Global Mergers and Acquisitions: Combining Companies Across Borders

Introduction

Reviewing the M&A literature, one comes across a fragmented field of inquiry. One can recognize different patterns in the development of the M&A literature according to the disciplines of the researchers. The research interests in M&A and corporate restructuring literature are primarily concerned with the following questions. Why do companies merge? Are M&As successful in achieving the goals of acquisition and combinations? Why do so many companies fail to create shareholder value or capture the synergies they inspired to gain? How to best value the target firm? What role does postmerger integration play in the postmerger performance of the acquiring and acquired companies? What role do corporate and societal cultures play in the success or failure of M&As? The literature on M&A deals with these and many other questions.

The fragmentary nature of the literature emerges from the discipline-based approach researchers take in answering the questions. One finds articles with emphasis on economics of M&A (economies of scale, market power, and shortcut to obtaining costly technology) written by economists; articles written by strategic management scholars, focusing on motives for acquisition and postmerger performance according to the motives of consolidations; articles written by scholars in corporate finance, concentrating on postmerger performance based on stock market indicators. Studies by researchers on organization theory project attention on postmerger integration and conflicts arising during the integration processes and, finally, experts on human resources have focused on effective communication, cultural differences, and socio-psychological issues that might have an impact on the success or failure of the combined entities. Based on this, it is common knowledge among the scholars of M&As that the discipline-based approach used for answering any of these questions leads to answers that tend to differ and in some cases even contradict each other (Larsson and Finkelstein 1999).

In the first volume of this book, we review the literature of M&A from different angles and bring together valuable, practical insights from this vast literature in a short, but cohesive form that hopefully has great managerial relevance.

Structure of the First Volume of the Book

Cross-border M&As are international activities. To gain a better understanding of the depth and breadth of international business and economic transactions, Chapter 1 deals with globalization or internationalization of economies. In Chapter 2, we define some M&A terminologies, briefly review the motives for M&As, discuss different types of mergers, and differentiate between domestic and cross-border M&As. Chapter 3 gives an overview of M&A processes and reviews problems that often arise during acquisition processes. In Chapter 4, we develop strategies for M&As, define organizational culture, enumerate a set of strategic objectives for M&As, identify the corporate development office as the responsible body in many M&As by several companies, and elaborate on the role of the lead adviser in implementing mergers or acquisitions. Chapter 5 encompasses selecting a potential target for acquisition, enumerates target-screening criteria, and defines as well as lists different types of due diligence.

Chapter 6 discusses accounting for M&As and, using examples, illustrates how the valuation of the target firm will affect the income statement and balance sheet of the combined company. Chapter 7 deals with alternative approaches to valuation of the target firm by illustrative examples of comparable companies approach, the discount cash-flow approach, the capital budgeting method, and free cash-flow calculations under different assumptions about the growth of cash-flows. Chapter 8 examines the critical role the cost of capital plays in valuation methods. Chapter 9 considers real options analysis as a versatile method for valuing target companies in general. Chapter 10 carefully examines how the Black–Scholes model is used in assessing the value of the target companies under different scenarios.

In Chapter 11, we turn our attention to valuing target companies in cross-border M&As, by discussing issues related to international finance. We examine the purchasing power parity theorem and real exchange rate, exchange rate fluctuations, and forward as well as swap currency transactions. Moreover, in the chapter, we discuss the effect of exchange rate fluctuations on the discounted cash-flows of multinational companies.

Chapter 12 discusses the negotiation and deal structuring part of the acquisition process. It focuses on developing a strategy to secure approval from the target firm, refining valuation of the target, and developing a plan for financing the deal. Chapter 13 examines the important topic of postmerger integration and reorganization. Furthermore, the chapter focuses on different types of integrations, approaches to integration, establishing a new organization, integration of functional departments of corporations, and instructs on how to form a new corporate culture.

PART I

Cross-Border Mergers, Acquisitions, and Corporate Restructuring

CHAPTER 1

Internationalization of Economies

Among all factors affecting businesses, internationalization or globalization of the economies has been found having the most profound impact on private business management since the World War II. Of course, cross-border mergers and acquisitions (M&As) is an essential component of the internationalization or integration of diverse economic systems. Accordingly, it is pivotally important to have a clear understanding of the internationalization of the economies. We elaborate this critical concept, in this introductory chapter, by examining the constituent parts of the internationalization process.

Internationalization of Product and Service Markets

It is common to use the sum of exportsand importsof goods and services as a percentage of the gross domestic product (GDP) of a country as a measure of the openness of the economy. Using this indicator of the openness of the economy is common even though capital flows across the borders, as well as global currency transactions, are considered the other leading indicator of globalization. According to this index, a rapid rise in international trade has occurred around the globe since World War II. Nevertheless, as Table 1.1 shows, the size of the two-way trade as a percentage of the GDP of the world and groups of the countries has remained relatively stable during 2005 to 2015. We present values of the exports plus imports of goods and services as percentages of GDPs by types of economies since 2005 in Table 1.1.

As can be seen from Table 1.1, the overall degree of openness for all economies shows a little over 1 percent increase during 2005 to 2015. During the same time, the two-way trade, as a fraction of the GDP of the developing countries, has decreased by almost 9 percent. The value of exports plus imports as a percentage of the GDP of the transition economies has declined by 5 percent. Finally, the ratio for the developed economies has experienced a 4 percent growth.

