, X 1

40 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 40 –Purchasing power parity theorem (PPPT) Expression of the law of one price In competitive markets, exchange-adjusted prices of identical tradable goods and financial assets must be equal worldwide (taking account of information and transaction costs) whereT f =1 + foreign country inflation rate T d =1 + domestic inflation rate

41 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 41 –International Fisher relation (IFR) Nominal interest rates reflect anticipated rate of inflation whereT=1 + rate of inflation r=real rate of interest R n =nominal rate of interest If other parity relations hold, real rates will be the same across countries, but nominal rates will differ by the countries' inflation factors

42 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 42 Notes on parity relationships –In the shortrun, many real world frictions cause departures from parity conditions –In the longrun, international financial markets move toward parity relationships –Hedging foreign exchange risk Futures markets Borrowing in foreign markets for foreign projects Conducting manufacturing operations in multiple countries Making sales in multiple countries

43 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 43 Cost of equity and cost of capital Capital asset pricing model (CAPM)

44 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 44 Market definition –Integrated global markets — investments are made globally and systematic risk is measured relative to world market index –Segmented capital markets — investments are predominantly made in particular segment or country and systematic risk is measured relative to domestic index World is moving toward a globally integrated capital market

45 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 45 There is still a home bias phenomenon — investors place only a relatively small part of their funds abroad –Extra costs of obtaining and digesting information –Greater uncertainty associated with foreign investments

46 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 46 If capital markets are not fully integrated –Gains from international diversification –Multinational corporation (MNC) would apply to foreign investment a lower cost of capital than would a local (foreign) company –MNC will have a cost of equity capital related to beta measured with respect to markets in which it operates

47 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 47 Procedure –Cost of equity for a foreign investment in nominal foreign currency terms should reflect risk 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 gives present value expressed in FC –Present value in FC can be converted to dollars at the spot exchange rate to give net present value of investment in dollars

48 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 48 Similar alternate procedure –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 flows to dollars over time by using expected foreign exchange rates at time t based on interest rate parity and relative inflation rates –Discount dollar cash flows by WACC of U.S. firm


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