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International TakeoversInternational Takeoversand Restructuringand Restructuring
1717ChapterChapter
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Chapter 17-2
Patterns of International M&As
1,005
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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
International Joint Ventures
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
International Joint Ventures
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
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E
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0 1
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!
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Chapter 17-15
Cost ofCapital International
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
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Chapter 17-16
Cost ofCapital International
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
Cost ofCapital International
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
Cost ofCapital International
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
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