Table 1.1 Openness of the economies: Exports plus imports as a percentage of the GDP 2005 to 2015

Note: The authors calculated the percentages.

Source: UNCTAD Stat (2017).

To gain a better overall view of the global international trade, we present Figure 1.1, which shows the index of the value of exports calculated by the chain method.¹ The index shows that after rising to 121.7 in 2004, the value of trade dropped precipitously during the global financial crisis (The Great Recession) of 2007 to 2009 to 77.4 points in 2009, and again increasing to near its peak in 2011. The index shows the value of the exports in 2016 was 96.6, which is a little less than its value of 98.9 in 1981. These figures imply that despite an extensive fluctuation, the value of the global exports in 2015 remains roughly at the same 1981 level.

The world trade-in services has increased rapidly over the last several decades. The commercial services data indicate that between 2000 and 2016, the value of all commercial service exports increased from $1,491 billion to $4,807.69 billion, an increase of 222.4 percent. Furthermore, the value of imported commercial services worldwide rose from $1,463.8 billion to $4,694.09 billion during the same period (World Trade Organization 2013).²

Figure 1.1 Value index of exports

Source: World Trade Organization (2017).

Internationalization of Financial Markets

An important contributing factor to the rapid internationalization process over the last three decades is the removal of restrictions on capital flows across the national borders of many countries. With the removal of the restrictions on capital flows, the sum of the value of equity markets’ capitalization, corporate and public bonds, and loans globally has increased from 0.5 trillion dollars in 1980 to 11.9 trillion in 2007. Since then, however, the financial flows have plummeted to half of its peak value or 5.2 trillion dollars in 2014 (McKinsey Global Institute 2016).

International Transfers of Technology

International transfer of technology has increased through cross-border licensing agreements, cross-border M&As, joint ventures, foreign direct investment in wholly foreign-owned enterprises, and joint research and development (R&D) activities of multinational enterprises.

Internationalization of National Enterprises

An important aspect of internationalization of national enterprises, which began in the late 19th century and accelerated in the 20th century, is global operations of what Alfred Chandler, Jr. (1984) called integrated industrial enterprises. The first step in the development of integrated international enterprises was the formation of an administrative organization. Chandler best described the pattern of development of these industrial enterprises and creation of the administrative organization:

It was essential first to recruit a team to supervise the process of production, then to build a national and very often international sales network, and finally to set up a corporate office of middle and top managers to integrate and coordinate the two. Only then did the enterprise become multinational. Investment in production abroad followed, almost never preceded, the building of an overseas marketing network. (Chandler Jr. 1984, 491–492)

Multinational enterprises can fall into one of the two categories: multidomestic and global. The multidomestic enterprises operate on stand-alone, country-centered management strategy. The enterprise is present in many countries, but competes on a country-by-country basis. These enterprises operate in retailing, retail banking, insurance, and consumer packaged goods industries.

Global enterprises, on the other hand, adopt the strategy of integrating operations on a worldwide basis. The enterprise’s competitive position in one country significantly affects and is affected by its position in other countries. The global enterprises operate in industries such as an automobile, consumer electronics, semiconductors, and similar type of industries.

In addition to the rise of multinational enterprises, an increasing number of international coalitions and alliances among business entities for undertaking R&D, marketing, logistics, operations, and services have been formed in recent decades. These coalitions and alliances consist of joint ventures, licensing agreements, supply contracts, marketing agreements, and pooling of R&D activities.

Internationalization of the Labor Market

Internationalization of the labor market implies that the actors in the labor markets, that is, both the employers and suppliers of labor (workers), instead of entering the national labor markets, interact in the global labor markets. The second meaning for internationalization of the labor market refers to the consequences of cross-border movements of goods, services, and capital as well as implications of internationalization of production for the labor market. In short, internationalization of labor has taken place because of increased movement of work and labor across national boundaries. Specifically, internationalization of labor over the last several decades has increased through a rise in international trade, foreign investment, technology transfer, and increased mobility of workers across borders.

Not all immigrants enter the labor force of the host nation. The data for the number of working immigrants globally are not available. Hence, we cite the stock of world immigrants as an indicator of the size of immigrants participating in the labor forces around the globe. Based on this we see that, for example, the stock of world migrants in1990 is estimated to be 152,563,212. The number increased to 243,700,236 in 2015, according to the United Nations (2017). These figures imply an average annual growth rate of 2.3 percent in stock of total world migration. Since not all these migrants are of working age and do not enter into the labor force of the countries they migrate to, an unknown portion of the total stock of migrants constitutes labor force migration.

Internationalization of Communication and Transportation

Advances in communication and transportation technologies mostly brought about by innovations in information technology (IT) have facilitated transnational movements of goods, services, and capital. These technological advances had and continue to have profound impacts on business organization, the structure of the industry, internationalization, and cross-border trade of services as well as cross-border M&As.

Having a precise definition of IT, a term that is frequently used in the book, will prove to be useful. Information technology refers . . . to the interconnected set of technological and organizational innovations in electric computers, software engineering, control systems, integrated circuits, and telecommunications, that have made it possible to collect, generate, analyze, and diffuse large quantities of information at a minimal cost (Miozzo and Soete 2001, 160).

We note that internationalization of the economies to a large extent is made possible through services in general and via advances in IT and telecommunication services in particular, services that have been supplied with rapidly falling costs of production. Therefore, we find further discussions of the role services play in