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

©2001 Prentice Hall Takeovers, Restructuring, and Corporate

Governance, 3/e Weston - 1

- - - - - - - - Chapter 17 - - - - - - - -

International Takeovers and Restructuring



Background

• Significant proportion of total takeover activity has an international dimension

Worldwide M&A Activity ($ Trillion)1998 1999 % Increase

World 2.70 3.40 25.9%U.S. 1.32 1.42 7.6%Rest of World 1.38 1.98 43.5%



• 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



Historical and Empirical Data

• U.S. acquisitions of foreign businesses

• Foreign acquisitions of U.S. companies

Average of U.S. Acquisitions of Foreign CompaniesNumber of

Transactions% TotalM&As

Dollar Value($ Billion)

% TotalM&As

1980-86 139 5.4% 2.5 2.4%1987-91 205 9.6% 14.3 8.8%1992-98 689 14.5% 45.6 10.0%

Average of Foreign Acquisitions of U.S. CompaniesNumber of

Transactions% TotalM&As

Dollar Value($ Billion)

% TotalM&As

1980-86 187 7.3% 12.5 12.0%1987-91 253 11.9% 36.3 22.4%1992-98 318 6.7% 59.6 13.0%



• 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



• 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



– 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



– 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



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



• 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



• 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.



• 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



• 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



• 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



• 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



– 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



• 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



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 1970-1987– Foreign bidder pays higher premia by 10

percentage points– High foreign currency values led to

increased premia



– 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 1987-1998, premiums in foreign acquisitions exceeded all acquisitions by about 5 percentage points



• 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



Event Returns

• General results– Similar results as domestic transactions– Targets receive large abnormal returns– Buyers earn nonsignificant returns



• 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



• 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



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



– 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



• 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



– Criteria for evaluation of performance should be defined

– Allocation of rewards and responsibilities under different types of outcomes should be considered



• 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



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



• 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



– Interest rate parity theorem (IRPT)• Ratio of forward and spot exchange rates equal

current ratio of foreign and domestic nominal interest rates

where Xf = current forward exchange rate expressed as number of foreign currency units (FC) per dollar

X0 = current spot exchange rate expressed as FC per dollar

Rf0 = current foreign nominal interest rate

Rd0 = current domestic nominal interest rate

Ef = current forward exchange rate expressed as dollars per FC

E0 = current spot exchange rate expressed as dollars per FC

fd

ff

E

E

R

R

X

X0

0

0

0 1

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