© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. International Financial Management Abridged 10 th Edition by Jeff Madura 1

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use International Corporate Governance and Control Chapter Objectives This chapter will: A. Describe the common forms of corporate governance by MNCs B. Provide a background on how MNC’s use corporate control as a form of governance C. Explain the motives, barriers, and valuation process in international corporate control D. Identify the factors that are considered when valuing a foreign target E. Explain why valuations of a target firm vary among MNCs that consider corporate control strategies F. Identify other types of international corporate control actions 2

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 International Corporate Governance 1.Governance by board members 2.Governance by institutional investors 3.Governance by shareholder activists

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 International Corporate Control 1.Market for corporate control a.If managers make decisions that destroy value, the MNC could be subject to takeover and managers could lose their jobs. b.Market for corporate control is a means for MNCs to achieve expansion goals 2.Motives for International Acquisitions a.Comparative advantage b.Better form of direct foreign investment 3.Trends in International Acquisitions

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 Barriers to International Corporate Control 1.Anti-takeover amendments implemented by target 2.Poison pills implemented by target 3.Host government barriers

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 Model for Valuing a Foreign Target

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 Model for Valuing a Foreign Target 1.Estimating the initial outlay 2.Estimating the cash flows 3.Estimating the NPV 4.Impact of the SOX Act on the valuation of the target

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 Factors Affecting Target Valuation 1.Target-Specific Factors a.Target’s previous cash flows b.Managerial talent of the target 2.Country-Specific Factors a.Target’s local economic conditions b.Target’s local political conditions c.Target’s industry conditions d.Target’s currency conditions e.Target’s local stock market conditions f.Taxes applicable to the target

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 Example of the Valuation Process: Exhibit 15.2 Valuation of Canadian Target Based on Assumptions Provided (in Millions of Dollars)

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 Example of the Valuation Process: Sources of Uncertainty 1.Growth rate of revenue is subject to uncertainty 2.Cost of goods sold could exceed assumed level 3.Selling and administrative expenses could exceed assumptions 4.Corporate tax rate could increase 5.Exchange rate may be weaker than expected 6.Estimated selling price of target in future may be incorrect.

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 Changes in Valuation Over Time 1.Impact of stock market conditions 2.Impact of credit availability 3.Impact of exchange rates 4.Impact of market anticipation regarding the target

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12 Disparity in Foreign Target Valuations 1.Estimated cash flows of the foreign target 2.Exchange rate effects on the funds remitted 3.Required return of the acquirer

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Other Corporate Control Decisions 1.International partial acquisitions 2.International acquisitions of privatized businesses: difficulties due to: a.Future cash flows are uncertain due to introduction of competition. b.Data regarding value and benchmarks are limited c.Uncertain economic conditions in transitional economies d.Volatile political conditions e.Potential conflict between government control and acquirers.

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 Control Decisions as Real Options 1.Implicit options on real assets such as buildings, machinery, and other assets. 2.Call option on real assets represents a proposed project that contains an option of pursuing an additional venture. 3.Put option on real assets represents a proposed project that contains an option of divesting part or all of the project.